costs 5g of gold today and there is 20g of gold in the money supply, if the central bank decreases the money supply to 10g, it can sell its widgets for the formerly agreed upon price. Once the market finds less overall demand, however, prices will halve. While the central banks 'money supply deflation was the cause of the price decrease, it received double the money for its widgets that they are now worth in real terms.
4.2 Keynesian economics
Keynesians insist on the distinction between consuming goods and producing goods, and between government based and credit based money supply.
For a given money supply, if wages rise faster than productivity, profits will fall and with them the price of producing goods (Deflation), while consuming goods will rise (inflation). This happens in times when labor supply is tight and bargaining power is strong. When wages rise slower than productivity, profits rise as do the prices of assets relative to consuming goods. This can occur when labor supply is great and bargaining power is weak. p> Inflation and deflation occur when the economic policies allow wages to increase or decrease at differing rates than productivity. Wages rising faster than productivity lead to inflation. Wages failing to increase at the rate of productivity for protracted periods will ultimately cause deflation.
Indeed, if growth continues despite lagging wages, it is because of debt accumulation, producers lend to wage earning consumers part of their profits, in order to sell their products. For protracted periods, there is a lot of endogenous money creation.
Then, when debt payments exceed the borrower's ability to pay, debt accumulation and endogenous money creation stops, demand and goods 'prices fall, manufacturers reduce production, employment falls, and fewer borrowers are thus able to pay their debts, and the cycle exacerbates.
Once preventive action has failed, Keynesians advocate corrective action. In case of debt deflation, Keynesians advocate "Pump priming" or government creation of fiat money. As witnessed since 1990 in Japan, and in the 1930s in the USA, this policy is not very effective unless government creates employment via public works projects or military manufacturing.
Austrians and Keynesians agree on the idea that there are counterproductive cycles of booms and bust but while the former believe the government tends to be a cause of those cycles, the latter believe it is a means to reduce the size of those cycles.
5. Historical examples
5.1 In Ireland
In February 2009, Ireland's Central Statistics Office announced that during January 2009, the country experienced deflation, with prices falling by 0.1% from the same time in 2008. This is the first time deflation has hit the Irish economy since 1960. Overall consumer prices decreased by 1.7% in the m...
