(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
For money to work you need it moving (people using it).
The threat of money losing value (inflation) makes you do something with it. Buy things you want, or invest your money (allowing other people to use it).
If everyone thinks money increases in value over time, money stops moving. Because you would use as little as possible in an attempt to hoard as much as you can.
This would mean no incentive for competition. No incentive to start a business. No incentive to invest.
It would be a feedback loop that quicky implodes and destroys money and our way of life.
In addition to what everyone has said, sure goods may become cheaper, but debt that you carry becomes more expensive and harder to pay off. Given the amount of consumer debt carried by the average American, this would be a nightmare.
Most people will give you an explanation framed from a macroeconomic perspective. I thought it would also help to give a more personal perspective.
Deflation means your money becomes more valuable over time: it takes less money to buy comparable goods.
For most goods and services, businesses would try to compensate to balance things out so that the time it took you to earn enough to buy something stays about the same. So things might cost less, but you’re also being paid less.
But not everyone can do that. Most notably, when it comes to debt or other fixed cost agreements, you’re still on the hook for the agreed upon amount.
Deflation is thus bad for debtors. You’re making less money, but your debt is staying the same. It would be like paying today’s price, but on your grandparents’ wages.
Conversely, inflation is good for debtors because that’s like getting paid today’s wages to pay your grandparents’ mortgage.
In a debt based economy it would destroy it. If people had savings and money was backed by gold it would be a different story. In our current Ponzi scheme fiat system it is just impossible.
If i have money to invest, and i can get a guaranteed return by just having it exist then theres absolutely no reason to ever invest that money. This is very bad for the economy
Deflation is bad because it causes people to horde their money which is terrible for the overall economy if no one is buying goods or spending money.
Why would I buy X item for Y dollars today when I can just wait six months and the same item will be 30% cheaper?
I think the issue that’s causing you to talk past people here is the idea of microeconomics vs macroeconomics. You’re talking about your personal life and what decisions you might make or how you would directly interact with the economy. This is very different from the large scale economic activity of an entire country.
Do you want to make more or less money as you get older? Most of us want to make more money: inflation. Business is no different, nor is the economy. Economic growth is the goal of our system.
You want a new phone. It costs $500 today.
Tomorrow it will cost 499.
In a year it will cost $350.
In 2 years it will cost $200.
Why would you not wait? Same with food, cars, houses, etc. who would buy anything they didn’t absolutely need?
Deflation would be the result of demand growing slower than supply, and so suppliers reducing prices in order to sell their stock.
The problem is them having less revenue to cover their costs. Eventually they’re going to go into survival mode, ie. cutting their costs. The largest cost is usually labour costs – and so job layoffs occur.
As more people lose jobs, theres less people buying stuff, and so prices go down even further.
This is basically a recession and a shrinking economy. Less demand for goods means less need for jobs.
Overall, people will begrudgingly accept that prices will go up. Being unemployed is far less tolerable.
Money’s loss of value is intentional. It’s just paper, metal coins and numbers on screen. But in being spent and triggering a need for more goods and services, along with investing into businesses, it creates jobs – and tax revenue that comes as a result of economic activity. Money isn’t printed for the purposes of hoarding.
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