Japan’s economy has been experiencing a deflation and there has even been 0% interest (sometimes in the negatives, why is this a bad thing?
In: Economics
Deflation is poison for an economy. If cash becomes more valuable sitting in a coffee can (or any zero-risk scenario) then investors are motivated to _not_ invest at all and reap the returns they get. Additionally, consumers are motivated to wait as long as possible to make any purchase, as the purchase will be less expensive the longer they wait.
This creates a death spiral – businesses can’t get investment and consumers don’t purchase, so they reduce the goods they produce and lay off workers. This means even less purchasing and investing, which means even more reductions in work force. So on and so forth.
If that wasn’t bad enough, it makes debt more difficult to service the longer times goes by. Your debt is a fixed number, but if the value of that debt goes up thanks to deflation, the debt becomes harder to payoff.
Almost every modern economy targets a modest amount of inflation (2-3%) if for no other reason than to ensure this scenario doesn’t happen.
Because in our current economic understanding bigger numbers are good, smaller numbers are bad. A set level of inflation means the GDP will grow by that much before any other effects.
If I sell you a table for 100 bucks this year and sell you another one for 110 bucks next year just because inflation, we contributed to the gdp growth by %10 without doing any improvements to anything.
An economy is a bunch of people doing favours for each other. Deflation is when people want to stop doing these favours. The end result is that nothing gets done.
Not a real world example, but when new world MMO had deflation (due to low supply of money), people started hoarding gold and resorted to bartering. Since items were still dropping, but gold wasn’t, it was worse to repair an item than to trade something for a new one.
Imagine how that made the blacksmith feel 😀
Why is japan struggling when pokemon is the highest grossing media franchise ever. Surely thats keeping things afloat???
ITT: People think it’s a bad idea to encourage savings and Keynesian economic propaganda.
I believe deflation can be a good thing. Research Austrian economics. It was the first economic theory that actually made sense to me. https://mises.org/begin
If inflation was a constant 2% and never changed, I’d be okay with it. But when you have an unelected group trying to micromanage a complex economy with rate hikes and drops, you get the broken system we all live in today.
Deflation means that people and businesses are incentivized to hoard cash (like physical paper currency) instead of lending or investing it. This then makes it hard to open or expand businesses, which then makes the deflation worse, and then makes it even harder to open or expand businesses.
What compounds the problem even more is that many institutions (including the government) have borrowed billions of dollars betting that the deflation will stop, but instead, it just keeps getting worse and worse, making their bets further and further in the red.
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