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Falling Prices Are the Antidote to Deflation
Daily Article by George Reisman

...Totally apart from deflation, falling prices are also a consequence of increases in the production and supply of goods, which are an essential feature of economic progress and a rising standard of living. In such circumstances, falling prices are not accompanied by any plunge in business sales revenues or profits, by any increase in the difficulty of repaying debt, or by any surge in bankruptcies. All of these phenomena are the result purely and simply of deflation, not falling prices....

...The government today has unlimited powers of money creation. And so it is highly likely, given its evident willingness to use those powers, and the overwhelming public support that exists for using them, that the increase in the supply of money it brings about will ultimately outweigh the present increase in the public's demand for money for holding....

....If the government delays too long in reining in its inflation, then when it finally does decide to do so, it may be confronted not only with prices rising as rapidly as they did in Latin America decades ago, but also with the massive unemployment rates that accompanied the efforts to rein in such major inflation. At that time, prices rising at a rate of 20, 30, or 50 percent or more were accompanied by comparably high unemployment rates....

....Falling home prices are not in fact responsible for bank failures, any more than falling prices of aging automobiles are responsible for bank failures. The fact that homeowners may owe more on their homes than their homes are worth has no more fundamental connection with defaults on mortgage loans than the fact that many or most automobiles purchased with installment loans are worth less than the outstanding loan balances owed on them. Indeed, the mere act of driving a new car off the dealer's lot is often sufficient to put its resale value below the value of the outstanding loan balance on the car.

What leads to defaults, whether on home loans or on automobile loans, is the inability or unwillingness of borrowers to honor their financial obligations, not the market value of the homes or cars.

Only decades of inflation and credit expansion could make it possible for people to think of the houses they occupy as an investment. In reality, a house is a consumers' good, just like an automobile or a refrigerator....