Conflicting deflation/inflation trends


Inflation- more dollars chasing fewer goods

Deflation- fewer dollars chasing more goods

I’m making three assumptions based on demographic evidence.

  • In the next 20 years, there will be roughly the same number of people working, as demographic patterns show, and there will be far more retired people.
  • This means that the average amount produced, both per worker and nationally, will remain about the same.
  • However, this will be achieved with a larger share of beginning and mid-career people, as opposed to the older (and therefore disproportionately expensive) Baby-Boomers.

My general take: since retirees and entry-level employees don’t make as much money, there will be less money chasing the same number of goods, putting a deflationary pressure on prices.

Deflation is unacceptable in a debt-based economy such as our own. Here’s some of the reasons why:

  • Private debt becomes more expensive as wages fall, reducing demand.
  • Public debt becomes more expensive as tax revenues fall.
  • Real profits and incomes decrease, reducing tax revenues.
  • Paper profits in terms of capital gains decrease, reducing tax revenues.

So, deflationary pressure created by lower cost of production, coupled with patent refusal by central banks to allow deflation, will invite further dollar-debasement in order to keep nominal incomes and tax revenues up.

This should be interesting to watch as the printing presses get their exercise.

 

 

Published in: on January 13, 2013 at 5:36 am  Leave a Comment  

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