WEBVTT NOTE Deflation and Liberty 1 00:00:00.000 --> 00:00:25.000 Welcome to the first installment of our lecture series seminar. Each summer we have at least two seminars, two weekly seminars, one of which provides a forum for the more senior people, in case you have any doubts about this, that's me and my likes. 2 00:00:25.000 --> 00:00:29.600 and the other one is for the more junior people that you like, we know this all, 3 00:00:29.600 --> 00:00:36.640 where you present your research in your papers. My topic today is deflation and 4 00:00:36.640 --> 00:00:43.120 liberty that will open the whole lecture series and we will have at least 5 00:00:43.120 --> 00:00:48.920 two or three more talks that will follow up on this theme, which is an important 6 00:00:48.920 --> 00:00:56.920 and has even been neglected by Austrian economists. I started reconsidering the case for deflation 7 00:00:56.920 --> 00:01:03.920 again about one year ago, at least six months ago when I have been invited to give a talk at Grove City College 8 00:01:03.920 --> 00:01:13.920 and I thought the subject fitted perfectly the occasion because the reason to go to Grove City College was evidently to honor 9 00:01:13.920 --> 00:01:18.920 to honor Professor Hans Zenholz, who has been teaching there for several decades. 10 00:01:18.920 --> 00:01:26.920 And Zenholz is not only a great Austrian economist, but he was an excellent analyst of deflation and of monetary reform. 11 00:01:26.920 --> 00:01:32.920 And what I had to say was very much, as I perceived it, a Zenholzian message. 12 00:01:32.920 --> 00:01:41.920 So I had very nice things to say about the guest of honor and one reason more, therefore, to take up the subject. 13 00:01:41.920 --> 00:01:47.120 And what I did in this subject, in my talk in Growth City, which I will not repeat here, 14 00:01:47.120 --> 00:01:54.060 give you the executive summary, was by and large to state that in the theory of money 15 00:01:54.060 --> 00:02:02.560 we have a couple of central actions or principles which underpin both the case that Austrians 16 00:02:02.560 --> 00:02:06.560 commonly make for the gold standard, which we mean in fact free market money, as Professor 17 00:02:06.560 --> 00:02:16.560 and also orient our proposals when it comes to monetary reform. 18 00:02:16.560 --> 00:02:20.560 So what are these principles? First of all, as we have explained last week, 19 00:02:20.560 --> 00:02:27.560 the quantity of money is irrelevant in the sense that we can by and large do with any quantity of money. 20 00:02:27.560 --> 00:02:32.560 Any quantity of money is equally fit or equally optimal in the sense that 21 00:02:32.560 --> 00:02:38.000 and we can perform all indirect exchanges with any quantity of money in the economy. 22 00:02:38.000 --> 00:02:45.080 There are certain limitations relating to the physical supply that we have of the money 23 00:02:45.080 --> 00:02:47.880 commodities as we have explained last week. 24 00:02:47.880 --> 00:02:53.560 So if we have a very high purchasing power due to economic growth and in the monetary 25 00:02:53.560 --> 00:02:59.040 area, for example, operating with the gold standard, then this might lead to a situation 26 00:02:59.040 --> 00:03:04.880 in which high purchasing power is concentrated in very small coins, which you then cannot 27 00:03:04.880 --> 00:03:09.560 use any longer to buy, let's say, a cup of coffee or so, which is already now the case. 28 00:03:09.560 --> 00:03:13.720 Nobody of us will ever try to buy a cup of coffee in the present day situation with a 29 00:03:13.720 --> 00:03:14.720 gold coin. 30 00:03:14.720 --> 00:03:23.080 So, in these situations then, the demand for gold will be transferred into another commodity 31 00:03:23.080 --> 00:03:27.280 money, silver for example, or copper and so on, and so there is currency competition between 32 00:03:27.280 --> 00:03:33.280 in different metallic currencies that all equilibrate in the free market. 33 00:03:33.280 --> 00:03:40.280 Now, in the case of paper, that is, of course, we don't encounter this problem here, 34 00:03:40.280 --> 00:03:45.280 rather this insight that we derive from general monetary theory is important 35 00:03:45.280 --> 00:03:52.280 because it squarely contradicts the underlying hypothesis of all inflationist programs. 36 00:03:52.280 --> 00:03:59.280 programs, because all inflationist programs are premised on the assumption that we can somehow make things better off. 37 00:03:59.280 --> 00:04:04.280 We can somehow benefit society in the aggregate by modifying the quantity of money. 38 00:04:04.280 --> 00:04:12.280 Now, and I don't tell you anything new if I say, modifying the quantity of money is much too nice a way to state the agenda of these people, 39 00:04:12.280 --> 00:04:16.280 which, because in practice it always means increasing the quantity of money. 40 00:04:16.280 --> 00:04:45.280 As you know, there is the famous theory of contracyclical economic policies, monetary policies, the growth path of the economy, secular growth trend, and then there are cycles around it, and then according to this myth, in times of excessive growth, you take some money out, and then in times of slacking growth, you re-inject it into the economy. 41 00:04:45.280 --> 00:04:46.600 into the economy. 42 00:04:46.600 --> 00:04:49.900 Now, that constantly goes on, right? 43 00:04:49.900 --> 00:04:51.580 Injects you might think they're constantly 44 00:04:51.580 --> 00:04:53.720 in a phase of declining growth, 45 00:04:53.720 --> 00:04:56.060 but there's never any taking out going on. 46 00:04:57.280 --> 00:04:59.200 So apart from, I will not go into this detail 47 00:04:59.200 --> 00:05:01.360 while it's all wrong and profoundly wrong 48 00:05:01.360 --> 00:05:03.200 at this occasion, just want to point out 49 00:05:03.200 --> 00:05:05.240 so this never happens really. 50 00:05:05.240 --> 00:05:08.180 All that happens is a constant injection. 51 00:05:08.180 --> 00:05:11.920 And as we are informed, as far as central theorem, 52 00:05:11.920 --> 00:05:15.000 the quantity of money is not really important. 53 00:05:15.000 --> 00:05:20.280 We know that the whole program is pointless. The whole inflation program is pointless. 54 00:05:20.280 --> 00:05:27.160 And this also informs, more or less directly, the Austrian proposals for monetary reform. 55 00:05:27.160 --> 00:05:32.840 They all aim at the re-establishment of a gold standard. And clearly, as you see from this line 56 00:05:32.840 --> 00:05:38.520 of argument, Austrians favor the gold standard, but again, which would mean any free market 57 00:05:38.520 --> 00:05:42.760 commodity money that is spontaneously adopted by the market participants as their medium of exchange 58 00:05:42.760 --> 00:05:50.760 It doesn't rest on any aesthetic predilections for the yellow metal. 59 00:05:50.760 --> 00:05:56.760 It's not because somehow we have centuries and centuries where the gold coins have been used. 60 00:05:56.760 --> 00:05:59.760 Now we need to go back to the good old times or something like this. 61 00:05:59.760 --> 00:06:01.760 No, it's a very simple case. 62 00:06:01.760 --> 00:06:04.760 The quantity of money ultimately has no importance. 63 00:06:04.760 --> 00:06:10.760 The gold standard therefore is certainly as good as any other standard as well. 64 00:06:10.760 --> 00:06:16.760 It can certainly not be deficient on the grounds that the quantity of money behaves in a certain way. 65 00:06:16.760 --> 00:06:22.760 So what are then the advantages of gold money or the free market money? 66 00:06:22.760 --> 00:06:29.760 The advantages are that the manipulation of the money supply are independent of political control. 67 00:06:29.760 --> 00:06:31.760 Now why is this so interesting? 68 00:06:31.760 --> 00:06:39.760 This brings us to the second principle of monetary economics that is so fundamental that it can be called an action. 69 00:06:39.760 --> 00:06:45.760 That is the principle that changes in the quantity of money bring first of all about redistributions. 