Comments (5)

• greg

  When Ford's car dropped from $600 to $280, it was done on productivity gains which creates true wealth. If the fall was due to deflation of the cost of production without gains in productivity, society's wealth would have remained constant.

  If a man is digging a hole with a stick, the price drop of sticks does not allow him to dig more holes, just the cost of hole drops. This is just a cost adjustment that the economy makes a small journal entry. However, if the man invest in a shovel and can dig 5 times more holes, the price of holes drop on productivity and the economy grows. Ford provided the shovel in the auto industry, increased productivity and this productivity allowed more people to buy cars.

  Published: July 13, 2009 8:22 AM

• Gil

  Good point greg. However does 'inflation' strictly refer to an expanding money supply or not?

  If not, you could then say:

  'Good' Deflation - goods becoming cheaper through better productivity.

  'Ho-hum' Deflation - money supply shrinking so the purchasing power hasn't changed.

  'Bad' Deflation - goods becoming cheap because sellers are trying to offload stuff they don't want before it becomes even cheaper again (a.k.a. depreciation).

  With inflation you turn it around with these definitions:

  'Bad' Inflation - fewer goods are being produced relative to a static money supply (e.g. food prices in a famine).

  'Ho-hum' Inflation - money supply expanding but purchasing power remains static.

  'Good' Inflation - certain goods are becoming more valuable and attract a higher purchasing power with time (e.g. antiques).

  Published: July 13, 2009 9:43 AM

• Jonathan Finegold Catalán

  And, Paul Krugman hasn't stopped suggesting for further stimulus.

  Greg, if the price of capital-goods decreases it is likely that the deflation was caused by the same thing that would cause deflation of prices for consumer-goods; that is, an increase in savings. The concept is explained by Jesús Huerta de Soto in his book "Money, Bank Credit and Economic Cycles".

  Published: July 13, 2009 10:40 AM

• gangaroo

  The P.I.G. series is one of the best tools out there for challenging popular conceptions and fears of the free market.

  Published: July 13, 2009 10:45 AM

• Jake

  Out of curiosity, how does everyone else pronounce "P.I.G."? "Pig" or "Pee-ahy-jee"?

  Published: July 13, 2009 11:40 AM