Deflation [Paperback]

 

 

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If you look in bookstores at any give time you will find a shelf of books predicting a bright future with some a really strangely bright future. You will also find another shelf explaining to you why things are bad and will only get worse. Readers of a certain disposition will find the books appropriate to their sense of the future and find confirmation.

Deflation is a serious topic, but this is really not a serious book. The book makes the case that our new economic paradigm is, this time, really different because of the way prices fall because of technological efficiencies. Mr. Farrell links this kind of price decline with the kind of general deflation that follows and economic contraction and huge missteps of a central bank. The problem is these are not the same kinds of things and do not have the same kinds of effects. This incorrect mixture of topics under the same noun adds to confusion and foggy thinking.

To the person caught up in any kind of economic dislocation the state of the general economy is irrelevant, they are suffering in a depression. The problem is this kind of book lumps different kinds of things together to create a sense of alarm and concern.

Falling prices are a normal part of the business process as products and industries mature. They are a good thing for consumers of those goods and services and help efficiencies. They also spur development of new products and services that have higher prices and margins. In a general contraction and (real) deflation, everyone suffers because borrowers must repay debts with what amounts to devalued currency.

For example, we saw this in the housing market in the United Kingdom in the nineties when the collapse of the currency left people having mortgages on their houses that were higher than the market value of their homes. People just walked away from their homes. This kind of misery is not the same thing as accounting people losing their jobs because software now does what they used to do.

I like Mr. Farrell's urging of more free trade, and of reforming the retirement programs in this country to a single program attached to the individual rather the employer.

Is the United States currently in a deflationary period? If not then are we headed for one? Why have such major economic figures as Alan Greenspan started hinting that deflation is a possibility? Is deflation always a negative event bringing on recession is its wake? Author and financial columnist Chris Farrell answers all these questions and more in his fascinating book "Deflation: What Happens When Prices Fall". Mr. Farrell makes a strong case for deflationary pressures coming about from globalization of many industries as well as the strong pressure from retailers forcing suppliers to continually lower their prices. While deflation is a normal part of the economic cycle most of the 20th century has seen pronounced inflation. What does it all mean now that there are legitimate concerns about deflation? Mr. Farrell makes a convincing case that deflation does not necessarily equate with depression. In fact deflation can co-exist with a strong economy! This is definitely not the economics that I learned in college but is a well presented argument for a different view of where we are headed. Brilliantly done, "Deflation: What Happens When Prices Fall" is highly recommended for anyone interested in economic theory and may represent a more accurate view of deflation than the popular Keynesian theory of economics.

I follow the financial news fairly regularly, reading the news headlines and many of the columns on the Internet at least three times daily. A few months ago, the main topic of some of the economic stories was one that I had never seen in a contemporary financial column, the possibility of the U. S. economy entering into a deflationary state. A deflationary condition is when prices start to fall, and people begin to delay non-essential purchases in the belief that they will continue to fall, which can lead to an economic collapse. In general, it was considered a significant threat, and apparently the high officers of the Federal Reserve (the Fed) were preparing contingency plans if it were to happen. The possibility, consequences and potential benefits of a deflationary phase in the U. S. economy are the primary topics of this book.
Outside of major wars and their consequences, there were two major economic cataclysms in the U. S. economy in the twentieth century. The first was the Great Depression of the thirties, which was a major deflationary period. The second was the uncontrolled inflation of the seventies, where price increases were relentless, a major success was proclaimed when the inflation rate dropped to ten percent or less. These two long-term economic problems form the major historical basis for the basic premise that monetary policy is the preeminent driver of major economic trends. Milton Friedman, long the primary champion of monetary policy, is mentioned many times. Farrell finds many historical justifications to blame the severity of the two events on the Fed. While it cannot be refuted that the Fed made many major mistakes in both situations, the political leadership also must bear a great deal of responsibility. That point is made, but not quite as forcibly as it should have been.
The primary event that is driving the current concern over the potential for deflation is the performance of the Japanese economy in the last decade. It has been in a recurring deflationary condition throughout that time, performing sluggishly and with no end in sight. However, Farrell uses this as a point of demonstration as to how monetary policy can be used in a counterproductive manner. He argues that the Fed is smart enough to avoid those mistakes and will act quickly and forcibly to prevent a dangerous deflationary trend in the U. S.
Another major point is whether deflation is in fact a trend to be feared or welcomed. As Farrell so excellently points out, there have been many deflationary periods in the American economy, and while we remain focused on the 1930's, the others were often periods of economic expansion and growth. They were due to the development of new technologies, which led to previously unheard of improvements in efficiency. Dramatic improvements such as the telegraph, telephone, railroad and medical advancements all changed society and dramatically lowered the costs of gods and the efficiency of living. His point is that if the costs of the goods are declining due to increased efficiency, then it is a very good thing. Companies being forced to reduce their production costs in order to compete is always a boon to the overall economy.
The last chapter contains a series of recommended policy changes. The first is that global free trade should be expanded to include all nations. Farrell argues that since the poorer nations largely rely on agriculture, the U. S. should stop subsidizing agriculture, which would allow the products from the poorer nations to compete in the global markets. A valid point, but of course politically impossible. One point that I found of particular interest was the cost benefits of sophisticated medical care. He argues that nearly every successful medical treatment returns more than it costs. The exact figures are that from 1960 to 1997 it cost approximately $13,000 in medical spending and pharmaceutical research to gain one year of additional life and that the economic return on this additional year of life was $150,000. If true, it would be the most powerful argument for universal health care that could be made. An additional argument made in this section is that the current system of employer-managed health care programs is inefficient and should be refined into a single program.
Several pages are devoted to significant human capital investment, which means enormous investments in education and training. Farrell argues very forcefully that this is essential and historically justified. As Americans began moving from a rural, agrarian society to an urban, industrial one, the massive investments made in education were necessary for the transformation to be complete. He argues that sufficient investment capitol would be available if the agricultural subsidies were eliminated.
Farrell makes powerful arguments in favor of his basic premise that deflation is an expected consequence of dramatic increases in economic efficiencies due to the opening of global trade and technological advancements. While I sometimes had minor disagreements with his points of emphasis and understand that his proposals for solution are largely politically impossible, I found the book a sound analysis of what is now being raised as a potential economic danger.

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5.0 out of 5 stars Deflation by Farrell
The author explains what happens when prices fall. Falling prices can be an opportunity for persons with cash and buying power. Read more

Published on May 25 2004 by Dr. Joseph S. Maresca

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