Preamble: this an old post that I wrote on deflation some time ago, but it still gets a lot of traction. 

In a SAFM Market Update interview with Lorien Gamaroff, the CEO of Bankymoon, this caught my eye:

LORIEN GAMAROFF: Bitcoin is actually a deflationary currency, it’s not an inflationary currency because there can never be more Bitcoins in the world.

HANNA ZIADY: But do we need inflation for growth? That’s what we are told, that you need some inflation in an economy to generate growth. How would Bitcoin fuel economic growth?

LORIEN GAMAROFF: I often hear that, and you hear everyone on TV always talking about inflation, how we need inflation. But do we really? Who does that serve? I want to live in a world where things get cheaper. So is it true that the only type of economy that can be sustainable is an inflationary one? I have my doubts.

Specifically, this part caught my attention: “I want to live in a world where things get cheaper.”

I mean, who doesn’t?

But when I read this type of thing, it always makes me think about how dangerous it is to get simplistic about macro issues. From what I can tell, they’re saying that “deflation” means “living in a world where things get cheaper”. Unfortunately, it’s not nearly as simple as that.

Prices fall for two different kinds of reasons

If you look at deflation, you’re talking about a fall in prices. And there are at least two ways in which prices can fall:

  1. The first (nicer) way is when people learn how to be more productive at the same cost. An example: if we genetically modify corn, you can use the exact same amount of land, fertilizer, sun, water and labour to produce more corn. In that case, if there’s competition amongst corn farmers, then the price of corn will come down, because it’s cheaper to make and there’s more to sell.
  2. The second (less nice) way is when people cannot afford to buy something at the existing price. So for example, in a depression, when people are losing their jobs, there is less money to be spent, and the demand for goods pulls back. Prices for goods then either have to adjust downwards (so that people can still buy them), or the companies making those goods will stop making them, because the cost is higher than the price the market can stomach.

In that second scenario, you have many mainstream economists talking about the deflationary spiral:

deflationary spiral

There are people who might point out that businesses are also consumers – and if their customers are only willing to pay less for purchases, then those businesses will also pay less for their purchases. But that does ignore things like the salary bill, which doesn’t cope well with pay-cuts because in response, workers generally get despondent and less productive.

I guess the main point is: there is deflation which comes from higher productivity, and there is deflation which comes from lower demand. The first is great, while the second seems to be more of a problem.

Point of Information: We Already Get Some Deflation Of The Nicer Kind

The good news: we do live in a world where things get cheaper. iPhones, iPads, Macbooks – these are pieces of technology have only been “economically feasible” for sale to the general public for a few short years. Today, we can buy a terrabyte of hard-space for less than what we would have paid for a millionth of that storage space two decades ago. That is deflation through greater productivity. That is living in a world where things get cheaper.

Look at this productivity graph:

From this website

Where productivity gains have been made in areas like computer chips and such, we’re either paying the same price for more, or paying a lot less for the same.

This kind of deflation is not a problem. It’s stimulative: cheaper prices are driven by cheaper costs and more economies of scale and more jobs and the list goes on.


This is not the same kind of deflation that you get in depressions. When it comes to depressions, Keynes might talk about “animal spirits”, where the collective consciousness of the people in the economy gets dulled and pessimistic, resulting in less spending and less investment and more firing.

Other types of economist might talk about the crisis of credit and malinvestment, where a depression is actually just the economy undergoing an adjustment phase: one in which the people that bought a lot of things during the preceding cheap-credit bubble are now having to pay back what they borrowed, cut back spending and/or go bankrupt, and sell off distressed assets. In this kind of narrative, economic activity and prices are just declining back down to a sustainable level.

The trouble is: both of those narratives (to me, at least) sound plausible. So how to tell which is a better reading of the status quo? You can’t.

But however you narrativise it, the point is that the kind of deflation that people worry about is especially painful. And they’re worrying about a world in which things become cheaper because people have no money to spend.

No, thank you. That doesn’t sound sustainable at all.

But perhaps that’s just me.

Rolling Alpha posts about finance, economics, and sometimes stuff that is only quite loosely related. Follow me on Twitter @RollingAlpha, or like my page on Facebook at Or both.