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Deflation Is Very Bad For Fractional Reserve Banking – Lyn Alden

Part 1:

Peter McCormack: “We’re often told that deflation is terrible.”

Lyn Alden: “It depends on the fiscal policy at the time, but in general, the reason deflation gets a bad reputation is because deflation is bad for very highly-leveraged systems. We previously talked about the instability of fractional reserve banking. Deflation is very bad for fractional reserve banking, which is what our banking systems currently are.

“In a more equity-based economy – one that’s less debt-based and is more equity-based – then deflation’s a good thing. It’s good for prices to go down over time.

“If you look at the late-1800s in the U.S. there was long stretches of deflation, and yet that was a major age of new technological growth. The U.S. became the world’s largest economy at the time when it often had persistent deflation. But the way we’ve structured things since then just doesn’t mix with deflation.”

Peter: “So inflation is worse for the people with the most debt?”

Lyn: “Yes.”

Peter: “And with the government holding the most amount of debt, they have the most incentive to avoid deflation.”

Lyn: “It’s extremely rare for a government to ever default in its own currency when, instead, they can default gradually through inflation and expanding the money supply.”

Part 2:

Peter: “If you were a small country with no debt, would you favor deflation?”

Lyn: “Deflation is prices going down because technology is getting better. That’s a good thing. Our best-performing sector is technology, and that’s one of the few areas where deflation is happening because it’s strong enough to override the money supply growth.

“For example, the cost of a megabyte of storage used to be prohibitive, and now that’s trivial. Now we buy terabytes drives, for example.

“The field of technology is able to make some things cheaper so quickly that it even overrides the fact that the money supply is going up, on average, 7% per year. Most sectors can’t overcome that.

“It’s funny that people think deflation is a bad thing, but it happens in our best performing sector on a regular basis.”

– Lyn Alden (What Bitcoin Did, “Will Bitcoin End Central Banking”, June 19, 2024)

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