Negative Interest Rates

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Since the 2008 financial crisis, the policy of central banks to forcibly push down interest rates, followed by the rapid expansion of their balance sheets in order to attempt to “stimulate” economic growth has, to say the least, been something of an abysmal failure. Unemployment is still high, economic growth barely makes it any higher than a rounding error and real wage rates continue to stagnate as they have done for the past ten years or more. Benefitting only Wall Street, the new money has pushed stock markets to record highs and bond yields to record lows, so much so that owning these assets over the past five years has been the closest one can get to a sure bet. Main Street, however, having had to deal with the reality of the fact that the debt-fuelled consumption mania is no longer sustainable and that real savings to grow businesses are in short supply, continues to languish in what seems like a completely separate realm from the casino operations of the financial markets. With positive interest rates now as low as they can possibly go and with little to show for it, it is no surprise that the prospect of negative interest rates in order to force everyone to spend their way into a recovery is now a real one. Indeed, it is already very much a reality in Switzerland and Denmark.

The proposal for negative interest rates rests on a typical Keynesian plea that the government and central banks did not act “drastically enough” in attempting to defibrillate the economy back to growth. Contrary to understanding the lack of any meaningful recovery as a failure of their policies, they instead turn around and say “if it is this bad now then imagine how terrible it would have been had we done nothing at all!” The patient is therefore prescribed ever greater doses of bad medicine in spite of the fact that it is the medicine that is killing him. (Has it not also been said often that the definition of insanity is to repeat an act continuously with the expectation of a different outcome?) Indeed, the economy is so saturated with debt that only paying people to get deeper into it has any prospect expanding the volume of spending.

Negative interest rates are, of course, a praxeological absurdity and could not come about through anything except government force. It is tantamount to placing a premium on future goods as opposed to present goods, so that the prospect of receiving £100 today is less valuable than receiving £100 in a year’s time. Practically, what this means is that, if you deposit £100 in the bank today with an interest rate of -5%, you will have only £95 in one year’s time. You are, therefore, quite literally paying the bank to borrow your money, a proposition absurd to anyone except a tenured professor of economics. Since when, to invert a popular proverb, has a bird in the bush been worth two in the hand? The idea, of course, is that you will be so keen to avoid the interest charges that you will cease to be an “evil” saver and rush out to spend all of your money as soon as you can. Thus the magical Keynesian multiplier will burst into life, restoring us to the land of milk and honey. What’s more, they hope that it will encourage a flurry of borrowing as all the excess reserves piling up in bank vaults (or, rather, on their computer screens) are now lent out to those eager to be paid to hold cash. Traditionally, of course, banks earn their revenue by paying depositors a lower interest rate than they charge to borrowers. With negative interest rates it seems as though the situation will reverse: the bank will make its money by charging its depositors more than it has to pay its borrowers.

Such a ridiculous idea does, of course, run into the unfortunate fact that every unit of money has to be in someone’s cash balance and if all cash balances attract a negative interest rate there can only be an incentive to borrow if the rate on your deposit account is less than the terms of the loan – in other words, you have to pay less to hold the cash than you get paid for taking out the loan. Further, if someone can only get rid of their cash by passing it onto someone else and that latter person can then only do the same then the logical end of the proposal is hyperinflation. That aside, however, what will be the likely effects of the introduction of such a policy?

The first likelihood is that, with bank deposits now charging an interest levy, holding hard cash under the mattress becomes an attractive alternative. In both inflationary and deflationary environments it will lose less and gain more than a bank deposit. Indeed, at first blush, libertarians should welcome this possibility. After all, it is free deposit banking that has resulted in people willingly stashing all of their cash in fractional reserve banks, enabling them to pyramid loan upon loan on top of them and thus causing the disastrous business cycle. When money consisted of gold or silver stored in full reserve banks it was natural for banks to levy a charge for this storage service. People could either choose to accept the charge in return for the safekeeping of their assets, or prefer to keep the cash in their own storage provisions at no cost. Viewed this way, negative interest rates give the appearance of a return to something more akin to cash handling as it would be in a libertarian world. Unfortunately, of course, the negative interest rate is an arbitrary figure and does not represent the true value of storage services to holders of deposit accounts, and having been accustomed to the provision of such services for free anyway a mass withdrawal will be the most likely response. Indeed, it would not be unsurprising if something akin to Gresham’s Law emerged where, legally, bank deposits and cash notes trade at par but where undervalued cash becomes hoarded and people keep only a minimum amount of overvalued bank deposits with which to use for their exchanges. Such an outcome would, of course, utterly defeat the purpose of negative interest rates which is to swell the volume of spending through electronic exchange. In other words, the point at which negative interest rates begin a flight into cash will mark the true limits of monetary policy in creating a spending splurge.

