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If Inflation is Theft, Then So Is Deflation

Posted on the 01 November 2012 by Lachmannian @TheLachmannian

I do not think many Austrians understand the logic of this point. To them, inflation is theft because inflation lowers the purchasing power of the currency. Thus, those savers of currency are in a sense, victims of theft for their currency is losing its value. In other words, this is a burden to people that save in currency. But to say that this is theft is a bit, well, misleading. But lets accept that this is theft.

If we accept that this is theft, then what happens when we describe deflation? Lets say I have a debt in which I sign a contract to pay back in which I signed this contract at time 1. Then deflation occurs, thus contracting the supply of currency and increasing the purchasing power of the currency, this is time 2. Then I, as the debtor, have to pay back my debt using the purchasing power of time 2 when I did not agree to it, since I signed my contract at time 1. I now, unexpectedly, have to work harder to pay back my debt. So just like in inflation when a decrease in purchasing power is considered theft because my savings is now worth less, in deflation an increase of purchasing power is considered theft because I now have to pay back my debt with the currency having a stronger purchasing power.

In other words, inflation is considered ‘theft’ because my savings has decreased in value at the expense of the debtor, who now has an easier time paying off his debt. Deflation is considered ‘theft’ because my debt has in a sense ‘increased’ in value at the expense of the saver, who is now enjoying the fact that his stock in savings has increased in purchasing power.

So what is my point? My point is that describing inflation as ‘theft’ is pointless. It is an emotional appeal in which it is trying to scare people about inflation, and to many Austrians, is a justification to why deflation should be preferred. But many Austrians fail to understand that their logic in describing inflation as ‘theft’ is also describing deflation as theft too.

This post was caused primarily because of a twitter post by John Yowman in which he states that Inflation is theft. After my brief response, “if inflation is theft, then so is deflation, right ?” he goes on to say that an increase in purchasing power is not theft, in which I respond, “sure it is. If a person has a debt and there is deflation, the person has to work harder to pay back his debt.” He then posted another tweet linking to this video on inflation and why it is bad (maybe this post was an indirect reply to me?). But the video is ignorant. Just look at the description of the video:

Why does your monthly rent today cost just as much as the down payment your grandparent’s put on their home 70 years ago? The answer is inflation. Economics Professor Robert Lawson explains how inflation is essentially the change in the purchasing power of your money (i.e. how many tacos can you buy with, say, $20 today as compared to a decade ago). When inflation occurs, you’re able to buy fewer goods and services with the same amount of money. And when inflation really picks up, it can have catastrophic economic consequences. Watch Professor Lawson to learn more! (my emphasis)

This completely ignores the fact that incomes have increased too. I mean, sure, in the 1940s, I bet that I could buy a lot more tacos with $50 than with $50 today, but $50 was A LOT harder to obtain back then than today. On average, employed people in America can earn $50 in a day’s work (and probably earns more than just $50) while in the 1940s, that average was unheard of*. In other words, this is a clear fallacy of comparing nominal with real figures.

And no one denies that ‘when inflation really picks up, it can have catastrophic economic consequences,’ or I should say the Keynesians do not deny this. Yes there is such thing as too much inflation, but that does not mean that inflation is bad. This is like me saying, “Milk is bad for you because if you chug a whole gallon, you will throw up.” Well as my mother says, “No Shit Sherlock!”

*How ironic is it to see that Austrians ignore time as a factor?

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