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My understanding is that deflation causes perverse incentives for businesses to not spend money (since investing in doing nothing now has returns).
This is bad for the economy, which requires continual activity to work. Slowdoans cause further slowdown, which compounds unto itself
Yeah, and it discourages consumer spending on big-ticket items, since consumers will wait until prices fall. Which leads to layoffs as inventories stay high. And layoffs further depress demand, etc.
The expectation of falling prices in the future discourages consumer spending on an item, but this is not absolute. And if a price is falling in the present, then that increase consumer spending. How these things work out depends on time preference, expectations etc.
There have also been periods of deflation without layoffs. The mistake people often make is to conflate deflation caused by falling nominal incomes (demand-led deflation) with deflation caused by rising production (supply-led deflation). The latter is not necessarily a problem.
Right. It is not absolute. That's what I meant when I said it discourages consumer spending on big ticket items. And of course it depends on how long deflation lasts.
The point is not that deflation will absolutely cause problems, but rather that deflation is very dangerous.
Yes, I think we more or less agree.
It can be helpful to think in terms of real interest rates rather than prices. Deflation lowers the real interest rate, and thus lowers the opportunity cost of (safe) saving over consumption. If the deflation is caused by a squeeze in demand, then it tends to cause an increased burden on borrowers, who must now pay back more (in real terms) with less. If the deflation is caused by rising supply, then the burden on borrowers rises, but so (on average) does their incomes.
Deflation in the near future, which I think is much more likely than people think (look at recent money supply growth) would be demand-driven, and potentially disastrous in the same way as the 2008-2009 deflation in the US.
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