You are here:

Economics/Been Many a Year --- Deflation Do You Agree Necessary to Manage Current Account Deficit, Debt?


QUESTION: Dear Mr. Miller,
Would you today agree that global deflation, the collapse of commodity prices and the strong dollar --- Key to our US government being able to service it's account deficit at near zero rates.....I Made the point years ago - our United States needs deflation to service it's account deficit and slow growth and lack of demand has enabled our US Government to borrow without the fear of walking the plank because of basic 0% interest.  Weak demand creates 'Deflation' which pushes down interest rates which as you know Well - has allowed our government to borrow without the fear of Inflation, i.e., higher interest rates due to a lack of supply and strong demand --- The opposite as you know is the truth/fact.  So, again slow growth, tepid global demand not a bad thing for you/I our United States government because therein we can service our debt with basically .0? interest......I remember your inflation argument but five years henceforth, my argument that governments wish for deflation in order to borrow at ZERO, Valid....Sincerely Phil

Sincerely Phil

ANSWER: I understand your argument, Mr. Russo. I just don't agree with it. Among other forces you're overlooking, you're ignoring the repayment side of borrowing.

No government with any sense wants deflation. Here's why: Deflation shreds non-government borrowers because they have to repay debt with dollars that, even with no interest rate at all, are worth MORE, not less. Interest rates have an implicit inflation assumption embedded in them.

Moreover, private debt is far larger than the national debt. IMHO, you're looking only at one borrower--one that has a printing press, no less--and ignoring the private sector.

In addition, what happens when the government has to begin repaying all that zero-interest debt? What happens when the prime rate returns to normal levels (about 5-6%)? Any idea what the interest component of the federal budget will be then? I do - well over $1 trillion/yr., or > 25% of the total federal budget.

It will then be time to pay the piper. . .or face hyperinflation. The politicians don't have the will or the job incentives to pay the piper (by making tough choices), and citizens aren't going to tolerate hyperinflation. That is what brought Hitler to power, you know. If we get long-term deflation, which happened in Japan from about 1990 until about 2012, you will have a better understanding of why the Framers gave us the Second Amendment. The American people won't stand for it.

Good luck.

---------- FOLLOW-UP ----------

QUESTION: Dear Mr. Miller,

Please allow me to address the fourth paragraph of your kind response which is Precisely my point....Governments will not be able to repay at normalized interest rates of 5-6% - Hence, why I believe Governments need deflation in perpetuity in order Not to pay the piper and more important collapse.  Ergo, our government foresees normalized interest rates taking our nations debt service to 25% of our budget and therein an inevitable collapse and why I believe politicians/government can not allow for inflation and thus an increase in interest rates for the very point you make - that our government can not afford Normalized interest rates!

In toto I believe our arguments are circular and symbiotic....Very Kind response...

Phillip Urso Russo

Thanks for your follow-up, Phil.

Although my prior reply implied otherwise, I don't believe that permanent deflation or rising interest rates are the only two choices. I believe that great political leadership can enable countries to do things that no one ever thought they could or would do. We certainly don't suffer from any such leadership right now.

I don't know if you're old enough to remember Jimmy Carter's administration, his 'malaise' speech (in which he blamed the American citizenry for his brain-dead 'leadership'), and the widespread questions about whether America was really governable any more. Well, you know who answered that question: Mr. Reagan. Unfortunately, since he left office, we have chosen flawed leaders. Bush #41 said, "Read my lips: NO. NEW. TAXES." And then he went along w/a tax hike in 1990. Slick Willie's deficiencies, sleazy behavior for which he was subsequently disbarred, is well know. George W. Bush could've been great, but juxtaposed his religion with his politics with predictably disastrous results; he also ignored the use of his veto power, and, instead, went along with insane levels of spending. For his part, Mr. Obama ran on a lie: that there "are no blue states. There are no red states. There is only the United States." He said that he would bring people together, that his Administration would "be the most transparent Administration in history," and so on. It culminated in his bald-faced lies about having defeated Al Qaeda and "If you like your doctor, you can keep your doctor. Period."

But, if a narcissist intoxicated with the sound of his own voice talks long enough, even a pathological liar can stumble into the truth every now and then. He did that on October 30, 2008, in a speech in Columbia, Missouri, when he said the following:

"[W]e are five days away from fundamentally transforming the United States of America."

