Deflation is a good thing

See the latest article by Ambrose Evans-Pritchard, "Gold reclaims its currency status as the global system unravels". His point:

It is certainly not inflation as such that is worrying big investors, though inflation may be the default response before this is all over. Core CPI in the US has fallen to the lowest level since the mid-1960s. Unlike the blow-off gold spike of the Nixon-Carter era, this rally has echoes of the 1930s. It is a harbinger of deflation stress.

Capital Economics calculates that the M3 money supply in the US has been contracting over the past three months at an annual rate of 7.6pc. The yield on two-year Treasury notes is 0.71pc. This is an economy in the grip of debt destruction.

Albert Edwards from Societe Generale says the Atlantic region is one accident away from outright deflation - that 9th Circle of Hell, "abandon all hope, ye who enter".

Yet the markets are already moving on, in any case. They doubt whether the EU’s strategy of imposing of wage cuts on half of Europe without offsetting monetary and exchange stimulus can work. Such a policy crushes tax revenues and risks tipping states into a debt-deflation spiral, as if everbody had forgotten the lesson of the 1930s.

My point: I think you can be afraid of a deflationary recession, or of hyperinflation, but it doesn't make sense to be afraid of both. My fear is hyperinflation, and I don't understand why everyone is so afraid of deflation. When deflation occurs, your dollar is worth more. And if you do need to borrow, interest rates are much lower. And so I think the article is contradictory - if there is deflation, then why would you buy gold?

A little deflation is a good thing. "This is an economy in the grip of debt destruction." Good, we need much more debt destruction. So a few more bank fail. That's a bad thing - if you are a bank, but it's good for everyone else (assuming depositors are taken care of). We can survive a depression. What we can't survive is Zimbabwe-style hyperinflation.

Deflation does require a change in everyone's mindset. Workers need to accept lower wages. Businesses need to ruthlessly cut costs to survive. Governments need to cut programs (oh the horrors!). Everyone needs to either pay back or default on debts. But after a period of deflation, the economy will come roaring back on its own, without the need for artificial stimulus.

Austerity is the watchword of the day. We need more of it. We don't need any more "stimulus" programs which do nothing except waste money on pork projects and encourage even more dependence on big government.