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.
Latest Answers