Gary North writes Why the Deflationists' Argument Is Wrong in Both Theory and Historical Fact
Aug. 3, 2012Obvious Falsehoods
An inflationist is someone who believes that price inflation is the result of two things: (1) monetary inflation and (2) central bank policy.
A deflationist is someone who believes that deflation is inevitable, despite (1) monetary inflation and (2) central bank policy.
No inflationist says that price inflation is inevitable. Every deflationist says that price deflation is inevitable.
Gary North does not speak for any deflationist, nor does he speak for all the inflationists. He acts as if he does.
Sustained price deflation is certainly not inevitable, nor is price deflation inevitable in the short-term either.
Since I am a staunch deflationist, and since Gary North is aware of my writing, it appears he is purposely making preposterous straw-man arguments just to be able to shoot them down.
Discussion of Definitions
As I have pointed out many times, before there can be a debate at all, one has to agree to definitions.
My definition of inflation is an increase in money supply and credit with credit marked to market. Deflation is the opposite.
Prices are clearly not part of my definition, and prices can indeed rise in a credit-deflationary period.
I cannot demand that people accept my definitions, but without an agreement of definitions, the likely result is people talking past each other.
Misguided Focus on Money Supply
I have given many reasons why a focus on money supply alone is complete silliness, but the condensed version is the total credit market is $54 trillion and base money supply is about $2.7 trillion.
If people think that $54 trillion can and will be paid back, or if they think that money supply is more important than credit, they will be wrong, but they are entitled to their opinions.
Money Supply vs. Credit
Gary North's definition of inflation obviously involves money supply.
Not every inflationist would accept his definition. Some would consider credit and some would include government manipulations irrespective of money supply. So that is a third thing North is wrong about.
Ignoring Time Preferences
North says "An inflationist is someone who believes that price inflation is the result of two things: (1) monetary inflation and (2) central bank policy."
With that, Gary North is wrong for the fourth time.
Non-monetary government interference in the markets can certainly affect prices.
More importantly, prices can rise or fall by changing time-preference for money even if money supply is constant.
For example, social trends and changing demographics can affect the demand for money, and thus prices. So even if there was no Fed and no Fractional Reserve Lending it is a mistake to believe there could not be general price increases for reasonably lengthy periods of time.
Likewise, because of continual advances in productivity, there is a general downward pressure on prices over time. Thus productivity can affect prices.
North misses all of those things in his blanket statements.
Credibility Issues
People really get into serious trouble using phrases like "no inflationist" and "every deflationist" when they clearly do not speak for everyone, especially when they also need a lecture about changing attitudes and time-preference as well.
Finally, it's easy to setup a straw-man debate that you can win. It's also easy to lose credibility doing just that.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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