Download In Defense of Deflation by Philipp Bagus PDF

By Philipp Bagus

This publication analyses the reasons and effects of deflation. not like the frequent trust that deflation will be destructive to the economic system as an entire, the writer argues that loose marketplace deflation is freeing and important. numerous myths of deflation are uncovered and the explanations for the common deflation phobia that serves to justify expansionary financial coverage, i.e., inflation are investigated. historic case stories, the expansion deflation within the US after the Civil conflict and the financial institution credits deflation in Germany through the nice melancholy are mentioned to demonstrate the issues made within the theoretical research of deflation.

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The real cost of borrowing will be on a level higher than is necessary to stimulate the economy. Liquidity trap theorists argue that there is no way out of this situation via conventional monetary policies. The central bank can buy bonds from the public and enlarge the money supply, but the public will hold onto the money it receives, instead of spending it. Bonds and money are essentially conceived of as perfect substitutes as the nominal interest rate is zero. The recession and deflation can then be prolonged.

Hence, one might assume that Marshall did not see any problems resulting from price deflation. In early neoclassical theory, there is an important treatment of price deflation by Knut Wicksell (1851–1926). His case is curious as at several stages in his life, he defends different and apparently inconsistent theories of deflation. In his famous article “The Influence of the Rate of Interest on Prices” (1907) Wicksell reveals his theory of inflation and deflation. , the existing rate of profit or the natural interest rate, a credit expansion will follow and prices will keep rising.

Warren and Pearson write: “One of the most important problems in all human relationships is the establishment of reliable measures”(1933, p. 150). Regarding the problem of redistribution by price changes, these authors go so far as to state: “The solution of the problem of a stable measure of value will go far in establishing peaceful relations among men” (1933, pp. 151– 152). From the argument for price level stability it follows that price deflation should be prevented. These authors advocate preventing price inflation as well.

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