Is deflation truly that bad for an economy?

[dinofelis]

If you're a fiat-based fractional reserve bank, there's a fuck-ton of danger! Saved money become more valuable even without interest, and no one wants to borrow money that you create out of thin air because direct investment pays off better!

No, deflation is terrifying... if you're a fiat-based fractional reserve bank.

Guess who is making the decisions here, and everything is explained.

Indeed.  That's about the only true difference between constant, mild deflation, constant, mild inflation, or constant prices in the long run.

[TTMNewsMJ]

Yes it is.
Deflation is really bad in the economy of a country.

[n2004al]

We are being told deflation is bad for our economies and this is used as excuse from our central banks to print more money and destroy our savings/currencies. What they say is that in a deflationary environment, the price of goods falls so people would not buy anything and would rather wait to buy in future, therefore slowing the economy. If so why smartphones sell like hot cakes?their price is falling and people are buying them actually because of that. Maybe because each time the price decreases customers feel like they are getting a good deal, therefore are prompted to buy!!
If our economies are not growing it means that there isn't much inflation pressure, so I don't see any reason to artificially induce inflation by destroying our currencies. I would like to know your view on that..also do you think bitcoins (deflationary) will see a wider adoption by retailers in future?

In the first view seems that a deflationary situation is good for everyone. Anyone could have more with the same amount of money. But for the overall economy, according to the economist is not so good. According to Wikipedia: "Economists generally believe that deflation is a problem in a modern economy because it increases the real value of debt, and may aggravate recessions and lead to a deflationary spiral"

For more, everyone who want can read here: https://en.wikipedia.org/wiki/Deflation

There is explained in full everything regarding this phenomenon and even the meaning of expressions "real value" and "deflationary spiral" used in the above sentence.

As for the inflation in the situations where it is not real grow of the economy, serve to realize exactly this grow. Injection of new money in the economy make possible that this economy go forward and not remain
without moving. This is a toll used principally for this reason. But it is not told that for sure the put of new money in the market when it is not growth have good results. There to many other factors which need to fulfilled that this tool give the desirable effect.

[Eastwind]

Price deflation for electronic goods is always there, we will still buy those goods even though we know the price will drop and function will improve. With the improvement of efficiency in manufacturing, price will also drop.

[Amph]

Yes it is.
Deflation is really bad in the economy of a country.

why? the argument about the fact that people would not buy anything because they could buy more later, is moot

because it is based on their target, many have a low or average target, the industry would still benefit from their buying and there will be less "children of consumerism"

[NorrisK]

Yes it is.
Deflation is really bad in the economy of a country.

why? the argument about the fact that people would not buy anythign because they could buy more later, is moot

because it is based on their target, many have a low or average target, the industry would still benefit from their buying and there will be less "children of consumerism"

I beleive inflation is a way of "reducing" the debt of countries, while deflation actually increases the debt burden.

For instance, if a country takes 1 billion in 2020 and the inflation is 2%, the 1 billion will be worth 2% less in 2021, effectively reducing the debt burden as the 1 billion is worth 2% less. While in deflation, exactly the opposite would happen.

[Eastwind]

Yes it is.
Deflation is really bad in the economy of a country.

why? the argument about the fact that people would not buy anythign because they could buy more later, is moot

because it is based on their target, many have a low or average target, the industry would still benefit from their buying and there will be less "children of consumerism"

I beleive inflation is a way of "reducing" the debt of countries, while deflation actually increases the debt burden.

For instance, if a country takes 1 billion in 2020 and the inflation is 2%, the 1 billion will be worth 2% less in 2021, effectively reducing the debt burden as the 1 billion is worth 2% less. While in deflation, exactly the opposite would happen.

Yes, inflation favours debter while deflation favours savers.

[Amph]

Yes it is.
Deflation is really bad in the economy of a country.

why? the argument about the fact that people would not buy anythign because they could buy more later, is moot

because it is based on their target, many have a low or average target, the industry would still benefit from their buying and there will be less "children of consumerism"

I beleive inflation is a way of "reducing" the debt of countries, while deflation actually increases the debt burden.

For instance, if a country takes 1 billion in 2020 and the inflation is 2%, the 1 billion will be worth 2% less in 2021, effectively reducing the debt burden as the 1 billion is worth 2% less. While in deflation, exactly the opposite would happen.

Yes, inflation favours debter while deflation favours savers.

and right now every inflation system is centralized, we can say that the inflation favors a centralized system while deflation is against it

unless there is a government that is deflationary...

