Why Politicians are at War Against Deflation

The condition of Apoplithorismophobia afflicts a certain group of people, and they display these symptoms.

  1. They crave rising grocery prices
  2. They desire rising electricity costs
  3. They are happy to pay more at the fuel pump
  4. In fact, they are deliriously happy when consumer prices rise generally.

Do you have any of these ailments? Probably not.

Extensive studies have identified that this mental condition is confined to politicians, central bankers, mainstream economists and financial commentators.

American economist Mark Thornton identified and described this phobia in his 2003 economics paper:

Apoplithorismosphobia (ay-pope-lit-horris-mos-foe-be-ah) is the fear of deflation. Or, more correctly, the fear that an economy would “suffer” from falling prices, or a general decline in the prices of goods and services.

Read: central bankers and their political masters. Whether we (the majority of society) recognise it or not, by wanting lower prices for the goods and services we buy, we are actually in favour of deflation. So the question is ‘why are the policymakers so intent on stopping it?

Perhaps the writings of early 20th Century Italian economist Vilfredo Pareto can provide the answer:  He said the ruling class sees a theory falling into one of the following categories:

  1. True and useful
  2. False and useful
  3. True and useless
  4. False and useless

According to Pareto, the ruling class’s definition of ‘useful’ is ‘something that increases the power of the anointed, not one that benefits the population at large’.

Pareto argues that ‘false and useful’ theories are highly prized by those wanting to consolidate, and preferably strengthen, their power bases.

We have lived with inflation for so long, we do not know any other economic model. Year after year prices rise. An expected increase in incomes accompanies this to offset the higher cost of living. The upward spiral has continued unabated, at varying degrees of velocity, since The Great Depression.

Inflation gave us ‘bracket creep’ and governments enjoyed greater revenue streams. Not content with this, governments later found a way to clip the ticket on the things we need to buy with taxes like the GST.

Governments over the decades created and then tapped the increasing tax revenues to ‘buy votes’ — the ‘thin edge of the wedge’ 1970’s welfare promises have given way to a full blown entitlement mentality. Governments have successfully convinced nearly every level of adult society they are entitled to a disproportionate share of another person’s income.

To lessen the pain from ‘the rod they have made for their own backs’ governments need, NO, demand inflation. Tax revenues must rise, otherwise the lash from entitled voters will be far too painful.

Therefore, the boomer retirees are a real conundrum for governments.

The following chart from fivethirtyeight shows that the ageing population issue is a global ‘problem’. Year after year, more people are going to be shifting from the taxpaying side of the seesaw to the tax receiving (age pensions and increased healthcare demands) side — eventually the seesaw is going to tip too far.

While Australia does not get a mention in the graph, we are certainly confronting the same issue.

Share of population age 65 and over
click to enlarge

The state of the Australian budget is a prime example of far too many promises with not enough income to fund them. The forward estimate expenditure figures, contained in the 2014 budget papers, confirm the ageing population problem is definitely on our doorstep.

Over the next four years expenditure INCREASES by $60 billion — so much for a tough budget to cut costs. Nearly $39 billion of the increased expenditure is due to expected demand for Social Security and Healthcare. In 2017, Social Security and Healthcare account for just over 50% of government expenditure.

It’s a falsehood to say deflation is evil and should be avoided at all costs. What’s the matter with lower costs and greater levels of savings? Sounds like an infinitely more stable economic system to me.

The reason for an outbreak of apoplithorismophobia within the ruling class is simple — the threat of the greatest Ponzi scheme in history being exposed, resulting in wholesale social unrest (think of Greece after austerity measures).

Without inflation the whole credit infused growth game is up.

Demographics and debt are a double edged sword. When both were in the ascendency, the desired inflation was in abundance. Now, as boomers en masse accept their ‘gold watches’ and households modify their debt levels, the sharp edge of deflation is cutting its way through the global economy.

Unfortunately the ruling elite are going to persist to the bitter end in their war against deflation. Ironically, the potential market carnage caused by their constant and increasingly desperate meddling is only going to exasperate the deflationary spiral they have so anxiously tried to avoid.

My mental affliction is ‘losingsixtypercentofmymoneyphobia’ — that’s why my Gowdie Family Wealth portfolio, for now, is 100% cash and poised to take advantage of the deeply discounted asset sale when the inflationary forces can no longer prop up the Australian share market.

Regards,

Vern Gowdie+
for The Markets and Money Australia

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Vern Gowdie has been involved in financial planning since 1986. In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners. His previous firm, Gowdie Financial Planning was recognized in 2004, 2005, 2006 & 2007, by Independent Financial Adviser (IFA) magazine as one of the top five financial planning firms in Australia. He has been writing his 'Big Picture' column for regional newspapers since 2005 and has been a commentator on financial matters for Prime Radio talkback. His contrarian views often place him at odds with the financial planning profession. Vern is is Founder and Chairman of the Gowdie Family Wealth advisory service, a monthly newsletter with a clear aim: to help you build and protect wealth for future generations of your family. He is also editor of The Gowdie Letter, which aims to help you protect and grow your wealth during the great credit contraction. To have Vern’s enlightening market critique and commentary delivered straight to your inbox, take out a free subscription to Markets and Money here. Official websites and financial eletters Vern writes for:

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