Tech & Biz

Is Deflation Good?

by mtippett | November 20, 2008 at 08:42 am

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Deflation is a word that seems to scare a lot of people. But I have been wondering why it causes so much dread? After all, if prices drop then we are all richer (relatively). I was happy to see a piece about the topic in today's news.

Over the past 10 years we've been trained to treat deflation -- an actual fall in prices, as shown in today's consumer price index (CPI) release -- as a horror to be avoided. Could it be that in this case a whiff of deflation may help us get out of the crisis?

There are a couple of reasons why deflation is bad.

It reduces the governments ability to control the economy by adjusting interest rates.
It reduces the wealth of those who have assets. The more assets you have, the more deflation will hurt you.
It reduces the incentive for investment. If the value of assets is going down then people aren't going to produce them.

On the other hand if you've just lost your job, have no income (or are on a fixed income), have no home and no significant assets couldn't depreciation be a good thing in the short term?

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beautyFULL (not verified)

at 05:41 on June 10th, 2009

definitely on th short term deflation can never be good but lets all get lng sighted on the long run it hasto be good

PIM of SPAIN

at 06:28 on June 10th, 2009

After a period of too much expansion and thus inflation, deflation will be inevitable the consequence, but the feds try to influence Mr. Market by printing more money and inflate out of the deflation. But no one is able to manipulate the market as a whole, neither the feds or central bankers. Deflation has its pros and cons depending on which side you stay. If you just bought a house for an inflated price its to bad. If you still have to buy that house in deflation mode the house will be cheaper and you wait until the best bargain arrives.

Japan is in deflation mode on and off since 1989, and today still in deflation again. The world economy is nowadays in contraction mode, too much capacity of everything. This has to be rebalanced, and during that period deflation is King. Hope its clear?