Redefining deflation

Our current problems were caused by the misguided notion that in a free market the state should still dictate the price of money through control of the base rates. Artificially forcing rates low has led to the mis-pricing of risk and a gross mis-allocation of resources into assets such as property (which is why the price of domestic property is still way above its economic value in terms of the cost of housing services).

Yes, low inflation is better than high inflation (as Zimbabwe knows) - but a genuine free market would see the cost of money being set by the market to reflect the genuine risks of lending money (which are currently quite high) if that leads to falling prices so be it.

So let's change the word deflation to digestion and recession to retrenchment - then we can all be happier about falling prices. OK so it hurts (particularly at an individual level) but so does inflation.

However, whereas inflation leaves you penniless, debt ridden and leveraged to the hilt just in time for the next crash, digestion helps consolidate wealth in the hands of prudent savers while cutting out excess capacity and speculation from the system.

State employees will also enjoy seeing a sharp rise in their real income. And people will use their capital goods more efficiently (so rather than buying a new car every year, people will drive more carefully and car makers will transform into car make-over technicians).

There will be less junk going to landfills, our ceaseless and senseless quest for new modes of consumption will slow and people will buy assets because of their effective yield rather than in the hope of price rises (so people will buy houses as if they were going to rent them to themselves - take a look at some of the buy-to-let calculators if you want to see what your house is really worth to you in terms of "lifetime cost of housing services").

Asset prices won't fall to zero simply because eventually they will reach a point where they make economic sense (when buying a new car makes more sense than reconditioning the one I have, when buying a house is cheaper than renting - taking into account the opportunity cost using my savings as a deposit).

In a couple of years time I should be able to buy a nice house with my deposit not a one bed flat. Now where's the problem with that?