Hayek on the post bust secondary deflation — again

“It does not follow [from the fact that a disequilibrium generating inflation cannot be allowed to expand forever] that we should not endeavour to stop a real deflation when it threatens to set in.  Although I do not regard deflation as the original cause of a decline in business activity, a disappointment of expectations has unquestionably tended to induce a process of deflation — what more than 40 years ago I called a ‘secondary deflation’ — the effect of which may be worse, and in the 1930s certainly was worse, than what the original cause of the reaction made necessary, and which has no steering function to perform.”

— F. A. Hayek, “Full Employment at Any Price?”, 1975.

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2 Responses to Hayek on the post bust secondary deflation — again

  1. No steering function? Guido Hulsmann begs to differ.

  2. If the bust is caused by a scarcity of capital, in the sense that current investments have been outlaid under the belief that there exists a greater amount of capital than actually does, then I see the secondary deflation as a possible force of coordination. First, some deflation will result from the liquidation of loans; it seems to me that deflation caused by a rise in the demand for money (caused, in turn, by a change in expectations) is equivalent to a change in prices which reflects a preference to save. If this is true, then what is occurring is an increase in savings in a world where there are insufficient savings to complete all business activity — I can’t possibly see how this is a bad thing.

    But, I am no Hayek.

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