Although I confess that this isn’t exactly on-trend in the news right now, I’m trying to understand deflation after reading an old post on on the disadvantages of Gold Currency:
>The reason it’s actually bad is because the government can’t mess with the money supply. The supply becomes tied to some shiny metal. Now, if you have a society with 100 people, and 1,000 dollars (each person having 10 dollars), then this is fine. **But in 20 years, those people will have children that will grow up and be part of the economy. But there’s still 1,000 dollars, only for 150 people now. That means each dollar is worth more, which is called deflation.**
***Source –*** u/yellowjacketcoder
The post is now 9 years old, so I thought to make a post on it here as I’m confused on the sentence in bold.
I’m not understanding the point with regards to when 150 people now exist, the same 1,000 dollars are worth more now. I understand that after 20 years, this hypothetical population goes up by 50 to 150. My intuition led me to believe that due to supply-demand economics, the same 1,000 dollars (linked to a fixed exchange rate for X ounces of gold) would be needed by more people so it would be worth more (given the supply of gold is fixed).
However, what didn’t make sense to me is how this would then be linked to the idea of deflation where spending goes down as consumers would think that prices are about to fall further (which they would, in a deflatory economy) etc.
How are the two ideas (the increased demand for the same fixed supply of dollars and the falling prices) linked, if by any means they are? Appreciate any answers as always, community (and sorry if it seems so obvious to anyone – I’ve been struggling to wrap my head around it for years)!