The argument that I hear the most is that if money will increase in value then people are going to save as much as they can and spend far less, which will decrease economic growth. But wouldn’t it be far better if everyone only buys the things they really need and save the rest?
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Because it’s another form of tax.
It is literally as having no inflation while government prints money and using it for their budget.
It’s not just people who would be holding onto their money; institutions like banks would be, too. They wouldn’t be loaning it out or making investments.
“The economy” is built out of money in motion, and deflation causes money to stop moving. So people aren’t buying as much, they aren’t borrowing as much, which means companies aren’t seeing money come in to pay their employees, aggregate demand will continue to collapse, and eventually the economy grinds to a halt and dies.
Deflation means that the prices tomorrow are going to be cheaper tomorrow so people tend to wait and delay purchases till they are cheaper and the economy stalls as fewer people are buying things. https://youtu.be/-dnKdCwCw8o
Every time you spend a dollar, somebody else makes a dollar. If that dollar changes hands many times, it can be part of a lot of people’s income. Every time it changes hands somebody gets something they want and somebody else gets richer, everyone wins. As a general rule, you want money to change hands as often as possible to promote a thriving economy. But if money sits around in savings, it doesn’t do any of that.
One way to achieve this is inflation. If your dollar is able to buy more stuff now than it will be able to in the future, people are going to want to spend their money now. If on the other hand money deflates, people are encouraged to horde it and spend as little as possible in the hopes that it’ll be worth more later. We want people spending money to make the economy thrive, so inflation is better for the economy while deflation can lead to economic crashes.
But this must be balanced out with a second factor: if money inflates too fast nobody is going to want to accept it at their business. If that happens everyone will start selling their stashes of money for some different currency, but as demand goes down and supply goes up that only inflates the currency even higher. This can result in a runaway hyperinflation effect in the worst of cases.
Most economists tend to agree that about 3% inflation per year is a pretty ideal middle ground between these two things.
Several reasons.
– Slight inflation causes real (inflation adjusted) prices and wages to edge down over time. Wages in particularly are sticky, going up more easily than down. This will help to correct disequilibrium without firing people.
– Loans. Inflation allows a broader range of interest rates than deflation. Real interest rates are what matters, but loans below 0% nominal don’t work. With 5% deflation, a 0% nominal (not inflation adjusted) interest loan would be a 5% real interest rate. So anything below about a 7% loan today wouldn’t be viable.
– Control over interest rates is hugely important for government policy. So deflation cuts into that level of control for the same reason.
– The value of money increasing can encourage not spending it, which can depress demand. Combining depressed demand with rising real wages is likely to lead to unemployment.
Inflation keep economy moving forward… you buy that new refrigerator now for fear of it going up $50 next year. You invest your savings rather than leave it in a checking account or under your mattress, so that it’ll grow and that investment allows money to be borrowed by others to fuel growth.
Conversely, deflation slows economic activity by causing people to hold off spending, to hoard money in unproductive ways, so economy slows.
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