66 THE BiG DROP
capital formation and hurts investment. A policy of favoring
inflation over deflation may prompt consumption growth in
the short run, but it retards investment led growth in the long
run. Inflation is a case of a farmer eating his own seed-corn in
the winter and having nothing left to plant in the spring. Later
he will starve.
It is also not true that inflation is easy to control. Up to a
certain point, inflation can be contained by interest rate increas-
es, but the costs may be high, and the damage may already be
done. Beyond that threshold, inflation can turn into hyperinfla-
tion. At that point, no amount of interest rate increases can stop
the headlong dash to dump money and acquire hard assets such
as gold, land, and natural resources. Hyperinflation is almost
never brought under control. The typical outcome is to wipe out
the existing currency system and start over after savings and
retirement promises have been destroyed.
In a better world, central bankers would aim for true price
stability that does not involve inflation or deflation. But given
the flawed economic beliefs and government priorities de-
scribed above, that is not the case. Central banks favor inflation
over deflation because it increases tax collections, reduces the
burden of government debt and gooses consumption. If savers
and investors are the losers, that’s just too bad.
The implications of this asymmetry are profound. In a pe-
riod where deflationary forces are strong, such as the one we
are now experiencing, central banks have to use every trick at
their disposal to stop deflation and cause inflation. If one trick
does not work, they must try another.
Since 2008 central banks have used interest rate cuts,
quantitative easing, forward guidance, currency wars, nomi-
nal GDP targets, and operation twist to cause inflation. None
of it has worked; deflation is still a strong tendency in the
global economy. This is unlikely to change. The deflationary
forces are not going away soon. Investors should expect more