Thursday, 27 June 2013

What is deflation?

Deflation is the general reduction of prices and wages. This sounds quite good (particularly the prices bit) until we consider how it might happen. Why would a worker accept a reduction in wages? Only in the most desperate situation.


Inflation is inconvenience but to an economist deflation is more bitter than death.



A photo posted by Richard Ford (@richard.ford) on
Photographs of Oxford. The spookiest I could find.

Deflation occurs at times of deep recession and is hard to stop once it has started. The best asset to hold in deflationary times is cash because it will always buy more tomorrow than it does today. The is fact also explains why deflation is so deadly and hard to reverse. There is no point in investing or spending any money in a deflationary spiral because everything will always be cheaper if you wait. This generates unemployment which also generates deflation..and so on.

Fear of deflation is the greatest cause of inflation in modern times. NOTHING is worse than a deflationary spiral and so a government will generate inflation to ward it off.

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