13. “The Causes of Price Inflation & Deflation: Fundamental Economic Principles the Deflationists Have Ignored”
by Laura Davidson
Abstract: In the inflation-deflation debate, deflationists view credit as the most important factor affecting prices. As far as they are concerned, the credit contraction of 2008 caused prices-in-general to fall, and prices will continue to fall unless bank lending resumes. But are these opinions based on a sound understanding of economics? The first part of this article examines the causes of price inflation and deflation from a theoretical perspective. The analysis is firmly in the Austrian tradition. The theory is then applied to recent historical data to show that the general price deflation that began in the wake of the financial crisis was not the direct result of a contraction of credit. The article concludes with a discussion of the prospects for price inflation and deflation in the future.
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A few queations: 1) When reservation demand for money changes, does it change the same for all the various types of money? 2) Is crowd psychology driven by exogenous or endogenous factors? 3) Is wealth destruction inflationary or deflationary? 4) Do financial prices behave the same as prices for economic goods and services? 4) In our current financial system isn’t all “money” technically credit?
I really enjoyed this article. I will have to review it once more, for it deals with a LOT of very relevant issues. Thanks for writing.