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Europese bank zet geldpers aan tegen deflatie. Waarom is dat zo eng dan?

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De Europese Centrale Bank besluit vandaag waarschijnlijk ‘de geldpers’ aan te zetten. Een historische stap die nodig zou zijn om deflatie in de eurozone tegen te gaan. Maar misschien moeten we helemaal niet zo bang zijn voor deflatie. 

Steve Stanek is typical of the readers who’ve peppered my inbox in recent weeks on the topic of deflation. “I cannot understand why deflation is viewed as worse than inflation,” writes the 59-year old corporate communications consultant, who lives in Illinois.

“Inflation rewards borrowers and punishes savers and people on fixed incomes. Deflation rewards savers and people on fixed incomes and punishes borrowers. I’m tired of being on the losing team because I’ve been frugal, instead of a borrowing spendthrift.”

Well, Steve, the standard textbook explanation, as I’m sure you’re tired of hearing (and I’m frankly getting tired of typing) is that in a prolonged period of falling consumer prices, rational consumers will defer purchases because they expect to be able to buy goods and services cheaper in the future. That drives prices into a tailspin and the economy into a funk.

Except Steve, along with many other people, isn’t buying that theory. “If you expect food prices to drop, will you stop eating?” he asks.

“If you expect housing prices to drop, will you start living in a cardboard box? If you expect clothing prices to drop, will you walk around naked?”

We certainly don’t want a starving, homeless Steve wandering around in the altogether. But that’s what the most recent inflation figures from around the world suggest might be coming:


Economic theory suggests that consumer spending should soon be cut off at the knees (or a bit higher). How does that compare with what actually happens in the real world when deflation takes hold? Luckily, we have an example available in Spain, where consumer prices have fandangoed below zero for six consecutive months. So presumably half a year of deflation has killed off consumer spending as everyone waited for prices to get even lower, right?

Wrong. Check out this chart comparing official Spanish inflation data with consumption figures (both actual and forecast) from the Organisation for Economic Cooperation and Development:

spanish inquisition

The 3.3 percent growth in Spanish private consumption in the third quarter was the second-highest annualized rate since 2007, according to Deutsche Bank. And Bilal Hafeez, the bank’s global head of currency strategy, has dug even deeper into history. He’s examined 200 years of growth and inflation data for 30 countries to see how economies perform when consumer price changes are abnormally high or low:

“Growth was exactly equal across inflationary and deflationary periods -- 1.6 percent. Hence, global data over two centuries provide no reason to prefer inflation over deflation from a growth perspective.”

I’m not smart enough (or perhaps stupid enough) to argue against economic orthodoxy; but the current backdrop of falling prices seems to be doing wonders for people’s optimism, rather than making them fearful of the future. In the U.S., consumer confidence jumped to its highest level for 11 years, according to January’s University of Michigan preliminary consumer sentiment index. In Germany, figures today showed investor confidence is at an 11-month high, according to the ZEW Center for European Economic Research, even after the Bundesbank said yesterday that this year’s inflation outlook “must be corrected significantly downward.”

I certainly haven’t let the prospect of deflation inhibit my consumerism. I bought a new Apple iPad at Christmas even though I know there’ll be a cheaper, better model arriving soon (there always is with Apple gadgets). I decided I’d rather have the tablet in my hand today than wait several months to save a few dollars. (In doing so, I avoided what economists call “utility loss”.) And I appear to be in the majority; Deutsche Bank reckons consumers in the industrialized world tripled their buying of computers, televisions and cameras between 1992 and 2010 precisely because they got cheaper.

Given the prevailing trends for consumer prices, it seems we’re about to live through a real world economic experiment that will show what happens to growth and consumer behavior when deflation takes hold. I’m going to let Steve, though, have the final word in this debate:

“I’m sure deflation would result in lots of turmoil, but that’s because we’ve had decades of government policies to encourage borrowing instead of saving -- including by governments themselves. This is why a $100 bill today has less purchasing power than a $20 bill had when I graduated from high school in the 1970s. I would love to see my money worth more instead of less.”