The Price Paradox

Apostles of monetary expansion continue to believe that avoiding deflation is simply a matter of speeding up the printing press. But why should this be any more successful in the future than it has been in the last few years?

LONDON – In 1923, John Maynard Keynes addressed a fundamental economic question that remains valid today. “[I]nflation is unjust and deflation is inexpedient," he wrote. “Of the two perhaps deflation is…the worse; because it is worse…to provoke unemployment than to disappoint the rentier. But it is not necessary that we should weigh one evil against the other."

The logic of the argument seems irrefutable. Because many contracts are “sticky" (that is, not easily revised) in monetary terms, inflation and deflation would both inflict damage on the economy. Rising prices reduce the value of savings and pensions, while falling prices reduce profit expectations, encourage hoarding, and increase the real burden of debt.

Keynes's dictum has become the ruling wisdom of monetary policy (one of his few to survive). Governments, according to the conventional wisdom, should aim for stable prices, with a slight bias toward inflation to stimulate the “animal spirits" of businessmen and shoppers.

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