70 00:06:45.760 --> 00:06:49.760 Increases in the quantity of money benefit those who first receive the additional units, 71 00:06:49.760 --> 00:06:55.760 who enrich themselves thereby at the expense of all other members of society. 72 00:06:55.760 --> 00:06:59.760 That is, changes in the quantity of money go in hand with redistribution effects. 73 00:06:59.760 --> 00:07:04.760 Now that is not something that is particular to money or to gold or whatever. 74 00:07:04.760 --> 00:07:09.760 It is something that results from any change in the quantity of any good. 75 00:07:09.760 --> 00:07:15.760 And if you are a very successful carpet producer, you sell more carpets than your competitors, 76 00:07:15.760 --> 00:07:19.760 or maybe you are the very first carpet producer ever in Alabama. 77 00:07:19.760 --> 00:07:24.760 Well, so certainly you will attract, in so far as you sell them at all, you will attract some demand, 78 00:07:24.760 --> 00:07:28.760 which means that this demand is no longer directed to the purchase of other goods. 79 00:07:28.760 --> 00:07:34.600 of Other Goods. So you're certainly creating a redistribution of resources in your favor 80 00:07:34.600 --> 00:07:40.920 into the detriment of other market participants. What is the lesson of this? Well, the lesson 81 00:07:40.920 --> 00:07:47.560 is that as usual, redistribution per se is not a very interesting question because there's 82 00:07:47.560 --> 00:07:52.480 constantly redistribution going on. From a political libertarian point of view, the question 83 00:07:52.480 --> 00:07:57.480 The more interesting question is, is this redistribution justified? 84 00:07:57.480 --> 00:08:01.480 Now we can justify it under the libertarian considerations, 85 00:08:01.480 --> 00:08:06.480 natural law libertarians will not be happy with this, or in any case not be satisfied with this, 86 00:08:06.480 --> 00:08:17.480 so we'll point to the fact that only redistributions that result from the use of one's own property are justified, 87 00:08:17.480 --> 00:08:23.480 whereas redistributions that result from encroachments of other people's property are not justified. 88 00:08:23.480 --> 00:08:34.480 Now that is certainly the case with the gold standard. It brings about redistributions of property that result from purely voluntary decision making. 89 00:08:34.480 --> 00:08:44.480 If I'm a gold miner and I dig gold out of the ground and I clean it and so on, produce nice bars of gold, 90 00:08:44.480 --> 00:09:10.480 and even the coin business, right, vertical integration, merger, I offer you these coins, I infringe on nobody's property, I sell you a product that is the result of my labor and of my capital and the labor that I've paid with my capital and so on, so there's no problem from a libertarian point of view than with the redistributions that result from my participation in the market. 91 00:09:10.480 --> 00:09:13.040 It is different in the case of paper money. 92 00:09:13.040 --> 00:09:17.520 This brings us to the third fundamental proposition of monetary theory, 93 00:09:17.520 --> 00:09:24.080 namely that paper money regimes, or we might say paper monies, 94 00:09:24.080 --> 00:09:31.120 facilitate the enrichment of their producers 95 00:09:31.120 --> 00:09:37.440 beyond the degree to which this would have been possible for a money producer on the free market. 96 00:09:37.440 --> 00:09:42.440 That is clearly, if all that you've got to do is to run the printing press, right, 97 00:09:42.440 --> 00:09:47.440 and we don't need to think of very high-tech production processes, at the limit, 98 00:09:47.440 --> 00:09:52.440 you could just have your little printing press that you operate by hand in your cave, 99 00:09:52.440 --> 00:10:00.440 and then you work the whole night, and the next day you show up, and you have your bags full of newly printed notes and so on. 100 00:10:00.440 --> 00:10:16.440 and so on, clearly that's not a very, as far as cost of production and so on is concerned, cannot be compared to the gold standard, right, where the production is very expensive, involves lots of resources and so on. 101 00:10:16.440 --> 00:10:22.440 So then, do we favor the gold standard because it's more costly? It seems to be irrational, right? 102 00:10:22.440 --> 00:10:30.440 Let's take always the cheapest product must be the best. This is certainly not an economic principle. 103 00:10:30.440 --> 00:10:39.440 Rather what is involved here is that on a free market, if we had a purely free market, paper money could not withstand the competition of commodity monies. 104 00:10:39.440 --> 00:10:47.440 And that is precisely for the reason that they can be multiplied, the quantity can be increased almost at the whim of the producer. 105 00:10:47.440 --> 00:10:56.440 Now, put yourself in the position of a money owner, which shouldn't be all too difficult because I guess most of you should be money owners at present. 106 00:10:56.440 --> 00:11:07.440 If you have the prospect that you get the choice between two commodities, one can lose its value at the whim of the producer, which would be the case of paper money. 107 00:11:07.440 --> 00:11:16.440 And in the other case, the producer, even if he willed, even if he so willed, could virtually have no impact on the purchasing power of the good. 108 00:11:16.440 --> 00:11:31.440 Well, clearly the second good is more attractive, because what you expect from a medium of exchange is, first of all, that it preserves its value, it's a store of value, otherwise you wouldn't even adopt it as a medium of exchange. 109 00:11:31.440 --> 00:11:40.880 Exchange. Now, since this is so, paper monies cannot withstand the competition of commodity 110 00:11:40.880 --> 00:11:45.820 monies and have never been able to do so in recorded history. And as a further consequence 111 00:11:45.820 --> 00:11:52.760 of this, we can understand why paper monies have always been privileged by a special legal 112 00:11:52.760 --> 00:11:59.720 protection. Wherever and whenever a paper money has come into existence, it has been 113 00:11:59.720 --> 00:12:12.720 protected in particular by legal tender laws, that is, those laws that force you to accept a payment in terms of this paper money, even though you might have stipulated payment in another commodity. 114 00:12:12.720 --> 00:12:24.520 Let's say we have your two subversive individuals, Mr. Barlow, maybe, and Mr. Perry, and they strike a deal, Mr. Perry sells his house to Mr. Barlow and stipulates payment in gold. 115 00:12:24.520 --> 00:12:37.840 Mr. Barlow goes bankrupt because of whatever and he just happens that you cannot pay in gold but he just happens to have this inflationary paper money 116 00:12:37.840 --> 00:12:52.600 and the government now steps in and says look Perry you have this contract and according to our very precise calculations 15 ounces of gold or 1500 ounces of gold depending on the size of the palace 117 00:12:52.600 --> 00:13:03.600 equal $3,500 or $35,000 or whatever, and then Mr. Perry will be obliged to accept the sum of money, that means legal tender. 118 00:13:03.600 --> 00:13:17.600 Now, what does this do? Well, it brings into operation Gresham's Law. If you can, if the law enables you to fulfill your obligations in terms of a commodity of lesser value, 119 00:13:17.600 --> 00:13:25.200 Obviously you will always do this, you will keep the gold for yourself over the higher valued commodity and pay in terms of the lesser valued commodities. 120 00:13:25.200 --> 00:13:34.560 So therefore, the very least that legal tender laws do is to drive out good commodities out of the country, out of circulation anyway. 121 00:13:34.560 --> 00:13:44.680 On top of that, we have additional privileges that the Federal Reserve system in the United States enjoys and all the other central banks in other countries. 