Deflating the Deflation Myth: Fed Chief Alan Greenspan Is Claiming That the Specter of Deflation Is upon Us. the Truth, However, Is That Fed-Created Inflation, Not Deflation, Is Threatening American Prosperity. (Economics)

By Ingraham, Jane H. | The New American, June 30, 2003 | Go to article overview

Deflating the Deflation Myth: Fed Chief Alan Greenspan Is Claiming That the Specter of Deflation Is upon Us. the Truth, However, Is That Fed-Created Inflation, Not Deflation, Is Threatening American Prosperity. (Economics)


Ingraham, Jane H., The New American


Alan Greenspan is spinning us a new tale of monetary deception. His old tale, in which he cast himself as a financial wizard saving us from the ravages of inflation, has suddenly taken a bizarre twist. No longer are we to tremble at the thought of inflation; Greenspan is now terribly worried we don't have enough of it!

Seemingly having taken root as head of the Federal Reserve, for umpteen years Greenspan has pictured himself as hunkered down over the Consumer Price Index ferreting Out the merest whiff of prices being driven up by -- who else but businessmen? This picture of Greenspan as an inflation hawk has been hugely successful with the public, taught by government, the media, and academe to believe that rising prices are the cause of inflation rather than the result. Somehow Greenspan's old tale overlooked the fact that the one and only cause of inflation is an expansion of the money supply by the Federal Reserve System itself, a power that Greenspan has exuberantly exercised during his entire tenure.

But if Greenspan's old tale has been exposed as fiction by the deplorable consequences of his bubble inflation of the 1990s, his new tale is about to do even more damage. Early in May, Greenspan uttered the dread word "deflation," while his banker cronies on the Fed's Open Market Committee announced in what passed as an explanation that a "substantial fall in inflation" is not only "highly unwelcome" but is even worse than a "pickup in inflation from its already low level." Well, now we know. The Fed is finally admitting it's not in the business of protecting the purchasing power of Everyman's dollar after all.

Overlooking this little revelation, an army of commentators and financial analysts from the World Bank to the academic world sprang into print and speech quivering with Greenspan at the mere thought of deflation. "Just like Japan!" "Just like the 1930s!" In sync with this hysteria, on May 19th the Wall Street Journal headlined: "Having Defeated Inflation, Fed Girds for New Foe: Falling Prices." "This shift came not a moment too soon," the Journal told us, for shortly afterward the government announced the inflation rate has "hit a 37 year low." After enumerating our economy's many woes and concluding they are due to "just too much money chasing too little demand," the Journal agreed with Greenspan that the remedy is more inflation.

Voices on every side, eager to enlighten us, jumped in to explain that falling prices may seem good, but are really a dreadful menace. This is because consumers spend less while they hold their money in anticipation of lower prices. Since consumer spending is 70 percent of Gross Domestic Product, a cut in consumer spending would slow the economy even further, which then would cause business to lay off more workers, which, in turn, would decrease consumer spending even more. Thus, so the explanation goes, falling prices create a downward spiral that would intensify our economic slump, increase unemployment, and end up in long-term stagnation just like Japan.

All this is economic nonsense. To begin with, it is based on the fallacy that Fed intervention can stimulate the economy, create jobs, and fix the stock market. The reality is that the only help the Fed could give for the mess it has created would be to undo its fiction and stand aside.

What Is Deflation?

But what is deflation? Do falling prices cause it? Do we have it? Is it bad? Do people stop buying because of falling prices? Is consumer spending the crux of the matter?

To answer these questions and unravel the web of obfuscation and error that has been spun, let us turn to the economists of the Austrian School of economic analysis. These economists, abhorring the political spin, are dedicated to ascertaining the real causes and effects of economic phenomena and identifying their cure if needed. Run-of-the-mill economists, anxious to "fit in" and get ahead, or protect their current jobs, have it all wrong from the start. …

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Deflating the Deflation Myth: Fed Chief Alan Greenspan Is Claiming That the Specter of Deflation Is upon Us. the Truth, However, Is That Fed-Created Inflation, Not Deflation, Is Threatening American Prosperity. (Economics)
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