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Economics-101

Deflation: friend or foe?

As we draw closer to the inevitable financial catastrophe that lies ahead of us, we will likely hear plenty about the pure evil of deflation and how it must be avoided and fought at all costs. Deflation will be depicted as an alien disease that must not be allowed to establish a presence on this planet. Like many global topics of today, the facts will be hidden and scare tactics will be fully deployed.

Firstly, what is deflation? Deflation is simply a contraction of the money supply, which results in a decrease in nominal prices. Of course the flip side of this, as we have learned from previous articles in this column, is that this is an increase in purchasing power.

The two biggest opponents of deflation are banks and governments. Banks detest deflation because it decreases the value of the asset that they lend against, and it also decreases the demand for loans from the bank. Governments find deflation vile because it reduces tax revenue and governments’ ability to grow and infringe itself in to our lives.

Deflation is a big win for the people of a nation. In a deflationary environment, there is incentive for savings, as opposed to inflation which argues for money to be spent as quickly as possible because with each day the currency loses value. Throughout history strong and healthy economies have always possessed the attributes of a strong currency, a high savings rate, and a currency that retains its purchasing power.

We would all benefit from a little deflation in our lives. People should embrace deflation as one would embrace a loved one. Deflation increases people’s wealth and purchasing power, which in turn will reduce the burden of debt in our lives. Deflation will allow a return to single income families that can actually prosper on one income. Some will argue that deflation results in increased unemployment. However, the contrary is true as the employment pool shrinks as people leave the workforce because sustainable single income families will once again emerge.

This is a longer topic than I have been allotted space to write. So I would recommend that you conduct some research yourself on this issue. If you access sound economic information sources, you will find that the evils of deflation are purely a myth to propagate inflation and a debt slave society. Deflation is a liberating force. Now, I will concede that deflation cannot persist inevitably to the point that prices disappear. However, it would be nice to regain that 96% of our Canadian dollar purchasing power that has been inflated away since 1870.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.



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About the Author

Derrick Nicholson is a Currency Strategist. He has been in the industry for the past 20 years, and specializes in mitigating currency risk for companies doing business outside of Canada.

Questions and inquiries can be directed to Derrick at [email protected].

 



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The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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