By Michael Pento
Given the dire deflation warnings that have become the standard talking points of most economists, American investors can be forgiven for reaching for their Prozac. I believe their anxiety is misplaced. Unfortunately modern economists don’t understand what deflation is or why, in reality, we have much more to fear from inflation.
Moderate deflation is actually the natural trend for a productive economy. If a producer can increase his output per unit of input, then he can afford to expand his market by lowering prices and still increase profits. In that way, deflation allows consumers to buy items that they may not have previously afforded. It also promotes savings, which is essential for investment and capital development.
Deflation is also the natural consequence of a contracting economy. In a recession producers cut back output, and there is a reduction in the amount of goods and services available for consumption. To keep prices from rising (due to shrinking supply) under such circumstances, the central bank should allow the money supply to decline in line with the reduction in output. Consumers also put downward pressure on prices during an economic contraction by responsibly selling assets to pay down debt.
