Roger recently posted in comments that deflation was bound to continue for “the next 2-3 year period.” His argument referenced a number of different sources and pulls in a lot of complex theories. I feel that it would be best to analyze these points one by one because these are the same points that get tossed around by people on a daily basis. I figure that doing so will take three different posts in a series where I explore economic myths. In so doing I’m going to provide a lot of definitions that are slightly different from the definitions that we here economics spouting. You will find that my explanations provide a great deal of clarity and reduce the situation to mere common sense.
Let’s start with what wealth is. Wealth is a stock of assets. Assets are, for the most part, unconsumed economic goods. We traditionally think of wealth in terms of money and, back in the days of the gold standard, money was itself an unconsumed economic good. However today our modern money has been technically divorced from economic goods and services. It’s not a complete divorce because we can still use Federal Reserve Notes to pay for things. But the rate of exchange between money and good and services fluctuates from day to day. If we ever found that we could not exchange US Dollars for goods then we would cease to desire them at all and someone who had a lot of them would not be considered rich. This proves my point about wealth. If someone has a mass of things that either are unconsumed/functional economic goods (i.e. real estate, a car, a storehouse of fine wines) or things that are immediately convertible into such (money) then we would consider him wealthy provided that he did not also have debts that exceeded his assets.
Which brings us to the next question, what is a debt? Continue reading Exploring the Myths of the Consumer Driven Economy: Part I