THE THREAT OF DEFLATION 71The Google CEO told the Financial Times that the average
price of a home in Silicon Valley today is $1 million, but he sees
no reason why it couldn’t be $50,000 in the future. That would
represent a 95% price decline, really a form of hyper-deflation.
These insights of Irving Fisher and Larry Page highlight
the fact that deflation comes in two forms: what writer James
Grant has called “good deflation” and “bad deflation.”
Good deflation is the type Larry Page envisions. It comes
from technology, efficiency, investment and innovation. If we
are getting more efficient through technology, things should
cost less.
We see this in personal computers, which have dropped
in price from $4,000 to $800 in recent years. This is also the
kind of deflation that prevailed from 1870 to 1914, when
innovations in railroads, radio, steamships, harvesters and
many other fields led to strong consistent growth with low
or declining prices. Today, we see good deflation coming not
only from information technology, but also from fracking and
other aspects of the energy revolution.
Bad deflation is the kind Irving Fisher wrote about in 1933.
In prevailed from 1927–1933, when prices dropped over 30%.
It is associated with asset sales, liquidations, bankruptcy, un-
employment and declining output. Once this kind of deflation
takes hold, consumers will stop spending because they expect
lower prices in the future and prefer to wait. Cash becomes
more valuable in deflation, so consumers don’t mind sitting
on cash. Bad deflation feeds on itself and is very difficult for
central banks to reverse.
Today, investors and policymakers are faced with two
challenges as a result. The first is that we are experiencing
good deflation and bad deflation at the same time. The good
deflation is coming from technology, and the bad deflation is
coming from deleveraging. This double-whammy makes the
deflation train almost impossible to stop. The second dilemma