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What's So Bad About Deflation?


After many years of currency destruction and "inflated" earnings, a little deflation could be healthy.

What's so bad about deflation?

I think the world has things backwards a little bit. This insistence to battle deflation like our lives depend on it is quite confusing to me. Sure, I understand the wage and standard of living argument, but after many years of currency destruction and "inflated" earnings, I don't see anything wrong with a little deflation. In fact, I think it's healthy.

In looking though history, inflation has been viewed kindly. The argument is that we wouldn't enjoy this standard of living without it. Perhaps that's true. But, no one mentions that our purchasing power has been devastated, and no one mentions the Fed's obsession with eliminating the business cycle from economics -- both due to inflationary pursuits.

Cycles are good things, and the biggest problem we have in front of us now is our unwillingness to accept the downside of a cycle. We need downside to remove bad companies and management teams, eliminate excess inventories, and most importantly, to clear out bad debts. Current "leadership" (and it's not just this one) has been completely unwillingly to let anything fail.

Today, the big article making the rounds is Paul Krugman's piece advocating yet more government spending to allay any potential for a depression. It's precisely this ideology that's led us to the situation we face today. Spending for spending's sake isn't a positive. It's quite obvious that the last round of stimulus was nothing short of completely wasteful. So, now we need more of that? In my opinion, what we need is to ensure that strong, well-managed businesses have a favorable climate in which to operate, a simple and competitive tax structure, and a less intrusive federal government that currently continues to confound management teams leading to inaction from the corporate world and exacerbating the situation.

I'd argue that a return to prudence and smaller, less intrusive government would be the beginning to kick-starting the economy. Is this deflationary? Yes. Will it be painful to many? Yes. However, people have simply lost confidence in the ability of the government to behave in a responsible manner. They're scared of the end result and acting accordingly by paying off credit cards, increasing savings, and spending less. If the government were to show that they can control their spending, balance the budget (I'll start with passing one for now), and generally return to the real principles of capitalism, I believe those actions would instill renewed confidence in citizens and thus they'd be more likely to resume a more normalized pattern of spending behavior.

We're nearing a tipping point in American history, and unfortunately it's not a positive one. The worst part is that Congress and the President are ignoring the warning signs that are screaming red lights at us, while pushing forward with an agenda that's clearly at odds with the desires of the people. The good news, if you can call it that, is that it makes the general direction of our equity markets in the intermediate term quite predictable, and that direction is down.
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