Falling Prices Aren't 'Deflation.' They Instead Signal Booming Growth

Falling Prices Aren't 'Deflation.' They Instead Signal Booming Growth
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In 1980 the supergroup Fleetwood Mac was on yet another one of its extravagant world tours. Band patriarch Mick Fleetwood was dating Sara Recor at the time, and this was problematic simply because Fleetwood had taken up with Recor while seeing bandmate (and close Recor friend) Stevie Nicks on the relative quiet. Nicks said she wouldn’t go on tour if her ex-friend were traveling with Fleetwood.

Nicks’s ultimatum ultimately proved expensive (in a relative sense, of course) for the band during its tour stop in Japan. One night Fleetwood, having another row with a frustrated-to-be-left-at-home Recor, stayed up all night arguing with her and presumably placating her. Keep in mind that this was the 1980s. The call cost $2,000.

Forty years later Fleetwood’s spats while on tour would cost next-to-nothing. Better yet, the calls could be made “in person” in a sense via Skype, Zoom, and now, Portal from Facebook. So abundant has investment in technology been since the 1980s that the cost of communication has been shrunk to next to nothing.

While cross-continent communication in 1866 (when it first took place) cost $10/word with a 10-word minimum, now we can connect by voice and video with individuals populating the earth’s four corners via WiFi connections that more and more come free of charge. To be clear, this is economic growth.

In other words, the surest sign of surging economic growth is falling prices for everything. How we know this is that it was copious investment for decades (and centuries, realistically) that brought down the price of communication. Along with everything else. Figure that the original laser printer marketed by Xerox cost $17,000, the first flat-screen TVs fetched $25,000 and above, while the original window unit air conditioners that nowadays can be found in the poorest of poor U.S. neighborhoods used to set back the richest of the rich anywhere from $10,000 to $50,000 in the 1930s.

Thanks to investment capital matched with creative minds, everything the rich enjoy exclusively is always and everywhere a preview of what we’ll all enjoy in the future. Through their “venture buying” of products and services at nosebleed prices, the rich signal to entrepreneurs what is useful, and what will enrich them if they mass produce it.

Entrepreneurs, seeing what the rich uniquely enjoy and that is coveted by the poor and middle, then get to work. Through investment they turn scarcity into major abundance that reveals itself through rapidly falling prices.

Along these lines, readers can rest assured that the private flight that in so many ways symbolizes “superrich” will soon enough be common. We know that’s the case simply because private flight is too desirable for entrepreneurs to not seek billionaire-variety wealth by mass producing it. To achieve the latter, they’ll have to attract the investment that, by democratizing private flight, will wildly enhance the productivity and living standards of all.

So while it’s already been said that falling prices signal economic growth, at the same time it will be confidently asserted that periods of flat prices for life’s obscurities signal a lack of growth. For obvious reasons. Investment powers the productivity that brings down prices, while a lack of investment limits investment such that market prices remain flat, and by extension, out of reach for most.

All of this requires mention at the moment as economists and journalists roll out their all-too-familiar laments about the “threat” of falling prices. Of the Keynesian view that consumption powers economic growth, they claim that rising demand leads to rising prices during boom times. No, demand is a consequence of production, and thanks to copious investment, production of exponentially more with fewer hands. During boom periods, surging consumption is a consequence of surging production of endless plenty at prices that continue to fall.

Looking at the present, politicians have crushed economic activity through the imposition of command-and-control, lockdowns, along with government spending itself. Indeed, while this column predicts a big economic rebound once the hideous lockdowns end, it should be made clear that the extraction of $2.9 trillion (and counting) by Congress in response to a contraction caused by politicians will restrain what would have otherwise been a much bigger economic rebound. Central planning always fails, and $2.9 trillion worth of politicized resource allocation on top of the prior imposition of command-and-control will sadly shrink future growth. It will not erase it, but oh what might have been. As a consequence, future prices will not fall as quickly as they otherwise would have thanks to the reduced investment.

Some will point out that amid this forced political contraction there will be a fair amount of inventory clearing, going-out-of-business selling, along with falling prices for labor. With tens of millions forced into unemployment alongside mass bankruptcy, some of what’s already been produced will change hands at lower prices. So will the unemployed migrate, ideally as quickly as possible, to new opportunities. Workers will in many instances offer up their services at wages that don’t match what they previously earned. Politicians have a way of wrecking things in tragic fashion.

Still, even here it should be said that the falling prices of what’s already been produced similarly signal rebirth contrary to what economists and pundits believe. Low-cost everything makes it possible for liquid entrepreneurs and businesses to purchase and hire high value assets on the relative cheap, thus propelling them toward profitability much faster. Lest readers forget, no business or entrepreneur seeks “money” as much they seek what money can be exchanged for in order to create what they envision. Falling prices not only signal economic growth, but they’re the friend of recovery.

Ideally this will be kept in mind in the coming months. The chattering classes will endlessly lament falling prices, and use words they don’t understand like “deflation.” Ignore them. They know not of what they speak.

John Tamny is editor of RealClearMarkets, Vice President at FreedomWorks, and a senior economic adviser to Toreador Research and Trading (www.trtadvisors.com). His new book is titled They're Both Wrong: A Policy Guide for America's Frustrated Independent Thinkers. Other books by Tamny include The End of Work, about the exciting growth of jobs more and more of us love, Who Needs the Fed? and Popular Economics. He can be reached at jtamny@realclearmarkets.com.  

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