We need a Reagan- or Truman-type president to lead us out of Emperor Obama's 'transformation'. The damage it will do if it's allowed to persist will be incalculable. America as we know it will cease to exist. Right now, I'm betting that President Carly Fiorina is the person to lead us back to our role in the world. The world needs that, and so does America.

I'm not an alarmist. In 71+ years of living, I've seen a lot. And I am a political realist. But I also believe that our system is such that, with the right leadership, we can survive almost anything, except one-party rule for twenty or thirty years. Luckily, that is extremely unlikely in this day and age. But the country needs to make a really good choice in 2016, and the options to do so are extremely limited.




All Answers

Answers by Expert:

Ask Experts


Warren D. Miller, CFA, CPA, ASA


My expertise in economics is limited to three sub-disciplines: Austrian economics, industrial organization, and evolutionary economics. Questions dealing with macroeconomics and other sub-disciplines of the subject should be submitted to those who have the appropriate expertise. N.B.: I DO NOT ANSWER QUESTIONS MARKED 'PRIVATE' because I believe that knowledge should not be hoarded. I also believe that such questions are likely to come those trying to cheat. Also, as one who was a full-time academic for half a decade, I can recognize test/homework questions several time zones away. Do not demean yourself by submitting such questions to me. Those who do so are cheating; I WILL call you out publicly. I have a zero-tolerance policy for cheating and dishonesty. In addition, please don't emulate the businessman who posted a request for help in August 2008. He expressly denied that he was seeking "investment advice" and said that his query was for, and I quote, "educational and informational purposes." Later, he allowed as how his questions related to the possible purchase of a $500K piece of equipment. I said I thought he had misrepresented himself. Bottom line: high-end business consulting is how I make my living. I am the sole support for my family. Please respect that fact and don't try to get for free what our clients pay for. If your company is big enough to have a sophisticated problem, it can afford to pay for the expert advice we and others provide. Beckmill Research, LLC, is a 95-octane firm. We're small, but we've been at this for nearly 20 years. We know what we're doing. Segue: Early on, some asked me for career advice; I gave it. I now get many such requests. The demand for a valuable good that is free is unlimited, so I now charge for that advice. Email me: Finally, PLEASE DO NOT ASK FOR INVESTMENT ADVICE. I am not licensed to provide such advice. If you want such counsel, talk to your financial planner or other financial adviser.


I work with Austrian economics (which differs in major respects from the traditional economics), industrial organization (which is about industry structure, conduct, and performance), and evolutionary economics (almost, but not quite, the economic analog of its biological counterpart) every day in my work. I appraise closely-held businesses, provide exit-planning services, and offer high-level strategic analysis, advice, and solutions to CEOs and owners of mid-sized businesses. Understanding, applying, and writing about these disciplines is an essential part of how I have made my living since 1993.

CFA Institute, Strategic Management Society, American Society of Appraisers, Academy of Management, Culver Legion, National Association of Scholars.

CFA Magazine, Strategic Finance, Valuation Strategies, Journal of Advanced Property Economics, Harvard Business Review, American Fly Fisher, CFA Digest, CPA Expert, Business Valuation Review, among others

Chartered Financial Analyst designation (2006); Accredited Senior Appraiser in Business Valuation (2006); Certified Public Accountant (1992); MBA - Oklahoma State University (1991); Completed all of my Ph.D. coursework in strategic management - Oklahoma State University (1983-87); BBA in finance and accounting - U. of Oklahoma (1975)

Awards and Honors
Business Valuation Volunteer of the Year (2001) - American Institute of CPAs; Winner - Oklahoma Humorous-Speaking Contest - Toastmasters International (1971)

Past/Present Clients
Names are confidential. However, the "sweet spot" of our target market is companies that are too big to be small and too small to be big. Usually, those are companies with employees in the 15-to-100 range. At the low end of that range is where companies can first take advantage of the specialization of labor. However, having everyone do everything is a tough habit for many--most, I would argue--small enterprises. That is why they not only remain small, but also fail to survive beyond a second generation. Only 5% (one in twenty) companies make it to the third generation of ownership.

©2017 All rights reserved.