Thinking Aloud/the inflation monster

Those of you with less than a passing interest in economics will find your eyes closing at the words inflation and deflation. It's worth opening them again for Amity Shales who does a great job of bring the subject to life. She argues against the current orthodox view that deflation (when prices fall) is not necessarily the biggest danger facing the economy.

Deflation, as we hear so often now, hurts good people, strivers who over-borrow.
What’s the reality about deflation and inflation? Deflation can cause depressions, as the U.S. saw in the early 1930s, the period Bernanke has studied so intensely. In the Great Depression, there wasn’t enough money around -- literally. Lacking cash, banks collapsed, and good people did lose homes or farms. More banks collapsed.
Deflation doesn’t always spell apocalypse. It can coexist with prosperity -- or even perpetuate it. There was deflation in the 1920s. Prices fell in 1923, and 1925 through 1928. The money shortage hit one sector, farming, hard. Overall, the economy grew. Unemployment stayed low. Vigilance on inflation kept prices stable. Stable prices made life easier.
As Harvard University’s alumni magazine reported recently, in wonderment, Harvard’s tuition stood at the same level, $150, between 1870 and the beginning of World War II.
And when prices are rising? How bad can it get? The most famous example is Germany's hyper-inflation of 1923. We often hear about customers taking wheelbarrows of money to the supermarket. But what was the effect on the German equivalent of Harvard University:
“The Department of Canonical Law at the University of Munich had a budget of 2,000 marks in 1922. Yet the subscription price for a single scholarly journal was already 10,000 marks.”
In other words the college did not have the money to buy a copy of its own magazine!

So that's why those meetings of the Federal Reserve, the Bank of England and the European Central Bank are so important. They must decide whether to put up interest rates (to control inflation) or down (to avoid possible deflation). At the moment they are doing neither - let's hope they've got it right.

See here for the full Amity Shlaes article