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Spain, Article: “No fear of deflation”
Sinking prices are not a problem for the entire economy
By Philipp Bagus, Assistant Professor for macroeconomics at the Universidad
Rey Juan Carlos at Madrid, Spain. Just now, his book “In Defense of
Deflation” has been released (Springer Wissenschaftsverlag, 2015), from
Frankfurter
Allgemeine
Zeitung,
Frankfurt,
Germany,
May 4, 2015
In the course of the European monetary easing, started by Mario Draghi (quantitative easing,
QE), the European Central Bank is planning to purchase securities for 1.1 billion Euro, first of
all government bonds. For this unprecedented action, the European Central Bank needs
convincing arguments. One argument is the low rate of price increases in the Eurozone. A
“sliding down” into “deflation” should be avoided by all means. The deflation-zone is
suggested as quicksand meaning to have hardly escape and gradual ruin.
It is said that a security distance of inflation is needed from the number zero which would be
achievable by QE.
How far this fear of deflation is scientifically tenable? Does price deflation mean a problem
for the entire economy? Intuitively, favourable prices seem to be no problem. Purchasers are
happy about lower prices. But now, we are not only purchasers, but also sellers of goods and
services. And as sellers we are preferring higher prices. Concerning the general decline in
prices, the individual person can win or lose. The positioning of everyone depends on the fact
how the prices change relatively to each other: either the individual purchasing prices are
falling faster or the selling prices. The purchasing prices of one are the selling prices of the
other one. What one wins, the other one loses. In an aggregate, there is no problem.
For corporations, a positive profit margin is decisive, and this can be the case at higher or at
lower price levels. If the purchasing prices are falling faster than the sales prices, the real
profit situation will improve even in a price deflation. Of course, the state can also cause
economic distortions during a price deflation, when its interventions prevent the falling of
certain prices. Then, the falling prices are not responsible for the involuntary lying idle of
resources but the state, which is holding against the sinking of individual prices with its
interventions.
Often one may hear a more sophisticated argument against price deflation: Not the falling
prices themselves would be the problem, but the expectation of falling prices. Consumers
would defer consumption while expecting falling prices, corporations would then make
losses. Hardly one will not buy gasoline for a full year by assuming that the gasoline price
will be lower at 10 % the following year. In the technology sector, the prices are sinking
continuously without leading to shrinking capital expenditure and to a crisis. Quite the
contrary: The sector is flourishing. The consumers are knowing that prices for technology are
falling continuously. The price-performance-ratio is improving. In spite of this the volume
sale of computers and digital cameras is flourishing. Corporations are investing in the latest
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