Wednesday, February 18, 2009
A debauched King
Apparently, Unswervin' Mervyn has written to the Chancellor of the Exchequer asking for permission to start making up new money to stave off deflation. After all, if you have dropped rates as low as they can reasonably go, the next stage in making money cheap is to print the stuff with gay abandon. The economic logic is certainly sound, but I do wonder about the theory underpinning the policy prescription. We keep getting told, as though repetition makes it true, that deflation is bad. But surely deflation is just negative inflation? I can see the argument for the existence of a deflationary spiral, which the Great Depression is said to have been; but from exactly the same era the Weimar Republic proves the existence of an inflationary spiral. In fact, inflationary spirals have been more common than deflationary ones: the Roman Empire fell prey to them. Both kinds of spiral are dangerous, so why are we so scared of a little deflation, but not scared of a little inflation? Is there good econometric evidence to suggest that deflationary spirals start earlier than inflationary ones?As far as I can tell, people insist that the Great Depression was a deflationary spiral, but ignore the fact that deflation theory only really applies in modern economies with fiat currencies. At the time of the Great Depression, everyone was on the gold standard. On the other hand, Austrians and other gold-bugs tell us that deflation is no worry at all, but their evidence is also from the gold standard era. So again I ask, is there any evidence, under a fiat currency, that deflationary spirals occur earlier than inflationary ones?The only reasoning I can really see is for someone to take the view that economic policy should serve the interests of net debtors. Given that a good economic policy would neither favour nor disfavour anyone, I see that thesis as profoundly immoral and politically corrupt. There surely ought to be a better reason than that for printing money.Debauching the currency is a serious measure and not one to be taken lightly. If it were to turn out that, in fact, the effects of inflation and deflation are equal in magnitude and opposite in effect, then the Bank of England's current inflation target and consequent plans for "quantitative easing" would look extremely dodgy.