“Davidson” submits:

The argument for or against Inflation/Deflation has been colored by speculators so that we think inflation is natural while deflation is not. Inflation makes current savings worth less and it stimulates individuals to spend, to replace currency with goods, and even to borrow to spend as one hopes to pay back with cheaper currency. Inflation is the friend of the homeowner, it is a wealth transfer condition which hurts savers, people living on fixed incomes and favors those who borrow at fixed rates. One’s investment costs can remain stable while the value of the asset inflates. It has always been seen that inflation was good for those entering the Middle Class and becoming homeowners. It has likewise been seen as a detriment for the wealthy who represented the lending class.

Deflation on the other hand has always been viewed as dangerous. Falling asset prices used a loan collateral can quickly depress loan values and lead to perceptions of insolvency, i.e.  bank insolvency, as stated Book Value falls below regulatory requirements. We just came through such a period in 2008-2009 when FASB accounting rule FAS157 forced lenders to use market based prices during a time of market panic to determine their solvency. Many thought we were on the brink of global financial collapse, Hank Paulson for one, because they did not understand the difference between market prices and asset values. Ben Bernanke’s testimony March 2009 reversed this collapse when he indicated that FAS157 did not provide fair asset values.  The markets reconsidered and began the strong rebound which remains in place to this day.

Best one can assess recent events is to come to the conclusion that Inflation/Deflation has a lot to do with what people think it is!

Like everything else financial, we seem fraught more with myth and reality. If we were to view economic history over the longer term, we would come to the same conclusion Julian Simon did in ‘The Ultimate Resource’. That is, Deflation is a normal process in a healthy economy. Individuals are forever tinkering, inventing and making one breakthrough or another so that they can bring a competitive product to market. To be competitive it must provide ‘value’. Value is comprised of a mixture of ‘faster, better, cheaper’. Jobs’ iPhone was twice the cost, but the functionality it brought to individual users caused it to fly off the shelves during the most difficult economic downturn since the 1930s. The iPhone has not been displaced as a prime example of Julian Simon’s ‘The Ultimate Resource’ by anything since its introduction. A productive/creative economy is DEFLATIONARY!! Products/services are always being introduced which have as part of their novelty the fact that they do that much more per unit of currency than what they are replacing in the perceptions of consumer

A productive/creative economy is DEFLATIONARY!!

Deflation is the natural result of discovery, invention and subsequent commercialization. Deflation in a ‘Free Market’ generally means that existing products become worth less as newer more effective products enter the marketplace with consumers preferring the newer more useful for the older less useful. Consumers will pay more for a new product/service if it fulfills their needs that much more than existing products/services. A product’s net deflationary impact is what causes one product to replace another.

Deflation is not something to fear. Deflation is something to be welcomed!

Current financial thinking on the Inflation/Deflation debate is backwards!

Via: valueplays