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by fairenough42
2182 days ago
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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? |
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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.