122 00:13:44.680 --> 00:13:51.320 just think of the tax code that penalizes purchases or exchanges of precious metals 123 00:13:51.320 --> 00:13:58.800 in some countries you've got to pay excise taxes when you buy and sell gold but in some 124 00:13:58.800 --> 00:14:02.760 countries it's also in the United States I do not know the situation very well but for 125 00:14:02.760 --> 00:14:09.360 example in Germany or France it has been impossible to conclude even to make contracts denominated 126 00:14:09.360 --> 00:14:14.660 in gold and you couldn't enjoy legal protection it was not just that legal tender laws it 127 00:14:14.660 --> 00:14:34.660 Thus, paper money always exists in a monopoly regime, always enjoys monopolistic privileges, and therefore, Austrians want to get rid of it, or more precisely, what Austrians want to get rid of is the monopoly. 128 00:14:34.660 --> 00:14:45.660 Therefore, Austrians want to get rid of it, or more precisely, what Austrians want to get rid of is the monopoly. 129 00:14:45.660 --> 00:14:55.660 In my eyes, in any case, that would be the only coherent Austrian position on currency reform, but I will not go into more detail about this today. 130 00:14:55.660 --> 00:15:09.660 The idea is that libertarian currency reform would involve abolishment of the legal privileges of the Federal Reserve, not necessarily physical dismantling of the Federal Reserve as an institution. 131 00:15:09.660 --> 00:15:20.660 There would be no necessary case to be made for selling the buildings and the equipment of the Federal Reserve offices and so on. 132 00:15:20.660 --> 00:15:32.660 and so on, they could even keep the printing press, or that what we need is that they return the gold and silver that they have stolen in former times from their rightful owners to these very persons. 133 00:15:32.660 --> 00:15:47.660 Okay, so the Austrian sense on principles of monetary theory informed therefore both their views on the superiority of the gold standard or commodity standard and on monetary reform. 134 00:15:47.660 --> 00:16:05.660 Now, this case has never been adequately addressed by the proponents of our current regimes, that is of the current regime, which is in fact a paper money regime. 135 00:16:05.660 --> 00:16:14.660 And therefore, Austrians are by and large the only ones still today who pioneer or develop this literature. 136 00:16:14.660 --> 00:16:17.620 and this is what I've done in these two papers. 137 00:16:20.500 --> 00:16:21.340 Now again, 138 00:16:29.900 --> 00:16:32.020 in the light of the principles 139 00:16:32.020 --> 00:16:34.520 that I've enunciated just before, 140 00:16:34.520 --> 00:16:39.520 it is easily understandable why we have in the present day 141 00:16:40.460 --> 00:16:43.020 such great apprehensions about the introduction 142 00:16:43.020 --> 00:16:51.660 of Paper Money System, but also about simple things such as letting deflation happen. 143 00:16:51.660 --> 00:17:02.860 Some of you might recall that at the end of last year, November 2002, Federal Reserve Governor Ben Bernanke gave a talk 144 00:17:02.860 --> 00:17:09.420 with the revealing title, Preventing It from Happening in the US, or something of the sort. 145 00:17:09.420 --> 00:17:13.940 Making sure it does not happen in the US. By it, he meant deflation. 146 00:17:13.940 --> 00:17:17.020 So why is deflation this terrible thing? 147 00:17:17.020 --> 00:17:26.740 Well, the case against deflation is the mirror inverse case of the general case for inflation. 148 00:17:26.740 --> 00:17:33.540 So it should not surprise us that the inflationists, who in the wake of the Keynesian revolution of the 1930s, 149 00:17:33.540 --> 00:17:39.540 have taken over not only political decision-making as far as monetary policy is concerned, 150 00:17:39.540 --> 00:17:48.900 but also the teaching of monetary economics in most universities in the economics department or universities in the world. 151 00:17:48.900 --> 00:17:55.220 So the case for inflation and against inflation is constantly with us. 152 00:17:55.220 --> 00:18:02.340 And it is a weak case indeed because it rests mainly on an amalgamation of myths 153 00:18:02.340 --> 00:18:08.780 In the light of the second principle, the third principle that I've explained before, 154 00:18:08.780 --> 00:18:12.580 changes in the quantity of money bring about redistributions, 155 00:18:12.580 --> 00:18:17.780 these redistributions have a much more ample scope once you have a paper money. 156 00:18:17.780 --> 00:18:25.380 Well, it's clear why they have such resistance against deflation on the side of our political economic establishment. 157 00:18:25.380 --> 00:18:31.980 Clearly, this is because many of them profit most from the present regime. 158 00:18:31.980 --> 00:18:37.980 This concerns in particular the members of government on all levels. 159 00:18:37.980 --> 00:18:43.480 There's those who run the welfare state, there's many, many million people who run the welfare state, 160 00:18:43.480 --> 00:18:47.480 but also people who are the guardians of monetary policy. 161 00:18:47.480 --> 00:18:58.980 Just think about how many intellectuals, how many economists of undoubted intellectual capacities the Federal Reserve has in its employment. 162 00:18:58.980 --> 00:19:01.980 How many hundreds and thousands of economists are working for them? 163 00:19:01.980 --> 00:19:07.980 Same thing applies to the World Bank, same thing applies to the International Monetary Standard. 164 00:19:07.980 --> 00:19:24.980 And, of course, these persons define the standards of monetary analysis. 165 00:19:24.980 --> 00:19:44.380 But in fact, for anybody who takes a sober look at these institutions, at the conditions where you cannot help wondering what meaning it has if one grants special expert status to people working for agencies that are charged merely with the technical details of spreading inflation. 166 00:19:44.380 --> 00:19:51.740 There is a non sequitur implied in granting expert status in matters monetary to the employees of these organizations. 167 00:19:51.740 --> 00:19:57.940 An obvious parallel is the case of the economists who are on the payroll of labor unions. 168 00:19:57.940 --> 00:20:02.940 They are considered to be experts because labor unions pay them. 169 00:20:02.940 --> 00:20:06.540 What we here see is, of course, again, the power of language. 170 00:20:06.540 --> 00:20:13.340 The labor union rather than, say, for example, the associations for the destruction of the labor market. 171 00:20:13.340 --> 00:20:20.740 Then it would be clear that they are not experts on matters of labor at all, but rather experts in the destruction of labor. 172 00:20:20.740 --> 00:20:29.240 The same thing was true for those writers in Monetary Affairs who happened to be on the payroll of the various associations for the destruction of our money. 173 00:20:29.240 --> 00:20:35.240 Of course the point is not to deny that these are bright people or good monetary economists. 174 00:20:35.240 --> 00:20:45.240 The point is that it is wrong to just infer on a priori grounds they are working for these institutions, therefore they know particularly well things monetary. 175 00:20:45.240 --> 00:20:52.240 It's rather the obvious, rather the other way around, given the incentive structure which pushes them, 176 00:20:52.240 --> 00:20:58.240 it's their own monetary pecuniary interest to push for schemes involving more inflation, 177 00:20:58.240 --> 00:21:06.240 come up with justification for ever more inflation that explains their behavior. 178 00:21:06.240 --> 00:21:12.240 So we should expect them rather to be monetary experts in spite of the incentive structure 179 00:21:12.240 --> 00:21:16.140 that they face at their workplace. 180 00:21:23.520 --> 00:21:26.760 So, but these people, again, so they stand to profit 181 00:21:26.760 --> 00:21:30.560 from the present regime, which we can understand 182 00:21:30.560 --> 00:21:33.960 on the basis or in light of these elementary propositions 183 00:21:33.960 --> 00:21:35.600 of monetary theory. 184 00:21:35.600 --> 00:21:38.320 And it is these people who constantly propagate 185 00:21:38.320 --> 00:21:42.600 or pay people to propagate the myths 186 00:21:42.600 --> 00:21:46.640 on which our present monetary regime still rests. 