Monday, January 11, 2010

Deflation delusion

Tucker Carlson's new Daily Caller features a spurious Fed-bashing opinion piece by James Rickards, lawyer, economist and former general counsel of Long-Term Capital Management. Rickards takes the paleolibertarian deflation-is-wonderful line:
Now imagine your salary stays the same but the price of everything you buy goes down. You still don’t have a raise but you do have a higher standard of living and increased purchasing power. A new car that used to cost $24,000 now costs $16,000 and is much more affordable. That’s the power of deflation; call it the workingman’s bonus.
Trouble is, deflation rarely if ever means you sit back enjoying the falling prices while everything else stays the same. It more likely means your house price is falling, you can't get a loan (who wants to lend against declining collateral?), your employer's revenues are sliding and your job is gone or soon will be. Japan's lost decades, not to mention the Great Depression, should put the lie to any idea that deflation is a good thing. Nor is it meaningful to write, as Rickards does that --
it is a fact that since the creation of the Federal Reserve the dollar has lost 92 percent of its purchasing power. If you had a nickel and three pennies in your hand, that’s what’s left of the dollar since the Fed took charge.
By any reasonable measure, the population is vastly wealthier than it was in 1913, and the only person who would have suffered the effect Rickards describes is someone who's been holding his or her wealth exclusively in non-interest-bearing cash since 1913; presumably an extremely old person who's homeless and uses a mattress in lieu of a bank account. If we'd had deflation during all this time, that theoretical person could have posted some kind of gain (as long as he or she never swapped out of dollars into real assets), but the economy would have long since collapsed.

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