Deflation, from an Austrarian School perspective

It's happening: now students of the Austrian School of Economics are finally starting to see that deflation is actually our future. Robert Prechter, Mish and myself were the only people that I am aware of who think from an Austrian perspective and believed we were deflating. Gary Shilling and Harry S. Dent are two other notoriously famous deflationists. Now, add Vijay Boyapati to the list.

Vijay Boyapati is a former Google engineer. In 2007 he started Operation Live Free or Die, a grassroots organization to help Ron Paul's 2008 presidential campaign. Since 2009 he has devoted himself to studying Austrian Economics

Vijay recently published a 28-page article titled "WHY CREDIT DEFLATION IS MORE LIKELY THAN MASS INFLATION: AN AUSTRIAN OVERVIEW OF THE INFLATION VERSUS DEFLATION DEBATE” on Libertarian Papers (link the full article in PDF). Below is the abstract:
This article provides an Austrian overview of the inflation versus deflation debate which has captured the attention of the economics profession in the years following the US housing bust. Much of the Austrian analysis of this debate has focused on the massive expansion of the Federal Reserve’s balance sheet and attendant creation of new reserves. Several Austrian economists have predicted that the creation of new reserves will cause a massive increase in inflation. The money multiplier theory, on which these predictions are based, is criticized and an overview of the Austrian business cycle theory is provided to explain why banks are reluctant to issue new credit. Finally, an analysis of the politics of deflation is provided and a class theory is presented to explain why a policy of controlled credit deflation is more likely than a policy that would result in mass inflation or hyperinflation.


Dave Narby said...

Inflationists generally don't look too deep into the monetary system, most I don't believe understand we have debt-based currencies.

The mistake they make is misunderstanding modern monetary theory.

Deflationists look at the crisis like mathematicians. And mathematically, they are correct. We should deflate.

The mistake they make is they assume that laws will be obeyed.

Unfortunately, crooks don't care about math or laws.

Which is why HYPER-inflationists know they they will break every rule, regulation and law on the books to save the debt.

Every scrap of debt will be paid for in cash and dumped on the taxpayer's doorstep, watch and see.

This is why deflation leads to hyperinflation. The money creation they have to engage in to save a debt based system from deflation causes a loss of faith in the currency, which is what hyperinflation is.

The only solution is to revalue the dollar vs. gold at a price only those who hold it will approve of.

And EVEN THAT might not save this crooked system!

pej said...

Very good comment Dave. The only way hyper-inflation could happen, is if the Gov and the Fed agree to self-destruct themselves. This is nonetheless very unlikely, as self-preservation is likely to take over the printing instinct, and that hyperinflation will destroy banks, while the Fed is trying to save them.

Finally, again, looking back at History, the same arguments would mean that Japan should be in hyper-inflation. While in reality, they are still deflating.

Wait & Pray

pej said...
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Dave Narby said...

Hi Pej

Thanks, and I enjoy following your blog, you do some good work here.

The way I see it, the Fed and Gov't have *already* created a situation where they have self-destructed, it's just that they are managing to keep it from being realized... For now.

The problem is the gov't has done itself in by failing in it's primary goal (insuring the rights of citizens and being a fair arbiter of contracts (via legislation and regulation)).

The Fed has done itself in by creating too damn much debt-money, causing malinvestment and an unsustainable debt service requirement.

So they have already self-destructed, they're just managing to contain it... So far.

The problem is strong inflation will soon follow, as government spending has not decreased relative to the functioning of the productive economy, and that will cause cost-push inflation, and the debasement of the dollar is causing strong inflation (just not here in the USA, but it will come here soon enough).

Note I'm saying 'strong inflation', which is IMO 50-100% annually, not 'hyperinflation' which is 50-100% monthly/daily/hourly (a repudiation of the currency)!

While this happens, every other country will be debasing their currency to match ours, exacerbating strong inflation.

Quite quickly this will result in a global repudiation of fiat. This has already begun, it will just take some time to climax.

THEN we get hyperinflation (which won't last long).

However, they may just put a stop to the whole circus before that happens and revalue all currencies vs. gold (gold goes way up in fiat terms, and perhaps real terms as well), and announce gold as the reserve of choice, allowing it to trade freely.

The bankers using the USA don't want this, but if the rest of the world demands it, they won't be able to stop them.

I could be wrong.

I have a blog BTW... http://www.TheTailDoesNotWagTheDog.blogspot.com/

I also recommend these blogs


I believe you will find many like minds there.


Dave Narby said...

Oh, and regarding Japan: The only way they've maintained their system is through QE, which is a delayed method of robbing their pensioners. They are now facing a demographic crisis which is going to bring that to an end.

This is similar to how the USA has abused the goodwill extended to it by the rest of the world by debauching the reserve currency. Eventually, that's going to end.

Be of good cheer, once this is resolved, and government and finance are reduced to a size and scope where they are actually constructive to society, I expect a burst of productivity and entrepreneurship most will not have even remotely imagined.


pej said...

Hi Dave. Thanks for the additional info and links. I'll go through and get back to you :-)

Dave Narby said...

Safe journey sir!