Needless to say, of course, the likely government response is to restrict cash holding with a view to eliminating cash altogether in order to concentrate as much money as possible in commercial bank deposits. Such an end has, in and of itself, been a cherished aim of government, as it permits oversight of and control over every single financial transaction. Under the guise of “combating terrorism” such restrictions have already been tightened recently in France, where, from September of this year, cash payments in excess of €1000 will be illegal. Similar restrictions have appeared, in the last few years, in Spain, Italy, Russia and Mexico. Where cash remains less restricted, any attempts to convert deposits into cash may be met with refusal and obstinacy, as a Swiss pension fund discovered recently when it attempted to switch its deposits to paper notes stored in a vault. Indeed all of this harkens back to the era when banks overinflated on a monetary base of redeemable gold. Back then, redemption in gold was restricted to concentrate people’s cash holdings in paper notes. Now, redemption in paper notes is restricted to concentrate cash holdings in deposits.

The likely reaction to this is that, with deposits and fixed income securities losing value in both nominal and real terms, people will abandon these assets in pursuit of safer stores of value – probably gold and silver. In other words, shorn of the ability to withdraw hard cash, people will keep on deposit only the amount they need to meet their current expenditures while the rest of their savings will be ploughed into harder assets. A flight out of debt instruments would trigger a deleveraging and usually, in such circumstances, the safe home for such funds would be cash. But if cash will also be subject to a negative interest rate and with no ability to withdraw paper notes, then movement of the money into gold would cause the gold price to rise. We would therefore have the peculiar effect of increasing asset prices during an era of deflation. Such are the ways in which monetary policy can turn the world upside down.

The likely effects of a negative interest policy as outlined here demonstrate the limits of a monetary policy that attempts to kick the economy back into gear through spending. You can print all of the money that you like; you can lower interest rates as far as they will go; you can make it impossible for people to withdraw their cash; but like the proverbial horse to water, you cannot force people to borrow and spend. In short, you cannot cheat the market with increasingly absurd tricks that would have baffled even the monetary charlatans of yesterday. Only liquidation of the existing debt and a return to sound money with interest rates determined by the supply of and demand for saved funds will create a proper, sustainable recovery on the path to prosperity.

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Austro-Libertarianism – Three Next Steps

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Austro-libertarianism undoubtedly has a long history of scholarship of which it can proudly exemplify as not only providing a coherent body of truthful insights into the way in which the world really works, but also provides a foundation for a just and prosperous society.

However, far from resting on any laurels (and I doubt any scholar in this tradition would ever believe that we are at the stage where we can do such a thing), this essay will suggest three areas of development to which scholars in the Austro-libertarian tradition may wish to focus their research.

Pure Praxeology

The first area is to reconceive “Austrian” economics as a pure (or at least “purer” theory) of praxeology. Although “Austrian” economics is noted for deriving its laws from the theory of individual human action, economics traditionally – not least because concepts such as exchange, production, prices, money, and so on are the complex phenomena that we wish to study and understand the nature of – concentrates only on action above the level of the bilateral exchange of wares for a money income. Our economic categorisations and concepts therefore rest on that limitation. “Austrian” treatises, although they begin quite properly by explaining how economic theory is derived from the action axiom (together also with extremely useful chapters on unilateral or “Robinson Crusoe” exchange), soon begin to espouse their theories in terms of these more aggregative concepts, only occasionally returning to individual action in order to emphasise a particular point1.

