The essential things that need to be understood are that falling prices caused by increased production do not serve to reduce the general or average rate of profit in the economic system and do not make debt repayment more difficult. Indeed, to the extent that such falling prices take place in the face of an increasing quantity of money and rising volume of spending, and result merely from the fact that the increase in production and supply outstrips the increase in money and spending, they are accompanied by a positive elevation of the rate of profit and a greater ease of repaying debts.
Precisely this would be the case under a gold standard, inasmuch as the supply of gold modestly grows from year to year as the result of continued and expanded gold mining operations, and the volume of spending in terms of gold grows commensurately. In such circumstances, the average seller in the economic system would be in the position of selling at lower prices and at the same time have a supply of goods to sell at those lower prices that was larger in greater degree than prices were lower.
For example, if falling prices result from the fact that while the quantity of money and volume of spending in the economic system are rising at a two percent annual rate, production and supply are rising at a three percent annual rate, the average seller in the economic system is in the position of having three percent more goods to sell at prices that are only one percent lower. His sales revenues will be two percent higher, and that is what counts for his nominal profits and his ability to repay debts. His profits will be higher and his ability to repay debt will be greater. There are lower prices here, but absolutely no deflation.
What wipes out profits and makes debt repayment more difficult is not falling prices but monetary contraction, i.e., the reduction in the quantity of money and or volume of spending in the economic system. This is what serves to reduce sales revenues, and, in the face of costs determined on the basis of prior outlays of money, causes a corresponding reduction in profits. It is also what makes debt payment more difficult, in that there is simply less money available to be earned and thus available to be used for the repayment of debts. It is monetary contraction, and monetary contraction alone, which should be called deflation.
Moreover, in the face of any given monetary contraction, the reduction in profits and increase in the burden of debt would in no way be diminished if prices did not fall. Indeed, these phenomena would not be alleviated even if prices rose. Prices would not fall if production and supply fell to the same extent that money and spending fell. They would actually rise if production and supply fell to a greater extent than the quantity of money and volume of spending. But irrespective of what might happen to production, supply, and prices, the same monetary contraction would cause the same reduction in sales revenues and, in the face of the same prior outlays of money showing up as costs, the same reduction in profits. And it would cause the same increase in the burden of repaying debt.
The point is that falling prices are simply not the cause of a plunge in profits and increase in the burden of debt. At most they can be the accompaniment of these things, when all three result from monetary contraction. But they need not even be an accompaniment. For the phenomena of plunging profits and a rising burden of debt, as I've just shown, can also be accompanied by rising prices?to the extent that a reduction in production and supply were to outstrip the reduction in money and spending.
Facebook
Twitter