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Who's afraid of deflation?

Di ritorno dalla Spagna trovo subito un bell' articolo di Matthew Lynn su Bloomberg riguardo lo spauracchio of our time: the price deflation. Before I go off to hide behind walls made from dollars hot off the press you care to read who gains and who loses from price deflation and you have a clear idea about why so much media hype about the "danger deflation

theory deflation is a lemon. We've all been sold.

By Matthew Lynn

For much of last year, the central bankers, industry leaders and politicians We have warned of the dangers of deflation. The falling prices, they said, would create another depression on the style of the thirties. The only solution was to print money like crazy.

Now it turns out that this theory was a lemon.

Deflation is in no way a threat.

does not prevent the economy to function and does not even preclude recovery. The evidence suggests that a period of deflation prolonged exposure may instead be what is necessary because the economy is particularly indebted come back on track.

Chancellor of the Exchequer (equivalent of our Minister of Finance) British Alistair Darling, said this year that the Bank of England should be "prepared to act" to prevent price deflation.

"We were very careful to avoid the risk of deflation," said ECB President Jean Claude Trichet in un’intervista questo mese. Lo stesso messaggio è stato passato a ripetizione in tutto il mondo dai leader economici.

E non sono stati nemmeno lenti a mettere in pratica i loro consigli. La Bank of England ha iniziato un programma di “quantitative easing”, ovvero ha creato nuova moneta, per respingere questa minaccia.

Il problema è che questa teoria non sta in piedi e la deflazione dei prezzi, dopo tutto, è già arrivata.

prices falling

According to statistics from the European Union, the eurozone countries Prices fell 0.7 percent in July year rispeso earlier, after it had declined by 0.1 percent in June. In Germany, the largest economy among the European consumer prices fell for the first time in the last 22 years. Wholesale prices actually fell almost 11 percent.

So we conclude that the euro zone, hit by deflation, is disappearing under a financial precipice, right? Apparently not. Is leading the world out of recession [always that we are really coming out of recession, author's note]. Figures released last week show that Germany and France are dragging the region out of the decline - both economies have expanded by 0.3 percent from April to June after 12 consecutive months of decline.

do not see much evidence of the dangers of deflation there.

In fact, all those who have a minimum sense of economic history should be aware that this whole story about deflation was "sold" too. In the UK, the House of Commons Public Library price data going back to 1750. From 1814 to 1914 prices have gone up a bit 'in some years, less in others, so that there was a real change in the price level during the whole century.

The great world power .

In other words, there were a lot of years of deflation. Nevertheless, this long period, the United Kingdom became the largest economy in the world. Its relative decline began only when inflation began. Deflation did not prevent the industrial revolution, one of the most sustained periods of economic creativity ever seen.

Similarly, a study by the Federal Reserve Bank of Minneapolis dated 2004, has looked at the data about the deflation of 17 countries over 100 years. He found that although the Great Depression of the thirties has been linked to falling prices, this was not true for any other period in history. There was virtually no evidence "that deflation had caused a depression.

Why should we believe this theory? We are constantly told that deflation is bad because it means that consumers refrain from buying, thinking that tomorrow the price will be lower. But this is nonsense!

Two pulses

Everyone knows that a computer or an iPod will be both better and cheaper in six months. Yet people want one right now . Links between these two impulses, a lot of consumers go out and buy computer and music player. This is true for the electronics industry and when that other industries get used to this situation, it is also true for them.

Deflation, however, can be bad for some groups of interest, which happen to be very powerful. E 'bad for CEOs. It 's easier to grow your profits in a slightly inflated. can gradually increase your prices and often cut the real wages of your workers in a hidden way by keeping a constant level money.

Even the banking industry, which relies on inflation to make loans to support its high-beverage, does not like deflation. It is equally wrong for governments, using inflation to reduce the value of their debts .

Across deflation is good for savers that become richer simply being attached to their money. It 's good for consumers who pay lower prices . E 'is usually beneficial for workers generally maintain the value of their wages while prices fall .

There are winners and losers as in almost all economic developments. The essential point is that the losers are much more powerful group of those who earn. This may explain why we always hear of the dangers of deflation and its ever benefits . But do not make these threats more real.

There is no threat of deflation. It may also be desirable if it encourages a balanced relationship between savings and consumption and discourages governments and banks from debt.