Global Research published an article entitled “Why Quantitative Easing (QE) May Lead to Deflation”. That article argued that, although “Quantitative easing (QE) was supposed to stimulate the economy and pull us out of deflation . . . . QE3 [the third round of QE] failed to raise inflation expectations in the US.
• “QE hasn’t worked in Japan, either.”
The Wall Street Journal noted in 2010, “Nearly a decade after Japan’s central bank first experimented with the policy, the country remains mired in deflation, a general decline in wages and prices that has crippled its economy.”
In fact, “The Bank of Japan (BOJ) began doing quantitative easing [printing fiat currency] in 2001. It had become clear that pushing interest rates down near zero for an extended period had failed to get the economy moving. After five years of gradually expanding its bond purchases, the bank dropped the effort in 2006.”
• Coincidentally, the Federal Reserve is also currently holding US interest rates close to zero in order to “get the economy moving”. And, after five years of expanding bond purchases here in the US, the Federal Reserve tapered those purchases until they ended around October of A.D. 2014. While QE may have prevented the US economy from collapsing, it has been largely unsuccessful at providing enough “stimulus” to cause the economy to do much more than stagnate.
• The Global Research article argued that QE has been tried and failed in Japan, the US, China, and even the UK, but, “despite massive QE by the U.S., Japan and China, there is now a worldwide risk of deflation.”
• The Telegraph asked, “Why the world economy cannot seem to shake off this ‘lowflation’ malaise, even after QE on unprecedented scale by the US, Britain, Japan and in its own way Switzerland.”
• The observations provided by Global Research and the question provided by The Telegraph’s both presume that inflation is good (and should be prevalent) and deflation is bad—and should be avoided. In fact, inflation and deflation are, at best, both only “good” for some people, but also bad for others. Because of the inherent harm posed by both monetary conditions, both inflation and deflation are morally “bad”.
I.e., inflation seems “good” for borrowers because it allows them to repay their debts with “cheaper dollars” that have less purchasing power.
For example, for most of my lifetime, anyone who’s ever taken out a mortgage has been encouraged to do so by the assurance that, thanks to inflation, he’d be able to repay his debt with “cheaper dollars”. If he borrowed $250,000 to purchase a new home, thanks to 20 years of inflation, he’d repay the nominal sum of $250,000. But in terms or purchasing power, he might actually repay the lender only $200,000, even $150,000, or even less as compared to the purchasing power of the $250,000 he originally borrowed.
Thus, in this hypothetical example, inflation might’ve subsidized the borrower with the equivalent of, say, a $100,000 “gift” over the 20 or 30 years of the mortgage loan. It’s therefore argued that inflation is “good” because it “stimulates” people to borrow and spend and thereby “stimulates” the economy.
But, while inflation may seem to be “good” for debtors, it’s terrible for creditors (those who’ve produced and saved wealth and have currency to lend) because, by means of inflation, creditors are robbed of some or much of the value (the purchasing power) of their loans.
I.e., in the previous hypothetical example, a creditor loaned $250,000 in purchasing power to help the borrower purchase a new house. However, thanks to inflation, the creditor might only have been repaid $150,000 in purchasing power. Thus, inflation might’ve caused the creditor to suffer a $100,000 loss of capital. Yes, the creditor may still get his “$250,000” back, but it’s only worth $150,000 in purchasing power as compared to its worth when the loan originated. The creditor has been robbed by inflation.
• Conversely, if we enter into a period of deflation, again, it may appear to be good for some but bad for others.
During deflation, the purchasing power fiat currency increases. The market price of the home a borrower purchased with a $250,000 mortgage, might fall to $150,000. That fall in price doesn’t merely mean that price of the house has fallen, it means that the purchasing power of the dollar as increased.
During an hypothetical period of deflation, what could’ve been purchased for $250,000 ten years ago, might be purchased today for just $150,000. In this example, the dollar would’ve gained almost 66% more purchasing power than it had when the original $250,000 was borrowed. That means that the borrower who repays the nominal $250,000 may actually be repaying as much as $415,000 (in terms of the purchasing power).
In this hypothetical example, thanks to deflation, the debtor/consumer/borrower might be robbed of the “extra” $165,000 in purchasing power while the creditor/producer/lender seems to be unjustly enriched to the tune of $165,000 in purchasing power. Assuming the loan is repaid, the borrower is robbed and the creditor is subsidized and enriched by deflation.
But there’s the rub: The creditor is only subsidized by deflation if the loan is repaid.
