Why deflation causes a higher standard of living

Do you understand why deflation creates a higher standard of living? Please read this excerpt from The Death of Money by James Rickards so that you no longer think of deflation as “bad”.

…Despite possible real growth, the US Treasury and the Federal Reserve fear deflation more than any other economic outcomes. Deflation means a persistent decline in price levels for goods and services. Lower prices allow for a higher standard of living when wages remain constant. This is because consumer goods cost less. This would seem a desirable outcome, based on advances in technology and productivity that result in certain products dropping in price over time, such as computers and mobile phones. Why is the Federal Reserve so fearful of deflation that it resorts to extraordinary policy measures design to cause inflation? There are four reasons for this fear.

The first is deflation’s impact on government debt repayment. debt’s real value may fluctuate based on inflation or deflation, but the nominal value of the Debt is fixed by contract. if one borrows $1,000,000, then one must repay 1 million dollars plus interest, regardless of whether the real value of 1 million dollars is greater or less due to deflation or inflation. US debt is at a point where no feasible combination of real growth and taxes will finance repayment of the amount owed. But if the Fed can cause inflation – slowly at first to create money illusion, and then more rapidly – the debt will be manageable because it will be repaid in less valuable nominal dollars. In deflation the opposite occurs, and the real value of the debt increases, making repayment more difficult….

In summary, the Federal Reserve prefers inflation because it erases government debt, reduces the debt to GDP ratio, props up the banks, and can be taxed. Deflation may help consumers and workers, but it hurts the Treasury and the banks and is firmly opposed by the Fed. This explains Alan Greenspan’s extraordinary low interest rate policies in 2002 and Ben Bernanke’s zero rate policy beginning in 2008. From the feds perspective, aiding the economy and reducing unemployment or incidental byproducts of the drive to inflate. The consequences of these deflationary dynamics is that the government must have inflation, and the Fed must cause it.