A simple example to illustrate this point is the economist’s approach to the classification of goods. A “consumer good” is one that is purchased by a consumer for money without any further sale for money expected. Bread, for example, is treated as a consumer good because it generally goes through no further monetary exchange prior to being consumed. At the individual level, however, the bread may only be a capital good in making, say, a sandwich. Labour is combined with the bread and other goods – say cheese and tomatoes – in order to produce the final consumer good of a cheese and tomato sandwich. We can say the same thing about cutlery and crockery, paper and ink and so on. All of these goods are used at the level below that of exchange for money by individuals to produce further goods. “Land”, on the other hand, is treated as the natural resources which are a gift to all humans, not just an individual human being. However, a good produced by another human being may, to the individual who happens to stumble upon it, comprise “land” in the sense that it is a free gift to him and that he has not had to exert any productive effort in order to bring it into the condition in which he finds it. If, for example, I find an abandoned car in perfect working order and (assuming there are no competing ownership claims), even though the car is a produced good, as far as my action and my computation of costs and benefits towards that action goes, the car is a gift of nature and is in exactly the same condition as, say, a tree that has grown naturally.

It is easy to see why any loss of the connection to individual action can quickly lead economists in the “Austrian” tradition and their fellow travellers down wrong paths. Murray N Rothbard provides an extensive critique of W H Hutt’s aggregative concept of “consumer sovereignty” – the idea that all consumers are sovereign over producers and that the latter exist only for the benefit of the former and not for themselves2. The market place is where everybody seeks to benefit himself through voluntary exchange, and there is not, in fact, a distinct class of labourers, of producers and of consumers with one being “sovereign” over the other. Rather, everybody at differing points of the day (even from minute to minute) participates in a different economic category – a man is a labourer when he goes to work; he is a consumer when he stops by at the shop on his way home; he is a capitalist if he purchases some shares for his pension, and so on. Questions of “sovereignty” – the boundaries of rule – concern only the political arena. Concentration on the basis of economic law in individual human action would have avoided any fallacy and prevented a resort to parcel phenomena into homogenous, collective blocks. However, Rothbard hardly escapes the same danger to which Hutt succumbed, building his entire theory of production using the economic fiction of the Evenly Rotating Economy (ERE), an economy in which all economic activity is repeated and known. Thus, entrepreneurial profit and loss is eliminated. This model allows (or, perhaps, forces) Rothbard to conclude that capital goods earn no net rents and that all rents are paid back to the original factors of production – land and labour – a theme that is oft repeated throughout his entire treatise. It is submitted here, however, that regardless of how such an approach may be helpful in illustrating the complexity of the structure of production, any firm or even implied conclusions drawn from it are likely to be grossly misleading and can only lead to error. The most dangerous false step from this presentation is to assume that the ownership of land – as an original factor – provides essentially free income to those who happen to hold it. Needless to say Rothbard takes great pains to rebut this conclusion, but his attempt could be condensed, with a slight modification, to a single paragraph:

As the only income to ground land that is not profit or interest, we are left with the original gains to the first finder of land. But, here again, there is capitalization and not a pure gain. Pioneering—finding new land, i.e., new natural resources—is a business like any other. Investing in it takes capital, labor, and entrepreneurial ability. The expected rents of finding and using are taken into account when the investments and expenses of exploration and shaping into use are made. Therefore, these gains are also capitalized backward in the original investment, and the tendency will be for them too to be the usual interest return on the investment. Deviations from this return will constitute entrepreneurial profits and losses. Therefore, we conclude that there is practically nothing unique about incomes from ground land and that all net income in the productive system goes to wages, to interest, and to profit3.

The correct position, therefore, is that “things” do not “earn” anything. All actions, whether they involve the dispensation of labour, land or capital goods, require the sacrifice of one state of affairs (“costs”) in the pursuit of another state of affairs. It is hoped that the ends brought about are more valuable than the ends given up. The creation of this value if the action is successful (or its destruction if it is not) is the product of entrepreneurial judgment. All income from any action is therefore paid out to cover costs, interest or entrepreneurial profit and loss. All net rents in the economy accrue only to this latter element – successful entrepreneurial judgment with the means at one’s disposal, whether this is your labour, land that you own, or a capital good that you hold. All of these things that can be bought or sold for more or less money than is sufficient to cover their costs plus interest. It is only by remaining firmly anchored to action at the individual level that this realisation can remain in focus4.

