The deflation bogeyman
Peter Schiff and Nouriel Roubini, two of the original “Doctor Dooms”, go at it hammer and tongs in the video above, in a discussion on the state of the US economy and the perennial inflation versus deflation debate. Not much love lost between them, though they keep the discussion civil.
What interests me is Roubini’s continual references to the Great Depression and Japan’s experience since 1990 as evidence that deflation is always bad. Yes, this is one side of the story. No one, not even Schiff, is arguing that debt-deflation – when falling prices increase the real burden of debt – is good.
But there is another side to deflation – the one that Schiff describes: when a relatively fixed money-supply combines with pro-growth, low tax policies, encouraging saving, investment and hence industrial expansion. In this scenario, lower prices are not a symptom of collapsing demand, but a reflection of greater industrial efficiency and productivity.
The US slipped briefly into deflation in the mid-1950s, during the postwar boom. It also experienced persistent deflation during the late 19th century – a period of rapid industrialisation. In Britain, wholesale prices were at the same level in 1900 as they had been 200 years earlier, with prices falling steadily over the course of the 19th century.
Heavily-indebted modern governments rightly fear deflation (in comparison, consider that from 1815 to 1900, the UK government ran an annual deficit on just four occasions). But, contra Roubini and as Schiff says, this does not mean that deflation is always a sign of trouble with the economy.
Recommended: Charting the Federal Reserve's Assets - 1915 to 2012