Post
Topic
Board Economics
Re: Is deflation truly that bad for an economy?
by
tee-rex
on 18/04/2015, 17:26:19 UTC
So we have, all else equal:

a loan at 1% in a 2% deflation environment
a loan at 3% in a 0% inflation environment
a loan at 5% in a 2% inflation environment.

These 3 give identical burdens.

Your actual burden will be equal to real interest rate. This I don't argue with, but you again miss the whole point. Why in the first place you assume that in real life you will have the real interest rate the same for both inflation and deflation? In 10% deflation the real interest rate will necessarily be equal to or more than 10% (by definition, since nominal interest rate is always above 0). But this in no case means that in 10% inflation it should be the same 10% (which would amount to 20% nominal interest rate, if rates are taken as percentage points). I obviously cannot accept your allegation as being relevant to reality.

In fact, you say that deflation mirrors inflation and then contrive arguments that fit your assumption. That won't work, unless you somehow manage to prove that the inflation real interest rate necessarily follows that of deflation.