Good can come from deflation, says American financial analyst

“There is an important distinction between good deflation caused by excess supply and bad deflation created by deficient demand. Good deflation is the result of new technologies that power productivity and output as the economy grows rapidly and as supply outpaces demand. The bad kind stems from financial crises and deep recessions, which increase unemployment and depress demand below the level of supply,” A. Gary Shilling wrote in a article yesterday. Shilling continued, “The Industrial Revolution began in the late 1700s. But in the U.S. it didn’t achieve sufficient scope to drive the economy until after the Civil War. Value added in manufacturing and mining leaped. As bottle machines replaced glass blowers, the price of a dozen goblets dropped to just 40 cents in 1888, from $3.50 in 1864. At the same time, railroads connected the nation, enhancing productivity and supply. Real gross national product grew 4.5 percent each year from 1870 to 1898, an unrivaled rate for a period that long, and consumption per consumer jumped 2.3 percent a year. Good deflation reigned, with wholesale prices dropping 34 percent, a 1.7 percent annual rate of decline, and consumer prices falling 47 percent, or 2.5 percent annually. Good deflation also prevailed in the 1920s, when the new technologies were electrification of factories and homes and mass-produced automobiles. Electrification contributed to the development of other goods, such as household appliances and radio. Industrial production almost doubled in the 1920s, but prices fell as supply outran robust demand.” Read the full article here. | Raymond Matt, CFP, CLU, TEP, CHS

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