Economists and economic writers bemoan deflation. Meanwhile, consumers love it. Who doesn’t like better prices?
One side is wrong. Here’s a hint: It’s not the consumers who are wrong. Economically illiterate economists and authors are wrong.
Financial Times writer Nicholas Megaw moans Swiss Deflation Worsens Again.
Another month, another disappointing set of inflation statistics from Switzerland, as the country’s deflation problem refuses to budge despite its record low interest rates.
Consumer prices fell 0.2 per cent in November, compared to a 0.1 per cent rise in October, according to the Federal Statistical Office.
On an annual basis, the consumer price index declined by 0.3 per cent, worse than the 0.2 per cent fall predicted by economists.
The Swiss National Bank lowered its main interest rate to -0.75 per cent in an attempt to fight the appreciation of the Swiss franc last year, but the strong currency has continued to drive down the cost of imports, keeping the country in deflationary territory for the 25th straight month.
Swiss Unemployment Rate
Let’s explore this economic travesty starting with a look at Switzerland’s soaring unemployment rate.
Mercy! People have jobs and prices are falling. What could possibly be worse?
Economic Challenge to Keynesians
Of all the widely believed but patently false economic beliefs is the absurd notion that falling consumer prices are bad for the economy and something must be done about them.
I have commented on this many times and have been vindicated not only by sound economic theory but also by actual historical examples.
My article Deflation Bonanza! (And the Fool’s Mission to Stop It) has a good synopsis.
And my Challenge to Keynesians “Prove Rising Prices Provide an Overall Economic Benefit” has gone unanswered.
There is no answer because history and logic both show that concerns over consumer price deflation are seriously misplaced.
The BIS did a study and found routine deflation was not any problem at all.
“Deflation may actually boost output. Lower prices increase real incomes and wealth. And they may also make export goods more competitive,” stated the BIS study.
It’s asset bubble deflation that is damaging.
And in central banks’ seriously misguided attempts to fight routine consumer price deflation, central bankers create very destructive asset bubbles that eventually collapse.
When those bubble burst, and they will, it will trigger debt deflation, which is what central banks ought to fear.
For a discussion of the BIS study, please see Historical Perspective on CPI Deflations: How Damaging are They?
Meanwhile economically illiterate writers bemoan deflation, as do most economists and central banks. The final irony in this ridiculous mix is central bank policies stimulate massive wealth inequality fueled by soaring stock prices.
Mike “Mish” Shedlock