Coupled with this endeavour of better preserving the link between the complex phenomena in the economy with individual action is a greater emphasis on “Austrian” methodology not as a separate topic but one to be espoused during the course of the treatise. The reason for this is that a “vulgar” conception of “Austrianism” would state that all economic theory and all of the laws of economics are deduced logically from the action axiom and one or two subsidiary axioms. Truths derived empirically have little or no place in “Austrian” economics. This is not, however, altogether true. Only the core theory concerning the action axiom and its immediately related categories, in addition to some of the more fundamental laws (such as the law of marginal utility) are deduced logically. However, there is a great body of “Austrian” economic law that requires the ascertainment of empirical facts. We cannot, for example, derive economic laws of bilateral exchange without ascertaining the existence of more than one human being, an endeavour which any individual cannot simply deduce. We cannot have an “Austrian” approach to the economic effects of taxation unless one group of persons had, in fact, attempted to tax another group. We cannot have an “Austrian” business cycle theory without first assuming the existence of banks, the practice of fractional reserve banking, a loan market and even money itself must be presupposed. Although the regression theorem, for instance, is a valid praxeological law5, it would only exist if we first of all knew that money existed and that people had chosen to use a good as a general medium of exchange. Now it is true, of course, that these laws would remain valid and true even if the substantive human choices upon which they rely had not been made. If we imagined a world without money, for example, and pondered its existence merely as a hypothetical we could still derive “Austrian” laws concerning it without it ever actually existing. The actual phenomena in existence simply direct our interest to them as those are the areas that matter in our lives and hence are the things we wish to study and understand. No doubt it is also quite impossible to try and “imagine” alternative institutions and choices that have never existed and to apply to them the core “Austrian” theory, especially as our own experience of real concepts such as money, exchange, prices, banking and so on often provides an illustrative tool to our theoretical insights. However, it is more accurate to speak of the entire endeavour of “Austrian” economics not solely as a body of economic law that is deduced logically, but as the application of the core theory, deduced from the action axiom, to the substantive institutional choices that humans have made, the existence of which is verified empirically6. More prominent highlighting of the “Austrian” method and the source of each parcel of knowledge during the course of a treatise would aid greatly any misunderstanding in this regard.


The second area of fertile development in “Austro-libertarianism” is the necessity to sever or more sharply delineate the relationship, often casually assumed not only in political philosophy but also in the opinions of lay persons, between legal norms and moral norms. That is, the question of what should be legal – in other words, those norms which may be enforced by the imposition of violence – should be separated from the question of what is good, worthy or preferable. It is submitted that this is one of the greatest barriers to a proper understanding of the role of violence in interpersonal morality, and has been dealt with in detail by the present author here, here and here. Many people happily recognise the illegitimacy of the legal (violent) enforcement against themselves of norms that other people value as moral ends which, as the hapless victims of this enforcement, they themselves do not (or at the very least, they would complain about it). But, because of the prevalence of the legitimising effect of democracy and the blurring of any distinct line between the governors and the governed, most would not think twice to advocacy of the legal (violent) enforcement of ends that they deem good against other people. Indeed, the criterion for what should be legally enforced boils down to little more than what most people think should be legally enforced. Libertarians need to create an understanding that the proper role of violent enforcement is restricted to preserving the physical integrity of each individual’s person and property – and as moral agency requires such integrity in order for a person to choose and act, such an insight is crucial for any proper understanding of interpersonal morality. The examination of whether something is bad, unpleasant or a vice must be separated from the question of whether its prevention should be enforced legally; and, equally and oppositely, the examination of that which should be peacefully permitted by the law should be separated from the question of whether such acts are good and noble things. In addition to aiding moral and political philosophy, this would be of a benefit to libertarianism specifically as it would render inert the perceived support for all of those bad and unpleasant things – drugs, prostitution, gambling, blackmail, and so on – which are non-violent but are nevertheless not necessarily things that we would wish to see in our society7.


