Keynes and the puzzle of falling prices

Benign disinflation means rising real incomes for lenders, pensioners, and workers - but 'bad deflation' means an increase in the real burden of debt

In 1923, John Maynard Keynes addressed a fundamental economic question that remains valid today. "[I]nflation is unjust and deflation is inexpedient," he wrote. "Of the two perhaps deflation is " the worse; because it is worse"to provoke unemployment than to disappoint the rentier. But it is not necessary that we should weigh one evil against the other."

The logic of the argument seems irrefutable. Because many contracts are "sticky" (that is, not easily revised) in monetary terms, inflation and deflation would both inflict damage on the economy. Rising prices reduce the value of savings and pensions, while falling prices reduce profit expectations, encourage hoarding, and increase the real burden of debt.