Destructive Deflation


"Deflation is more destructive than inflation."


Both deflation (decreasing money supply) and inflation (increasing money supply) transfer buying power from one group to another and both distort the pricing process of the market. The structure of the market determines the relative damage done by each.

If the supply of money declines, as the result of the liquidation of malinvestments and the reduction of artificially increased money supply, deflation will cause little problem.

If, on the other hand, the government artificially contracts the money supply in an otherwise healthy economy, producers may have to liquidate assets to pay obligations, which could have a detrimental effect on the economy.

The popular notion that a generalized price decline (commonly referred to as “deflation) would wreak economic destruction has no validity. Falling prices should indicate increased productivity – a positive change for the economy. In addition, having productivity increase in all segments of the economic simultaneously remains highly unlikely.