Why Deflation Is Not Inevitable (Sadly) Part 5: Conclusion

Over the past month, I have written seven lengthy articles on the totally erroneous theory that consumer price deflation is inevitable, no matter what the U.S. government and the Federal Reserve System do. You can read them here.

I would like to believe that this will end the debate. It won’t.

Why not? Because there are people in the hard money movement who reject the Austrian theory of the business cycle. They reject the views of central banking offered by Ludwig von Mises and Murray Rothbard. Incredibly, some of them claim to be followers of Mises. If so, they do not understand what he wrote. Yet Mises was easy to understand on monetary theory. I wrote a book on his view of money: Mises on Money.


I first heard the theory of looming price deflation in November 1967 at the first gold investment conference, which was sponsored by Harry Schultz. At that conference, there was a forecaster who predicted serious price deflation. He did not recommend buying gold. He recommended that we be 100% in Treasury bills. His name was J. Irving Weiss. Weiss never changed his forecast. Until late 2009, neither did his son, Martin Weiss.

Today, it would take $6,400 to buy what $1,000 would have bought in 1967, according to the inflation calculator of the Bureau of Labor Statistics.

To say that J. Irving Weiss did not know what he was talking about in 1967 does not do justice to the man’s lack of ability as a forecaster on this, the crucial economic issue of the last four decades. His son built a kind of family cottage industry with almost three decades of his own false predictions in this regard. He always got lots of subscribers. Finally, he reversed course in September 2009. I wrote an article on this.

There have been other minor figures who never changed their deflationist tune. One of the oldest is William Tehan, whose opinion on the coming deflation has not changed for over three decades. He was still singing the same old song at the September 2009 meeting of the Committee for Monetary Research and Education, a pro-gold organization that has invited him back to speak on the looming deflation for the entire period. I used to be on the Board of Trustees in the mid-1970s. I remember his speeches. They made no sense then. I am confident that he will be equally wrong this time. But with a record like his, why would he change this late in life? Nobody notices. Nobody cares. Nobody remembers (except me).

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I mention all this because I have spent my career arguing that price inflation is highly likely, and price deflation is nowhere to be seen. I have written for four decades on why Austrian monetary theory is correct. The central bank can inflate and is likely to inflate. Prices will rise.

I have been right every year. Admittedly, it did not take a high IQ to make this annual prediction. Except for a tiny band of deflationist journalists and obscure forecasters, the financial media have predicted inflation every year for half a century. The only widely known forecaster who always predicts price deflation is A. Gary Shilling. For at least two decades, deflation has been his constant theme. He is still quoted as an expert. He may be an expert in some areas. He is not an expert on the issue of deflation. He is the author of these books:

Deflation: Why It’s Coming, Whether It’s Good or Bad, and How It will Affect your Investments, and Your Personal Affairs (1998)

Deflation: How to Survive and Thrive in the Coming Wave of Deflation (1999, 2001)

I searched Google for “A. Gary Shilling” and “deflation.” I got 122,000 hits. Busy, busy, busy. Wrong, wrong, wrong.


The deflationists confuse asset prices with consumer prices. It’s that simple. They look at this or that asset market bubble and conclude: “The debt load is too high. Debtors will default. This will cause massive corporate failures and layoffs. This will cause a fall in consumer prices. The Federal Reserve will not be able to reverse this by lowering interest rates. No one will borrow, even at 0%.”

They believe that low interest rates led to the debt build-up, but even lower rates somehow will not sustain it. The price of capital can fall to zero, their analysis necessarily implies. Still, no one will borrow.

Sound familiar? It should. This was the view of John Maynard Keynes in his book, The General Theory of Employment, Interest, and Money (1936). He believed that the national government should borrow on its good credit and spend the money into circulation. Private firms would not borrow and spend, even at zero percent per annum. So, the government must intervene.

The difference between today’s hard-money deflationists and Keynesian deflationists is that Keynesian deflationists do not think the government, when funded by the central bank, is incapable of getting the economy out of its otherwise permanent depression. Their policy prescription: “Borrow and borrow; spend and spend; print and print.”

The hard-money deflationists are theoretical Keynesians who think they are Austrians. This is bizarre. John Exter, the central banker and Citibank economist, began this tradition. It continues.

Beginning with a false view of capital — “at zero price, there is greater supply than demand” — the hard-money deflationists write that the Federal Reserve is powerless to get commercial banks to lend. They ignore the obvious: the FED can impose fees for commercial banks’ excess reserves. That will get them lending.

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There is no shortage of borrowers. If this were not the case, then the commercial bond rate would be at 0% today: no borrowers at any price. It’s at 6%.

The deflationists do not believe that the rate of interest clears the capital markets at rates above 0%. They think there will be no demand for loans at 0%. It should be clear that they do not understand the capital markets in a world where central banks can and do buy corporate debt. There is corporate debt for sale. They do not understand that money, once created, continues to be spent.

Imputed prices for specific goods rise and fall. Imputed prices for dreams — capital markets — can and do rise and fall wildly. Imputed prices for consumer goods on supermarket shelves rarely fall. A few may. Most don’t. Why not? Because the money supply keeps rising.

Pricing in consumer goods markets that have high turnover is in principle the same as pricing in capital goods’ markets. Individuals impute prices based on expected income generated by the assets. But when hardly anyone sells assets in any given week or month, as is the case with stocks and bonds, expectations can produce bubbles that pop. In contrast, when supermarket shelves get cleaned out every three days, expectations do not produce bubbles. Consumer prices rise comparably to the increase in M1 in the United States and M2 in Japan.

Deflationists confuse money with dreams. That is, they confuse money in a bank account with imputed prices in a capital market — a market in which the latest price of one small sale is imputed to the entire asset’s market capitalization.

Meanwhile, back at the supermarket, prices are slowly rising in the United States and slowly falling in Japan.

There is no mass deflation. There is surely no hyperdeflation. In the United States, there is price inflation. December 2008 to December 2009, the CPI rose by 2.7%. The Median CPI rose by 1.1%. For yet another year, the deflationists’ prediction has been proven wrong.

Will they predict more price deflation? Of course. If the evidence from 1956—2009 does not persuade them, we should not expect a change of view. They operate with a false view of consumer goods pricing and a false view of money. Why should the behavior of the consumer price index — upward — deflect them?

When they believe it, they will see it. They do not yet believe it — “it” being the Austrian theory of the business cycle. So, they do not see it — “it” being rising consumer prices in 2010.


Here is what those who predict inevitable price deflation lack: 1. An understanding of what money is 2. An understanding of capital: it isn’t money 3. An understanding of consumer goods pricing 4. An understanding of central banking 5. An understanding of commercial banking 6. An understanding of Keynesianism 7. An understanding of Austrianism

This puts them at a disadvantage when they make economic forecasts, especially their forecasts of consumer prices in the following year. They have been correct twice since 1940: in 1949 and 1955. That is not what I call an impressive record.