KUALA LUMPUR: Price deflation should not be discouraged in a period such as the present that is characterised by strong inflationary pressures, according to an academic and educational institution.

       The Centre for Market Education in its Policy Paper No 4 titled Why Monetary Policy Should Not Avoid Market Price Deflation released yesterday said price deflation could be the natural and welcome consequence of growth, bringing about real cash building and shorten the recession after an artificial boom.

       “Its most unpleasant form is credit contraction deflation, which decreases the money supply, however, that is only possible in a fractional reserve banking system that has previously created money out of nothing.“The main effect is a redistribution of the existing wealth in the economy rather than a necessary decline in general output as assumed in various arguments,” it said.

       It said banks and government, as well as businesses that depended on a credit expansion boom, feared deflation and profited from the money production they recommended as a prescription against deflation at the expense of other economic agents who paid higher prices than they otherwise would.

       “By artificially lowering interest rates and distorting the structure of production, it is precisely expansionary monetary policy that triggers the greatest economic disasters and makes credit contraction possible in the first place,” it said. — Bernama