Price deflation thought experiment

October 10, 2008

Category: Economics Email Email    Print Print    

If a house is purchased for $1 million using debt and the house value subsequently drops by 50% the dollars that were created and spent into circulation are not affected. In fact, the same $1 million can now buy two homes. In other words, relative to the value of stuff, money has become abundant, not scarce. There are way more dollars than stuff to buy with those dollars. Is that not the precise definition of inflation? It’s no different than selling $500,000 homes then doubling the money supply. The only caveat of course is the excess money in both cases is not required to be spent on housing. So we can have vicious price deflation for real estate and vicious price inflation for everything else, with no contradiction, with no new loans (for a while). Deflation and price deflation are two different animals.

Thoughts?

  • Inflation or Deflation
  • An alternative scenario: inflation AND deflation
  • Ceteris Paribus
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    1 Comment »

    Comment by Geoffrey
    2008-10-12 12:23:48

    This experiment may only work with money, not debt.

    If the $1,000,000 is in the form of a loan that does not get paid back, it never existed in the first place.

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