| > Who wants to have a mortgage on a house that is going down in value every year? The problem is not the declining value of the house, it's that the borrower's income is declining. To a first approximation, inflation is rising wages relative to the goods and services bouoght with them. Deflation means falling wages, which makes it progressively harder and harder to pay back loans, so people are less and lesss willing to take on debt. Falling ability to repay also increases risk to lenders making them less willing to lend and causing them to demand higher rates and shorter terms, reducing both investment and consumption. > just holding onto the money generates returns No. No, it doesn't. To generate a return, it must be used for investment or lent (ultimately) to someone who invests. Deflation also disincentivises investment directly (besides lender unwillingness): your market will have less and less disposable income over time, so the expected value of investment declines and the risks go up. So the business case hurdle for investment gets higher and higher. Deflation is a reinforcing feedback spiral to zero for capitalism. Inflation at about 3% - 4% per year seems to be optimal. |