Deflation Returns to Britain

Did you know deflation has returned to the UK for the first time since JFK was running for president of the US? Well, this guardian.co.uk article wants you to know that yes, it is true! DEFLATION has returned!

"Deflation returned to Britain for the first time in nearly five decades last month as prices measured by the retail price index (RPI) were lower than the same time a year ago."

I have not belabored this point for a while now because with all the hopeful market activity of late, sprung by the heroic inflation efforts of Britain's leaders, along with those in the US, China and Europe, and with a dose of G20 and IMF noise thrown in for good measure, it was time for the deflation angle to take a back seat.

Now, I am not going to argue that deflation does not exist and is not possible. If the forces of credit contraction can overwhelm the desperate Keynesian Hail Mary attempt, then the dark forces of deflation and perhaps depression will indeed come calling. But please do not present to me falling prices as evidence of deflation, as this article does.

Falling prices should be good. No matter how a political and financial establishment would like to have us fear falling prices, they are good for the whole of society and are not deflation. Deflation can be defined as the contraction of credit leading to the contraction of money supply. Global authorities are inflating 24/7 and articles like this one, highlighting falling prices, help give them license to do so. The system is trying to save itself, but is not necessarily trying to help you or me.

Now of course, with the way a would-be sound and productive global economy has been perverted by decades of meddling policy, falling prices now come with a downside. That is because leverage is unwinding at the same time. So policy makers pretend that deflation (incorrectly defined as falling prices) is bad, most people believe them, and there is cover for more toxic policy. Do you see why my newsletter conjures up the Rabbit Hole? It is because you simply must get a different view on these clowns and stay one step ahead.

Inflation policy is happening 24/7 and it has nothing to do with prices. Authorities have no choice as this is the system they have built. The system will end if policy is not successful. I believe they will be ultimately successful, with success defined as a tepidly recovering economy with another leap (ho hum) in moral hazard that may hold the potential to end the system one day soon, if the current crisis has not already done so.

Your eyes are being diverted. I do not own a tin foil hat and I ignore those black helicopters flying outside my window. But I see articles like this and it really kind of ticks me off that most people believe in fairy tales about deflation, and those about inflation as well, for that matter. Inflation after all, is what is happening now. Never mind general prices. They will follow one day after the trade is well in progress.

Comments

[Eric in IL:]

Cetin, not sure how fiscal conservativeness and social welfare jive? I completely agree with you about debt though. Why is debt for govt bad, when we encourage leverage every else to build business? Without issuance of debt, there is no growth.

Apr 24 03:01 PM

[Nathaniel C:]

Thank god someone understands deflation. It is not prices as the FED claims but a contraction of the money supply. The Fed uses the argument of deflation to openly inflate the monetary supply. Von Mises warned people that central banks use the myth of deflation to debase the currency. I fear that is what the end game is for the dollar. Bernanke said that FDR's massive devaluation of the dollar durring the depression was a great idea.

Apr 24 03:26 PM

[Chris B:]

"Deflation can be defined as the contraction of credit leading to the contraction of money supply. Global authorities are inflating 24/7 and articles like this one, highlighting falling prices, help give them license to do so. "
----------------------...
Sorry, but you can't just take a word and decide that it "can be defined" to mean what you wish it would mean. Language doesn't work that way. Words are defined. See your Econ 101 textbook if you have one.

I believe you mean to use the term "money supply." For everyone else in the world, the term "inflation" means a period of broadly rising prices and "deflation" means a period of broadly falling prices. Prices can be related to money supply, for sure, but often move independently. They are separate concepts.

If it's the increase in money supply you are opposed to, just say so. If you think the increase in money supply will result in inflation, say so. But don't confuse people by making up your own definitions for words. I cannot understand why a grown man should be ticked off because everyone else doesn't use the definitions he made up for already well-established words.

Apr 24 03:38 PM

[samba:]

I agree that single words like deflation and inflation are too broad based and cannot accurately descibe anything, this is definitely being abused by governments and organsations.

