Krugman has “explained” why deflation is “bad”. Well, he’s tried. But in fact he’s made the case for deflation, especially following insane bouts of INflation.
So first of all: when people expect falling prices, they become less willing to spend, and in particular less willing to borrow.
Why is this bad? Real capital formation comes from savings. Indeed, it is the essence of capital formation of all sorts. You can’t lend except from excess capital (production ex required spending, that is, surplus) so being less willing to borrow or spend is a net public good over time.
Yes, it makes the Madison Avenue people go nuts, and it particularly makes those people nuts who want to blow bubbles with borrowed money (which always ends in a bust with a huge number of people going bankrupt) but in terms of public policy saving of surplus and thus capital formation should be encouraged, not punished.
A second effect: even aside from expectations of future deflation, falling prices worsen the position of debtors, by increasing the real burden of their debts.
It’s supposed to be expensive to borrow.
Again, there are three sorts of borrowing:
Productive borrowing. That is, borrowing for the purpose of purchasing the means of production, where the reasonably-expected outcome is that the productive means purchased will return more than the amortized principal and interest on the loan. An example of this sort of borrowing is taking out a line of credit to buy a CNC machine which, along with raw materials, electricity, tools and labor turns out precision aircraft parts. This sort of borrowing is of net benefit to society as a whole, as it generates employment and net increases in GDP after the fully-amortized cost of the loan.
Consumptive borrowing. This serves only to pull forward demand. That is, it is borrowing to buy today what one cannot afford until tomorrow. This produces a temporary distortion in the supply:demand curve. Since the signal it sends to the economy is false, in that the demand proffered cannot be maintained indefinitely without an ever-increasing amount of debt being taken on (by definition a Ponzi Scheme) it is thus of negative value to society and as a matter of policy should be discouraged.
Speculative borrowing. This is borrowing to place a bet that whatever is purchased will sell for a higher price tomorrow than it does today – not for utility value or consumption itself. This is the most-destructive form of borrowing of all, since it is both inherently a Ponzi scheme and provides for no positive consumption boost whatsoever, as the item(s) purchased are not bought for the purpose of consumption in the first place. That is, this is not “pulled forward” demand (that would otherwise exist tomorrow) it is entirely false demand that but for speculative borrowing would not exist at all, at any price. Policy should thus always discourage such borrowing.
Now the right of free action says that there will always be some mix of these three forms of borrowing in the economy. That is, absent draconian (and unconstitutional) acts one cannot prevent someone from borrowing to speculate, or to pull forward demand.
But the public interest makes clear that society should not provide incentives to borrow for purposes that are against the public interest. It is for this reason above all others that “zero interest rates” and other similar policy pronouncements, along with inflation, are CORROSIVE and DESTRUCTIVE to long-term economic stability and growth – they DESTROY the incentive to form capital, and it is from capital formation that all legitimate and productive new business interests spring.
Finally, in a deflationary economy, wages as well as prices often have to fall – and it’s a fact of life that it’s very hard to cut nominal wages — there’s downward nominal wage rigidity. What this means is that in general economies don’t manage to have falling wages unless they also have mass unemployment, so that workers are desperate enough to accept those wage declines.
Oh, so the cure for wages that are above the economic value of the work performed is to keep paying people for work they don’t do, like, for example, government workers who make $250,000 pensions as SCHOOL ADMINISTRATORS? Exactly where’s the money supposed to come from Paul?
All borrowing must inherently come from surplus capital – that is, production less the cost of production and sustenance. IT CANNOT BE OTHERWISE since one cannot manufacture CAPITAL out of thin air – one must PRODUCE it.
There is an underlying problem with people like Krugman: They hate private capital formation and private self-determination with a passion.
They can’t deal with the idea that government doesn’t have all the answers, even when government is demonstrated to be the problem and blows serial bubbles on purpose, driving policies that offshore tens of millions of jobs.
Then when the bubble bursts they refuse to see the basic math of exponents, and proclaim that we must continue to spend more than we make – even though such policies are mathematically impossible to continue forever, just as all such exponents are into any physical environment bounded by actual fixed size.
Since the Earth is a rock of fixed size, it is thus inherently impossible for such “prescriptions” to work in the intermediate and long term.
Krugman claims to have an advanced degree. I presume that having such means he passed basic algebra, in which class he would learn how exponents work.
I therefore must presume that the garbage that comes from his mouth is knowingly falsely spewed, and not argued from ignorance.
The only solution to be found in a free market to such idiocy is to lead a boycott of those “media institutions” that give people like him a voice, along with their advertisers.
It’s time folks.