Tuesday, December 9, 2008

A Worthy Perusal

Lew Rockwell discusses pricing and inflation on Mises.org:

The price mechanism provides a means of coordinating consumer demands with producer realities. Retailers are wildly overstocked with goods now, having made their purchases for Christmas back in the spring or summer. (We should never forget that sellers have to buy goods before they sell them, and that this is always a speculative enterprise.)

The downturn hit hard and suddenly, and its impact has been felt up and down the structure of production. Retailers find themselves with a serious problem of overstuffed inventory, a declining cash flow, and a financial sector that is risk-averse. The solution is to disgorge, and this accords precisely with the demand of consumers. So in this one signal of the price we see a remarkable coordination taking place.

When you put all these price cuts together — and they are pervasive — you end up with a macroeconomic setting that is a great relief to consumers in troubled times. Wouldn't you know that the press would find this to be a cause to bellyache about the supposed dangers of "deflation." And in a crazy, upside-down way, we find politicians, financial managers, and economists quoted all over the place who have deduced that the real problem with the economy is falling prices.

If you want a pretty basic understanding, without reading a whole economic textbook, about the current inflation/deflation debate and what is actually likely to happen, the whole thing is worth reading. In summary, you will find out why prices are falling in the face of massive monetary inflation on the part of the Federal Reserve, and why they are likely to increase very, very rapidly when lending starts up again in the next go-round of the crazy Keynesian roller-coaster we call the American Economy.

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