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An Article of a Young Dutch Journalist.

I understand that some colleagues will get a smile on their face when they read my remarks about deflation. They are quite certain that our economic environment has not shown any deflation for years. About ten years ago they did not see it either while it was certainly there.
I understand their viewpoint because they hold on to the general idea that the economy is one totally integrated environment. They see only one economy, while I see most definitely two totally different economies.

This website contains a visual presentation of the consequences of those two different economies as a result of capital leakage.

  1. The Production Environment
    and the
  2. Financial Environment.

Seeing only one is extremely convenient. However, the truth is that both environments, the Production-Environment and the Financial-Environment show two totally different separate economic activities.

The Financial-environment produces so much hyper-inflation that it absorbs the deflation in the Production-Environment. The result is that it SEEMS that there is a continuously ongoing inflation in the whole of the economy.

More then ten years ago, April 1985, the International Monetary Fund (IMF) published an annex to a publication titled "World Economic Outlook." In fact this is an annually repeating event. A Dutch journalist published about one month later a review about this publication with the title:

Money;
The real Interest Rates Still Stay Particularly High.

Yet, the subtitle of his article was rather curious. It had the following contents:

"Never before in so many countries have the interest rates stayed so high
while there was
no trace of DEFLATION."

(This article has been published in Elsevier's Social Economic Weekly, May 21, 1985.)

After an understandable discussion in this article about the development of the interest rates since 1979 in different countries, the author of the article came to the conclusion that we were facing then in 1985:

A Unique Historic Event.

Further he wrote:

"Never before in known economic history have such high interest rates been registered during such a long period and in so many countries at the same time, without at the same time being confronted with DEFLATION."

The journalist went into depth about how the IMF explains the elements that could have been involved in this phenomenon. A very important fact registered by the IMF was that this phenomenon had not been restricted to one country.

The conclusion was that this situation had developed from factors, that all Western countries had in common. They clearly stated one thing without any reservation:

"The IMF did not know which factors had caused the extreme interest developments since 1979"

The IMF gave only about seven possibilities that eventually could have led to the high interest rates, without a trace of deflation at the same time. With other words we cannot restrict the ignorance about the product: "MONEY" and DEBT" to the common folks in the Financial-Environment. Even the World Bank and the IMF have no idea what good or bad their debt supply has done to the world.

The really unique historic event is that neither the World Bank, nor the IMF, nor any Central Banking Institution have any idea what is happening to them. We are when I am writing this more then ten years later and we can draw a simple conclusion:

The responsible economic leadership, the Central Banks, the politicians never saw a trace of Deflation, while the same trace of Deflation is ruining our prosperity, at least since 1979 (but probably since 1969) and they never discovered that the deflation is still there, in full swing ruining the Production-Environment.

They never discovered that this development was not a unique historic event. They never realized that it was only an illustration of the great significance of the economic know-how, or rather the lack of it, with some of the most serious problems and with that feeling of impotence in regard to the solution of these problems. The deflation was all the time present but the economic leadership did not see it for more than two decades. (Statements made by Professor Herbert A. Simon

The Journalist who wrote this article was with his nose on the real issue, but he didn't see it. The reason? He had accepted, just like I have done, when I was younger, a bunch of empirical rules that someone had elevated to economic law, without ever investigating whether those rules were rooted in economic reality. They never investigated whether the economic tool "money and ordinary debt" could stand the test of having the qualities to serve the economy in the year 2000.
I think we have enough arguments to enter the first economic lesson.

Lesson One


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