Saturday, August 28, 2010


A little over a week ago I mentioned some of the reasons we need not fear a deflationary spiral, drawing upon several works in recent popular economic commentary. The pieces I linked to were written to combat an all too popular fear of deflation. This fear is particularly dangerous, because it often feeds the inflation monster.

As Lucy van Pelt says to Charlie Brown in A Charlie Brown Christmas "The mere fact that you realize you need help indicates that you are not too far gone. I think we better pinpoint your fears. If we can find out what you're afraid of, we can label it." A few years ago a former professor of mine, Mark Thornton, did just that. In an article in The Quarterly Journal of Austrian Economics, Thornton appropriately labels the fear of deflation, apoplithorismosphobia, drawing on the Greek word for deflation. provides a scholarly (and humorous) diagnosis of this malady.

Thornton begins by briefly describing a taxonomy of the different types of deflation developed by Joseph T. Salerno. He points out that deflation generally helps the economy adjust following both economic growth and malinvestment.

He separates economists into three groups. He explains that the first two, keynesians and monetarists, both generally suffer from apoplithorismosphobia to some extent. Keynesians do so because they see deflation as contributing to a collapse in aggregate demand which they think causes recession. Monetarists fear deflation, because they think prosperity requires a relatively stable price level.

The third group is made up of causal-realist economists who go back at least until Richard Cantillon. This group does not advocate any particular quantity of money or rate of monetary inflation as optimal.

Thornton then goes on to diagnose a case of acute apoplithorismosphobia, that of economist and New York Times columnist, Paul Krugman. He notes how much monetary policy mileage Krugman gets out of a tongue-in-cheek article on a baby-sitting co-op.

Thornton concludes with a 12-step program to vanquish apoplithorismosphobia. The steps are as follows:

  1. Revisit and relearn the basic principles of economic analysis, such as supply and demand.
  2. Remember that the cause of misallocations and unemployment is government interventions, such as price controls, inflation, and regulations.
  3. Re-examine the effects of monetary policy, other than on the price level.
  4. Stop thinking about the price level.
  5. Pay less attention to statistics in general.
  6. Forget modern macro9 altogether.
  7. Note that macroeconomic problems are usually preceeded by large increases of the money supply (i.e., inflation).
  8. Remember that the Great Depression occurred after central banks were established, not before.
  9. Remember the Fed’s “mistakes” took place well after the Great Depression began.
  10. Recall that Herbert Hoover and FDR (and modern Japan) pursued activist policy regimes to keep wages and prices high.
  11. Remember that monetary and fiscal policy do not cure recessions or prevent deflation; they only exacerbate the problems and delay recovery.
  12. Remember that some of the best periods of economic improvement in human history have occurred during deflations.
The entire piece is worth reading. It is relatively brief, very readable, and quite revealing about the fear of deflation and how to combat it.

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