[cutesakura]

Mainstream economic thought states that a moderate amount of inflation is good for economic growth, and most of the world's central banks target an annualized inflation rate of 2 to 3%. When inflation gets out of hand, prices rise too quickly for incomes to adjust, which can potentially lead to an economic crisis known as hyperinflation where prices inflate quickly and exponentially. If the rate of inflation begins to decrease, it is known as disinflation. Deflation occurs when the change in prices turns negative.

During the Great Depression, economies around the world experienced crippling deflation as production ground to a halt and general prices levels declined 10% or more on an annualized basis. After the Great Recession of 2008, the United States barely avoided a deflationary spiral. Today, the economies of the Eurozone are combating deflation and the European Central Bank (ECB) has even taking the extraordinary measures of undergoing a round of quantitative easing.

Deflation: Causes and Effects

Changes in consumer prices are economic statistics compiled in most nations by comparing changes of a basket of diverse goods and products to an index. In the U.S. the Consumer Price Index (CPI) is the most commonly referenced index for evaluating inflation rates. When the change in prices in one period is lower than in the previous period, the CPI index has declined, indicating that the economy is experiencing deflation.

One might think that a general decrease in prices is a good thing, as it gives consumers greater purchasing power. To some degree, moderate drops in certain products, such as food or energy, do have some positive effect on consumer spending. A general, persistent fall in prices, however, can have severe negative effects on growth and economic stability.

Recessions and Deflation


Deflation typically occurs in and after periods of economic crisis. When an economy experiences a severe recession or a depression, economic output slows as demand for consumption and investment drop. This leads to an overall decline in asset prices as producers are forced to liquidate inventories that people no longer want to buy. Consumers and investors alike begin holding on to liquid money reserves to cushion against further financial loss. As more money is saved, less money is spent, further decreasing aggregate demand.

At this point, people's expectations about future inflation are lowered, and they begin to hoard money. Why would you spend a dollar today when the expectation is that it could buy effectively more stuff tomorrow? And why spend tomorrow when things may be even cheaper in a week's time?

Deflation's Vicious Cycle

As production slows down to accommodate the lower demand, companies reduce their workforce resulting in an increase in unemployment. These unemployed individuals may have a hard time finding new work during a recession and will eventually deplete their savings in order to make ends meet, eventually defaulting on various debt obligations such as mortgages, car loans, student loans and credit cards.

The accumulating bad debts ripple through the economy up to the financial sector that must write them off as losses. As banks' balance sheets become shakier, depositors seek to withdraw their funds as cash in case the bank fails. A bank run may ensue, whereby too many deposits are redeemed and the bank can no longer meet its own obligations. Financial institutions begin to collapse, removing much needed liquidity from the system and also reducing the supply of credit to those seeking new loans.

Central banks often react by enacting a loose, or expansionary monetary policy. This includes lowering the interest rate target and pumping money into the economy through open market operations – buying treasury securities in the open market in return for newly created money. If these measures fail to stimulate demand and spur economic growth, central banks may undertake quantitative easing by purchasing more risky private assets in the open market. The central bank can also step in as lender of last resort if the financial sector is severely hindered by such events. (For more, see: How Unconventional Monetary Policy Works.)

Governments will also employ an expansionary fiscal policy by lowering taxes and increasing government spending. The problem with lowering taxes in a period of low prices and high unemployment, however, is that overall tax revenues will decrease, limiting the ability of government to operate at full capacity.

A little bit of inflation is good for economic growth – around 2-3% a year. But, when prices begin to fall after an economic downturn, deflation may set in causing an even deeper and more severe crisis.

As prices fall, production slows and inventories are liquidated. Demand drops and unemployment increases. People choose to hoard money rather than spend on consumption or investment because they expect prices to drop even more in the future. Defaults on debt increase and depositors withdraw cash en masse causing a financial meltdown defined by a lack of liquidity and credit. Central banks and governments react to stabilize the economy and incentivize demand through expansionary fiscal and monetary policy, including unconventional methods such as quantitative easing.

All in all, in a deflationary period is a very bad place for an economy to be.

[designerusa]

I think deflation is always bad for economy. It means economy is not very alive because it means people do not return their earnings back to economy.

