Deflation is usually thought to be a synonym for falling prices. There could be no more serious error in all of economics, writes George Reisman. Calling falling prices "deflation" results in a profound confusion between prosperity and depression. This is because the leading cause of falling prices is economic progress.
If you stuck a dollar in a savings jar in 1913 and tried to spend it today, you would find your purchasing power had been sapped. Your dollar would be worth about a nickel. What happened? Well, the government had created an institution called a central bank that was endowed with the power to create money. And create it did: so much so that it diminished the value of all existing currency.
The historical record shows that commercial freedom is the best policy in peace and war. Cooperation is more fruitful than coercion. And if one wants the friendship or assistance of others it is better to appeal to their interests instead of their fears. Above all, foreign trade should be as free and unrestricted as trade within a nation.
Every good libertarian should favor tax cuts. The money belongs to us in the first place, and it should be an occasion to celebrate when Washington wises up and gives some back. We've been promised a tax cut as long as memory serves, but it never seems to arrive. At last, here it is, thanks to Bush having pushed so hard for this as an economic stimulus measure.
The tax bills of many American families are falling during a period of exorbitant increases in federal spending due mainly to war. Odd? Not once we discover the record levels of government debt accumulation. It's the shell game of government finance at work. It is not the first time that government warriors have turned to debt and the printing press to pay for their military ventures.
The NBER says the recession ended 20 months ago, but where is the recovery? The labor market is not responding, and growth is weak and ambiguous. Christopher Westley offers an explanation of why this supposed recovery looks different from previous ones.
You buy a stock and the price goes down. Who accepts the liability for losses? The purchaser of stock, of course, who must always bear in mind that stocks are never foreordained to go up or down. As painful as they are, investment losses are necessary to work off the excesses of a bubble, and to re-allocate capital to more promising business ventures.
How powerful is economic law, that mysterious aspect of the structure of reality that causes prices to rise and fall and thereby give direction concerning the use of resources? More powerful than the US government, even more powerful than all the governments in the world combined. In Iraq, the US demonstrated that it can overthrow a despotic government but it can't finally control economic forces, particularly as they affect money.
In recent newspaper columns, Paul Krugman of Princeton University and Lawrence Kudlow have sounded deflation alarms. The solution to combat falling prices, they argue, is for the Federal Reserve System to increase the money supply.
Why is the dollar falling? Many commentators blame the balance of payments deficit. In fact, writes Frank Shostak, this has nothing to do with it. The main influnce on exchange rates is the purchasing power of money, which is mainly determined by supply and demand. The dollar is falling because the Fed has been pumping money.