The final area for development in Austro-libertarianism, this time in the field of economic history and anthropology, is to engage in a rigorous study of the effects of inflation and inflationism throughout history. “Austrian” scholars have certainly charted well the purely economic effects but, in the opinion of the present author, an exhaustive study of the social, cultural, political, and aesthetic effects of inflation is yet to be written, at least in the “Austrian” tradition. As Henry Hazlitt notes:

[Inflation]…discourages all prudence and thrift. It encourages squandering, gambling, reckless waste of all kinds. It often makes it more profitable to speculate than to produce. It tears apart the whole fabric of stable economic relationships. Its inexcusable injustices drive men toward desperate remedies. It plants the seeds of fascism and communism. It leads men to demand totalitarian controls. It ends invariably in bitter disillusion and collapse8.

Apart from the wide “macro” effects of inflation – not least of which include the birth of odious ideological movements and regimes and their ability to fund wars and conflict – also of interest is how inflation effects us at the individual level. For example, how many of our day-to-day products that we enjoy today are the result of genuine development by a capitalist economy and how many are simply substitutes developed in an era of inflation to enable people to attempt to salvage some of their previous standard of living? Products such as instant coffee, condensed milk; synthetic clothing; plastic bottles; and so on. How many genuine labour saving products were developed not because people genuinely wanted to save time but because inflation had either reduced their income to such a degree that time came at a premium or because inflation had induced impatience and a present-oriented fervour? Indeed the latter may have had distinct ramifications beyond the economic – the birth of adolescence as a distinct demographic; the sexualisation of society; the preference for entertainment ahead of learning; the attraction to style rather than to substance; the prominence of sound bites and “tweets” rather than in-depth analysis; the emphasis on youth and adaptability to an ever changing world rather than on age and accumulated wisdom. All of these things have significant consequences for which inflation much at least be partly responsible. Further, how much does inflation distort our views of reality and of what is possible? Inflation, as Hazlitt noted, makes speculation rather than production profitable – the image of productivity and wealth creation rather than the very thing itself. It makes big or easy wins more attractive than patient investment in a lifelong endeavour. But at the extreme we might say that we have attempted to replace reality itself with dreamed ideals. Government, has taken over and replaced real money (gold and silver) with a fake paper counterfeit. Having replaced reality with one form of fakery, we expect government to be able to legislate to replace reality with our pseudo visions, to carry out the miracle of transforming stones into bread. Thomas Nast’s cartoon, Milk Tickets for Babies in Place of Milk (below), concerning the inflation during the American Civil War, perhaps captures the foundation of this mindset in artistic form. The cartoon contains representations of reality that are passed off, for example, by Acts of Congress as reality itself. As English professor Paul A Cantor explains:

Nast’s illustration brilliantly captures [the confusion of] things with representations of things. Like Magritte [in the painting The Treachery of Images], Nast reminds us that a picture of a cow is not actually a cow, but he is not making a merely aesthetic statement. He is drawing a more serious analogy between the duplicity involved in artistic representation and the duplicity involved in the government printing money and forcibly establishing it as legal tender, an analogy embodied in the parallel “This is a Cow By Act of the Artist” and “This is Money by the Act of Congress”9.

Given that “Austrians” lead in the way in a providing a genuine understanding of the definition and effects of inflation it would be appropriate for an historian versed in “Austrian” theory to undertake a full study along the lines that we have suggested here.

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1It is also the case that most “Austrian” scholars writing today received their initial education in the mainstream economics tradition and only later “turned” to “Austrianism”. Thus one senses a tendency, if not a persistency, to lapse into the comfort of aggregative and pseudo-concepts, at best obscuring the essential connection to individual human action, and at worst completely losing it and ending up in the rhetoric of collectivist and societal-oriented action.

2Murray N Rothbard, Man, Economy and State with Power & Market, p. 631-6

3Ibid., p.530, emphasis added.

