[BoiledCabbage]

> People know how to consider inflation-adjusted rates of return and invest accordingly. Soon these same lessons will be applied in negative interest rate scenarios, which I guess counts as deflation

This is part of it. Deflation means my money is worth more tomorrow than today. If due to 10% return just by keeping my money under my mattress due to deflation, why would I ever risk loaning it out into an investment opportunity. Essentially the risk-free return is now 10%, so for any investment to be worth wild it must return even higher than that. That's hard to do. The higher the deflation, the higher the baseline return needed. As a result any business that might've returned 5% is now no longer a viable option. So it reduces overall investment because it raises the bar for success.

Similar is for purchases. Why buy something now, when I can wait 6 months and get it cheaper. As a result everyone stops spending, and everyone stops investing. Now that there is no spending, there is no money to pay salaries, so people have less money to go around and so again money becomes more valuable and you get a downward cycle.

Imagine I said, at midnight january 1st any money you have in cash or in a bank will be worth 50% less. You'd buy up anything you could or invest in anything you could to get rid of cash and put it in hard currency. Even if someone had a business that would lose 10% over the year, that'd still be better than losing 50%.

Deflation is the opposite. Any cash or bank accounts you have will double. You'd sell your items, but nobody would want to buy. They could buy two couches with that money the next year.

Overall if money always is slowly decreasing in value, people want to find uses for it either consumption or investment which move the economy. If it's increasing in value (ie deflation) they wan to do the opposite. Hoard it.

[fairenough42]

Thanks for the detailed reply!

Some of your point sounds a bit like this (please correct me if I'm wrong): "Deflation is always bad because it could be hyperdeflation." Namely, if deflation is significant enough that it incentivizes me foregoing a purchase for a few months (and then another few months, etc) it's _significant_ deflation. But why not make the equivalent argument "inflation must be bad because we can imagine hyperinflation" as well?

But instead of hyperdeflation, if we had -0.1% risk-free interest rates, would people really forego all purchases? I don't see why. If I need a new toaster, or some clothes, or gas for my car, I would not delay the purchase for 6 months to save 0.05% on the purchase. This seems like a realistic number if the deflation is caused by a population contraction in a country with an advanced economy.

It seems real-world encounters with deflation (at least since the inception of central banking and planned expansions of money supplies) have come largely during periods of _sharp_ economic contraction. But is such a scenario really comparable to a slow decrease in population?

Moreover, if monetary policy can offset deflation, what creates the need for immigration to offset the deflation? Why isn't the monetary policy enough?

[BoiledCabbage]

> Some of your point sounds a bit like this (please correct me if I'm wrong): "Deflation is always bad because it could be hyperdeflation."

I'm not an expert at this, I'd suggest looking at it in this manner instead. You are correct that other than the psychological (which does matter), there is no magic barrier that once inflation crosses the zero point and becomes negative things will spiral out of control. Instead it is a sliding scale 10% inflation will produce less investment than 20%, and 5% will produce less than 10%, and 0% less than 5%, and -5% less than 0.

Deflation frequently comes sharply, but it also often immediately comes following a period of credit expansion. Pretty often you'll see a sudden contraction after a bubble. In my understanding, a modern view of a "stable" economy is one that is at least slowly growing. And so even one that is holding still is "shrinking". Some degree of this is psychological as well. Debt becomes harder to handle, some businesses go bust, so people become less willing to lend money again.

I do think that yes, in the most cases deflation can be handled via monetary policy. But by essentially borrowing from the future and increasing demand. But that means the way out is essentially putting free money in the hands of the people most likely to spend it. The poorest.

A lot of politicians are more comfortable with giving money to banks or businesses than to low income citizens. But they are the ones who will spend it directly to increase demand. So in essence, in my opinion, it really boils down to political will to spend your way out of a deflationary cycle. That said, economists aren't all in agreement about these types of things. Dig into it a bit more yourself and see what's written on it.