(I’m American) Inflation is the rising cost of goods and services. Inflation constantly goes up by varying degrees. When economists say “inflation is decreasing”, that just means that the rate of inflation has slowed, not that inflation reversed.
If inflation is causing money to be less valuable over time, why would it be bad to have deflation? Would that not make my money more valuable? I’ve been told it would be very bad, but not in a way that I understand
In: Economics
Imagine you had $100 to buy a tv today. But tomorrow that tv will cost $90. The day after that? $80. You would wait to purchase the tv until you believed the price hit bottom. But you don’t know when that is. So you delay the purchase forever. No one spending money on goods and services is bad for everyone. So deflation is bad. Mild inflation encourages the purchase of goods and services today which keeps the economy humming along.
Remember deflation includes wages so your average person will be earning less and less each year. This is all while the amount they owe on their car/student/home loan remains the same. Conversely the rich who tend to have excess savings rather than debts can sit on their money like a dragon does on a hoard and it will make them richer and richer every year.
Small inflation forces them to invest that in stuff like new factories which employ people if they want to maintain it.
It wouldn’t. Someone will come in and say how deflation will cause people to hoard their money, nobody will buy anything, and the economy will grind to a halt.
*They are wrong*.
Their argument ignores the most simple thing: people want stuff. Deflation would lower people’s time preference, making them more willing to defer consumption until a later time, but nobody has a time preference of zero. The key is people will *defer* consumption, they will still consume, just later, when a more useful, or durable product is available.
In the meantime, deflation will encourage saving (and future-oriented thinking), and will reduce the desire to mindlessly consume cheap plastic crap that you don’t need. It will also reduce the need to invest in assets just to maintain your wealth, which in turn will lower asset prices and make things more affordable for the people who want them for their utility, instead of just wanting them as a wealth storage mechanism (in case it’s not obvious, I’m referring mainly to property here).
Edit: to everyone saying how this would cause businesses to collapse due to lack of income, and jobs to be lost, you’re forgetting that all of the newly unemployed will be able to support themselves for a while, since they’ve all been hoarding money. they would be forced to spend, since they have no income and immediate needs, which would in turn keep open the businesses that you say will close. as always, an equilibrium will be reached, which is startlingly obvious after considering the problem for any length of time whatsoever.
Edit 2: I’ll stop replying now that the inflation-loving brigade has arrived. to anyone actually listening instead of regurgitating what central bankers make you swallow, check out the mises institute and read some books by Austrian economists (the Austrian school of economics, not the country). to everyone else, see you in fifty years when your money is worth 98% less than today.
Deflation is worse than inflation. With inflation prices go up for products people actually want to buy. They rush to buy them as fast as they can before the price gets any higher. This keeps people employed because the things are still bought. Inflation can often be controlled by limiting the money supply; i.e. raising interest rates. This takes money out of the economy and tends to pull back on inflation.
Deflation is the opposite. Prices are in freefall. This is bad, because “why buy a car today, when it will be less expensive tomorrow?”
Because people stop buying anything other than critical necessities, there is far less need for longer term items such as cars, houses, etc. This means much of that production diminishes or even ceases. This production be hard to restart when things get better. This kills huge amounts of jobs.
Deflation is harder to fix. You can lower interest rates, but there have been cases where governments have actually had negative interest rates. The government would offer banks money at a loss just to get it into circulation to try to jump-start out of deflation.
The great depressions are often correlated with deflation.
It’s bad for a few reasons:
– If people think prices will go down in the future, they put off spending today. This causes a slowdown in economic activity as sales fall, companies lay people off, those people have no choice but to spend less and sales fall further, and it becomes a vicious downward spiral of recession.
– If people think their money will already be worth more in the future, they have less incentive to invest it, put it into a savings account or CD, etc. meaning that banks have less money to lend to home buyers, car buyers, businesses. Businesses wanting to go public have less demand for shares making it harder to raise capital to expand.
– If prices fall, so too will wages. And that’s demoralizing to workers to see their pay go down instead of up. There’s a psychological benefit to seeing pay go up, even if it doesn’t translate to buying power due to inflation.
deflation means you money is worth more tomorrow than it does today…
ie. everything gets cheaper day by day…
if that is the case, why would you buy anything today? the more you wait you less you have to spend… everybody would do this, therefore the economy would grind to a standstill as everyone is hoarding money and not spending it…
Okay, so say I have 100 bucks saved up and I want to buy cookies. Cookies are 5 bucks a piece so I can buy 20 cookies right now. If I do that, the baker gets 100 bucks, some of that goes to taxes, and the baker gets to keep 90 bucks, with which she buys flour or sugar, pays rent or even a book from the book store. This way, money keep circling around and around and this is great because everyone gets to work and make stuff and buy stuff!
Now imagine I have 100 bucks and I want to buy cookies but there is a 100% deflation per day, which means every day the price of stuff goes down by half. I can buy 20 cookies now for 5 bucks a pop, OR I can wait a day since cookies will be only 2.50 tomorrow, and I can buy 40. I would like more cookies, so I wait. The baker doesn’t get my money and can’t buy things herself.
The next day, I still want cookies, but I know that if I wait until tomorrow, cookies will only be $1,25, so I could buy 80 for the 100 bucks I have. I would like more cookies, so I wait. The baker still doesn’t get any money and she is starting to be in trouble. Everybody is waiting until tomorrow to buy cookies, so she isn’t making any money today. This also means she isn’t buying flour or sugar, so those suppliers aren’t making any money either.
This continues basically forever, since I know I can get twice as many cookies if only I wait until tomorrow. My 100 bucks stays with me and nobody gets to work or make stuff or buy stuff. This would be an absolute disaster for everyone involved.
It happened in Japan post bubble economy and during the Great Depression – people consume less, prices fall, and companies reduce investment in new products to sell which leads to fewer jobs. https://www.frbsf.org/research-and-insights/publications/economic-letter/2009/03/risk-deflation
The key that most people miss about deflation is that economists aren’t particularly worried about it discouraging consumption. Deflation discourages investment.
Lets say you’ve got enough money to build a factory. You expect that factory to grow your wealth by 2% a year. Well if deflation is at 5% a year, you expect to make more money stuffing that money under your mattress and sitting on it. So you don’t build the factory. Nothing gets made at the factory. No one gets employed at your factory. Businesses around the factory don’t get a bump in customers from the employees at the factory.
On the other hand, if inflation is 5%, you would absolutely build that factory. You expect your wealth to drop by 5% a year if you sit on it. With that much deflation you’d even build the factory if you expect it to lose a bit of wealth. After all even if the factory is going to lose 2% a year, that’s still better than holding cash.
That lack of investment caused by deflation is horrible for the economy, particularly in the long term.
Now the other hand, if inflation gets too high, it causes some pretty serious problems for consumers. But economists have figured out that a low amount of inflation (around 2% per year) has little to no impact on consumers, while also working to prevent deflation.
You just have to look at Japan. It has been in a longterm deflationary period and it is objectively considered one of the worst countries on the planet /s.
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