A Blow To Inflationists

by: Investment U

By Justin Dove

The following chart shows the monthly inflation levels since 1872. As you can see, the rates of inflation and deflation were much more volatile in the early days. Until World War I, periods of high deflation and inflation almost mirrored each other.

Then, after both world wars, there was a steadier rise in inflation without the valleys of deflation as seen following the Great Depression.

But the most important takeaway from this chart is that inflation now is nowhere near the rates it reached in the stagflation era of the ’70s and ’80s. In fact, it remained fairly low in the past few decades.

Inflation is (NOT) Coming...Click to enlarge

So how is this case with all the claims that “Helicopter Ben” and his merry crew are devaluing the currency and causing hyperinflation?

As Louis Basenese writes for Wall Street Daily, “most people don’t take into account the deflationary pressure that’s currently leveling things out.”

“The collapse in housing, the contraction in personal credit and soaring unemployment… were more than enough to offset the Fed’s inflationary actions,” Basenese wrote.

So What’s Wrong With Deflation?

It’s obvious that the Fed is trying to thwart any possibilities of deflation, but why?

An Economist article from 2009 describes inflation as bad, but deflation as even worse:

A central bank can raise interest rates as high as it wants to suppress inflation, but it cannot cut nominal rates below zero. Deflation robs a central bank of its ability to stimulate spending using negative real interest rates. In the worst case, rising debts and defaults depress growth, poisoning the economy by deepening deflation and pressing real interest rates higher.

In effect, the Fed is choosing to err on the side of inflation, betting that it would be less catastrophic than erring on the side of deflation. But as the article states, the “efficacy is unproven” in using quantitative tools to manipulate the economy.

So I leave the question to the readers, is dealing with possible inflation a lesser of two evils? Or should the Fed stop meddling and let deflation run its course?

Disclosure: Investment U expressly forbids its writers from having a financial interest in any security they recommend to our subscribers. All employees and agents of Investment U (and affiliated companies) must wait 24 hours after an initial trade recommendation is published on online - or 72 hours after a direct mail publication is sent - before acting on that recommendation.