The fear of deflation

[Laosai]

Hello everyone.

I'm not an economist. But I'd like to discuss on something difficult to understand in my opinion. It's the fear of deflation.

Why is deflation so bad for economy? I understand that deflation means less money to spend that's true, but deflation also means more value for each $ you spend so that shouldn't change anything!

Deflation also means more buy power for consumers so it's a good thing for the population.

And though everyone (especially in Europe) is shaking in fear of deflation... Why?

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[JavaLove]

The thing is that both inflation and deflation are GOOD but also necessary for an economy to grow.

Just as we all say, too much of anything is not good. The same applies here.

Think of it this way. Inflation increases purchases which is good for the overall economy. It basically makes us feel that we'd better spend NOW because in a week all our money is going to be worth a lot less. This will give government more revenue and ultimately grow the economy (support local businesses and everyone you'd expect with massive buying). However, inflation decreases consumer purchasing power. If you have $500 and the inflation rate of that currency sky rockets, it'll say $500 but will soon be worth a lot less thus decreasing your capabilities of buying anything.

Now, as you said, deflation is good too! When consumers have NO purchasing power and all their money is worth nothing, deflation will correct that. It'll give power right back to consumers and make us feel more comfortable. But, and this applies when trading commodities too, such as Bitcoin, why sell NOW (so buy something, say a house or a tv) when in a week it'll be worth a lot more? And that is what goes through someone's head when deflation occurs thus limiting purchases which decreases government revenue, decreasing spending and funding and ultimately killing businesses.

So each are good and bad in their own way. A solution? A little bit of both. Increase consumer spending while soon increase consumer purchasing power. Both of these things are vital. If inflation kept happening, with no deflation, our economy would go in the dump. Same applies for deflation.

Obviously no 100% cure for both, you're going to be stuck with them no matter what you use, but if you want to avoid government controlled inflation just use Bitcoin. The price is rising and you're a lot safer than in the realm of printing thousands of dollars everyday (which would always limit deflation, allowing infinite inflation KILLING the economy).

Hope this makes sense  

[Laosai]

The thing is that both inflation and deflation are GOOD but also necessary for an economy to grow.

Just as we all say, too much of anything is not good. The same applies here.

Think of it this way. Inflation increases purchases which is good for the overall economy. It basically makes us feel that we'd better spend NOW because in a week all our money is going to be worth a lot less. This will give government more revenue and ultimately grow the economy (support local businesses and everyone you'd expect with massive buying). However, inflation decreases consumer purchasing power. If you have $500 and the inflation rate of that currency sky rockets, it'll say $500 but will soon be worth a lot less thus decreasing your capabilities of buying anything.

Now, as you said, deflation is good too! When consumers have NO purchasing power and all their money is worth nothing, deflation will correct that. It'll give power right back to consumers and make us feel more comfortable. But, and this applies when trading commodities too, such as Bitcoin, why sell NOW (so buy something, say a house or a tv) when in a week it'll be worth a lot more? And that is what goes through someone's head when deflation occurs thus limiting purchases which decreases government revenue, decreasing spending and funding and ultimately killing businesses.

So each are good and bad in their own way. A solution? A little bit of both. Increase consumer spending while soon increase consumer purchasing power. Both of these things are vital. If inflation kept happening, with no deflation, our economy would go in the dump. Same applies for deflation.

Obviously no 100% cure for both, you're going to be stuck with them no matter what you use, but if you want to avoid government controlled inflation just use Bitcoin. The price is rising and you're a lot safer than in the realm of printing thousands of dollars everyday (which would always limit deflation, allowing infinite inflation KILLING the economy).

Hope this makes sense  

It makes a lot of sense thanks. It's interesting indeed.

But from my point of view, the bolded statement represents a nonsense to me.
Isn't it good to see people not spending too much?
Of course it's harder for companies! But it also means we consume less and waste less! that we consume only what we need!

If an economy needs people to consume over and over without stopping, if they need them to consume more and more... Well this economy is doomed from the very beginning!

