Who’s Afraid of Deflation?

Americans, the AP reports, want not merely a slowing of inflation but a return of prices to where they were before the value of the dollar started its collapse.

AP/Patrick Semansky
Lisa Cook, right, takes the oath of office as a member of the Federal Reserve Board, May 23, 2022, at Washington. AP/Patrick Semansky

Just in time for the election debate the Associated Press is out with a piece warning against deflation. The Federal Reserve hasn’t yet conquered the Biden inflation, which is running more than — wait for it — 50 percent above the Fed’s target. Now the Bidenites want to protect what inflation they’re left with. They might find the AP useful, since its message on deflation is “be careful what you wish for.”

Then again, too, we gold standard advocates are happy with that for which we wish. So we put in a call to the editor of Grant’s Interest Rate Observer to inquire whether we remembered correctly that he had some years back tried to steady the nerves of those worried about deflation. “Yup,” quoth Mr. Grant. Back came his famous proposal that if everyone was so worried about deflation they could fill in the Suez Canal.

The column, Mr. Grant had written, was calculated to “advance the proposition that falling prices are a natural byproduct of human ingenuity.” What, after all — this is our lingo here — would have been the point of building the confounded canal if it wasn’t going to make things less expensive? What would be the logic of digging the damned ditch if it were going to make it more expensive to deliver your goods?

Writes Mr. Grant in that immortal column, which was issued in the spring of 2008 ahead of the collapse later that year: “Let Fulton harness steam power, Edison the incandescent bulb or Gore the Internet, and more work will be done by fewer hands. In consequence, some prices will fall, some people will lose their jobs and some portion of the world’s capital stock will be cast into obsolescence.”

Mr. Grant warned of the dangers of “intervening to mitigate the sting of these adjustments.” Economics, he wrote, “is wont to turn up its nose at history, but the past has much to teach about price movements. In the late 19th century, invention flowered, productivity growth galloped ahead and prices, accordingly, fell — by 1.7% a year between 1875 and 1896.” He cited Milton Friedman and Anna Schwartz. Call it the Great Deflation. 

“Missing from the institutional landscape of that day,” Mr. Grant noted, “was a Federal Reserve to print the money with which to generate a countervailing inflation.” That, of course, was launched in 1914. Congress was prepared to enact it only on the ground that convertibility of the dollar would be maintained at the 20.67th of an ounce of gold established in the Gold Standard Act of 1900.

It’s not the position of the Sun that deflation does not negatively impact some. Deflation means that debtors must pay back their owings in dollars more valuable than those they borrowed. It’s the inverse of the impact of inflation on lenders. This is well-marked by Mr. Grant. It is the position of the Sun, though, that the Great Deflation had its upside in the bounty of productivity unleashed by falling prices.

Which brings us back to the yellow flag the Associated Press has just waved. It beats us why the AP, which was founded in the newsroom of the Sun lo these many years ago, chose this moment to start worrying about deflation. It is transmitting its story, though, as the Democrats are frantically looking for justifications for the Fed to put through some interest rate cuts between now and the election in November.

“Many Americans,” the AP reports, “are in a sour mood about the economy for one main reason: Prices feel too high. Maybe they’re not rising as fast as they had been, but average prices are still painfully above where they were three years ago.” Such incremental improvements, the AP reckons, “are hardly enough to please the public, whose discontent over prices poses a risk to President Joe Biden’s re-election bid.”

Mr. Trump, too, overspent wildly, but inflation didn’t break out on his watch. For he won supply-side measures — tax cuts, deregulation — that incentivized output. Mr. Biden, though, has left most Americans “not just looking for disinflation,’’ a Fed governor, Lisa Cook, is quoted by the AP as saying. “They’re looking for deflation. They want these prices to be back where they were before the pandemic.’’


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