Deflation: What Happens When Prices Fall

by Chris Farrell

Book Overview

Deflation is one of the most feared terms in economics. It immediately conjures visions of abandoned farms and idle factories, and streams of unemployed workers standing in breadlines.In this... This description may be from another edition of this product.

• Format: Hardcover
• Language: English
• ISBN: 0060576456
• ISBN13: 9780060576455
• Release Date: May 2004
• Publisher: HarperBusiness
• Length: 228 Pages
• Weight: 0.70 lbs.
• Dimensions: 0.9" x 5.9" x 8.5"

Customer Reviews

Educational information

When the financial experts talk about the threat of inflation, we all understand what it means: prices are going to rise. But few of us really understand what deflation is and what consequences it brings to our economy. The author says that when prices begin to fall, people stop buying non-essential items. Even though we are not experiencing deflation now, it is evident that people do not want to buy houses because they fear that falling prices will eat into their equity. The Fed's job is to make sure that we do not experience deflation and too much inflation. Currently future inflation is more of a concern because the government pumped so much money in the system. - Mariusz Skonieczny, author of Why Are We So Clueless about the Stock Market? Learn how to invest your money, how to pick stocks, and how to make money in the stock market

Vital point, Global view

Output, prices and employment are the three key parameters that macroeconomics is all about. But then conventionally the unit of analysis was the country. Not anymore, if we need to prosper as citizens of the global village. This theme is at the core of this book and sets it apart from most others who are not so broadminded in accepting this fact. Coming to deflation, the author takes us through a well documented journey of over two centuries, two world wars and two big economic traumas of the twentieth century - the great deflation of the 1930s and the great inflation of the 1970s. He challenges the conventional view that deflation is inherently bad for the economy and on the contrary cites several decades of prosperity during periods of mild deflation. The very fact that most elected governments would like to hold the price line protecting consumers and investors, they need to put in place mechanisms with a deflationary bias. With this change in perspective about deflation, the author explains the main trends in the 1990s that are inherently deflationary. Globalization and the internet have strengthened global supply chains for products and services giving the consumer information, choice and control over her purchasing decisions. Rapid increase in productivity since 1995 ( to 3.5 % from an average of 1.4 %) due to technological advances is a fundamental force on downward prices. The rise of discount retailing giants like Wal-Mart is another factor. Thus, instead of branding deflation as a dreaded monster that will close down plants and spread misery, it should be managed in proportions that will improve competitiveness, increase availability and market efficiencies. Supply side economics rather than shrinkage in demand should be the driver of price determination. One concept that very well emerges from this book is that both inflation and deflation in large proportions for prolonged periods are bad. The responsibility of the Fed to intervene at the right time with appropriate therapies is well explained. Deflation like inflation is a stimulant if administered in the right doses. Two sectors that come up for criticism are Health Care and Education. These sectors are yet to exploit efficiencies of technologies and improvement in processes adopted in most other manufacturing and service sectors. Hence affordable healthcare and education that can impart substantial improvement to the quality of human capital are still proving elusive. There is a chapter devoted to investment choices and strategies available to individuals should there be a prolonged phase of deflation. This book explains some excellent concepts through a non jargon approach. Those who have not had formal college education in economics will also find it interesting. A table with the chronological listing of key economic events discussed in various chapters for ready reference would be very helpful.

Brilliant exposition of an alternative view of our economy

Is the United States currently in a deflationary period? If not then are we headed for one? Why have such major economic figures as Alan Greenspan started hinting that deflation is a possibility? Is deflation always a negative event bringing on recession is its wake? Author and financial columnist Chris Farrell answers all these questions and more in his fascinating book "Deflation: What Happens When Prices Fall". Mr. Farrell makes a strong case for deflationary pressures coming about from globalization of many industries as well as the strong pressure from retailers forcing suppliers to continually lower their prices. While deflation is a normal part of the economic cycle most of the 20th century has seen pronounced inflation. What does it all mean now that there are legitimate concerns about deflation? Mr. Farrell makes a convincing case that deflation does not necessarily equate with depression. In fact deflation can co-exist with a strong economy! This is definitely not the economics that I learned in college but is a well presented argument for a different view of where we are headed. Brilliantly done, "Deflation: What Happens When Prices Fall" is highly recommended for anyone interested in economic theory and may represent a more accurate view of deflation than the popular Keynesian theory of economics.

The "risks" of deflation presented accurately and in context

I follow the financial news fairly regularly, reading the news headlines and many of the columns on the Internet at least three times daily. A few months ago, the main topic of some of the economic stories was one that I had never seen in a contemporary financial column, the possibility of the U. S. economy entering into a deflationary state. A deflationary condition is when prices start to fall, and people begin to delay non-essential purchases in the belief that they will continue to fall, which can lead to an economic collapse. In general, it was considered a significant threat, and apparently the high officers of the Federal Reserve (the Fed) were preparing contingency plans if it were to happen. The possibility, consequences and potential benefits of a deflationary phase in the U. S. economy are the primary topics of this book. Outside of major wars and their consequences, there were two major economic cataclysms in the U. S. economy in the twentieth century. The first was the Great Depression of the thirties, which was a major deflationary period. The second was the uncontrolled inflation of the seventies, where price increases were relentless, a major success was proclaimed when the inflation rate dropped to ten percent or less. These two long-term economic problems form the major historical basis for the basic premise that monetary policy is the preeminent driver of major economic trends. Milton Friedman, long the primary champion of monetary policy, is mentioned many times. Farrell finds many historical justifications to blame the severity of the two events on the Fed. While it cannot be refuted that the Fed made many major mistakes in both situations, the political leadership also must bear a great deal of responsibility. That point is made, but not quite as forcibly as it should have been. The primary event that is driving the current concern over the potential for deflation is the performance of the Japanese economy in the last decade. It has been in a recurring deflationary condition throughout that time, performing sluggishly and with no end in sight. However, Farrell uses this as a point of demonstration as to how monetary policy can be used in a counterproductive manner. He argues that the Fed is smart enough to avoid those mistakes and will act quickly and forcibly to prevent a dangerous deflationary trend in the U. S. Another major point is whether deflation is in fact a trend to be feared or welcomed. As Farrell so excellently points out, there have been many deflationary periods in the American economy, and while we remain focused on the 1930's, the others were often periods of economic expansion and growth. They were due to the development of new technologies, which led to previously unheard of improvements in efficiency. Dramatic improvements such as the telegraph, telephone, railroad and medical advancements all changed society and dramatically lowered the costs of gods and the efficiency of living. His point is that if th

Deflation by Farrell

The author explains what happens when prices fall. Falling prices can be an opportunity for persons with cash and buying power. The capitalist system inevitably evolves through cycles of inflation and deflation. The author argues that deflation is a condition precedent to the capitalist system retaining itsrigor. He provides strategies to cope with worker insecurity.Ultimately, he explains that human capital generates earnings through training, education and new technologies. The author points to the 1948-1973 base period where the United States hadvery good overall growth in employment and the economy.The opportunities in a deflationary period allow us to purchasecheaply. The threats are that the deflationary tendencies in theeconomy impact labor adversely.