187 00:21:46.640 --> 00:21:51.640 And I have come up with a short list of 11 myths. 188 00:21:53.940 --> 00:21:55.320 I'm not happy with the number, 189 00:21:55.320 --> 00:21:57.780 it should be something else, it would be 10 or 12, 190 00:21:57.780 --> 00:22:00.080 but you will help me, you'll say, 191 00:22:00.080 --> 00:22:02.440 well, this is not a myth and we take it out of the list. 192 00:22:02.440 --> 00:22:06.720 But in any case, so short list of subdivision 193 00:22:06.720 --> 00:22:10.460 of the most essential myths that we here face in this field. 194 00:22:10.460 --> 00:22:12.240 So the myth number one is, 195 00:22:12.240 --> 00:22:14.080 you cannot earn a living and make profits 196 00:22:14.080 --> 00:22:15.600 when the price level falls. 197 00:22:18.920 --> 00:22:21.200 The answer also, is this true? 198 00:22:21.200 --> 00:22:23.720 Well, it is not true, of course. 199 00:22:23.720 --> 00:22:26.040 Successful business does not depend at all 200 00:22:26.040 --> 00:22:29.160 on the level of prices, but on price spreads, 201 00:22:29.160 --> 00:22:31.800 between prices, price spreads between selling receipts 202 00:22:31.800 --> 00:22:33.840 and cost expenditure. 203 00:22:33.840 --> 00:22:35.820 And these can exist at any level, 204 00:22:35.820 --> 00:22:40.820 not only at any level of prices, but at any evolution of the level of prices. 205 00:22:40.820 --> 00:22:47.820 Prices between selling receipts and cost expenditure can exist at a stable and high price level, at a stable and low price level. 206 00:22:47.820 --> 00:22:54.820 They can exist if the price level moves from a high to a low one, or inversely from a low to a high one. 207 00:22:54.820 --> 00:23:00.820 Again, so the quantity of money at the level of prices is no point whatever on the success of businesses 208 00:23:00.820 --> 00:23:04.820 and on the living standards of the members of society. 209 00:23:04.820 --> 00:23:11.820 Why is this so? Clearly because entrepreneurs provide for these spreads, right? 210 00:23:11.820 --> 00:23:15.820 They enter the market and say, well, I want to realize the price spread, 211 00:23:15.820 --> 00:23:19.820 and I can do this only if I buy factors of production at a sufficiently low rate. 212 00:23:19.820 --> 00:23:25.820 If they cannot do this, they won't even start producing, right? 213 00:23:25.820 --> 00:23:37.220 And therefore, we see that businesses often make very good profits at times when the price level falls. 214 00:23:37.220 --> 00:23:43.020 For example, both the US and Germany enjoyed very solid growth rates at the end of the 19th century, 215 00:23:43.020 --> 00:23:47.720 when the price level fell in both countries during more than two decades. 216 00:23:47.720 --> 00:23:53.520 In that period, money weight rates remained by and large stable, but incomes effectively increased in real terms, 217 00:23:53.520 --> 00:23:56.520 because the same amount of money could buy ever more consumers' goods. 218 00:23:56.520 --> 00:24:00.520 So beneficial was this deflationary period for the broad masses 219 00:24:00.520 --> 00:24:05.520 that it came to the first great crisis of socialist theory, as some of you might know, 220 00:24:05.520 --> 00:24:08.520 because socialist theory had predicted the exact opposite. 221 00:24:08.520 --> 00:24:13.520 Edward Bernstein and other revisionists appeared and made the case for modified socialism. 222 00:24:13.520 --> 00:24:19.520 So I think today we are in dire need of some revisionism too, deflation revisionism, that is. 223 00:24:19.520 --> 00:24:27.520 Myth number two, while falling prices are good, lacking aggregate demand is bad. 224 00:24:27.520 --> 00:24:31.520 Now clearly here we have a variant of myth number one. 225 00:24:31.520 --> 00:24:40.520 Only here we assume that our anti-deflationist says, okay, well you are right that falling prices are good for the consumers, 226 00:24:40.520 --> 00:24:48.520 but they are bad for business and your counter argument does not hold for the following reason. 227 00:24:48.520 --> 00:24:58.520 Profitable enterprise in time of falling prices presupposes that businessmen can bid down factors of production in anticipation of the event. 228 00:24:58.520 --> 00:25:03.520 If they are unable to bid down factor prices, they will not invest at all. 229 00:25:03.520 --> 00:25:05.520 Quod erat demonstrandum. 230 00:25:05.520 --> 00:25:09.520 But this argument overlooks that all resources are invested at any point of time. 231 00:25:09.520 --> 00:25:12.520 At every single point of time, all our resources are invested. 232 00:25:12.520 --> 00:25:21.520 The physical structure of production, the physical asset that we can use in productive ventures is never affected by changes in the quantity of money. 233 00:25:21.520 --> 00:25:30.520 So the question is why are our far-sighted entrepreneurs unable to bid factor prices down? 234 00:25:30.520 --> 00:25:32.520 Clearly there are only two possibilities. 235 00:25:32.520 --> 00:25:39.520 Either the present owner is not willing to sell them at the price that the entrepreneur offers, 236 00:25:39.520 --> 00:25:43.960 Office. Then this means that he himself knows of a better employment for them. 237 00:25:43.960 --> 00:25:49.000 He himself knows of a better way to make use of them and he just thinks well so 238 00:25:49.000 --> 00:25:53.600 at this price well that's not worthwhile I can I can use the resource and obtain 239 00:25:53.600 --> 00:25:59.280 a higher return on it. So who are we to tell the present owner well look I mean 240 00:25:59.280 --> 00:26:02.360 you're obviously wrong right I mean the prices will be so-and-so and you cannot 241 00:26:02.360 --> 00:26:06.480 know any project that will earn a higher return. Well so that is precisely 242 00:26:06.480 --> 00:26:12.080 is something to be found out through the market process or and that is the other 243 00:26:12.080 --> 00:26:16.320 possibility the present owner does sell the resources but only to an entrepreneur 244 00:26:16.320 --> 00:26:19.800 who offers slightly higher prices than our entrepreneur who anticipates 245 00:26:19.800 --> 00:26:25.240 falling prices in the future. Now there again you can say well this is this is 246 00:26:25.240 --> 00:26:29.360 foolish or they make malinvestments or whatever but you cannot say there's a 247 00:26:29.360 --> 00:26:33.400 lack of demand and there is certainly not a lack of aggregate demand there's 248 00:26:33.400 --> 00:26:37.400 There is not a lacking demand for investment purposes. 249 00:26:40.400 --> 00:26:41.400 Myth number three. 250 00:26:43.400 --> 00:26:47.400 You cannot earn a living and make profits when the money supply shrinks. 251 00:26:47.400 --> 00:26:51.400 So that is slightly different from the case that I discussed before. 252 00:26:51.400 --> 00:26:55.400 I said, okay, when the prices fall, now it's even more serious. 253 00:26:55.400 --> 00:26:57.400 Now the money supply shrinks. 254 00:26:57.400 --> 00:27:02.400 And as we know, the money supply is one of the causes of money prices on the market. 255 00:27:02.400 --> 00:27:11.400 The other courses being evaluations or value scales of the individuals relating to money and goods that can be bought for money. 256 00:27:16.400 --> 00:27:25.400 So against myth number three, we have to object that human beings are able not only to anticipate falling prices, but also the consequences of a shrinking money supply. 257 00:27:25.400 --> 00:27:34.400 Such anticipations will usually accelerate the deflationary process and make it reach the rock bottom of a stable money supply very quickly. 258 00:27:34.400 --> 00:27:37.400 But here two cases need to be distinguished. 259 00:27:37.400 --> 00:27:44.400 A, the case of a fractional reserve system operating on the basis of a commodity money, such as gold or silver, 260 00:27:44.400 --> 00:27:46.400 and B, the case of paper money. 