(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
One way that deflation is bad is that it potentially makes already existing loans ‘more expensive’.
Over longer time periods, cumulative inflation tends to make loans easier to pay off because towards the end of your 30 year mortgage, that last $100k you owe is worth less than $100k was worth when you first took out that loan.
Deflation could create the opposite conditions, where it gets harder to pay off a loan if the value of each dollar goes up.
Many of these posts are answering from the perspective of the consumer.
But the main reason deflation is bad is because it discourages *producers* from producing.
If I have a business with $1 million in the bank, what I normally do is build $1 million worth of product and sell it for more than $1 million. I make a profit and I use that profit to build more product, paying suppliers and employees along the way, and the cycle continues.
Now with deflation, I build that product, sell it, and I could end up with *less* money than I started with. So why not just keep the money in the bank? Why would I do the work to build my product when I would end up with less money? So instead I do nothing; I don’t buy any raw materials and I lay off employees because they aren’t doing anything. This contributes to a spiral where nothing is happening in the economy, nothing is being produced, and every employer decides the least bad alternative is to put their business on pause and stop paying employees.
It’s more about what deflation means about the underlying economy.
Economy wide deflation means that nearly *every* seller of goods and services feels the need to lower prices. Usually, that would mean lower demand across nearly all goods and services. Ie people have stopped buying.
If people have stopped buying economy wide that means two things:
1) Income is being sucked out of the economy. Prices aren’t just going down and incomes are staying the same. Incomes have probably gone down somewhere and consumers are shaken up. Layoffs are increasing.
2) If people are not buying, that means overall GDP goes down (a big part of our economy is consumption). So companies start getting more pessimistic and cut costs.
This results in a vicious cycle where there is more income being sucked out of the economy and consumption falls, there is deflation, etc.
An economy that is deflating *economy wide* means that it is probably sick.
Let’s say you are looking at a new car, and today its 20k nex week it will be 18k when are you buying it? Probably next week. Well in 2 weeks from today it’s going to be 17k going to wait the extra week? What about when the car drops to 15k after a month?
Prices get sticky everyone is waiting for prices to drop so the economy stops moving entirely, Keynes actually said deflation was good because stuff gets cheap but when people stop buying because their waiting for a sale they dont even buy on the sale because it will go even more on sale
When deflation happens, the dollar is losing value. This means any holdings you have are losing value.
So what do you do? You sell off those holdings for less than you got them for.
What does this do? Well, it causes deflation. Go back to step one and repeat.
Imagine if your student loan payments or mortgage kept rising as interest compounded, but your income was adjusted downwards for cost of living adjustment each year. With deflation, you have a shrinking supply of dollars. Each dollar buys more goods, but there is less to go around.
In deflation, people with debt lose HARD, and debt issuers win big.
With inflation, people that loan money lose out a bit, while borrowers/people that have long term debt tend to outgrow their obligations over a long time frame.
It’s not that inflation is good or bad. It’s about STABILITY. You just want your money supply and cost of goods to move generally in line with the growth of the economy. A moderate, controlled inflation supports a growing economy and facilitates growth and economic development, while deflation makes debt very punishing, and stifles growth.
The economy and people struggling because their money loses value is less bad than people not spending money and collapsing the economy.
Inflation incentivices money spending because you want to get rid of the money as fast as you can before it loses to much effective value or buying power. This keeps the economy going. Deflation incentivizes hoarding your money because it will gain value by not spending it. The money that now doesn’t flow into the economy leads to cuts in workers and products. The workers out of a job now don’t have expendable wages and will try to ration their money as best as possible and even less money is flowing into the economy until no one is spending money aside from essentials and the market collapses.
Can anyone here explaining how inflation is vital also please explain what happens when wages continue to not rise in line with inflation, after longer periods of time? If everything just becomes more expensive and the majority of people can’t afford basic things? LI5
I don’t get how I get my posts removed for questions I’ve never seen on here before but this question gets asked like twice a week and they all stay up.
Instead of inflation or deflation….just keep it the same. Everything has to grow. If they are already making profits leave it the same. Its called greed.
Latest Answers