Stop the Deflation

A chain of discount stores has a going-out-of-business sale. A manufacturer declares bankruptcy and unloads its inventory of metals to the highest bidder. Homeowners discover that they cannot afford the payments, as three-year balloon mortgages have to be refinanced at 18 per cent, so they sell their homes at a loss. When government statisticians add it all up, this looks like a welcome reduction in inflation. But it may be either an ephemeral cyclical illusion or a symptom of serious economic decay.

There is a world of difference between selling what we have at lower prices and producing more at stable prices. As the economy contracts, some measures of inflation may start to look good owing to the liquidation of assets and inventories. But this is not making it any easier to expand production and employment at stable prices. Bargains at a bankrupt store cannot be repeated once the doors are nailed shut. Falling prices are not a sign of stability.

About the Author

Alan Reynolds

Alan Reynolds, National Review’s economics editor from 1972 to 1976, is a senior fellow at the Cato Institute and the author of Income and Wealth.

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A chain of discount stores has a going-out-of-business sale. A manufacturer declares bankruptcy and unloads its inventory of metals to the highest bidder. Homeowners discover that they cannot afford the payments, as three-year balloon mortgages have to be refinanced at 18 per cent, so they sell their homes at a loss. When government statisticians add it all up, this looks like a welcome reduction in inflation. But it may be either an ephemeral cyclical illusion or a symptom of serious economic decay.

There is a world of difference between selling what we have at lower prices and producing more at stable prices. As the economy contracts, some measures of inflation may start to look good owing to the liquidation of assets and inventories. But this is not making it any easier to expand production and employment at stable prices. Bargains at a bankrupt store cannot be repeated once the doors are nailed shut. Falling prices are not a sign of stability.