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Blaming Deflation

• zerohedge.com
 It is time to untangle myth from reality and put deflation in context.

Keynesian and monetarist economists commonly use the word to describe the phenomenon of falling prices, or alternatively a rising value for money. Deflation is loosely meant to be the opposite of inflation. But the term inflation originally applied to an increase in the quantities of currency and credit, not to the rise in prices that can be expected to follow. The definition has drifted from cause to supposed effect. Taking its cue from this transfer of definition, deflation is now taken to describe falling prices, usually linked to failing demand, and not a contraction of money in circulation.

Keynes decided that falling prices discourage consumers because they are likely to defer their purchases. He also argued in his Tract on Monetary Reform that deflation benefited the rentier class at the expense of the borrower, calling to mind an image of the idle rich enjoying a windfall at the expense of the hard-working poor. Keynes and his followers subsequently developed this argument against falling prices to justify government intervention as the remedy.

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