(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
The primary thing to understand about economies is that activity is good and stagnation is bad. When people are buying, selling, and investing, that is good. When people stop this activity, economic performance falters.
In a deflationary environment, the value of currency goes up over time. This discourages spending money, investing money, and trade in general. All of these things are bad for economies.
It’s as simple as that.
– **Everyone is incentivized to sit on their money.** The value of your money going up means you want to hoarde it and not spend. You want savings. But money in the bank doesn’t actually do the economy any good. It’s the exchange of money which is the economy.
– **Loans get harder to pay off**. It’s a sneaky extra added interest rate. People will have a harder time paying off loans so banks have to be more careful about who they loan to. ALSO, as mentioned, it’s better to sit on your money, so banks wouldn’t want to loan out money unless it had an even bigger interest rate. (Although, same goes for when there’s high inflation).
– **Wages go down**. In the a exact way that [wages have gone up with inflation](https://www.piie.com/research/piie-charts/us-wages-lowest-earners-are-growing-fastest-rate-global-financial-crisis), once money is worth more companies are REAL quick to cut wages.
oh man, some nutcase on here were recently pushing some of the most ridiculous propaganda that deflation was a good thing. But they were crazy liberatarian gold-standard advocates that just really hate the Fed and fiat currency. Crypto-bros, ugh.
Inflation encourages investment.
If you’ve got $100 today, but inflation is happening, you need to do something with that money. It’s going to be worth less and less over time. So you’ll want to buy stocks and bonds, or real estate, etc… something to help your money at least keep pace with inflation. And those are only going to get more expensive, so invest now. Sooner you get that money moving, the better off you are.
Deflation goes the opposite way. Don’t spend, don’t invest, just sit on your pile of money. The longer you wait, the more your money will be worth.
Our economy is reliant on money moving around. The government wants/needs you to spend spend spend. Inflation helps achieve that goal.
It isn’t. In fact, we’re overdue for and need an asset crash if we want housing and cars to be affordable again. The examples given in this thread assume extreme deflation. Yes, if something is going to cost 10% less every day, then I’ll keep putting it off. That’s just as bad as 10% a day inflation forcing me to spend everything i can immediately. However, as a real world example, tech prices fall rapidly regularly, yet people still line up to buy the new iPhone and Galaxy phones the day they come out, and Apple and Samsung are still 2 of the largest companies in the world. It doesn’t stop their investment either.
No one is putting off buying food because it’ll cost 2% less next year. Same with gas, shelter, transportation to and from work, etc…
Deflation means your money is worth more tomorrow than it is today. It would therefore be prudent to put everything you can under a mattress, because you can buy more with it tomorrow. And even more the day after.
People still need food, water, energy and shelter; so you’re still buying those essential things. However all your discretionary spending your incentivized to hold off on. You’ve no incentive to invest your money, safe move is to lock it away because you’ll be able to buy more with that same money later. It doesn’t stop all discretionary spending, but it does slow it down.
If you have a mortgage or other forms of debt, those are getting relatively more expensive every day. With inflation it was getting relatively cheaper every day. With deflation, every payment you make is worth more than the last. This drives defaults. Because money is more valuable, your $500 000 home is now worth less money. And tomorrow it’s going to be worth even less. But you’re still making payments on the $500k. Relative to deflation your home’s value hasn’t changed, but your loan is still your loan.
Now, because people are spending less than they used to, business start failing. The employees lose their jobs, and the owners lose their investments. New companies are not started, because investing is disincentived and the market is no longer there. So these people that are out of work no longer can afford even the essentials.
Now you have a deflationary death spiral. Your economy has seized up, money is literally moving less and less day after day. More people lose their jobs, or if they are lucky, get their wages cut day after day. Businesses close, banks collapse under a mountain of bad debt. Your money is worth more and more, but getting more of it gets harder and harder until you can’t get any more.
Explanations like mine start at the retail level because it’s easier to explain and to imagine, but the spiral starts small with institutional investors who do care about their money appreciating by 1% or 2% year over year that will act accordingly to protect their positions.
This is why countries have central banks, that are in theory isolated from political influence, who’s sole responsibility is to control the money supply to ensure that you never have deflation and only a low level of inflation. 2% is the typical target as a sort of hedge against some economic stormy weather pushing you into deflation. High levels of inflation is also really bad, but relatively speaking easier to fix than deflation. Still painful though.
Only a small percentage of the money a bank loans out is their own. Banks lend money from the central (aka reserve) bank to lend out to their customers. The interest rate on this loan is the the cost the bank has to pay back, and they charge a higher level of interest to make a profit. This mechanism is how money is added to the money supply (“printing money”) and also removed from the money supply. The more expensive the loan, the less money is borrowed. The central bank changes this base interest rate to encourage or discourage spending as required to maintain the target inflation rate. It’s not perfect, but it works.
During deflation, the common people win (short time) and the capitalists lose (big time). And, because the common people depend on the capitalists, they eventually lose too (long term) by losing jobs and sources of income. So everyone loses.
you want some inflation because that means the economy is doing well (generally speaking). Deflation generally means the economy sucks.
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