Why Isn't Anyone Afraid of Deflation?

All right, not exactly no one. Fed chairman Ben Bernanke is worried about it — hence the latest round of quantitative easing.

But listen to talk radio, read a financial blog or two, or just talk to some of your friends, and you won't find much populist anxiety about falling prices. To the contrary, a lot of people are terrified about inflation, even though it's currently running at an annual rate of 1.1%.

Part of the reason is that Bernanke does seem to be trying to signal the market that he wants to generate some inflation — and if you're an investor, it's only rational to try to hedge your portfolio for the possibility that this effort will work. (I have my doubts.)

But I think something else is going on. The evil of high inflation is especially vivid, in a way that deflation's cost just isn't. In our high school history textbooks, we all saw an image like this one:

Those are German kids during the 1920s hyperinflation crisis stacking up nearly worthless marks.

Do you have an instant mental snapshot of what a similarly severe deflation might look like? Me neither. But if we did, it would look like this Dorothea Lange photo from the Depression:

This iconic image, like other Depression-era photos, conjures up "hard times." It doesn't signify "falling prices." But it should: prices declined at an annualized rate of 10.3% from 1930 through 1932. So now we're in this weird moment when Americans' historical imagination is focused on an episode of the Weimar Republic when we could just as easily be thinking about our own Tom Joad.

Now a reality check. There's little cause to worry about either hyperinflation or a deflationary, '30s-style depression. But some deflation, and a long, slow recovery from today's high unemployment, does seem like a real danger right now. In a general deflation, people hang on to money tightly, and that can be devastating for businesses and the people who want to work for them. It's also awful for anyone trying to service a debt. (Paul Krugman has a good, clear explanation of why deflation — or even too-low inflation — can be a bad thing.)

So question on the table is: Is it worth risking a spike in inflation to fight off deflation?

How you feel about that should depend on who you are. Inflation has serious costs for a lot people. It eats away at savings, which is a burden on those who are living off the assets they've accumulated over their lifetime. That's well known; inflation is often called a "hidden tax."

But less well-understood is that deflation has costs for a lot of other people, too. People like, well, me. I'm 39 and have two kids. Even though I'm a good saver, my household's wealth still depends far more on our current and future ability to get work than it does on any assets we've accumulated so far. That's not because we're imprudent; it's just that we're relatively young. So deflation scares me.

But it doesn't seem to scare anyone around me.

And that's scary.

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