Monday, January 27, 2014

No need to fear deflation

In another article two days later, the Journal hit readers with the same message: "Annual euro-zone inflation weakened further below the European Central Bank's target in December, rekindling fears that too little inflation or outright consumer-price declines may threaten the currency area's fragile economy." In this case, the paper adds "too little inflation" to the list of woes that needs to be avoided. Apparently, if prices don't rise briskly enough, the wheels of an economy stop turning.

Neither article mentions some very important historical context. For the first 120 years of the existence of the United States (before the establishment of the Federal Reserve), general prices trended downward. According to the Department of Commerce's Statistical Abstract of the United States, the "General Price Index" declined by 19% from 1801 to 1900. This stands in contrast to the 2,280% increase of the CPI between 1913 and 2013.

While the 19th century had plenty of well-documented ups and downs, people tend to forget that the country experienced tremendous economic growth during that time. Living standards for the average American at the end of the century were leaps and bounds higher than they were at the beginning. The 19th Century turned a formerly inconsequential agricultural nation into the richest, most productive, and economically dynamic nation on Earth. Immigrants could not come here fast enough. But all this happened against a backdrop of consistently falling prices.