Some Deflating Thoughts

Those who oppose government intervention to prop up demand and prices
may have to come to grips with the question of deflation, and soon. Proponents of letting deflation do its work see it more as a controlled burn to help the economy while opponents think of it more as a raging wildfire.

Austerity as Insurance?, Frum’s Question and Debt Deflation « Rortybomb

What is the “free-market” answer here? In his reply to Frum’s column Roosevelt Institute’s Marshall Auerback gives the haunting answer:

Let’s be clear: The “free market solution”, to use Frum’s terminology, is basically deflation. If households attempt to net save by spending less than they are earning, and businesses attempt to net save (reinvesting less than their retained earnings), then nominal incomes and real output will be likely to fall. Money incomes and economic activity will tend to contract until private savings preferences are reduced (with essential goods and services taking up a larger share of household income as incomes fall), or until depreciation leaves businesses and households inclined to invest once again in durable assets. In the absence of any countervailing fiscal stimulus, common sense suggests that a drop in private income flows while private debt loads are high is an invitation to debt defaults and widespread insolvencies — that is, unless creditors are generously willing to renegotiate existing debt contracts en masse.

Now, I suspect that some of Frum’s fellow conservatives actually think this sort “cleansing” is good. They believe it on both moral and economic grounds. Maybe not all, but a number of the more extreme libertarians with whom I occasionally debate, actually embrace this argument. Fair enough. It’s not something I would advocate, but it has the virtue of being ideologically consistent with many of the tenets of a free market/libertarian orientation….

...I also place it with a lot of the new intellectual and activist energy on the Right forming around things like the Mises Institute, Murray Rothbard, and Ron Paul “End The Fed” (which is how I read the Tea Party movement). Ron Paul is so popular on campuses poor Josh Barro had to write a piece for the National Review explaining why “End The Fed” shouldn’t be a policy plank of a resurgent conservative movement. (He sadly doesn’t address one of the core of their problem with the Fed, the illegitimacy of a fractional reserve banking. Heh.)

Not everyone on the Right is this way. Scott Sumner says “The other 98 years I am a Chicago-trained, libertarian, inflation-hawk. Twice a century I put on my Irving Fisher super-hero suit, and emerge from my deep underground bunker.” If only he could assemble a Justice League for this Crisis. Because I’m afraid this debt-deflation mindset is where a lot of the country is, and it is exactly the cliff our country is driving towards.