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The Inflation vs. Deflation Dialectic

by on January 12, 2012

After decades of inflation and fears of Ben ‘Helicopter’ Bernanke induced hyperinflation it is probably not surprising that a wearying public is starting to wonder whether deflation would be the lesser evil.
But not only is deflation (austerity) a disaster, we are being set up to believe it’s the only alternative to rampant inflation.
It is not and it is time we bury this lie before it starts a life of its own.

Let us recap the classic case against deflation, before looking beyond it.

1. Deflation makes money worth more and all the rest worth less.
That includes labor, which is the commodity that most Americans rely on in the marketplace. Deflation is thus a wealth transfer from those that don’t have money to those that do. About 50% of Americans own zero net assets.
It is fair to say that only a very small percentage of Americans will profit from this wealth transfer.

2. Deflation makes debts and the interest payed over them worth more.
This is good for creditors. I.e. the banks and the billionaires.
It is very bad for Government, which owes $15 trillion and for the tax payer, who is on the hook for the whole lot.
As we know it is primarily the middle classes that pay taxes.
It is very bad for all other debtors, including those paying off their mortgages.

3. Prices decline because demand is crashing
Of course, declining prices sounds great, right? Well, if they are going down in certain sectors as a result of innovation or market pressures, yes, then we are happy if prices go down.
But if prices go down because demand is crashing, that’s a completely different scenario. Demand is crashing because the money supply is contracting and that is a very serious problem indeed.

4. Deflation hinders economic growth
The currency is appreciating. That is a good incentive to hoard the stuff, instead of spending it on investments and consumption, which is the real economy.
Inflation has the opposite effect: people dump cash and this supports economic growth. That’s why contractions are usually deflationary, while booms are usually inflationary.

So deflation has been utterly discredited, not just in theory, but in practice. Just think of the Great Depression, which was a monetary contraction. Europe dumped the Gold Standard in the thirties because it was so deflationary. Keynesianism was a reaction to this deflation.

And, more relevant today, just think of the poor Irish and Greeks. They know all about deflation and austerity and they don’t seem to believe it is doing them much good.

Also keep in mind what kind of people are calling for it. The IMF, the ECB, Brussels, the banking community. Are we really going to listen to the people who created this mess in the first place?

Just another Hegelian Dialectic
The fact of the matter is: we are being set up for yet another of ‘their’ favorite dialectics: inflation vs deflation.
Or more accurate: deficit spending vs. austerity.

Its synthesis: a wealth transfer to the rich, of course.

The deficit spenders a la Paul Krugman tell us debt is no problem. Austerity’s advocates tell us it is.

The key to understanding all dialectics is to see their hidden common ground. In this case: both discuss debt, but not interest.
And the problem is not debt, it’s interest.

But that’s a moot point, you say. Where there is debt, there is interest!
Capital will always want a return, it’s unavoidable.


After all: we know our money is generated in computers. Banks (or better: the banking system at large) create all the money we borrow.

Our $200k mortgage, for which we pay $300k in interest over thirty years, amounting to ten years of wage slavery for the average American, is created the minute we go into debt.

Nothing is backing the debt. Nobody is losing control over even one dime. Not even temporarily.

We consider this a disgrace, and say we want Gold to end this scandal.

But the real question is:
If the bank creates the money out of nothing for nothing, why am I paying $300k interest on a $200k mortgage?

Why don’t I get it interest free?

We all know the answer to this question, of course.

It is because we are slaves.

The next question is: would I be any happier if I pay this $300k interest for a Gold based mortgage?

The answer is: we would still be slaves.

Not to the printing press, but to those holding Gold. And don’t believe for a second that those few ounces you may be holding count for much. Nobody knows where all the Gold is, but it is a sure bet that the Money Power has a decisive stake in the World’s Reserves. Remember how they got rich? Lending to Governments while setting them up for wars against each other? They were not lending paper back then. Real Gold is what they were offering. And we can rest assured they didn’t dump all their Gold after Nixon ended Bretton Woods.

Fractional Reserve Banking is a fraud and an incredibly inefficient way of producing credit. The reason it exists (besides obvious historical reasons) is to obscure the truth: that we pay $300k for absolutely nothing. We are being defrauded. Ripped off.

