In response to an FT article by John Kay on 27th January 2015, entitled 'History is the antidote to fear of falling prices'
People are not afraid of falling prices, governments and central banks are.
1. They can't tax deflation
2. Given that fiat money is created as debt by a fractional reserve banking system, they need a constantly expanding supply of it in order to stop the system from collapsing in on itself. So like a Ponzi scheme or a pyramid scheme the system needs a constant supply of new debtors and/or old debtors to continue increasing their leverage
3. Demographic trends in the developed world are working in the opposite direction:
- The number of young debtors and new tax payers is declining
- The number of older people paying off their debt is increasing (the younger baby boomers)
- The number of people retiring who want to draw on savings is increasing (the older baby boomers)
4. This all amounts to a problem governments don't want to face up to because they don't fancy telling the truth to people - ''Sorry guys, we can't afford to fulfil all the entitlements we promised you to get elected…we we're rather hoping we could inflate the debt away, and Professor Krugman still thinks we can…but…whoops"
Governments are no more likely to explain their fear of deflation than they are to admit they have absolutely no intention of ever paying off their debts in money that represents the purchasing power they borrowed, and are becoming increasingly desperate at the likelihood they will never pay it off nominally either. So they continue to do the 3 things they know how to do - kick the can down the road, pretend they know what they are doing, and print.
Personally, deflation doesn't scare me; governments and central bankers do.