47 / 54
IT. Consumers want to use the products and services and corporations want to create
competitive advantages with them, this rather sooner than later.
A last argument against a general sinking of prices notes, that at least some costs are fixed at a
medium-term and this may lead to losses, even with manageable business models. Especially
debts are fixed nominally. With the sinking of prices, it is more difficult for debtors to service
their nominally fixed debts. However, also here is true: the losses of the debtors are
countervailed by the profits of the creditors because the interest income of the creditors has
now a higher purchasing power. What the one loses, the other one wins.
In the extreme case, the debtor can get bankrupt. Should this bankruptcy not be
disadvantageous? Also here, it is not the case from the perspective of the entire economy. The
bankruptcy of the debtor due to sinking prices will not pauperise community. There will only
be a change of owner. Old owners are losing the control to their creditors, from the point of
view of the total economy, the production potential is not affected thereby. When a producer
is bankrupted by his disability of paying debts, his factory and machinery equipment will not
disappear, then. The bankruptcy only means a redistribution and a change of ownership. If the
business model itself is sustainable, the new owners will continue the production.
The losses of debtors in a price deflation are explaining their aversion against falling prices.
The financial industry, highly indebted large corporation groups and especially the state as the
biggest debtor have a great interest to declare price deflation being a terrible catastrophy.
Significantly, these actors are first and foremost profiting of their propagated remedy: the
inflation – respectively the currently executed quantitive easing of the monetary policy by the
European Central Bank.
Unfortunately, the cause of falling prices is often neglected in the debate of price-deflation.
Falling prices can be the consequence of increasing productivity. It is a wide-spread myth that
a growing economy shall need more money. If more or better products are produced, there
will simply be a tendency to falling prices – the most natural development in a healthy
national economy and the rule in the second half of the 19
th
century. Also the latest study of
the Bank for International Settlement cannot find negative effects of falling prices concerning
the growth of the economy.
A further kind of deflation is the credit deflation, going along with a falling money supply. In
connection with an artificial upturn, bubbles and failed investments, it is able to accellerate
and enforce a crisis of adjustment, so that distortions of the boom phase will be corrected
faster. However, this kind of deflation is not responsible for failed investments, it will bring
them earlier to light. If this deflation is prevented by the creation of new money, failed
investments and wrong developments will continue for a longer time. New bubbles can be
created. And it will lead to a redistribution. To justify a redistribution by way of monetary
policy as QE implies, the deflation is wrongly represented as a danger for the entire economy.
from Frankfurter Allgemeine Zeitung, Frankfurt, Germany, May 4, 2015.
Responsible for
translation: GEFIU, the Association of Chief Financial Officers Germany, translator: Helmut
Schnabel
IAFEI Quarterly | Issue 29 | 45