4The present author is not enthusiastic about the excessive use of equilibrium constructs and they should, at the most, be used as a tool in order to distinguish one concept from another, an endeavour that would be impossible without such a construct. Nevertheless, it is possible that a dynamic equilibrium – a fiction in which there is change and entrepreneurial profit and loss but where all forecasts of the particular entrepreneur in the model are correct – together with a focus on the costs of land acquisition and of the dispensation of labour would have created a better illustration than the ERE. But whatever model is used, it is submitted that the illustration of every stage of production, whether it is with land, labour or capital, necessitates the elements of costs, interest and entrepreneurial judgment and that, contra to Rothbard’s assertion that the mental construction of the ERE is necessary in explaining the structure of production, a much clearer grasp of reality can be and, indeed, is attained without omitting any of the crucial elements.

5Although this is disputed. See Gary North, The Regression Theorem as Conjectural History, Ch. 7 in Jörg Guido Hülsmann (ed.), The Theory of Money and Fiduciary Media – Essays in Celelbration of the Centennial.

6If anyone should doubt this and remain steadfastly wedded to the idea that “all” of “Austrian” economics is deduced logically this then he should attempt to present an “Austrian” treatise written in formal logic.

7The present author has dealt with the so-called “thick” or “thin” libertarian debate here.

8Henry Hazlitt, Economics in One Lesson, p.157.

9Paul A Cantor, Hyperinflation and Hyperreality: Thomas Mann in Light of Austrian Economics, The Review of Austrian Economics, Vol. 7, No. 1 (1994), 3-29.

Economic Myths #12 – The Deflation Danger


Politicians and mainstream economists have been warning us again lately of the so-called “deflation danger” – the idea that falling prices is calamitous for economic growth and that a perpetual and ceaseless price inflation is needed in order to bring us back to prosperity. With price deflation, so these sages tell us, lower prices today cause people to expect prices to be lower tomorrow so that, as a result, they put off their purchases until a later date, which causes prices to fall further and further. Hence we end up in an endless downward spiral of depression and impoverishment. Inflating prices, however, cause people to buy today so that they may insulate themselves from future price rises, thus bringing about economic growth and an increase in the standard of living. This fresh round of deflation warnings comes in the wake of the news that prices in the Eurozone were 0.2% lower than at the same time the previous year – something of an hilarious travesty when, regardless of the merits of the deflation thesis, this figure amounts to little more than a rounding error.

In basic economic theory, a price will fall as a response to the fact that demand is insufficient to meet supply at the current price. For some reason – say, as a result of the revelation of malinvestments – the demand curve for a particular asset or good shifts sharply to the left, meaning that prices now have to fall in order for the inventory to be sold to a willing level of demand. It will eventually settle at such a level. Indeed, all of the talk of “illiquid” and “toxic” assets on the balance sheet of banks following the 2008 financial crisis resulted from the unwillingness to find these lower prices and to, instead, retain assets at the old, inflated prices. Any asset, however, is surprisingly liquid when you offer a low enough price for it. However, the deflation thesis rests on the proposition that the initial fall in price, based on some exogenous factor, will then in and of itself cause a further shift in the demand curve to the left so that prices have to fall further. And then that this second price fall will cause yet another shift in the demand curve and prices will fall even further. Hence the thesis requires repeated, fresh rounds of shifting demand curves which are caused by nothing other than a previous shift in the demand curve.