If deflation persists for a year or more, the increasing value (purchasing power) of the fiat dollar adds to the value of the outstanding loans yet to be repaid at a time when work is scarce and both wages and profits are falling. Unlike inflation (where the fiat currency loses value, becomes “cheaper” and thereby makes loans easier to repay), deflation (where the fiat currency gains value, become “more expensive” and thereby makes loans harder to repay) causes existing borrowers to default on their loans.
The man that borrowed $250,000 that (thanks to deflation) has appreciated in value to, say, $465,000 in purchasing power—will be unable to repay his loan, or may simply refuse to repay their loans. We saw something like this after the Great Recession of A.D. 2008 when home prices fell so dramatically that borrowers (who were still owed on their homes but were “underwater” in terms of loan value) simply abandoned their homes and refused to repay the loans they’d taken out from the banks.
When the borrower can’t or won’t repay his debts, creditors get robbed.
Deflation tends to precipitate bankruptcies among borrowers who are expected to repay loans with “more expensive” dollars. Bankruptcies cause borrowers to default on their loans. When borrowers default on their loans, creditors take a loss.
• Thus, both inflation and deflation tend to rob creditors. Inflation robs creditors by repaying their loans with “cheaper dollars”. Deflation robs creditors by precipitating bankruptcies which cause borrowers to default on their loan payments—which, again, robs creditors of their capital.
Inflation may be preferable to deflation since inflation at least enriches borrowers, but deflation robs both borrowers of their properties (homes being foreclosed) and creditors of their capital due to default on debts.
Either way—inflation or deflation—requires that someone be robbed. That someone is always the creditors and sometimes the borrowers.
• “Creditors” are, or represent, those members of society that are: 1) productive; and 2) determined to live within their means and therefore able to save some of their wealth that might then be loaned to others. Producers/creditors are the “geese” that lay the “golden eggs” (capital). Capital is indispensable for sustaining an economy.
If your economy has 1,000 consumers/borrowers for every one producer/creditor, the consumer-majority would seem to hold all of the political power. But, if your society loses your minority of producers/creditors, there’ll be no wealth for the consumer/borrowers to borrow and nothing for them to eat. Chaos will reign.
Given that both inflation and deflation both rob creditors and deplete our nation’s capital, both inflation and deflation are immoral.
More, fiat currencies are dangerous to, and ruinous of, national economies because, both monetary phenomena ultimately rob producers/creditors to the point that a national economy is looted, loses much or most of its capital and ultimately collapses for lack of money and sufficient credit.
In either case, fiat currency robs creditors.
That is, during periods of inflation, fiat currency robs those who are productive and able to save their wealth by allowing debtors to repay their debts with cheaper dollars. Inflation robs producers/creditors of much of the wealth they are currently producing and saving.
Deflation causes bankruptcies that prevent borrowers from repaying their debts and thereby, again robs producers/creditors of much of the wealth that they’d previously produced, saved and loaned out.
• Both inflation and deflation are consequences of using a pure, fiat currency whose value/purchasing-power can be manipulated (artificially changed) by governments or central banks.
Monetary inflation and deflation are attributes of pure fiat currencies.
Given that both inflation and deflation are immoral (either way, creditors must be robbed and capital (saved wealth) must be destroyed), it’s arguable that every fiat currency is inherently immoral.
• On the other hand, if any “money” is inherent moral, it would have to be one that holds its value steadily over years, decades and even centuries.
There is no single “currency” that holds its value precisely over time. I doubt that there’s any single “currency” or “money” that can’t be exploited. But there is one “money” that does hold its value fairly steadily over time. There’s one “money” that’s least susceptible to the immorality of inflation and deflation: gold.
Gold is, and should be, money simply because gold is inherently moral (or at least far more moral than fiat currency). If you borrow one ounce of gold or 1,000 ounces of physical gold, then you have to repay that one or 1,000 ounces.
Gold doesn’t inflate and therefore won’t “stimulate” the economy, but gold also doesn’t deflate and collapse the economy.
When you do repay a loan of physical gold with an exactly equivalent mass of physical gold, odds are, no one gets robbed. There is no theft inherent in gold (or silver) coin.
• In the end, all fiat currencies collapse. I doubt that those monetary collapses are due to simple mathematics. I’d bet that the inevitable collapse of all fiat currencies is based on the fact that they are all inherently immoral and prone to robbing creditors and destroying capital.
Fiat currency will sap your nation’s capital, destroy your productivity, and leave your economy collapsed and ruined.
These adverse consequences won’t take place overnight. They’ll happen slowly, almost imperceptibly, over a period of decades or generations. But, once your nation accepts a fiat currency, it’s doomed to collapse and ruin.