Not inflation.

Jonathan Garner

The inflation we are experiencing right now is transitory. That’s the simplest explanation given the nature of the case and the base effect. What ‘inflation pumpers’ can’t explain is why the disinflation we’ve experienced the last 40 years would suddenly change. The burden of proof is on them. And given that the default is for disinflation to resume, there’s no reason it can’t go negative: deflation.

You see people everywhere talking about inflation:

In the finance world, when everyone is saying and doing one thing, bet on the opposite outcome. Everyone is saying there will be inflation, so it probably won’t happen. That’s just the way it works in markets. The fact that the mainstream media and the neighborhood Karen are talking about inflation should terrify you. Don’t follow the herd! And the fact that the Fed hasn’t been able to even get 2% inflation over the past decade should give you a hint. The Fed is worried about deflation, not inflation.

Don’t fall for the pump fake.

Remember, the Federal Reserve is a lender, not a spender. At least right now, they aren’t allowed to spend, therefore, they necessarily can’t increase the velocity of money.

And with deflation, we will see negative interest rates. The Fed won’t have a choice. They’ve been reluctant so far in our disinflationary environment, but deflation would force their hand.

Deflation is very bad for those in debt. That’s because deflation increases the real value of debt. And since our society currently runs on debt, it would be painful. Now some would argue that this pain is needed, but the moral and political problem is structures that put people in this position, to begin with, by giving crazy incentives: the Federal Reserve and Congress, for example.

So not only will we have negative rates, but Congress will be forgiving debts as well. Some will object by saying this is a moral hazard, but it doesn’t have to be. It would only be a moral hazard if done in the wrong way. If it is made clear that people were given crazy incentives and that debt forgiveness is a one-time deal, then there’s not a problem of moral hazard. One of the most plausible of debts to be forgiven is student loans. Most likely, it will be forgiveness up to $10,000 or $50,000. Government got involved with loans and encouraged taking out of crazy loans, so they must right the wrong.¹ Even more so, because they made it where you can’t declare bankruptcy on your student loan.² ³

You might say, “What’s wrong with deflation? Lower prices are good!”. This doesn’t address what I’ve already said. Deflation increases the real value of debt. And since our society currently runs on debt, most people would be screwed. So, the question/objection confuses good deflation (technological deflation) with bad deflation (debt deflation). Nobody denies that deflation increases the real value of debt.

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