If every country is in some sort of recession, shouldn’t the economy adjust accordingly as opposed to falling even more?
In: 53
Deflationary spiral. When deflation happens money becomes it’s own investment and borrowing money becomes extremely expensive, this makes it more difficult to start or expand a business and creates huge issues for businesses that rely on debt to cover short term or seasonal expenses. These businesses experience higher fail rates and and it becomes basically impossible to start a new business to replace them, this leads to more unemployment which creates more deflation in a vicious cycle that cannot easily be broken.
To break it you either need new large businesses that are massively profitable, or you need access to cheap credit. The latter can be achieved by the government either taking on debt or printing more money and injecting it into the economy through various methods to get back to some level of inflation, this has to be done kinda carefully as overcorrecting and causing massive inflation is possible.
Avoiding this whole mess is why countries typically target ~2% annual inflation, because that’s a point that is fairly stable and still gives some time to respond if something happens that starts to swing the economy one way or the other.
Latest Answers