261 00:27:46.400 --> 00:27:49.400 And indeed there are different dynamics at work here. 262 00:27:49.400 --> 00:28:03.400 So in case A, the supply of physical gold or silver can obviously not just vanish in thin air and thus it remains at all times to provide rock bottom in case of a deflation. 263 00:28:03.400 --> 00:28:14.400 Let's illustrate this maybe here. So we have here the time x and here we have the money supply. 264 00:28:14.400 --> 00:28:32.400 Okay, and then we say, okay, we have this inflation process, inflation, inflation, inflation, and then suddenly we hit, there's a big deflation setting in, poof, nobody wants the money substitutes anymore, nobody wants fractional reserve notes anymore. 265 00:28:32.400 --> 00:28:42.400 And so the demand shrinks, and according to our assumption, we had fractional reserve system based on the gold standard, some commodity money. 266 00:28:42.400 --> 00:29:08.400 So, there was some minimum amount that consisted in physical gold or silver and on this, on top of this amount we had money substitutes that is this is what Mises called the quantity of money in the narrower sense 267 00:29:08.400 --> 00:29:14.480 and if we count this plus the money substitutes that are dealt with as if 268 00:29:14.480 --> 00:29:18.880 though they were money we have the quantity of money in the larger sense 269 00:29:18.880 --> 00:29:22.080 what happens in a deflation is that the quantity of money in the larger sense 270 00:29:22.080 --> 00:29:28.280 shrinks and the point is it cannot shrink more than until it reaches the 271 00:29:28.280 --> 00:29:37.320 physical money stock and cannot shrink further than that and this then is 272 00:29:37.320 --> 00:29:57.320 what in financial circles is usually called the rock bottom. Then you have a hard landing or more or less hard landing there but you have a landing and based on this quantity of money which as we know will in any case be sufficient to perform all indirect exchanges we can go on. 273 00:29:57.320 --> 00:30:15.320 How long will this process take? In principle, there is no reason why it should not be finished. It could be finished within a second. 274 00:30:15.320 --> 00:30:27.320 If all people, all members of society, all market participants realize at once, ah, now it's over, the banks cannot redeem their banknotes anymore, 275 00:30:27.320 --> 00:30:34.320 they know at once, but nobody will accept them. They don't even bother to go to a shop and offer them for payment anymore. 276 00:30:34.320 --> 00:30:40.320 They just sit on their money and they know the banks won't give them any money, so it's just paper. 277 00:30:40.320 --> 00:30:53.320 Just decently good paper plus decently good ink transformed into a completely valueless scrap of banknote, former banknote, so that's what it is. 278 00:30:53.320 --> 00:31:02.320 So it can take place within a second. Usually, of course, it takes somewhat longer, but there's no reason why it should not be finished within a few hours or days. 279 00:31:02.320 --> 00:31:06.320 Empirically, that has been the case with many recessionary periods. 280 00:31:06.320 --> 00:31:11.320 So this here is no reason again why this shouldn't take just a few days. 281 00:31:16.320 --> 00:31:22.320 When it has ended, many banks will be bankrupt and many entrepreneurs will be bankrupt too, 282 00:31:22.320 --> 00:31:27.320 namely to the extent that they have financed their firms with debt rather than with equity. 283 00:31:27.320 --> 00:31:40.320 This explains, of course, why the present debt finance establishment ferociously resists deflation, but it does not, of course, mean that the production could not go on without them, that is, without these entrepreneurs. 284 00:31:40.320 --> 00:31:56.320 It could very well go on and it will go on with other entrepreneurs in charge. They are bankrupt, the physical assets are still in place, they are taken out of their leadership position, drawn back into the ranks of the workers, employees, 285 00:31:56.320 --> 00:32:04.320 No more companies, no more entrepreneurs, no more capitalists, and other people will take over, typically the creditors, and then go on. 286 00:32:04.320 --> 00:32:11.320 It's not that we are dependent on any particular person to run a shoe factory or whatever. 287 00:32:11.320 --> 00:32:39.320 Now in case B, that is in the case that we have a paper money regime, we don't have this year, we don't have any rock bottom because paper money ultimately suffers from the same essential deficiency as any money substitutes that are only covered by a fractional reserve. 288 00:32:41.320 --> 00:33:06.320 So in this case, we might face something like a deflationary spiral. People no longer wish to own a paper money and start selling it at any price, so the result will be an ever-declining purchasing power of this money, which in turn might convince even those who had bought it before that they better get rid of it, and the sooner the better. 289 00:33:06.320 --> 00:33:18.320 So there is the deflationary spiral, less willing owners, less purchasing power, means less willing owners, means less purchasing power and so on, until the money has completely vanished from circulation. 290 00:33:18.320 --> 00:33:24.320 Now notice that this does not necessarily mean that the economy will be thrown back into a state of barter. 291 00:33:24.320 --> 00:33:32.320 What usually happens in such cases is that people start using other monies, such as gold and silver coins or foreign paper monies. 292 00:33:32.320 --> 00:33:44.320 The deflationary spiral therefore has the healthy effect of replacing an inferior sort of money, that is inferior from the point of view of the money users, with superior money. 293 00:33:47.320 --> 00:34:01.320 And let me mention also in part, so here you see the importance of currency competition. It is currency competition in fact that saves an economy that has found its way by one way or another into a deflationary spiral. 294 00:34:02.320 --> 00:34:13.080 In the same way as we know that currency competition saves the monetary economy in times of hyperinflation. 295 00:34:13.080 --> 00:34:29.320 In 1923 when we had the hyperinflation in Germany, in August, September, October, at many places people adopted spontaneously various other commodities that they used for indirect exchanges. 296 00:34:29.320 --> 00:34:59.320 I could have been gold or silver, but it were usually also foreign currencies, not the pound or the Swiss franc, French francs and so on, French francs may be less, must be in VEDA money, but so the point is clear, currency competition provides objective limits to these spirals, spiraling us into and prevent that these spirals bring us back 297 00:34:59.320 --> 00:35:10.320 back into a barter economy. And conversely, of course, if we prevent currency competition by law, it has especially harmful effects in such a situation. 298 00:35:10.320 --> 00:35:24.320 That is, if we upkeep at all costs and enforce at any cost the monopoly laws that protect the present currency in the case of a deflation spiral or a hyperinflation spiral, 299 00:35:24.320 --> 00:35:34.320 Then we, in fact, have good chances of bringing us back into barter, into a primitive exchange economy, hand-to-mouth production. 300 00:35:34.320 --> 00:35:40.320 Unfortunately, even the Germans were wise enough in 1923 just to let it happen as far as it was necessary, 301 00:35:40.320 --> 00:35:49.320 and then later in the year, in November, they set out to introduce a thoroughgoing reform that salvaged the old money. 302 00:35:49.320 --> 00:35:56.320 But again, from an Austrian libertarian point of view, that is not necessarily the best result that you would aim for. 303 00:35:56.320 --> 00:36:05.320 It would have been, from a libertarian point of view, in many ways, it would have been preferable just to get rid of the old mark and have it replaced by these and other commodities. 304 00:36:05.320 --> 00:36:09.320 Gold, silver, coins, foreign currencies, whatever. 305 00:36:09.320 --> 00:36:23.320 So again, even in this case, there's no reason why this process should not be completed in a few days, and there's therefore no reason to expect that production will not resume very quickly under new ownership. 