Dear Friends,
It seems to me, the real reason economists, politicians and Central Bank Presidents are so terrified about deflation, has nothing to do with any pernicious incentives deflation would introduce into the economy, but actually because it would hamper the ability of governments the world over, to deficit spend. Deficit spending has become so entrenched in our political systems that most people don’t give it a thought, and when they do, they grumble but consider it a necessary evil. The ability to deficit spend gives politicians extraordinary power, over the economy, our lives and political evolution. The political elite exploit their ability to spend huge sums of money, to reward their political cronies aka crony capitalism, they “stimulate” the economy with deficit spending and they get and hold office, by promising this or that constituency a hand out if they get elected. All of which are pernicious and destructive of our economies, our Rights and our personal standard of living.
John Maynard Keynes aggregate supply aggregate demand model of economics gives politicians an imperative to deficit spend. In the aggregate demand aggregate supply model, if aggregate demand exceeds aggregate supply the economy grows, but if aggregate demand falls below aggregate supply then the economy shrinks, resulting in recession. Keynes made no distinction between consumer demand, business demand or government demand. In fact, he is famously known for saying, if the government buried money in the bottom of a mine, and let firms use the market system to get it out, that would stimulate the economy. This shows he made no distinction between productive uses of money, and schemes that use money to draw people into non productive actions, actions they otherwise wouldn’t engage in.
One of the fundamental reasons the aggregate supply aggregate demand model is deficient, is that it doesn’t make distinctions between productive spending, where productivity is increased by upgrading plant and equipment or where someone’s needs or wants are being met, and schemes where money is wasted to draw in other money, which is then also wasted, to increase aggregate demand. When government spends money to stimulate the economy, it takes money that otherwise would be used for productive purposes, and wastes it.
The more money that is wasted the lower real economic output will be. Every government today counts government spending as a part of Gross Domestic Product. Therefore, as they deficit spend to draw in other money to gin up the economy, using aggregate demand aggregate supply, the money that is wasted feeds a system where government must have more deficit spending, to offset the loss of market efficiency that is the inevitable result of government “stimulus.” In other words, government spending is increased, to increase GDP, where the market has been so damaged by deficit spending and stimulus, it cannot increase GDP itself. Where government doesn’t deficit spend sufficiently to raise GDP, outside of actual economic growth, economists call it fiscal headwinds.
Crony capitalism around the world is fueled by deficit spending. The political elite use it to reward their half witted brother in laws and political backers. In many countries it is impossible to get a permit to do business unless you have political backing. No one can get licensed in those countries to compete with the political hacks. If the power to deficit spend were limited, that would also limit the ability of the politically favored, to reward their backers and half wit relations, for their own illegitimate purposes.
The first goal of any political party is to get and hold power. Deficit spending allows the faction in power at any time to hold that power. Further, it allows that faction that is willing to damage the interests of society as a whole, by deficit spending, to get that power they so covet. This is a pernicious incentive for political factions each trying to out promise the other. The party offering the most rewards to the people will be the one to get and hold office. This has the tendency to ratchet up deficit spending to ever higher extremes while lowering outcomes. Simply because, that party which has the least scruples to protect the public purse is rewarded, while the party that practices the most fiduciary responsibility, is punished.
All of these things rely on deficit spending and deficit spending needs inflation. Inflation is a hidden tax on the accounts of savers. As a government’s deficit gets ever larger, if the value of the money that the deficit is counted in gets smaller, that deficit also shrinks. If however, the value of the money a deficit is counted in goes up, savers and consumers are rewarded, but government deficits become more problematical. Therefore, governments, central banks and their dependent economists cannot allow any deflation. Deflation would explode the huge deficits governments have built up over the years… to reward their cronies, buy power and “stimulate” the economy. Deflation would show in stark contrast the fiction that deficit spending can go on indefinitely and the system of political favor would come crashing down. Make no mistake, they couldn’t care less about the good to society, in fact the ability to deficit spend rewards those who care the least for the public good, so next time you see a central banker weep at the possibility of deflation remember, those are crocodile tears.
Sincerely,
John Pepin
