Does Deflation Spur Consumption? (Contrary to conventional Wisdom)

How many people have heard the claim that we need to increase inflation to motivate people to spend today rather than save for tomorrow. The idea behind price inflation is that people are better off spending their money today rather than saving it for tomorrow. I would like to put forth a theory that economic deflation maximizes consumption. Monetary inflation merely forces people to save by other (less efficient) means. The loss of economic efficiency of savings means people must consume less so they can maintain the same level of real savings after all inefficiencies.

People Need to Save

As much as mainstream economists like to promote the supposed societal benefits of increasing spending, living breathing people need to save. Without savings people are forced to join the rat race and live paycheck to paycheck. A single bad-day, loss of job, or economic dislocation can leave these people helpless.

Regardless of what monetary policy you deploy to encourage spending, the market will respond by shifting savings from money into other, less efficient, higher risk vehicles. Savers see inflation and instead opt to buy and hold inventory or take speculative bets on individual companies and debtors rather than less risky bet on the economy (via money). Meanwhile governments tax inflationary (artificial) gains which eats into the savings principle.

The more the government attempts to interfere with savers ability to save, the greater the extremes actual savers will adopt in order to prepare for the future. The more costly it becomes to save, the more capital must be diverted into the attempt to save.

Deflation Prevents Hoarding

In a deflationary environment people face an opportunity cost by holding on to resources. Businesses that maintain a large inventory lose money each day they refuse to lower prices. It only makes sense to hoard inventory if you expect a future scarcity of a resource to keep the price rising faster than the currency is deflating. Anyone who withholds labor today will make less tomorrow so people will no hoard their labor. Those with oil, gas, lumber, or other natural resources will sell today before the price falls further.

Consumers are more inclined to spend as a result of falling prices. What store advertises "rising prices" in order to sell more product today? Only in circumstances where there is a hard deadline and little competition can merchants advertise rising prices and motivate some people to spend earlier.

Inflation Motivates Saving (in non monetary assets)

In the face of rising prices, people are given the economic signal that they will need "even more" for retirement. They will feel poorer which in turn will induce them to save. In an economy designed to make savings difficult, it will force people into risky investments in things they don't understand. In an attempt to save for their future, people end up being lucky to break even after inflation, taxation, and defaults. The people who profit from this are those offering risky investments: borrowers, companies offering IPOs, and speculators.

Conclusion

No matter what economists claim about consumption driving the economy, their interventions can only make the economy less efficient and therefore consume capital. The more capital that is consumed the more people need to save and the less they can actually consume.

Saver's gonna save, they need to. Only price deflation can motivate a saver to consume today. Only price deflation can motivate producers to lower prices quickly to move their product. Only price deflation encourages people to unload losing investments quickly and reinvest elsewhere.

Inflationary monetary policy can only make savings less efficient and therefore increase the amount of capital directed toward savings while reducing the amount of capital that is actually effectively saved.

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