That’s one of the key reasons the bankers want to reinstate Gold: they have a better excuse for enslaving us with interest. It all sounds a bit rich to enslave billions of people with simply credit. Just give ‘m some shiny stuff in return. It worked for yesterday’s Natives, so why not today?

But real money creation is simple and stable. You can find out how it’s done here.

If you have never seen the real costs of interest to society I very strongly suggest you read up here.
Reread it until you get upset. As long as you don’t, you’ve missed the point.

We can create all the credit that we will ever need at zero cost. That is the stone cold truth staring us in the face. It’s all we need to know to transcend the nasty little Inflation vs Deflation dialectic.

It’s all we need to know to get rid of the crooks and end the lie.

The simple fact of the matter is: we can end all interest payments now and the crunch would be over tomorrow. Nobody would lose a dime. All debts would be repaid. Only the rich would lose a massive income stream. But this income is their reward for enslaving us through their printing press operation. So I think we can explain to them they’ll have to find a job to replace that income.

Just think of all the purchasing power that would become available in all the levels of the economy, if consumers and producers are no longer weighed down with exorbitant interest costs in exchange for computer entries.

All this may be a little hard to fathom immediately. But rethink this question:
‘If the bank creates the money out of nothing for nothing, why am I paying $300k interest on a $200k mortgage?’

If you don’t have a mortgage, think about this:
‘Why is the Government spending 700 billion per year (the equivalent of a TARP every year) on debt service alone? For money that was printed the minute it was borrowed?’

Keep thinking until you get angry, that’s when you’re getting close. Study a few of the links in this article and things will start to become clear.

The choice is simple: start paying attention to these questions, or continue paying interest for nothing to the Money Power for the rest of your life.

This article was written for Activist Post

Recommended reading:

On Interest
The Problem is not Debt, it’s Interest
The Wolfson Prize, I win!
Why Bankers Love Gold
Usurious Usurpation
Mutual Credit, the Astonishingly Simple Truth about Money Creation

  1. krle permalink

    well, you got it well figured out.. one could go deeper I suppose, but for most this is more than enough..

    also, without debt creation, there need not be inflation either (it is necessary to be able to propagate debt).. hoarding is not really a problem in real world if there is no debt to be repayed with the hoarded good.. there wont be much “growth”, but that is not necessary either..

    I had an uncle who had a workshop, he used to say: today a machine does in an hour what 3 men needed a whole day for 10-20 years ago.. And yet, everyone needs to work more and more, and for less and less money (in real terms).. something s not right here..

  2. james permalink

    pure nonsense, interest is there so that the bank can effectively monitor their risk, this goes for all banks. if i loan people money, how do i offset the potential for default? by adding interest. why do you think companies who earn great cash get to borrow at lower rates. please wake up.

    • The bank has collateral James, there is no risk. Still, the mortgage costs 150% of the principal, meaning you pay the real price of your house 2,5 times over.

      Please wake up.

  3. M Sea permalink

    I don’t know how you exactly forsee the implementation, but I don’t think your really considering the implications. You want a currency that is backed by nothing and has zero interest tied to it. What your are suggesting is that anyone can essentially create credit out of thin air. This is fractional reserve banking on steriods. This is kenyesian economics at its extreme. This would lead to absolutely huge credit bubbles. What it also shows me, is that you have very little real understanding of basic economics, which is frightening since it appears that your are running a currency blog.

  4. “Why is the Government spending 700 billion per year”? Partly to finance “national security” and other pet projects. Against my will/force I might add. I didn’t sign up for those loans or to pay the interest for bonds I don’t believe in. I Love the site and ideas. Nice to have another mind out there speaking against what amounts to usury. In lieu of Bitcoin, Thomas Greco has a better alternative as Kevin Carson points out

  5. 30yr fixed mortgage at 3.60%, 200k is ~127k in total interest. Where do you get 300k in interest? Dont you think it’s “usurious” to print disinformation to “prove” your point? Google mortgage calculator and do the math yourself.

    • yes, and at 5%, which is far more realistic for an average 30 year mortgage, it is 300k. You can find the calculator I offer to my readers at the resource page.

  6. Deflation is not what makes stuff worth less, it’s economic growth which makes all your stuff worth less. If you own a sack of potatoes and suddenly our economy is producing 10x as many potatoes as it did when you bought it, then of course your potatoes are worth as much.

