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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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.
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