[SFR10]

Actually I strongly believe deflation is good for economy alone (can't see why Europeans fear of this happening). To make it a lot easier, think of deflation as quality and inflation as quantity. Quality is always better than quantity (everybody knows this) therefor inflation only brings down economy and makes it worthless while on the other hand, deflation does the opposite and adds value to the economy and helps it grow furthermore.

[tyz]

Short answer: Deflation is the enemy of debt. It appreciates debt. Inflation, however, devalues debt. And because the world (especially countries) is full of debt, deflation is called bad.

[yugo23]

Short answer: Deflation is the enemy of debt. It appreciates debt. Inflation, however, devalues debt. And because the world (especially countries) is full of debt, deflation is called bad.

Word.

It's why the best solution for our Western countries right now would be something like 3 years of 100% inflation.
Of course that would be harsh, but after that we wouldn't have any debt left

[tobacco123]

Short answer: Deflation is the enemy of debt. It appreciates debt. Inflation, however, devalues debt. And because the world (especially countries) is full of debt, deflation is called bad.

Spot on! Besides, inflation will make the rich richer and the poor poorer... the greed greedier!

Both Deflation and inflation have pros and cons.

[botany]

The big fear of deflation is that people will prefer holding on to cash, rather than spending it.
This will result in the overall economy contracting.
You can think of it as the opposite of quantitative easing. 

[Barnabe]

Short answer: Deflation is the enemy of debt. It appreciates debt. Inflation, however, devalues debt. And because the world (especially countries) is full of debt, deflation is called bad.

Word.

It's why the best solution for our Western countries right now would be something like 3 years of 100% inflation.
Of course that would be harsh, but after that we wouldn't have any debt left

And they would not be able to borrow money for the next few decades... Which could be a problem since they are used to get easily loans...
Everything has consequences.

[coinzat]

Can anyone tell me about a fiat currency that had a a deflation in the last few years ? As I believe that the value of fiat money is declining a year after year because it is not scarcy as central banks print it without being questioned

[markj113]

maybe the powers at the top are concerned about that $18 trillion debt hanging over their heads.

Deflation = debt harder to service.

Inflation = debt shrinks

[Barnabe]

Can anyone tell me about a fiat currency that had a a deflation in the last few years ? As I believe that the value of fiat money is declining a year after year because it is not scarcy as central banks print it without being questioned

Japan had deflation for a while. They have problems restarting their economy partially due to this (but they also have a lot of other problems including demographics).

[tyz]

Yeap, then they decided to do massive quantitative easing to combat deflation. It has been called Abenomics named after the prime minister Shinzō Abe who started the massive QE program.
But it seems to fail. http://www.telegraph.co.uk/business/2016/02/12/bank-of-japan-loses-control-as-qe-hits-the-limits/

Can anyone tell me about a fiat currency that had a a deflation in the last few years ? As I believe that the value of fiat money is declining a year after year because it is not scarcy as central banks print it without being questioned

Japan had deflation for a while. They have problems restarting their economy partially due to this (but they also have a lot of other problems including demographics).

[calkob]

As far as i am aware money is debt, for every $ you have in your pocket basically someone else is in debt for it.  If the money supply deflates then there is less money around for those in debt to pay it off, which in turn causes arrears and bankruptcies which causes people to hoard money etc etc etc.  Its basically why we must live in an economy that is always growing, because there is never enough money to pay back the banks. 

[Pab]

Last inflation data from Eurozone Energy prices decreased by 7% becouse of oil but food prices increased by
1% sevices prices inrceased by 0.7%
To produce food energy is needed services also use energy
So there s deflation or not
Whatever Draghi will increase QE and will be more negatives  rates
Practically Euro will be worthless

[botany]

As far as i am aware money is debt, for every $ you have in your pocket basically someone else is in debt for it.  If the money supply deflates then there is less money around for those in debt to pay it off, which in turn causes arrears and bankruptcies which causes people to hoard money etc etc etc.  Its basically why we must live in an economy that is always growing, because there is never enough money to pay back the banks. 

