Deflation Rules

The United States was built on deflation.

Photo: Derek Jenson. Source: Flikr. CC-BY-2.0

In an era of wars over land and resources – the Spanish Armada, the 80 Years War, the German Peasant’s War – the discovery and settlement of the New World dramatically increased the supply of everything. More land, as pioneers established new lives. More resources, as endless vistas of fields and forests met the eye. More opportunity, as colonists and later immigrants poured in. The founding of the American republic in the 18th century coincided with the Industrial Revolution in England. New machines and methods of production meant the prices of staples like wheat and lighting plummeted. This was a global phenomenon.

Source: Our World in Data.

As people and societies devoted fewer and fewer dollars for basic staples, more and more resources were freed for investment into greater productivity. Cheap steel put strong tools in everyone’s hands. Steel bridges crossed massive rivers that used to take days or weeks to ford or raft across. Roads, then rails, then cars, then airplanes made travel faster and cheaper. And the massive continent that was open to immigrants created a natural self-sorting experiment, where the most restless and ambitious and independent chose to upset their lives and resettle here.

That’s why I don’t worry about the long-term effects of deflation, as new technologies disrupt hotels and taxis and restaurants and all kinds of other services. Deflation is the natural outcome of higher productivity. It’s disruptive to a financial system that has been structured to prevent its opposite, inflation. But we lived with deflation for centuries.

It’s just that we’ve forgotten what to do with all that extra capital.

Douglas R. Tengdin, CFA

Charter Trust Company

“The Best Trust Company in New England”

By |2019-07-22T05:57:52-04:00July 22nd, 2019|Global Market Update|Comments Off on Deflation Rules

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