Part 1: What is credit deflation?

If you’re already in a fiat system in which commercial banks create tons of loans with little to no actual deposits backing them (credit creation), then deflation of this money will be a quick, violent process (credit destruction).

Deflation of this sort (credit deflation) involves the swift collapse of promises cascading upon one another like dominos. This is essentially what happens whenever we have an economic crisis of any kind today. The entire system is highly leveraged, meaning there exists far more credit than can be actually made whole in the event of large scale defaults.

Part 2: What is natural deflation?

Imagine you’re instead living in a world operating on a sound money standard, in which leverage still exists, but to a less extreme degree. Banks still create more loans than the value of their deposits, but the risks of doing so are far higher because there is no central bank with the ability to manipulate the money supply to bail them out if they get in trouble. Therefore, to compensate for this risk, banks charge higher interest rates and leverage less extremely.

In this world, if credit deflation occurs, it’s not so violent because there’s already a lot less leverage and a lot more risk mitigation at every step in the economy. Instead, there may be more gradual fluctuations in the value of money over time as the economy grows and contracts. Under this method, if the value of money increases, we’ll call this natural deflation.

Part 3: What are the implications of natural deflation?

Natural deflation = value of money increasing over time

Value of money increasing over time = demand for money increasing over time relative to supply

Demand for money increasing over time relative to supply = demand for things other than money (including necessities like food, shelter, etc) decreasing over time relative to supply

Demand for things other than money (including necessities like food, shelter, etc) decreasing over time relative to supply = an overabundance of things other than money (including necessities like food, shelter, etc) relative to demand for those things

An overabundance of things other than money (including necessities like food, shelter, etc) relative to demand for those things = economic prosperity

Therefore natural deflation is economic prosperity.