[cutesakura]

PRICES in the euro zone are falling. Figures released on January 7th showed that consumer prices in the year to December fell by 0.2%, marking the return of deflation for the first time since 2009. Weak demand, driven by austerity, debt and a lack of economic growth is dragging down prices. The falling oil price is making things cheaper, too. One might think falling prices would be something to celebrate. But concerns about deflation traps and downward spirals abound. The European Central Bank may launch a programme of quantitative easing this month to fend off the threat. Why do economists so dread falling prices?

One common explanation is that in anticipation of falling prices, consumers delay purchases, causing them to fall still further. This argument is a simplification; it can be made with equal power in reverse to argue that inflation will inevitably run upwards as consumers bring purchases forward to avoid being stung later. But the argument hints at the right problem: deflation’s effect on interest rates. Generally speaking, the interest rate reflects the price of consumption today relative to consumption tomorrow. When interest rates are high, savings are worth more tomorrow, and vice-versa. The return in money terms (the rate advertised by banks) is called the “nominal” interest rate. But inflation also matters. Subtracting expected inflation from the nominal rate produces the real interest rate­—the expected return after inflation—which is what people respond to in most models of the economy.

Low inflation or deflation constrains this crucial variable. The nominal interest rate cannot fall below zero, because that would mean reducing savers’ bank balances every month, and would prompt them to withdraw their deposits from banks and stash cash under the bed. Together with inflation, this puts a floor on the real interest rate too. If inflation is low and real rates can’t fall far enough to boost demand and perk up prices, demand will weaken still further. This is the dreaded deflation trap. There are other problems, too. Lower-than-expected inflation increases the real burden of debts. Lenders benefit, but because they are more likely to save than borrowers, demand is sapped overall. Deflation also increases rigidity in the labour market. Workers are resistant to wage cuts in cash terms, but inflation lets firms cut real wages by freezing pay in nominal terms. Deflation, by contrast, makes this problem worse.

To avoid the trap, central banks can resort to unconventional policies such as quantitative easing, although there is debate over their fairness and efficacy. In the long run, some economists think inflation targets should be higher. That would give more room for real interest rates to fall when economies are hit by negative shocks. But in a few decades, the problem may disappear: in a cashless economy it is impossible to stash money under the bed. That would allow nominal interest rates to go negative, as everyone’s bank balance could simply be reduced simultaneously. But that might be easier said than done.

[RealBitcoin]

If the economy (like today) is based on ponzi debt, then yes , deflation is bad.

If you would have a real laissez faire, free market, austrian school based economy, then no, in this case, deflation would be the holy grail.

[DiamondCardz]

We are being told deflation is bad for our economies and this is used as excuse from our central banks to print more money and destroy our savings/currencies.

That's not quite how it works. Whether quantitative easing is effective is a different story.

What they say is that in a deflationary environment, the price of goods falls so people would not buy anything and would rather wait to buy in future, therefore slowing the economy. If so why smartphones sell like hot cakes?

Despite what some anarcho-capitalists would like you to believe, a slight rate of deflation is not going to grind the economy to a halt. But in the long-term, it will have large negative economic effects.

their price is falling and people are buying them actually because of that. Maybe because each time the price decreases customers feel like they are getting a good deal, therefore are prompted to buy!!

Fail in economics. Deflation doesn't even mean smartphones have decreased in price, necessarily.

If our economies are not growing it means that there isn't much inflation pressure, so I don't see any reason to artificially induce inflation by destroying our currencies.

There are multiple reasons to induce a small rate of inflation. A small rate of inflation boosts economic growth significantly by encouraging consumption and investment, two major parts of Aggregate Demand in the economy.

In short, your post really disregards most economic theories.

[Eastwind]

I think deflation is always bad for economy. It means economy is not very alive because it means people do not return their earnings back to economy.

How about the price deflation relative to the function enhancement of electrical goods? Will people hold on buying this generation iPhone and wait for the next generation iPhone? How about the price decrease because of the working efficiency and use of new technology?

[sdp]

Not everyone is a speculator.   The people who think twice before buying things understand that they need to obtain food and water.   I am not going to drink less water because it is going to be cheaper in bitcoins next month.  The economy adjusts for needs rather than luxuries.   Perhaps ex-jewelers can become vegetable farmers.

sdp

[Docnaster]

Deflation is a problem that happens when our economy which causes people to stop buying luxury products and just wait for the prices to be cheaper. Another bad effect is that debt can change it actual value if the said deflation happens. One way of how the government handles this is by cutting tax rates, so that money would stay in businesses and employees.