306 00:36:23.320 --> 00:36:31.320 Myth number four. Deflation entails slower economic growth than inflation. 307 00:36:31.320 --> 00:36:48.320 Now, okay, I don't need to go into much detail here. Essentially, that's wrong because inflation finances on a constant basis projects that would not find the voluntary support of other members of society. 308 00:36:48.320 --> 00:37:00.320 Think of the welfare state again, right? The welfare state could not exist without paper money because nobody of us would be ready to give sufficient amount of credits to the welfare agencies or make donations or whatever. 309 00:37:00.320 --> 00:37:08.080 donations, therefore they need the printing press to allow the government to incur ever 310 00:37:08.080 --> 00:37:12.080 more debts which in fact finance these projects. 311 00:37:12.080 --> 00:37:17.760 So here we have an enormous waste of resources which alone, and we don't even need to talk 312 00:37:17.760 --> 00:37:22.920 about the Austrian theory of the business cycle, that is about the possibility that 313 00:37:22.920 --> 00:37:28.600 increases in the quantity of money bring about inter-temporal misallocations of resources. 314 00:37:28.600 --> 00:37:37.600 and also a waste of resources, cornering of resources, but you don't even need to make this sophisticated point, right? 315 00:37:37.600 --> 00:37:46.600 It's just sufficient to look at the welfare state, look at the extent of the welfare state, how many resources are wasted in these bureaucracies and the projects that they run. 316 00:37:46.600 --> 00:37:59.600 and compare this to, well, the waste of resources, if you might call it thus, that result from deflation, which are in fact very short run, very one-time waste, right? 317 00:37:59.600 --> 00:38:06.800 They relate essentially to market participants adapting themselves to the new conditions. 318 00:38:06.800 --> 00:38:12.100 Myth number five, deflation is particularly burdensome for lower income groups. 319 00:38:12.100 --> 00:38:27.100 That is wrong, as we know from the Austrian theory of value, because the higher a good is up in the order of goods, the more its value will be affected by changes in the value of the consumer goods. 320 00:38:27.100 --> 00:38:32.100 Now, in the case of labor, what saves labor, in fact, is that it is relatively non-specific. 321 00:38:32.100 --> 00:38:36.100 So it can be easily moved from one stage of production to others. 322 00:38:36.100 --> 00:38:43.100 So it is not so much affected by changes of value in any one branch of production. 323 00:38:43.100 --> 00:38:47.100 But all capital goods are more or less specific. 324 00:38:47.100 --> 00:38:53.100 Just think of this building. Which use could we make of this building if the Mises Institute weren't here? 325 00:38:53.100 --> 00:38:58.100 Well, that's probably a bad example because it is a very charming and beautiful building and we have a university next door. 326 00:38:58.100 --> 00:39:05.660 But even then, right, so you wouldn't have exactly a use that is comparable, you have a huge decrease in value. 327 00:39:05.660 --> 00:39:20.540 But think of other things, a tool machine, for example, that produces replacement tools, let's say, for a very specific other machine that is used for car window wipers and so on. 328 00:39:20.540 --> 00:39:30.540 Now, if there's a lacking demand for that type of car, well, immediately all the equipment needed to produce these different parts for the car will become valueless too. 329 00:39:30.540 --> 00:39:39.540 So the changes of value that can be induced by deflation are much higher in the case of capital goods than in the case of labor. 330 00:39:39.540 --> 00:39:49.540 And this means that the owners of the capital goods, which are typically the richer people, will be affected by deflation much more than lower income groups. 331 00:39:49.540 --> 00:39:55.540 So it's not true that deflation is particularly burdensome for lower income groups. It's precisely the other way around. 332 00:39:55.540 --> 00:40:02.540 And that is also the very reason why, again, our establishment is a porous inflation to such an extent. 333 00:40:02.540 --> 00:40:08.540 Sure, it hurts the leadership most. 334 00:40:08.540 --> 00:40:15.540 And this does not only concern, well, political entrepreneurs, it also concerns, well, decent people who just happen to be capitalists. 335 00:40:15.540 --> 00:40:24.540 Myth number 6. Deflation destroys the credit of the state. 336 00:40:24.540 --> 00:40:33.540 So the idea is, once all prices are much lower, tax returns, the tax income, revenues of the state will be much lower than it had been before. 337 00:40:33.540 --> 00:40:40.540 On the other hand, they have still their debts in the old nominal extent, so they can't possibly pay back the debts. 338 00:40:40.540 --> 00:40:58.540 So therefore deflation would disrupt the credit of the state. I can only say well it takes some audacity to come up with this argument because to anyone who is right minded and sane it is obvious that it's just a question of time until our state or our governments won't get any credit anyway. 339 00:40:58.540 --> 00:41:17.540 Already now, until a couple of years ago, some 15-20 years ago or so, there were still politicians and other officials saying, well, one day the debt will be paid back. Margaret Thatcher in England even did pay back part of the English public debts, British public debts. She was the last one. 340 00:41:17.540 --> 00:41:23.260 ever since as we know not only the money stock has exploded but public debts have 341 00:41:23.260 --> 00:41:28.500 exploded as well and there's no more talk even of ever paying this back and it is 342 00:41:28.500 --> 00:41:36.860 clear that well since we are on some influential exponential growth path of 343 00:41:36.860 --> 00:41:41.500 public debts the point will soon be reached when our governments won't get 344 00:41:41.500 --> 00:41:45.100 more any more credits and have to file bankruptcy anyway with or without 345 00:41:45.100 --> 00:41:51.100 The only thing that deflation would do is merely to speed things a little bit up. 346 00:41:51.100 --> 00:42:00.100 The second point to be made here is, why is it actually so bad that government wouldn't get any credit anymore? 347 00:42:00.100 --> 00:42:12.100 That's very important. It's not cynical to say this, as Austrian scholars have stressed again and again. 348 00:42:12.100 --> 00:42:25.100 So even if we adopt the point of view of democracy as the most efficient, just and so on, form of government, then precisely from a democratic point of view, 349 00:42:25.100 --> 00:42:36.100 debts and inflation are highly problematic because they withdraw the control of the resources of government from the direct influence of the citizens. 350 00:42:36.100 --> 00:42:42.100 It's one thing to knock on each door and say, good man, give me your taxes, it's your government. 351 00:42:42.100 --> 00:42:56.100 Robin Hood, when the sheriff from Nottingham comes in, takes away the last penny from the very poor people. 352 00:42:56.100 --> 00:43:02.100 So that rouses resistance, that rouses people like Robin Hood to spring into action. 353 00:43:02.100 --> 00:43:08.580 That is also the reason why governments which are dependent on mere taxation remain moderate. 354 00:43:08.580 --> 00:43:14.700 Governments who can use public debts to some extent are already much less under control. 355 00:43:14.700 --> 00:43:22.060 They don't have to ask anybody to strike a deal with somebody who will lend them some 356 00:43:22.060 --> 00:43:28.020 money and they always find such persons because these persons know the government has the 357 00:43:28.020 --> 00:43:34.520 is a special resource of taxation, and they are even less controlled if they can rely on the printing press. 358 00:43:34.520 --> 00:43:45.020 So, certainly getting rid of the printing press and thereby of public debts is a good thing. 