Deflation Is Not My Cup of Tea

August 17, 2020 |

At the risk of being lambasted again, one of the things Keynes was first to
understand was the difference between economic theories versus how the world
actually works. He was a behavioral economist before there was such a word.
For example, Inflation or Deflation should be equally tolerable by the
rational economic man.  But in practice it is not so.  No one likes a pay-cut
even if the hard currency is theoretically more valuable.  Deflation
eventually leads to lost confidence, unemployment, economic stagnation,
strikes and rioting. ( see the 1930's UK) It just does not fit human nature to
feel better off with less cash.

But inflation works just fine in both theory and practice. (not hyper
inflation though).  And that is what every developed country has practiced
since the 1970's.  Wages generally go up to appease us worker-bees.
Governments can spend and borrow like there is no tomorrow and then inflate
the debt away.  No one really calculates the implicit tax in a decreasing
currency valuation. The rich never hold cash anyway.  The working man doesn't
save enough for it to matter.  Assets priced in dollars go up.  In effect all
government policy is Keynesian now.  It is written into the Fed charter to
target inflation. The Treasury has not balanced an annual budget in 20 years.
Believe me I prefer the elegant work of Hayek, Hazlitt, Uncle Milty and most
of all Thomas Sowell, but this is not our present world.   

It would be an interesting thought experiment to imagine a world of balanced
budgets, decreasing credit and a strong dollar policy.  I posit is would be
quite bad for stocks.  The last time the US balanced the budget was during the
Clinton years 1998 to 2001. They actually suspended Treasury bond auctions for
a period.  Shortly after we entered a 3-year bear market. We are nowhere near
such a world now.  All of this is a long-winded way of saying if the choice is
between having the best model and making money, I will go with the later.


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