Imagine a scenario where the economy is impacted by deflation – a term that most people associate with market collapses like the one witnessed in 2008. However, there is more than one type of deflation.
- The “Accidental” Deflation: This is the type of deflation that arises from a sudden market crash, leading to panic selling of assets, a decrease in consumer spending, and widespread unemployment. This deflation is essentially a result of too much money being pumped into the economy in the first place, leading to mispricing and subsequent collapse.
- The “Good” Deflation: In contrast, the late 1800s in the U.S. witnessed another form of deflation driven by a stable money supply and increased productivity. The prices fell due to advancements in the Industrial Revolution, benefiting everyone in the process.
- Inflation vs. Deflation: The current scenario involves managed money supply by the FED, resulting in inflation to benefit debtors like the government. This inflation, however, acts as a hidden tax on consumers by reducing the purchasing power of money.
Think about it – which is more detrimental to the economy? Would you prefer a sudden crash that resets the economy or a slow erosion of wealth over time due to inflation?
In a nutshell, deflation due to market crash might be painful in the short term but sets the stage for future growth. Conversely, inflation gradually erodes wealth and benefits debtors at the expense of consumers. The ideal scenario involves a stable money supply and increased productivity, resulting in falling prices and higher wages for all.
Ultimately, the choice between the two extremes is clear – “good deflation” is the foundation of a healthy economy devoid of the boom and bust cycles provoked by excessive money supply. If we had to choose, the short-lived pain of deflation might be the path to sustainable prosperity, as opposed to the prolonged agony of inflation.
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