In a period of shortages and inflation, I have been thinking a lot about deflation (maybe I have been dreaming about it). As I watch prices increase, it occurred to me that we only every discuss getting inflation back under control, but we never discuss prices falling back to a certain level. Why are we so deflation averse as a society? What’s so bad about it? I’m genuinely hoping to find some answers, and I will simply list a few thoughts below.

I think inflation has become normal. Every year we experience some level of inflation. Since we are used to inflation, we are at least a little scared of anything different. Deflation represents something new and scary. People hate change! To be honest, predictability is one of the most important parts of a thriving economy. It would be pretty bad if we wobbled back and forth between inflation and deflation. So, we don’t want to wobble back and forth every year, but, if the money supply remains fairly constant, a growing economy should experience gentle deflation. Perhaps, since we are used to inflation, we want to hold onto familiarity, so we keep printing money hoping we can hold onto some semblance of familiarity?

Another possible (I think quite likely) explanation is the broken Keynesian theory surrounding the current political discourse. The basics of Keynesian theory state that the economy is driven by demand. Economic problems are a result of deficient demand, and growth is driven by growing demand. Like it or not, this central idea drives the economic thought in our political world. What does this have to do with inflation/deflation, you ask? Well, the fear is that deflation will discourage demand. Consumers may wait too long to spend because they figure, “I bet a new ceiling fan will be cheaper in 8 months, so I am going to wait.” If we have inflation, consumers will be highly motivated to make purchases ASAP. Just the other day, I told my wife to go ahead and buy anything shelf stable with a good sale price since we don’t know how expensive it will be in a few months. In the eyes of the Keynesian, my thought process is great for the economy! We gotta spend, spend, spend! I am pretty sure that is the biggest driver behind our nation’s fear of deflation. We believe that deflation will discourage demand, and this will cause the economy to fall into a deep recession.

I think there is another layer to the Keynesian angle. The average American has about $90,000 in debt. This includes mortgages, auto loans, credit cards, etc. Debt is on the rise in American households, and if you look at different age groups, people seem to accumulate more debt as they grow older. It is no secret that our government is taking on more and more debt. States are increasing their debt levels on average, and no one plans to stop anytime soon. It is safe to say, that a significant share of our consumption, in both the private and public sectors, is driven by debt. According to Keynesian theory, consumption is the key. So, if we allow deflation to creep up on us, our consumers will stop taking on so much debt because the burden will become greater overtime instead of lighter. Debt is made more attractive by inflation because the burden is inflated away over time. Our government, who can create inflation pretty easily, is a big debt fan. Why not cut themselves a break by inflating some of it away? Rogoff and Reinhart, authors of This Time Is Different, suggest that governments have been using inflation as a soft means of defaulting on debt for centuries! It is easy to blame government for the inflationary problem, and it certainly played its part, but consumers want their debts inflated away just as much as government does. The centrality of debt to our society necessitates inflation.

If you have any thoughts on why we’re afraid of deflation, put them in the comments below. I do not think that deflation would be a bad thing. If you disagree, please let me know. I’m not afraid of the artificial drop in demand. I think that allowing supply and demand apart from the influence of a changing money supply is the best way to determine the price level. A central power attempting to control the price level is not the best way to run things, but that will not change unless our attitude towards inflation changes.