Eli5: why can’t we just “deflate” money, and why is it bad?
In: 620
A modern economy only works because people spend money. If people stop spending money, they stop buying goods and services, which means that businesses have to lay people off, which means there is less money to spend, which means fewer goods and services sold, etc.
If a currency deflates, then it gains value by doing nothing at all. As a result, you are incentivized to wait as long as possible to make a purchase – after all, why buy a TV today for $500 when you can buy it next month for $450 or the month after that for $400. The incentivization to delay puts us in that downward spiral in my first paragraph. Additionally, people don’t want to invest for the same reasons – why do a risky investment when your money gains value just sitting in a coffee can?
That spiral is the death knell for an economy and is **so bad** that pretty much every government targets _some_ inflation if for no reason other than as a hedge against deflation.
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