Mental Models discussed in this podcast:
- Deflation
- Inflation
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You can find out more information by listening to episode 11 of this podcast.
Show Outline
The Deflation Myth
Deflation is considered bad because economists assume that consumers will hold off making purchases with the expectation that prices will decline in the future.
My rebuttal: This just doesn’t happen.
The “rational consumer” doesn’t exist. This is why you have a whole field called ‘behavioral economics.’
For whom is deflation bad?
Deflation is bad for debtors (Those in Debt)
- Governments (because they are all debtors)
- Leveraged Companies
- Companies with pricing power
For whom is deflation good?
Creditors (Those who lend money to others)
Those without debt (Whether people or companies)
Companies without pricing power. (Simply holding prices stable will lead to increasing profits)
The Myth of “Stable Pricing”
Stable is 0% inflation, not 2% inflation as the US Federal Reserve would like you to accept.
Summary:
The Deflation Myth has been accepted primarily because economists have used false assumptions in their analysis and because debtors, namely world governments, tend to hold massive political and cultural power. It is in their best interest to convince you that deflation is bad so that they can inflate away their debts. Yet, most investors are harmed more by inflation than they would be by deflation.
