Deflation Does Not Lead to a Depression, suggests Research

December 28, 2011

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Abstract: Are deflation and depression empirically linked? No, concludes a broad historical study of inflation and real output growth rates. Deflation and depression do seem to have been linked during the 1930s. But in the rest of the data for 17 countries and more than 100 years, there is virtually no evidence of such a link.

Here we see only 8 episodes with both deflation and depression. There are 65 episodes of deflation without depression and 21 of depression without deflation. Thus, 65 of 73 deflation episodes had no depression, and 8 of 29 depression episodes had no deflation.What is striking is that nearly 90% of the episodes with deflation did not have depression.

Bernanke’s entire modus operandi: trillion dollar give-a-ways to foreign and domestic banks, the inflation tax, financial repression, picking the pockets of savers while rewarding debtors, stem from an intense study of an…outlier, all in an effort to avoid the phantom menace that is deflation. 

Just perhaps, it’s a good thing that prices fall when people’s incomes are being adjusted lower as they are being retrained. Why do they need to be retrained? Because of distorted price signals that result from a Fed induced credit bubble, like what happened in the Roaring 20s.

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