This file is a short, single-author monetary essay. Written amid post-bubble anxiety over Japan-style stagnation, it attacks the popular fear of deflation from an Austrian/free-market perspective. Sennholz’s thesis is that falling prices are not the primary danger; they are often the corrective aftermath of prior monetary inflation, while renewed Federal Reserve credit expansion is the deeper peril.
Sennholz begins by identifying the public discourse he opposes: advisers, journalists, and “popular economics” describe deflation as a catastrophe in itself, the mirror image of inflation but worse because it is believed to paralyze output, employment, and liquidity.
Deflation, according to these spokesmen of popular economics, is a decline in the prices of goods and services, the reverse of inflation.
His first conceptual move is to shift analysis from price movements to monetary causation. “Popular economics” is treated not as a coherent theory but as a bundle of Keynesian spending doctrines, exploitation narratives, bureaucratic incentives, and business preferences for regulation.
Popular economics is the offspring of genetically dissimilar notions, theories, concerns, and interests.
Against this, Sennholz argues that economists should ask why prices rise or fall. Inflation originates in monetary expansion by the Federal Reserve and banking system; deflationary symptoms can arise when fear increases the demand to hold money. Thus the same stock of money can gain purchasing power if people become reluctant to spend. The key issue is not a mystical “abyss” but the relation between money supply and money demand.
In short, demand and supply determine its exchange value.
The essay’s middle sections apply this framework to the early-2000s United States. The Fed can expand credit, alter reserve requirements, set discount rates, and conduct open-market operations, but it cannot fully command the decisions of millions of dollar holders. When uncertainty raises cash balances, official stimulus loses force.
The Fed is “pushing on a string.”
Sennholz then connects deflation fears to business-cycle theory. Easy money and low interest rates lure firms into unsustainable ventures, especially in capital goods. When these projects reveal losses, liquidation and unemployment follow. What popular economics calls deflation is, in his reading, the painful but necessary unwinding of earlier monetary distortion.
Deflation, in their view, is merely an inevitable phase of a business cycle that is engendered by inflationary policies; it is the final phase, painful but wholesome, as it forces businessmen to readjust to the demands of the market.
The structure of the essay then turns outward: trade deficits, foreign dollar holdings, a weakening dollar, federal deficits, war spending, and Fed credit growth all suggest that inflationary forces remain powerful. Low interest rates no longer communicate real saving and investment conditions; they falsify capital-market signals and prepare further malinvestment.
Interest rates may remain steady or even decline, but they no longer signal the true state of the capital market; they deceive and mislead investors, cause new distortions and malinvestments, and prime the markets for more inflation to come.
Japan serves as Sennholz’s cautionary example, but not in the conventional way. He denies that Japan was “swallowed” by deflation; instead, he attributes its stagnation to policy: deficit spending, support for insolvent institutions, subsidies, and refusal to permit market correction.
There is no deflation abyss that may swallow the economy.
The conclusion restates the essay’s deepest claim: falling prices do not justify further monetary creation. A money stock, whether larger or smaller, performs exchange services; the desire for greater purchasing power should not be confused with a social need for more units of money.
Declining prices do not call for ever more Federal Reserve money and bank credit.
The essay’s relevance lies in its inversion of mainstream crisis language. Where public commentary sees deflation as an independent threat requiring central-bank rescue, Sennholz sees anti-deflation policy as an extension of the very inflationism that produced instability. Its core move is to reinterpret price declines as signals of adjustment, not necessarily signs of collapse, and to warn that the cure—credit expansion—recreates the disease.
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