359 00:43:45.020 --> 00:43:51.020 Myth number seven, deflation creates unemployment. 360 00:43:51.020 --> 00:43:58.200 Now, whether labor or not, the unemployment of a factor of production comes about only in two cases. 361 00:43:58.200 --> 00:44:03.600 Case A, if the owner of the factor is not willing to rent it out at the price offered to him. 362 00:44:03.600 --> 00:44:07.460 Case B, if the law is preventing from doing so. 363 00:44:07.460 --> 00:44:13.860 It is therefore not true that declining wage rates bring about unemployment by any sort of inner necessity. 364 00:44:13.860 --> 00:44:20.960 People are not just unemployed, they choose not to work for somebody at the wage rate that he offers to him. 365 00:44:20.960 --> 00:44:29.960 It is clear that no sane person will accept to work for somebody else if the wage rate does not allow him to survive anyway. 366 00:44:29.960 --> 00:44:34.960 So if somebody offered you in a present circumstance is, okay, you're going to work for me for two cents an hour, 367 00:44:34.960 --> 00:44:39.960 well, you would do it because you couldn't go on very long like this. 368 00:44:39.960 --> 00:44:42.960 But that is not the situation that we face in deflation. 369 00:44:42.960 --> 00:44:47.960 Because in deflation not only wages go down, but all prices go down. 370 00:44:47.960 --> 00:44:53.960 that is the footstuff and other things in which the survival of our workers depends goes down as well 371 00:44:53.960 --> 00:44:57.960 and usually these prices decline even faster than weight rates 372 00:44:57.960 --> 00:45:05.960 and the last time we had in Germany any decent deflation in the periods the years 1931 to 1933 approximately 373 00:45:05.960 --> 00:45:09.960 we had a reduction of weight rates of some 10 to 20 percent 374 00:45:09.960 --> 00:45:13.960 now that certainly that can hurt 375 00:45:13.960 --> 00:45:19.960 But it's not a catastrophe. Imagine if you had 10 to 20 percent less. Well, you're poor fellows and so on. 376 00:45:19.960 --> 00:45:24.960 But even you could survive. Even you could survive with 10 to 20 percent less. 377 00:45:24.960 --> 00:45:35.960 And imagine that on top of that, the prices for all the things that you like, like cinema tickets and beer and what you guys consume, all this will go down. 378 00:45:35.960 --> 00:45:39.960 So you wouldn't even necessarily be worse off. 379 00:45:39.960 --> 00:45:51.960 Involuntary unemployment might arise in the deflation only if the letter is combined with minimum wage laws, which prevent the worker from offering his services at lower rates. 380 00:45:51.960 --> 00:46:00.960 But clearly in this case, unemployment is not the result of deflation, but of minimum wage laws, which infringe on freedom of association. 381 00:46:00.960 --> 00:46:08.960 Myth number eight. Deflation entails unequal and arbitrary burdens for the citizens. 382 00:46:08.960 --> 00:46:14.960 Now, it is true that deflation does involve heavy burdens for many individuals, as I have just said, well not for you though. 383 00:46:14.960 --> 00:46:23.960 Just consider the fact that today the great majority of US households have incurred considerable liabilities, usually in the form of real estate mortgages. 384 00:46:23.960 --> 00:46:30.960 If the contraction of the money supply sets in, household incomes will decline and it will be impossible to pay back these liabilities. 385 00:46:30.960 --> 00:46:37.960 It will then be necessary to renegotiate debts and some individuals will have to file individual bankruptcy. 386 00:46:37.960 --> 00:46:50.960 It is also true that deflation has unequal consequences for the individual citizens. Some will prosper in a deflationary environment, others will fare worse than they would have fared if the deflation had not set in. 387 00:46:50.960 --> 00:46:57.960 Finally, it is true that these redistributions are often difficult to square with one's notions of what is just and unjust. 388 00:46:57.960 --> 00:47:06.960 So where then is the myth? The myth consists again in the belief that only deflation entails unequal and arbitrary burdens for the citizens. 389 00:47:06.960 --> 00:47:12.600 So the idea is that if we didn't have deflation, well, how everything would be perfect and equitable and so on. 390 00:47:12.600 --> 00:47:21.480 It's only the evil, evil deflation that brings about redistributions that are unjust and burdensome and arbitrary. 391 00:47:21.480 --> 00:47:28.280 The truth is that the present inflationist regime is no less redistributive and arbitrary than any deflation could possibly be. 392 00:47:28.280 --> 00:47:33.120 Inflation constantly redistributes income from people who offer genuine services 393 00:47:33.120 --> 00:47:38.620 to people who happen to enjoy political alliances with the masters of the printing press. 394 00:47:38.620 --> 00:47:43.520 Even if inflation is used only to prevent an impending deflation, 395 00:47:43.520 --> 00:47:46.720 that is, if it is used to reflate, 396 00:47:46.720 --> 00:47:50.120 oh yeah, there's a whole vocabulary that you have to learn. 397 00:47:50.120 --> 00:47:55.020 There's not only inflation and deflation, there's also disinflation and reflation. 398 00:47:55.020 --> 00:47:59.920 And then there are different definitions of what deflation is all about according to some. 399 00:47:59.920 --> 00:48:05.720 So deflation means an absolute price level that is deflation, right? 400 00:48:05.720 --> 00:48:13.080 So the price level goes down, then according to some others, it means, well, until now, the price level has increased by two percent. 401 00:48:13.080 --> 00:48:18.640 If now suddenly we have a slower growth rate, only one percent, that is deflation. 402 00:48:18.640 --> 00:48:22.000 There's another school, there's always the next frontier, right? 403 00:48:22.000 --> 00:48:26.840 That says, OK, the relevant thing that we have to consider is the expectations. 404 00:48:26.840 --> 00:48:36.840 So if the market participants expected 5% inflation rate and we offer them only 3, that is also deflation. 405 00:48:36.840 --> 00:48:40.840 So the fantasy is usually unlimited. 406 00:48:40.840 --> 00:48:47.840 And of course this whole thing only serves to cover up the effects of the present inflationary regime. 407 00:48:47.840 --> 00:48:55.840 So even if inflation is used only to prevent an impending deflation, these arbitrary and unequal redistribution effects cannot be avoided. 408 00:48:55.840 --> 00:49:05.840 The very last thing, the least thing we could say is therefore that deflation is certainly not more unjust, not more arbitrary, not more unequal than inflation. 409 00:49:05.840 --> 00:49:16.840 But as I will explain in a minute, there are in fact very tangible benefits to be derived from it that make it actually better and preferable to continued inflation. 410 00:49:16.840 --> 00:49:26.840 But before I come to this, another short point, myth number nine. It will take decades to settle deflation induced legal disputes. 411 00:49:26.840 --> 00:49:38.840 That is a very prominent argument in the arsenal of one Austrian economist, who otherwise is an excellent economist, but who happens to have a weak spot on deflation. 412 00:49:38.840 --> 00:49:47.080 on Deflation. He might ask, have I not been too over-optimistic in assuming that deflation 413 00:49:47.080 --> 00:49:51.520 might be a matter of a few hours or days? Is it not rather likely that deflation will 414 00:49:51.520 --> 00:49:56.540 upset a great number of long-term contracts, from mortgage contracts over industrial bonds 415 00:49:56.540 --> 00:50:01.920 to real estate leases? And is it not rather likely that it will take the course some twenty 416 00:50:01.920 --> 00:50:07.500 years or so, that is the number that has been given in the literature, some twenty years 417 00:50:07.500 --> 00:50:13.080 or so to sort out all the different claims and counterclaims. Now it is true 418 00:50:13.080 --> 00:50:16.940 that while the adjustment of the price structure to the new deflation created 419 00:50:16.940 --> 00:50:21.660 conditions might take just a few hours or days, but could take much 420 00:50:21.660 --> 00:50:25.720 longer if government interventions hamper the process, the settlement of 421 00:50:25.720 --> 00:50:30.340 legal disputes could involve much longer time periods. But based on the 422 00:50:30.340 --> 00:50:33.920 empirical evidence it is certainly exaggerated to assume that more 423 00:50:33.920 --> 00:50:36.480 More than a few months would be needed. 