One must atleast precede the use of these terms with other words, like: asset, monetary and price

In the context of this article, UK prices are dependant on fx moves, as well as raw materials prices, etc, and i think they are going up, i spent 110 pounds in tescos last week!

deflating equities is different, stocks and housing are based on supply and demand, if everyone wanted to sell at the same time, firesale prices would ensue, However, stocks pay dividends and houses are good for living in, so both have a basic intrisic value to the owner.

and UK monetary inflation is already happening, its just being ofset by deflating equities, the governemnts only feasilbe option is to inflate

p.s RPI is government manipulated,

Apr 24 07:19 PM

[frosty:]

If the value of everything falls (homes, businesses, investments), and the price of everything falls (tv's, cars, food, clothes), and if the amount people earn falls, isn't that 'deflation'? It turns out that the easiest of these to measure is prices and I would guess that, over time, it is the best way to measure inflation/deflation (as well as being the definition). Price changes may influence monetary policy however there is not a very good correlation between the two except during certain periods of time.

Isn't money like stock? If a company decides to split 2-1 what happens to the price/share? When a government increases the money supply, the same happens to value of currency. This gets quite confusing when most governments in the world do this at the same time because it amounts to every country devalueing their currency simultaneously. Somehow, markets are expected to sort out what the relative values are. We can only hope that they're efficient!

Apr 24 08:06 PM

[bricki:]

The definition of inflation and deflation as money supply increase and decrease is a proposal of the Austrian school of economics. Price changes are then assumed to be merely the result of money supply changes. Since central banks are responsible for the money supply they then are directly responsible for inflation/deflation. By abolishing central banks you then abolish inflation.

I'll let readers decide for themselves if they think this makes any sense.

On Apr 24 03:38 PM Chris B wrote:

> "Deflation can be defined as the contraction of credit leading to
> the contraction of money supply. Global authorities are inflating
> 24/7 and articles like this one, highlighting falling prices, help
> give them license to do so. "
> ----------------------...
> Sorry, but you can't just take a word and decide that it "can be
> defined" to mean what you wish it would mean. Language doesn't work
> that way. Words are defined. See your Econ 101 textbook if you
> have one.
>
> I believe you mean to use the term "money supply." For everyone
> else in the world, the term "inflation" means a period of broadly
> rising prices and "deflation" means a period of broadly falling prices.
> Prices can be related to money supply, for sure, but often move independently.
> They are separate concepts.
>
> If it's the increase in money supply you are opposed to, just say
> so. If you think the increase in money supply will result in inflation,
> say so. But don't confuse people by making up your own definitions
> for words. I cannot understand why a grown man should be ticked
> off because everyone else doesn't use the definitions he made up
> for already well-established words.
>

Apr 24 10:32 PM

[Alan von Al...:]

"We're two years into this mess, and effall has been done to actually fix anything. it's like trying to fix a circuit board that has had 2 trillion volts passed through it - every componant is shot, and the board is fried and melted to a crisp. It should be binned. What do we need to do to get past the denial phase without going straight to the collapse phase? Answers on the back of a postage stamp pls" [comment on FT Alphaville]

Public borrowing, monetary easing and public spending crowd out and kill private enterprise. Falling prices (esp. real estate) are a symptom of wider problems like unemployment, SME bankruptcy, credit contraction, and decline in corporate revenue/earnings. The private sector share of GDP in Britain has shrunk to 50%, which is an absolute boundary in my opinion.

Milton Friedman argued that any amount of money dropped by helicopter in a quantitative easing does nothing except wipe out nominal savings and misallocate demand. It doesn't change the industrial plant, or population, or applied sciences -- except in wartime, which wrecks everything.

Apr 25 01:10 AM

[Screwloose:]

Very true. It's now clear that it's perfectly possible to have a situation where a new Mercedes is becoming cheaper - but the fuel for it is increasing fast.

The net rate of de/in-flation then depends on the complex formula applied to balance the conflicting effects. As the formula selected is under political control....

Wasn't it Friedman who said:- "Inflation is always and everywhere a monetary phenomenon?"


> One must at least precede the use of these terms with other words, like: asset, monetary and price

Apr 25 02:42 PM

[mkreisel:]

If you define inflation/deflation solely based on money supply, then 1931 would be a year of hyperinflation, because M1 went up 25% that year.

Apr 25 04:48 PM

[mkreisel:]

Deflation is good for savers, bad for debtors.

Is the US or UK a nation of savers or debtors?

Apr 25 04:49 PM