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< The general wealth of a country would be destroyed by deflationary policies.>

Yes, I agree.

Our only disagreement is a matter of semantics (the definition of words).

If you say, as Mike Shedlock (Mishedlo) does, that inflation is defined as an increase in the supply of money and credit, while deflation is the decrease of money and credit, deflation is certainly destructive.

With less money available (e.g. due to debt defaults), consumers can't spend as much, leading to economic slowdown. With less credit available, businesses can't borrow, to increase capacity.

The resulting economic slowdown is destructive to national wealth. Non-cash assets (such as homes and stocks) would lose value.

However, I have been defining inflation as a decline in the purchasing power of the dollar (as measured in the Consumer Price Index). Since I live in a "microeconomic" world, not a "macroeconomic" world, I tend to focus on my personal purchasing power. Inflation has wiped out 95% of the purchasing power of each dollar, over the past century. Inflation has persistently eroded the carefully saved dollars of LBYMers, instead giving a "free lunch" to profligate debtors.

Savers, who hold cash and equivalents, would benefit from deflation, as each dollar would buy more.

Since the U.S., at every level, has taken on record amounts of debt, deflation would hurt the majority.

However, the true wealth of nations depends upon capital formation and investment of saved resources. It is the savers, not the debtors, who paid for the factories and offices.

Deflation will help the savers, because each saved dollar will buy more.

I believe that it is about time that savers are rewarded for self-discipline. The overspending majority should learn to live within their means.

However, the pain of the correction would be so great that I do not believe that the Fed and the government would allow it. There are many fiscal stimuli that could be aimed at lower-income workers, who would spend the money, to stimulate the economy. (One such stimulus would be allowing mortgage interest to be deducted, outside of the standard deduction, since most lower-middle income homeowners' mortgage is less than the standard deduction. Another would be allowing renters to deduct their rent, just like mortgagers can deduct mortgage interest. This would target still lower incomes.)

This is why I don't think that deflation will be allowed to happen...or if it does, it will be very temporary.


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