The conclusion that deflation is always reversible under a fiat money system follows from basic economic reasoning. A little parable may prove useful: Today an ounce of gold sells for $300, more or less. Now suppose that a modern alchemist solves his subject's oldest problem by finding a way to produce unlimited amounts of new gold at essentially no cost. Moreover, his invention is widely publicized and scientifically verified, and he announces his intention to begin massive production of gold within days. What would happen to the price of gold? Presumably, the potentially unlimited supply of cheap gold would cause the market price of gold to plummet. Indeed, if the market for gold is to any degree efficient, the price of gold would collapse immediately after the announcement of the invention, before the alchemist had produced and marketed a single ounce of yellow metal.
What has this got to do with monetary policy? Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.
***We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation****
Odd, I draw the opposite conclusion, the more Ben prints, the MORE I save (not necessarily in $s). I rationally figure I need more savings in the future to maintain my lifestyle so I save more. Duh.
What Ben failed to take into account in this early 2000 flawed dissertation was a financial catastrophe which could turn a nation of consumers into a nation of scared savers for two decades. hahahahaha
Deflationistas cannot let this sink in. They argue from different angles that prices will fall and spiral down when the supply of labour is in excess, when production capacity is slack, when commodity demand is low, when consumption gives way to hoarding, when borrowing gives way to paying down debt, when loss of work removes market participation and demand, and when debt burdens become great enough to drain income away from trade.
Deflationistas, in other word, bring forth economic reasons to argue a monetary case when in reality they are making a case for a reduction in output and trade.....a recession or even depression.
Deflationistas rarely if ever actually say that there is a shortage of money although some will call a shortage of credit deflation. But that is what deflation is, a shortage of money in circulation relative to trade. This is like describing an apple to explain an orange. This confusion is what leads to calls for monetary intervention. In other words, monetary measures are called for to undo economic forces at play.
What the Fed, the ultimate deflationista, has done is too over-power an economic contraction by creating a monetary flood and this has slowed the recession but it has led to inflation of asset and commodity prices and put a stop under consumer prices. People who do not want to believe that the Fed can do this focus on velocity of money and consumption from wages, but what they ignore is that for every asset and commodity buyer, for every bond buyer, there is a seller on the other side who gets a higher price then otherwise and this money trickles into consumption as most people in the US these days are involved in asset markets. Inflation begins with printing and then a run for assets. Most people think inflation begins when consumer prices rise, but that is a late stage event.
The Fed has reflated, as it always does, an economy which needed an economic contraction to clean out the excesses of previous inflation. This was only possible in an elastic supply debt-based fiat money system.