More on Austrian Economics ...
Introduction to Austrian Economics
Podcast surveying the basic concepts of Austrian Economics.
Advanced Austrian Economics
Podcast covering advanced concepts of Austrian Economics.
Filed Under: Anything Peaceful
Tags: Austrian business-cycle theory • deflation • gas prices • housing market • monetary policy • oil prices
by Mason Drake
Deflation: The Bogeyman of Bankers and Confused Economists
Excellent article on this currently popular topic from the FEE vault: The Dreaded D Word by Christopher Mayer
Comment by Carl Clegg on 15 December 2008:
Deflation can produce some interesting challenges. Let’s think about it. Suppose you were to get a mortgage at a rate of 0% (not likely, but with Fannie Mae and Freddie Mac and their government mandates to produce affordable mortgages, it’s at least feasible). The challenge is that all future mortgage payments — during a period of deflation — would necessarily be made with money that is worth more in the future than it is now (since with prices going down, you can buy more tomorrow than you can today). Thus there would be a penalty for borrowers — even 0% borrowers. But as Mises taught, there are always winners and losers — both during periods of deflation and periods of inflation. As long as individuals are free to act on their own accord, they can alter their savings, borrowing, and spending to adjust to current economic conditions. And as Mr. Mayer points out, deflation is not necessarily a bad thing.
Comment by Jacob Steelman on 16 December 2008:
I suspect the reason bankers do not like deflation is the erosion of asset values (from the increase in the value of currency) used as security for loans the bankers made during the period of inflation when asset values were higher (from a decrease in the value of the currency). I suspect commodity based companies – oil companies etc. like the deflation – they can hoard the cash accumulated during inflation when the value of their commodities rose and then take the cash during the deflation and acquire commodity assets at low prices.
Comment by Sheldon Richman on 16 December 2008:
Watch The Freeman for a forthcoming article on deflation. Preview: there’s a difference between a monetarily induced deflation and a productivity induced price deflation.