Inflation or Deflation?
Q. Could you please explain the difference between an inflationary depression and a deflationary depression? I still don’t understand what we can do about it anyway.
Answer:
I understand your frustration. Top economists are having a hard time with it, too. Just read reports from the British Financial Times or Asia News to see how much confusion is out there.
Inflation Defined
First, let’s look at inflation. Inflation is a monetary phenomenon that occurs when the Federal Reserve is printing a lot of new money. They do this by making computer entries of new debt – treasury bills or notes, GNMA mortgage loans (which are backed by the government), and so on. The symptom of inflation is higher prices for everything: cars, homes, food costs, fuel prices, and so on.
Deflation Defined
Deflation occurs when credit supply and demand falls. Banks don’t want to loan and citizens don’t want to borrow. There is a “freezing up” of the money supply. Currently, our country and some other nations seem to be falling into this pattern, although it could change in a heartbeat.
As a result, prices begin to fall. People don’t shop as much or eat out as frequently. They postpone buying new furniture, toys, taking trips, or doing other things they might do in times of prosperity when getting credit is easy.
Deflationary or Hyperinflationary Depressions
Extremes of inflation or deflation result in hyperinflation or something like the Great Depression. 1920s Germany is an example of a hyperinflationary depression. Prices skyrocketed so quickly that consumers bought two cups of coffee at a restaurant so they wouldn’t have to pay double for the second cup by the end of the meal. Teachers were paid midday so they could quickly buy groceries before prices doubled at the end of the day.
12 German Marks bought an ounce of silver in 1919. By 1923 it took 543,750,000,000 marks to buy that same ounce of silver (that’s not a typo). Yet, people lost jobs and their homes just like in a depression. This was a hyperinflationary depression.
1930s America is an example of a deflationary depression. Citizens lost money in the stock market, lost their jobs, and lost their homes. Many banks fell into bankruptcy and people lost their savings, too. So much money disappeared from the system that the dollar became more valuable – not less. A dollar would buy more food and goods – not less.
Governments prefer inflation to deflation because they can pay back their own debt in cheaper dollars. Inflating the money supply is a hidden tax to citizens. People don’t usually say, “The cost of gas went up because the government is devaluing my dollar.”
Godly Principles of Stewardship
You’re right that we can’t do much about either situation. But, we can follow godly principles of stewardship. Here are some examples.
Love the Lord first:
“Wherever your treasure is, there the desires of your heart will also be” (Matt. 6:21, NLT).
“Those who love money will never have enough. How meaningless to think that wealth brings true happiness!” (Eccles. 5:10).
“Don’t love money – be satisfied with what you have” (Heb. 13:5).
Share with the poor:
“If someone has enough money to live well and sees a brother or sister in need but shows no compassion – how can God’s love be in that person?” (1 John 3:17).
“Teach those who are rich in this world not to be proud and not to trust in their money, which is so unreliable. Their trust should be in God, who richly gives us all we need for our enjoyment. Tell them to use their money to do good. They should be rich in good works and generous to those in need, always being ready to share with others” (1 Tim. 6:17-18).
Stay out of most debt:
“Just as the rich rule the poor, so the borrower is servant to the lender” (Prov. 22:7).
“Owe nothing to anyone” (Romans 13:8).
Pay off your debts:
“The wicked borrow and never repay, but the godly are generous givers” (Psalm 37:21).
“Give to everyone what you owe them: Pay your taxes and government fees to those who collect them, and give respect and honor to those who are in authority” (Ro. 13:7).
“Don’t agree to guarantee another person’s debt or put up security for someone else. If you can’t pay it, even your bed will be snatched from under you” (Prov. 22:26-27). (In other words, don’t cosign notes unless you are sure you can pay off the loan if the other person defaults).
Do not worry:
“Don’t worry…saying, ‘What will we eat? What will we drink? What will we wear?’ These things dominate the thoughts of unbelievers, but your heavenly Father already knows all your needs. Seek the Kingdom of God above all else, and live righteously, and he will give you everything you need” (Matt. 6:31-33, NLT).
“I have learned how to be content with whatever I have…I have learned the secret of living in every situation (Phil. 4:11-12).
“This same God who takes care of me will supply all your needs from his glorious riches, which have been given to us in Christ Jesus” (Phil. 4:19).
Be careful with what God gives you:
“The master was full of praise. ‘Well done, my good and faithful servant. You have been faithful in handling this small amount, so now I will give you many more responsibilities” (Matt. 25:21).
“Plant your seed in the morning and keep busy all afternoon, for you don’t know if profit will come from one activity or another – or maybe both” (Eccles. 11:6).
“All must give as they are able, according to the blessings given to them by the Lord your God” (Deut. 16:17).
Remember that God owns everything:
“The heavens are yours, and the earth is yours – everything in the world is yours – you created it all” (Psalm 89:11).