Wages and recovery

A post on Krugman's blog entry Wages and Recovery.

The fallacy people who complain of deflation commit is assuming the higher prices are natural and the decline is unnatural and somehow wrong or unfair.

While the decline is painful to say the least the problem is not the deflation but the unnatural inflation to begin with.

Consumer price deflation is a wonderful thing and helps cushion the wage deflation. If wage deflation is not allowed higher unemployment is the result as is always the case when prices are controlled. This caused much of the pain of unemployment during the Great Depression.

As far as debt, it is true that deflation would cause a cascade of bankruptcies as the inflationary house of cards collapses. But the faster this is allowed the faster recovery and growth can occur.

We can prevent inflation and the resulting deflation if we stop allowing banks and the Fed to inflate by means of fractional reserve banking and manipulating interest rates.