However, there is no reason to suggest that prices falling as a result of a genuine, external change in valuation will, in and of themselves, cause further price falls. Indeed, every businessman will tell you that if you lower prices people will buy more and if you raise them people will buy less – precisely the opposite of the deflation thesis. More importantly, however, even if such price falls did result, there is no further reason to suggest that it would cause economic calamity. First, goods are, at the end of the day, evaluated for the ends that they meet. The fulfilment of these ends, as a result of the logic of human action, cannot be put off indefinitely and each individual will have to consume at some point. A person may simply be waiting for prices to bottom out before he purchases but there must come a time where he believes this to be. Taken to its logical extreme, the deflation thesis suggests that falling prices will cause people to simply stop acting altogether – that they cease seeking the fulfilment of ends through means. This will never happen so long as they remain human. Indeed, price deflation in entire industries – particularly in personal technology, such as computers and mobile phones – has not caused the collapse of this sector precisely because the value of owning a more expensive computer today is greater than that of waiting for a less expensive one in, say, three years. In other words, even if a person knows that a computer may cost £1000 today but only half as much in three years, he will still spend £1000 today if the benefit to be derived from the computer today is more valuable than saving £500 and waiting three years for that benefit. Second, viewed from the point of view of the satisfaction of each individual’s ends, there is no reason to suggest that artificially inflating prices, thus causing a person to buy sooner, will cause a greater fulfilment of that person’s ends compared to an economy where there is no deliberate price inflation. From that individual’s point of view, the earlier purchase may be wasteful compared to the later purchase he would have made had prices not been forcibly inflated. Third, even though the opposite of “catastrophic” deflation – namely, hyperinflation – in and of itself causes shifts in the demand curve to the right that accelerate the price rises, the motivation for this is not so much the rising prices as the realisation, on the part of the public, that the currency is worthless. Hence, a hyperinflation always ends in a flight to other currencies and stores of value. Indeed, following the recent Zimbabwean hyperinflation, the government there has gone as far as to recognise no fewer than nine foreign currencies as legal tender. No such realisation exists during falling prices and, funnily enough, people do not seem to be eager to flee to inflating currencies during a deflation! Fourth, there is no reason to suggest that falling prices will dampen business prospects. Nominal revenue will, of course, fall during a general price deflation. However, the success of a business – measured by its profit – depends not only upon the height of its revenue but also upon the height of its costs and these too are falling. Businesses would only put off purchasing and investing if revenue was predicted to remain constant while costs were predicted to fall, or fall further. If, however, falling revenue is met by falling costs then there still exists a profit motive, with every incentive to invest and trade today. Fifth, much of the deflation fear comes from the monetarist analysis of the Great Depression where, indeed, there was a monetary contraction1. However, the stagnation during that era was not due to the deflation per se but because of the widespread attempt to keep wages and prices high in spite of the monetary contraction. Had prices been allowed to fall then recovery would have been much swifter.

The real reason for the deflation scare is, of course, because perpetual inflation serves to protect the vested interests of the state and its corporate cronies and banker elites. The characteristic of any deflation is that the purchasing power of the monetary unit becomes stronger; all else being equal, therefore, assets that are merely quoted in the unit of currency and promise to pay no amount of fixed currency – such as shares, houses, precious metals, and so on – will fall in value. However, assets that are denominated in the unit of currency and promise to pay a fixed number of dollars, euros or whatever – such as bonds and debt instruments – will not lose value. Governments and banks, having benefited from borrowing cheap, printed money, used it to purchase assets that are mostly dollar quoted while their liabilities are dollar denominated2. Hence, a deflation would cripple the prices of the government’s or a bank’s assets while leaving its liabilities untouched. Hence not only large banks but entire states would be obliterated by bankruptcy. Clearly the political-banker elite cannot permit this to happen. The need for constant inflation is not, therefore, something that is necessary for economic growth and the wellbeing of the general public. Rather, it is necessitated by the asset-liability mix brought about by previous inflation which would threaten the existence of large, establishment institutions if it was to reverse. They need more cheap money, more theft of your purchasing power, in order to keep their assets rising and their liabilities from doing the same. The deflation myth, therefore, is nothing more than a part of the big statist fraud, benefitting a select few and the expense of everybody else.

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1Although the failure to overcome this was not from want of trying – see Murray Rothbard, America’s Great Depression, Part III, where he argues that the deflation was the result of factors that negated the inflationary response of the government and the Federal Reserve.

2Although mortgages, which were a heavy factor in the 2008 financial crisis, are dollar denominated, the security behind the loan – the amount the lender will receive in the event that the borrower can no longer pay – is the house that the mortgage has been used to purchase. This asset is merely dollar quoted and hence during a deflation the value of the security of a bad mortgage will dissipate and with it any chance of recovery at par for the mortgagee.