Eli5: why can’t we just “deflate” money, and why is it bad?
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Deflation is not seen as good for the economy because it discourages investing.
We like our economy to have a steady-but-manageable level of inflation over time because that means if you just sit on your money without doing anything with it, you will lose value over time. If you put $100,000 in a safe for 20 years, you will not be able to buy as much with it when you take it out of the safe. In order to “beat” inflation, you need to invest it somewhere it will produce returns greater than ~2% per year. Investing means companies are able to expand, which means they can provide salaries to more employees (more spending money in the general population) and produce more goods and services for people to buy, which makes the company more successful, which makes the investors more money to invest further.
You can see it’s cyclical, every step of the system needs to work properly to prop up every other step. The investor class needs to be investing, the general population needs to be buying, and the companies need to be paying employees well and producing product. If one of those three doesn’t behave “properly” then the other two will stop doing their part as well.
If currency is experiencing deflation, then that $100,000 from before will be worth *more* when you take it out of the safe, twenty years later. That means it is a safer bet to *not* invest in the long run, which causes breakdowns all along the cycle. Corporate stock value falls if people aren’t buying it, so they have to operate more efficiently, so unemployment rises, so people aren’t spending money on product, so the company does not look good to investors, and now we’re stuck in the negative version of the same loop.
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