First, let’s start with the basic notion that both deflation and inflation are “monetary phenomena”, and occur as a result of central banking (the Federal Reserve) monetary policy.
Inflation or inflationary policy is the vast increase in the quantity of paper money over the increase in production. Thus, as a result of this increase in paper money over production prices will rise (i.e. reduce the purchasing power of existing paper money). However, this rise in prices does not occur all at once nor does the reduction in purchasing power impact all of the citizenry at the same time. Herein lies the inequality (that government claims to be a defender of); those who receive the new money first, before prices in general have risen, benefit from the inflationary policy. Inflation is a redistributive governmental practice.
The relentless influx of paper money makes the wealthy and powerful richer and more powerful than they would be if they depended exclusively on the voluntary support of their fellow citizens…….inflation puts a brake on social mobility
Deflation, no less, is merely the opposite, where the supply of money “disappears” and prices drastically fall as a result. In the case of deflation, much like with inflation, there are also winners and losers as the final outcome. However, the fear of deflation seems to be based on a fallacy, which is the disappearance of money will lead to the disappearance of “physical structure” and wealth (wealth equals previously produced capital goods not yet consumed). This fallacy seems to have been placated by the producers of money and policy (the policy of deficit financing).
But our tools, our machines, the streets, the cars and trucks, our crops and our food supplies – all this is still in place. And thus we can go on producing, and even producing profitably, because profit does not depend on the level of money prices at which we sell, but on the difference between the prices at which we sell and the prices at which we buy. In a deflation, both sets of prices drop, and as a consequence for-profit production can go on.
Therefore, if inflationary policy (i.e. easy credit) leads to the boom in the business cycle, which inevitably must come to correction as a result of exuberant misallocation of resources, then the deflation that occurs during a market correction only serves to speed up the correction process much like inflation speeds up the (illusory in this case) market expansion. “…Rothbard’s analysis of deflation, which demonstrated in particular the beneficial role that deflation can have in speeding up the readjustment of productive structure after a financial crisis.”
In short, the true crux of deflation is that it does not hide the redistribution going hand in hand with changes in the quantity of money…..Both deflation and inflation are, from the point of view we have so far espoused, zero-sum games. But inflation is a secret rip-off and thus the perfect vehicle for the exploitation of a population through its (false) elites, whereas deflation means open redistribution through bankruptcy according to the law.
So, is deflation really so bad for the aggregate economy or harmful only for those who have benefited from inflationary policy? Which, inflation or deflation, is more in-tuned with liberty?
If we tie this up with our comparative analysis of free and compulsory production of money and money substitutes, we come to the conclusion that deflation is not a mere redistribution game that benefits some individuals and groups at the expense of other individuals and groups. Rather, deflation appears as a great harbinger of liberty. It stops inflation and destroys the institutions that produce inflation. It abolishes the advantages that inflation-based debt finance enjoys, at the margin, over savings-based equity finance.
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