424 00:50:36.480 --> 00:50:43.380 Again I refer myself here to the case of the German deflation of 1931 to 1933 on which 425 00:50:43.380 --> 00:50:51.140 I have the only data so far and what we observe here is that in spite of all the difficulties 426 00:50:51.140 --> 00:51:00.320 that have been created, I saw bankruptcies and unemployment over 6 million, production 427 00:51:00.320 --> 00:51:12.320 was stopped in many firms, salaries and wages plummeted, mortgage was jeopardized as well as the financial titles backed up with mortgage claims. 428 00:51:12.320 --> 00:51:18.320 Well, so what happened was that these things were settled both within and outside of the courts. 429 00:51:18.320 --> 00:51:23.320 There was a huge number of cases, legal settlements that took place outside of the courts. 430 00:51:23.320 --> 00:51:26.320 Another huge chunk was settled within the courts. 431 00:51:26.320 --> 00:51:32.320 and still another chunk of problems was solved through special emergency legislation. 432 00:51:32.320 --> 00:51:40.320 So there was a series of four laws enacted from July 1931 when the crisis set in, 433 00:51:40.320 --> 00:51:47.320 with the bankruptcy of one major German bank, the Darmstädter Bank, 434 00:51:47.320 --> 00:51:52.320 and the last of the emergency laws was passed on December 8, 1931. 435 00:51:52.320 --> 00:52:08.320 So within a couple of months, all legal dispositions, legal institutions have been in place to solve the legal problems at hand and these seem to have been addressed within six months, a year or something like this. 436 00:52:08.320 --> 00:52:18.320 So it certainly seems to be, well, over the top to assume that things would be handled much less efficiently in the present day United States. 437 00:52:18.320 --> 00:52:23.320 Especially if legal scholars turn their energy into analyzing the problems that are here at stake. 438 00:52:23.320 --> 00:52:37.320 And I can only encourage those of you who are interested in legal analysis to keep an eye on this issue and work out maybe some sort of libertarian legal theory of deflation, which we would need. 439 00:52:37.320 --> 00:52:41.320 Myth number 10, I'm now approaching the end. 440 00:52:41.320 --> 00:52:45.320 Deflation confers no positive net benefit. 441 00:52:45.320 --> 00:52:53.320 Granted that a heavy contraction of the money supply is merely on equal footing with increases of the money supply 442 00:52:53.320 --> 00:52:56.320 when it comes to the distribution of burdens among the citizens. 443 00:52:56.320 --> 00:53:02.320 But is it not the case that we have pretty well adjusted our behavior to the present inflationary environment? 444 00:53:02.320 --> 00:53:06.320 Whereas letting deflation happen would impose on us a readjustment? 445 00:53:06.320 --> 00:53:12.320 Even if this adjustment is only a temporary affair, still it involves cost for all members of society. 446 00:53:12.320 --> 00:53:17.320 So what are the benefits of deflation that could prompt a responsible citizen to endorse it, 447 00:53:17.320 --> 00:53:26.320 apart from the uncertain prospect of being on the winner's side in the zero-sum, short-run redistribution process that inflation entails? 448 00:53:26.320 --> 00:53:33.320 So again, the point is, if the quantity of money is irrelevant, we can do with any quantity of money. 449 00:53:33.320 --> 00:53:50.320 So then we say, well, deflation is not worse than inflation, but the other conclusion, the other way around would hold as well, deflation is certainly not better than inflation, there is no way, no inherent reason for us to prefer a deflationary setting to an inflationary setting. 450 00:53:50.320 --> 00:53:54.320 But here I think the following considerations come into play. 451 00:53:54.320 --> 00:54:04.320 First of all, deflation is a very efficient mechanism to speed up adjustment to new circumstances in the wake of a major financial crisis. 452 00:54:04.320 --> 00:54:12.320 The reason is, as we have noticed above, that deflation affects the prices of factors more than it affects the prices of consumers' goods. 453 00:54:12.320 --> 00:54:18.320 And as a consequence, deflation increases the spread between selling receipts and cost expenditure. 454 00:54:18.320 --> 00:54:24.820 In other words, the interest rate, and that creates powerful incentives for increased savings and investments. 455 00:54:24.820 --> 00:54:34.320 That is, of course, the argument that Rothbard emphasized in his treatment of deflation in Man Economy and State. 456 00:54:34.320 --> 00:54:41.820 And now consider the present context, so the reaction of the Fed officials is exactly the wrong way around. 457 00:54:41.820 --> 00:54:49.820 I said, oh, we have now this financial crisis, now the only thing that we need to make sure is that it, that is, inflation does not happen again. 458 00:54:49.820 --> 00:54:54.820 Whereas in the light of sober economic analysis, it's precisely the other way around. 459 00:54:54.820 --> 00:54:58.820 Let it happen because it will speed up the adjustment process. 460 00:54:58.820 --> 00:55:05.820 Of course, it will not be allowed to happen because of the political cost that it involves. 461 00:55:05.820 --> 00:55:10.820 So here the following second consideration comes into play. 462 00:55:10.820 --> 00:55:19.820 Deflation is a one-time process that, however, has the potential to destroy the very institutions that produce inflation on a perennial basis. 463 00:55:19.820 --> 00:55:26.820 In particular, fractional reserve banks and fiat money producers, which we call central banks, misleadingly. 464 00:55:26.820 --> 00:55:33.820 The destruction of these institutions eliminates the advantage at the margin enjoyed by liability finance as compared to auto finance. 465 00:55:33.820 --> 00:55:39.820 In other words, economic and social power is taken away from the feds and the banks 466 00:55:39.820 --> 00:55:42.820 and returned into the hands of individual citizens. 467 00:55:42.820 --> 00:55:48.820 Firms will operate on a far higher equity basis than before and households will, in more cases than before, 468 00:55:48.820 --> 00:55:52.820 save, first save, and then buy a home. 469 00:55:52.820 --> 00:55:57.820 Furthermore, the destruction of the inflation machine will destroy the main financial engine of the welfare state. 470 00:55:57.820 --> 00:56:02.820 Governments will henceforth have to obtain their resources exclusively through taxation, 471 00:56:02.820 --> 00:56:10.820 which is subject to far greater social control than the unworthy stealth method of gaining resources by inflating the money supply. 472 00:56:10.820 --> 00:56:18.820 So this brings me in conclusion to myth number 11. Letting deflation happen is passivism. 473 00:56:18.820 --> 00:56:24.820 In the light of my discussion it is clear that letting deflation happen must not be simply equated to an apathetic resignation 474 00:56:24.820 --> 00:56:30.820 before the power of mysterious and blind forces and market mechanisms. 475 00:56:30.820 --> 00:56:42.820 Deflation can fulfill extremely useful social functions and those who cherish individual liberty and the sanctity of private property are on good grounds in consciously striving to let deflation run its course. 476 00:56:42.820 --> 00:56:48.820 If anything, it is letting inflation happen that amounts to a pathetic resignation. 477 00:56:48.820 --> 00:56:58.820 Resignation that is before the power of a money monopoly that thrives on ignorance and which benefits political networks at the expense of capitalistic civil society.