WHY NOT DEFLATION?

      I'll never understand this constant inflation thing on the part of the Federal Reserve. Our dollar has been severely depreciated in the past century. Check for yourself here and it's all because of an inflationary policy dictated by the Federal Reserve and I'm sure Congress too with its reckless deficit spending in peacetime.

      Right now under Bernanke, he is attempting to go for a targeted 1-2% annual inflation rate, which, while slow, is still ultimately exponential. Yes, the deflationary policy I am proposing is ultimately exponential too if left in place indefinitely, but I'm not looking to either inflate or deflate the dollar out of existence. I am seeking a balance, a kind of 21st century version of the Resumption Act.

      Originally our money was tied both to silver and gold and later only to gold before that standard was dropped commercially in 1933 and nationally in 1971. It was $19.39 per troy ounce from 1792-1834; $20.67 per tr.oz. from 1834-1933; $35 per tr.oz. from 1934-1971; $38 per tr.oz. from 1971-1973; and finally $42.22 per tr.oz. from 1973 to this day even though the United States will no longer pay gold out in exchange for dollars. $42.22/tr.oz. remains the official price of gold in the United States so why not make that the goal of the Federal Reserve? It took almost forty years to get to this point so what would be so wrong having Congress order the Federal Reserve to restore this parity in a similar time frame? Hell, I'll even give the Fed fifty years to do it in order to smooth the transition.

      I'm not saying we should go back to a gold standard (nor am I saying I would be against it either). However, just because the dollar and gold are no longer considered equal partners in the economy does not mean the dollar's value should be officially eroded over time. You would think it would be a duty of Congress to ensure the public's faith in its currency's integrity ESPECIALLY since the currency of the realm cannot be traded for gold coin at any Federal Reserve Bank. For me, the extreme deviation of the actual price of gold versus its official price is a failure on the parts of Congress and the Federal Reserve Board ($42.22 versus over $1500 per tr.oz. today) and an extreme one at that.

      The way I looked at the old gold standards was that they didn't make for suicide pacts with its citizenry. I find the current fiat systems akin to the old company store or a kind of loyalty oath to a system you may or may not support. In the old days, to use one example, Mexico used a weighting standard for its gold coins that was very similar to the United States. Basically, two pesos in gold was equivalent to one dollar in gold. Now, say Mexico was a much more powerful country and successfully invaded and conquered the United States any time before 1933. Holders of US paper currency would find themselves holding worthless paper bu those holders silver and gold coin would not be shit out of luck in this scenario. Their money could be melted down and recoined into Mexican coins of the realm with little loss on their part. Nowadays, our currency is purely fiat. Assume the same scenario of a powerful Mexico conquering the United States after 1964 (I say this because the US still had silver coins until 1964). Now you're fucked money-wise. All of your paper and coins are worthless. So while, yes, this does create an urgency on the part of the citizenry to not see their country fall, it also forces the citizenry into this position lest you wish to lose everything you've saved. Gold and silver coins were convertible world-wide and not subject to trading whims (consider how the values of Union and Confederate currencies shifted depending on either side's fortune in battle - the gold and silver retained value, but the paper rose and fell with each battle).

      Anyways, usually the argument I hear against deflation is that it would ruin the economy because it would make debts harder to pay and because people wouldn't buy things believing the price would drop in the future.

      Yes, debts would be harder to pay and that is the allure of an inflationary policy today. Borrow a sum today and effectively pay less back in the future - the longer the term, the better. No one phrases it that way, but that's the ultimate benefit of inflation to governments and to borrowers in general. It's a balancing act. You can't make inflation too high or else no one will lend you money and if it's too low, you have to restrain yourself from getting too indebted lest you risk defaulting. Inflation benefits debtors. The ultimate in inflation, official devaluation, is of greatest benefit to people who owe money.

      Deflation makes debts harder to pay over time so under a deflationary regime, not getting into debt in the first place is a high priority. If you go into debt under deflation, it had damned well better be worth it and it had better be short term. Deflation ultimately benefits savers. I would imagine banks would not be fans of deflation as it would not be necessary for people to put their money there. It would effectively earn interest under a mattress!

      Inflation does create an imperative to spend now as things only get more expensive in the future. Wages and prices do not rise in tandem so the poor and working classes lose under inflation. Inflation is supposedly the grease that lubricates the personal spending which makes up over 70% of our economy.

      Deflation might reduce some consumer spending, but I think it would more reduce impulsive spending - the kind that isn't good in the long run anyway. I'm sure, like inflation, wages and prices would not fall in tandem. Wages would likely fall faster than prices so it wouldn't be totally a win for the poor and working class under deflation. But the idea that the economy would suffer heavily is total nonsense as far as I'm concerned. If your boiler breaks down, you're gonna replace it now rather than wait through a cold winter in the hopes of getting a lower price next year. If you're hungry, you're not gonna starve hoping for deflationary effects to kick in later. And so forth. You might only hold off on upgrading your cellphone or getting a new car until necessary meaning that people would keep their possessions longer before replacing them but wouldn't that create a net positive for maintenance/repair jobs? Might deflation ironically INCREASE spending in the economy? You wouldn't have to save as much for the future because each dollar saved now would be worth that much more as you near retirement whereas now each dollar saved is reduced in value. The value of a dollar saved in an inflationary environment is subject to the economy and how it is invested (think of those who cashed out in late 2007 versus those who cashed out in early 2009 - my IRAs lost half their value in that time).

      Dollars MUST be invested in an inflationary environment or else you're guaranteed to lose come retirement. A hundred dollars when I was born left under a mattress is worth $28.85 today. I could not retire on savings alone in an inflationary environment. But what hath all this forced investment wrought? I don't want an IRA or a Keough or a stock portfolio, I don't understand them. I don't believe I should be putting money into investment vehicles I don't understand yet if I don't, I lose. I don't believe this current economic crisis would have happened (at least to the extent it did) if people didn't have to invest for retirement. There's too much money in the investment pool...way more than there should be and I think it the result of people being forced to invest under an inflationary regime.

      Now, I'm not strict "the dollar must be exactly $42.22/tr.oz. gold" guy. I believe that the dollar should be allowed to hover, rather than float and that it should hover around $42.22/tr.oz. gold. In peacetime and boom times, the dollar should deflate, maybe even below that target price, but not too much lower. That way, in war time and recessions, when extra dollars floating around are actually helpful, they can be made available through inflation and "stimulus packages" and when hostilities or the economic crisis passes, the dollar's value can be restored.

ADDENDUM: I will also argue that sustained deflation would be good for the environment too as all these billions of now nearly worthless coins the United States produces and has been producing annually for decades will have their purchasing power restored meaning that they will actually get used  instead of hoarded in jars awaiting redemption at a CoinStar.

FULL DISCLOSURE: Much of this post has been inspired by Mish's Global Economic Trend Analysis blog. You should read it. I don't support his stance on unions (at least so much as he appears to be against ALL unions, not just public service unions which I oppose to a certain extent [that is, I don't believe they should be able to negotiate wages, but that doesn't mean they shouldn't be to negotiate the employer/employee relationship in terms of procedures like hiring/firing practices or whether or not seniority should have a place]) but otherwise I find much of what he writes sound.