IMF Wrong on Lower Prices

The IMF mistakenly claims lower prices will sink economies:

Risks to activity associated with very low inflation in advanced economies, especially the euro area, have come to the fore,” the IMF said.

A negative shock to the economy could turn low inflation into deflation, which risks a downward spiral of activity as consumers postpone spending in anticipation of cheaper prices in the future.

If food prices were cheaper tomorrow, you would still eat food today. If car prices were cheaper next week, and you needed to drive to work this week, you would buy a car now. Cheaper prices mean people save money.

Lower prices are good!

What the IMF is really talking about is a lower quantity of money and how this will hurt borrowers.

A falling spiral of prices would weaken demand by making cash more valuable over time, discouraging consumption. It also increases the burden of debt, a big problem for highly indebted places like the United States and the euro zone.

When borrowers pay back money, the banks remove it the ledger completely; they destroy it. This reduces the quantity of money and makes money more valuable. This makes debts more expensive since a borrower has to pay back a debt with something that is more expensive. Imagine if you borrowed ten gold coins worth $1000 each, or $10,000 of value. If value of a gold coin increases to $2,000, then you have to pay back $20,000 in value, because it would cost $20,000 to buy 10 gold coins.

The IMF is speaking for the big debtors of society, firstly countries, secondly large businesses. The IMF does not speak for people who save money and who want prices to fall so they can afford more things.

The IMF also speaks for banks who want the freedom to create more money, instead of first borrowing from savers.

See articles by CNN and Reuters.

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