Tuesday, June 2, 2009

A Socialist's Guide to the Future of Capitalism -- Part 2: the Need for Hyperdeflation

I've already written, in an earlier post, about the importance of deflation, and the insane efforts of our financial leaders to force our economy to move in the opposite, inflationary, direction:
Sure, prices went down during the depression, but that is NOT what caused it. The last depression was caused by the same greed, manipulation, deception and dishonesty that caused this one. If anything made the last depression tolerable and, no doubt, saved millions from the streets or worse, it was deflation, i.e. lower prices. And if there is anything that could make our present situation truly impossible, for everyone concerned (aside from the bankers and their sycophants), it would be what the geniuses in Washington seem bound and determined to produce: inflation, aka higher prices.
To my immense gratification, I recently found an article, written in 2003, by a leading economist, Llewellyn H. Rockwell, Jr., of the Ludwig von Mises Institute, that expresses essentially the same view. It's called, appropriately enough, The Blessings of Deflation. Here's some of what Professor Rockwell has to say:
Now we get to the crux of the matter: the Great Depression. The assumption is that falling prices somehow caused the economy to crumble. In fact, it was the after-effects of the boom combined with massive government intervention that caused the depression. The only silver lining in the entire period of the 1930s was precisely the falling prices that made the dollar count for more. Falling prices (a falling cost of living) are what Murray Rothbard has described as the "great advantage" of recessions. If you can imagine the Great Depression without falling prices, you have conjured up an image that is far worse than the reality.

Ask yourself whether during economic downturns, you want your money to grow or shrink in value? If your future job security is in doubt, do you want to pay more or less for goods? If your savings are meager, do you want them to have more or less purchasing power in the future? If you answer these questions rationally, you can see that deflation is wonderful for everyone, and the saving grace of a period of economic contraction. Throughout the 19th century, prices fell in periods of economic growth, which is precisely what one might expect. This is all to the good.
So, first of all, it's important to remember that the "deflationary spiral" held up as a kind of economic bogeyman by the bankers and their government enablers is in fact, as far as the great majority is concerned, the best possible response to the financial collapse we are now experiencing. But, second of all, and this is my real point here, it looks to be the only means of getting our economy back on track, now that the "free market" investment mirage has been dispelled and it's increasingly clear that we must actually earn our way to economic health from now on.

What's needed, however, goes far beyond anything that happened in the Great Depression. We don't just need deflation, we need a veritable Tsunami of deflation, a deflationary spiral that will take our economy on a truly frightening, but absolutely necessary, ride, all the way to the abyss. But please: do not panic. Before everyone reading here has an absolute fit, it's important for all of us to remember that what we are talking about here is money. Only money. The deflationary spiral of which I speak will effect the value of pieces of paper -- and their virtual counterparts in the world of electronic banking. No resources will be destroyed, no jobs (necessarily) lost. No living creatures, human or otherwise, will (necessarily) be harmed by what I am proposing.

I've added those parenthetic "necessarily"s because everything depends on how our deflationary Tsumani develops. If it occurs in an orderly, controlled manner, then no harm will be done. If it occurs in a lopsided, uncontrolled manner, in which the natural forces impelling us toward deflation are continually undermined by artificial attempts to reverse the trend, through additional government borrowing, or the frantic printing of endless amounts of money (so-called "quantitative easing") as is now being attempted, then some very serious distortions will develop, which could be devastating.

Why do we need this? The reason can be found in my previous post. We presently cannot compete with third world industries and labor, because we have literally priced ourselves out of the world markets. Our role as the world's most extravagant consumer culture ended rather abruptly when all our credit dried up. Not enough of us are now making enough income to actually purchase all the stuff we used to put on the credit card tab, which means that, as far as the world economy is concerned, we have made ourselves irrelevant. Third world producers are still in shock over this turn of events, since we (or rather the con men who kept lending us other people's money) were their best customers.

They will adapt, however, to the new situation, also via a drastic process of deflation, but of a somewhat different kind -- a price deflation that will ultimately place their goods within reach of the workers who manufacture them, whose incomes will be steadily rising as part of the same process. If our own economy deflates sufficiently, then we will finally be able to legitimately compete in this market. And if all goes reasonably smoothly (let us pray), it will be a tremendous market that could have the potential to revolutionize the world economy as has nothing else since the industrial revolution.

What difference does it make if I earn $80,000 a year, $8,000 a year or $800 a year, so long as my living expenses, and the cost of consumer items I might desire, have been adjusted accordingly? During the Great Depression, my father, a highly skilled tailor and sewing machine operator, was always able to find a job. But his income was often meager, sometimes as low as $15 a week. However, as he explained to me, his rent was less than $10 a month, and he could buy a very satisfactory restaurant meal for around 25 cents! He was able to live adequately on what he earned, put something away toward the car he eventually bought, and have enough left over to participate with his brothers and sister in the support of their mother.

I'm not advocating the impoverishment of the American working class. That is something that's already happening, as we know very well, especially from the events of this week, with the bankruptcy of General Motors and the consequent loss of what will amount to tens of millions of jobs. What I'm contemplating is very different: the adjustment of the US economy as a whole to the realities of the new global economy, the real one, not the phony one promoted by the "masters of the universe." In order to adjust meaningfully, we have to give up all the phony pipe-dreams and find a way for American industry to once again compete.


  1. You mention "immense gratification" of being in agreement with an economist from the Ludwig von Mises Institute. I did a quick check of their website. They seem very oppositional to socialism and in favor of maintaining a management v. worker world view. Curiously, they are based in Alabama. Life is complex.

  2. Why would it matter if this guy's opposed to socialism? I quote lots of people who disagree with me. I agree with lots of people who disagree with me. You, for example. I was pleased to learn of ANY economist who agreed with me about the value of deflation.

  3. DocG
    Okay, but let's not lean on the myth that the roaring 20's had everyone doing the Lindy Hop with Josephine Baker and G. Gatsby. The 20's were hard for many, perhaps most Americans (forget the Europeans). The Depression made it even worse for those folks. Unless you want to say if you have little, loosing that is okay.


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