The Steampunk Satyricon

Wednesday, February 1, 2012

The Dismal Science of Deflation

I kept hearing conservatives certain people complain about the Federal Reserve for "printing money" and I began to wonder exactly what they were so upset about. Here's the deliberately over-simplified explanation I've been able to piece together:

People like me tend to think of inflation as "stuff getting more expensive." But another way to think of it is "non-cash assets becoming more valuable." This is why a little inflation happening can be good -- it's some of the stuff you own increasing in value before your very eyes.

(How's this for inflation: Of the almost 900 paintings created by Vincent Van Gogh, he only sold one during his lifetime, "The Red Vineyard" in 1890, for the modern equivalent of about $1,600. A conservative estimate of the painting's current value is somewhere between the gross national product of Anguilla and "OH MY FUCKING GOD!!!")

An increase in the value of your leveragable assets means you can borrow lots of money against your now-more-valuable stuff -- money which you will use to increase your wealth by investing it or using it to grow a business. A little inflation is seen by some as good. A lot of inflation is seen by everyone as bad. But what some people see as truly horrible is even a hint of the dreaded deflation.