    In the current system, we already account for inflation with interest rates. If you know your money is going to be worth less in the future, you charge a higher interest rate when you lend that money so that you aren’t losing money when your loan gets repaid. Basically the only people who are losing the value of their money right now are the people who keep their money in cash. The people who need their savings to live off, the working class, exactly the opposite of what you argued. Deflation/inflation won’t affect the interest income of creditors because they are maximizing their profit regardless of economic situation. They will charge the highest interest rate that they can get away with. In a deflationary economy, they would get the equivalent return by decreasing their lending rate by the difference between the inflation/deflation.

    Deflation does however reduce the power of certain creditors to have a monopoly on prime interest rate loans. Deflation is equivalent to spreading an inflation-tied interest rate across all money. Hoarding is the lamest argument ever, do you hoard your money because you know that you can park it in a mutual fund and earn %3 per year? I mean your money is worth more in the future, why would you spend it now? Of course, that just sets the minimum return you want to get on any investment. Similarly, in a deflationary economy, the minimum should stick at 0%. If you get less than 0% return it’s a bad investment. And it’s the same for everyone across the board. Basically it’s like giving everyone with money access to a prime lending rate which is tied directly to economic growth. This takes the power out of the hands of the big banks.

    • Deflation obviously favors the Money Power: Outstanding debts are becoming worth more, as is the interest payed over them.

      You are engrossed by maximizing return on capital, that’s why your falling for this line of reasoning, which is very pleasant for the money power.

      You are missing out on the devastating effects of ‘return on capital’ to society.

      You’re line of reasoning in beneficial to yourself only if you have net assets of 500 thousand dollars or more. Otherwise you will be losing to interest that ends up with the richest 10%.

      Read this:

      • You should turn it around:
        How can we MINIMIZE the return on capital, so that the added value of production remains with the real producers: us.

        • You should point out that economic growth, which of course would mean an economy running at full velocity, doesn’t necessarily change the value of products in relation to each other, other than the fact that demand for things change in good times and bad. Also, bankers don’t lend anything, they create the illusion they’re lending. Deflation, or contracting the money supply, helps those who know exactly when they’re going to contract it. You don’t “park” money in a mutual fund, you purchase it. You can minimize the return on capital, which I’m assuming you mean the means of production, by being able to choose who’s means of production you use. This would be accomplished by the establishment of private local brokerages and a currency issued by a publicly appointed bookkeeper instead of a private bank.

  7. a_reader permalink

    This is excellent! In my view, it touches on many of points that we were discussing recently on the DB, but restates the case against interest from an even broader perspective, by taking into account the inflation-deflation dialectic, and the gold-“paper” dialectic (which is also obscuring the fact that the real problem is interest).

    • It would be best to refer to what bankers charge for the facilitating of debt between other people not including the banker as peculation, embezzlement or larceny instead of referring to it as interest.

    • thanks a_reader! The article about bitcoin showed many think deflation is ok or the lesser evil.

  8. Bankers own the government and can say anything they want and be believed. They could actually say tax payers owe 17 quadrillion and they would believe it. Bankers are not creditors – they don’t loan anything. The person who takes the credits in exchange for something he produced is the creditor. Currency debt is between the borrower and that person. If you’re trying to expose the banking industry, but continually refer to bankers as creditors, you are doing nothing. Saying “fractional reserve banking is a fraud and an incredibly…” is saying nothing because banks don’t have a fraction of anything. The fraction doesn’t exist. If you keep on referring to what we pay bankers as “interest” or “usury”, you are inadvertently implying they are a lender of something. Gold can represent debt as much as a piece of paper can. “Gold standard” vs. “greenback” = synthesis. Bankers are rich because they know how to create the illusion they’re lenders. Bankers control the history books, so you can’t rely on them. You have to use logic. Think in metaphors. Draw yourselves illustrations. Debt lines(which is what we need to start calling what we call a “credit line” because you’re actually giving the borrower debits), have to be given evenly/fairly to producers as they enter the market by their publicly appointed bookkeeper. Debit = credit = debt, it’s just a matter of what side of the debt you’re on. We all take turns going back and forth to make the economy flow. Pool resources at local private brokerages(what you erroneously refer to as “a full reserve bank”). Or, maybe we should just incarcerate anyone who threatens to create a book entry currency and just barter. I don’t know about where you are, but my skies are completely covered in chemtrails right now.

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