There are 2 references to deflation - monetary deflation and price deflation. Monetary deflation refers to the money supply decreasing, where as price deflation refers to decrease in prices. Decrease in prices over sustained periods is what worries economists.

[Vaslime]

As far as i am aware money is debt, for every $ you have in your pocket basically someone else is in debt for it.  If the money supply deflates then there is less money around for those in debt to pay it off, which in turn causes arrears and bankruptcies which causes people to hoard money etc etc etc.  Its basically why we must live in an economy that is always growing, because there is never enough money to pay back the banks. 

There are 2 references to deflation - monetary deflation and price deflation. Monetary deflation refers to the money supply decreasing, where as price deflation refers to decrease in prices. Decrease in prices over sustained periods is what worries economists.

The computer price has deflated for long term. In 1999, a PC costs around $3000. Now it is only $500 and more powerful.

[calkob]

Deflation is seen as a good thing in some circles and not always the enemy, who said that things must always rise anyway... ?

[7788bitcoin]

Short answer: Deflation is the enemy of debt. It appreciates debt. Inflation, however, devalues debt. And because the world (especially countries) is full of debt, deflation is called bad.

Great answer... but this is the reason why people keep on borrowing money and get deeper in debt- hoping that inflation will eventually save them! However, they should also look at the interest that is being charged...

[naidray]

Short answer: Deflation is the enemy of debt. It appreciates debt. Inflation, however, devalues debt. And because the world (especially countries) is full of debt, deflation is called bad.

Thank you for that really short and accurate answer. After reading this it immediately reminded me of all the country's debt in the world bank. I mean, since every country (correct me if I'm wrong) has a debt in world bank, it means that deflation is bad.

[tyz]

For everyone who wants to read a little more about the causes and effects of deflation in a world of debt, I recommend to read this article on Investopedia.
http://www.investopedia.com/articles/personal-finance/030915/why-deflation-bad-economy.asp

[anti economist]

Forget about inflation/deflation. If you want to start with economics the first question is: Who must control the quantity of money? An unelected banker or an elected government?

[yugo23]

Forget about inflation/deflation. If you want to start with economics the first question is: Who must control the quantity of money? An unelected banker or an elected government?

Lol you have a suited login xD

ANyway it has nothing to do with inflation and deflation.
And to put it another way: deflation is great for a good economy, but is terrible for a shitty economy. As our economy is shitty as hell we can't affor any kind of deflation. Deflation means debt is more important and you might have heard about our skyrocketting debt xD

[Vaslime]

Forget about inflation/deflation. If you want to start with economics the first question is: Who must control the quantity of money? An unelected banker or an elected government?

No government or bankers should control the money. The money should be created and used like the gold. But gold is not very dividable.

[Enotche]

With increasing deflation, the purchasing power of an economic entity increases the more the longer he postpones purchase. Consumers worldwide are interested in that as long as possible to postpone the purchase, and save money over time, only increasing its value. In this situation, companies lose capital, making fewer sales. Lower corporate earnings in the resulting folding corporate programs. The most expensive first article - a candidate for contraction - staff costs. Those. unemployment begins to rise. And then everything is clear.

[yayayo]

With increasing deflation, the purchasing power of an economic entity increases the more the longer he postpones purchase. Consumers worldwide are interested in that as long as possible to postpone the purchase, and save money over time, only increasing its value. In this situation, companies lose capital, making fewer sales. Lower corporate earnings in the resulting folding corporate programs. The most expensive first article - a candidate for contraction - staff costs. Those. unemployment begins to rise. And then everything is clear.

That's the established theory. This theory is based on the assumption that only growth and a expanding economy are good. If you look at Japan, which is in economic contraction mode since years despite money flooding by its central bank, the life of the ordinary people has not become worse. You have to consider that especially people with low income, who have less options to get attractive returns on their capital, may actually see increases in their relative purchasing power.

What's more: It's highly unlikely that people stop spending entirely in a deflationary setting. They just buy less stuff they don't need and take less loans. In fact, that's a good thing - for people and the environment, because less resources are wasted for artificial growth.

ya.ya.yo!