PRESTOPUNDIT -- "It's a team sport, baby!"

Hayek-Ler and all-around nice person Virginia Postrel has a New York Times piece on deflation. I've got to go with my brain on this one and my brain tells me that Postrel is wrong about deflation. Consider. If you have growing productivity in a great many sectors in the economy -- and if the stock of money grows slower than this productivity increase, then you do have deflation. Your dollar does have a "general" higher worth. It buys more.

If more goods are being produced at lower cost across industry after industry, effectively you have a case were "the value of each dollar, regardless of how it is spent, is rising". And this is a good thing, and it does imply anything about unexpected changes in the value of money. When productivity goes up, a dollar should buy more -- you can expect it. What you have is perfectly benign deflation, using Fed gov Ben Bernanke's definition of deflation as, "a general decline in prices, with the emphasis on the word `general.'" Productivity increases are never exactly the same industry by industry, but a confluence of enough of them will give you what economists would call collectively a "general" increase in output -- with your non-inflated dollar buy much more "in general". Again, this is a good thing, and a completely harmless thing.

Now, it's easy to start talking mysterious talk about a phantom such as "the nominal prices of all goods and services", something which is "independent of underlying relative values". It is easy to take the next step, piling one phantom on top of another with talk of a change in the phantom entity "the overall price level". Of course, the substance behind the shadow is nothing but a collection of various relative prices, including various prices for money and credit. What Postrel goes on to say about the ill-effects of unexpected prices changes is true enough -- but none of this has any necessary connection with perfectly-to-be-expected increases in the purchasing power of a dollar in an economy with massive productivity increased coming from all side. (the numbers were given a week or two ago on this blog).

Postrel's article ends with supposed good news:

"[the] prospect [of Japanese style deflation] isn't likely in the United States. If anything, trends are moving in the opposite direction. The falling dollar raises the cost of goods, while the growing federal deficit creates inflationary pressures. "I've never known an economy — I doubt that there is one — that has a falling exchange rate and a large and rising deficit and that has deflation," said Allan Meltzer, an economist at Carnegie-Mellon University ..

If productivity increases mean greater output -- and we aren't seeing our dollar buy more, this can only mean that we are currently experiencing rip-roaring inflation in the form of a growing money supply .. and indications are that we will see only more and more of the same as far as the eye can see.

Posted by Greg Ransom