In Defense of Deflation by Philipp Bagus

By Philipp Bagus

This ebook analyses the reasons and outcomes of deflation. not like the frequent trust that deflation will be destructive to the economic climate as a complete, the writer argues that unfastened industry deflation is releasing and precious. a number of myths of deflation are uncovered and the explanations for the common deflation phobia that serves to justify expansionary financial coverage, i.e., inflation are investigated. ancient case reviews, the expansion deflation within the US after the Civil battle and the financial institution credits deflation in Germany throughout the nice melancholy are mentioned to demonstrate the issues made within the theoretical research of deflation.

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Hence, he is not afraid of a price deflation that can occur when output is growing and the money supply is constant. 65 He also states that the progress of industry and population makes the costs of production fall66 and refers to the contemporary situation of the world without being worried about the price deflation. He does not mention deflation as a threat in these circumstances. In sum, we can find two lines of thought concerning deflation in classical economics. Along one line of thought, authors such as Smith, Ricardo, Say, and Mill do not see problems with a price deflation or, at least, do not see them worth discussing in their theoretical works and treatises.

After World War II price inflation becomes a main problem in the eyes of economic theorists who did not regard deflation as a subject worthy to study in depth. S. And so papers and articles on the subject of deflation flourish once again. These theories often were developed during deflationary periods and concerned the problems of individuals who suffered losses during those periods. In fact, deflation theories were sometimes inspired by interest groups that had suffered losses in the price deflations.

Thus, they regard it as possible that a moderate price deflation would be optimal for an economy. This position is one with which the liquidity trap theorists would never agree. 6 Conclusion Theories of deflation have flourished during times when price deflation has occurred. The first treatments of deflation begin with the Swedish experience in the eighteenth century. A cluster of treatments follows during the suspension of specie payment in Great Britain from 1797 until the 1830s. 106 The discussion receives new impetus in Sweden and Great Britain after World War I when these countries pursued deflationary monetary policies.

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