Eli5: why can’t we just “deflate” money, and why is it bad?
In: 620
Tldr: We can, the problem is that the methods we use to deflate money hurt just as much as the inflation. On top of that, if we go overboard with deflation, the results could be worse than if we did nothing.
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The way we deflate money is by lowering how much money is in circulation. We have to take money out of the system so each bill is worth more.
The easiest way to do that is to raise interest rates on loans. If you want to borrow money, you’ll have to give more back to the government after.
Businesses, especially small/start up businesses, need loans to function. Businesses can just not be able to function, and some will just have to shut down.
By clamping down and getting rid of money, there’s less money to have, so entities like businesses and people have to lose it.
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The other reason is that hyperdeflation is so much worse than hyperinflation.
With hyperinflation, people are afraid to keep their money because it could become worthless. They take it all out of the bank, spend as fast as possible before it becomes worthless.
But, at least people are using their money for a bit.
Hyperdeflation does the opposite, people are afraid to spend their money because it keeps doing up in value. This means no one buys anything, and the economy just kinda freezes.
If the economy is frozen, money isn’t moving. If money isn’t moving, you can’t really do anything. The way we inflate currency is by lowering interest rates on loans, but people don’t want loans because they don’t wanna buy anything.
We can come back from hyperinflation, but it’s a lot harder to come back from hyperdeflation. Because of that, we’re kinda scared to do anything too drastic.
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