Price deflation should not be discouraged, says academic institution
KUALA LUMPUR: Price deflation should not be discouraged in a period such as the present that is characterised by strong inflationary pressures, according to an academic and educational institution.
The Center for Market Education (CME) in its Policy Paper No 4 titled “Why Monetary Policy Should Not Avoid Market Price Deflation” said price deflation could be the natural and welcome consequence of growth, brought about real cash building and shortened the recession after an artificial boom.
“Its most unpleasant form is credit contraction deflation, which decreases the money supply, however, that is only possible in a fractional reserve banking system that has previously created money out of nothing.
“The main effect is a redistribution of the existing wealth in the economy rather than a necessary decline in general output as assumed in various arguments,” it said.
It said banks and government, as well as businesses that depended on a credit expansion boom, feared deflation and profited from the money production they recommended as a prescription against deflation at the expense of other economic agents who paid higher prices than they otherwise would.
“By artificially lowering interest rates and distorting the structure of production, it is precisely expansionary monetary policy that triggers the greatest economic disasters and makes credit contraction possible in the first place.
“In a full reserve commodity money standard, price deflation is completely harmless and the symptom of strong economic growth or successful cash accumulation,” it said.
It said a few measures of price deflation were suggested including allowing productivity growth deflation by nurturing an environment conducive to innovation and allowing cash-building deflation as savings are the necessary means for enhancing a process of sound growth.
It added that it also suggested reducing government spending to reduce the quantity of money in circulation and introducing reforms to reinstate the primacy of balanced budgets.