Post
Topic
Board Economics
Re: Is deflation truly that bad for an economy?
by
Erdogan
on 20/04/2015, 08:17:55 UTC
I think some reality check is urgently needed. You insist that deflation mirrors inflation, and I take crazy numbers for an example. Okay, you have 3% inflation and a real interest rate of 2%, not something that you would call crazy, right? What will the real interest rate then be for the deflation of the same 3% according to your logic?

You cannot have 3% deflation and only 2% real interest rate in steady state, long term.

Because the *source* of deflation is also the *source* of real interest, namely economic expansion ("more goods chasing the same amount of gold").

The ONLY way to obtain a stronger deflation rate than the economic expansion rate (in steady state, long term) is when money is DESTROYED systematically.  If gold is regularly dumped in the ocean or sent in deep space or so.  If bitcoins become un-spendable (hehe!). 

On the other hand, upward, inflation wise, there is no limit.  You could print so much money that you get 80% inflation if you want to, as a matter of speaking.

What I meant with "deflation mirrors inflation" is for those sets of numbers that make sense.  Of course inflation can be made arbitrarily big, while deflation not.  But *for those sets of numbers that are possible* the two mirror situations are dual.  There are indeed number combinations of inflation possible, that are not possible with deflation.  But that's not the point.  For those that are both possible, they are mirrors of each other.

Look at it this way: I could say, in some or other mechanical problem, that "the mass increase is a mirror to the mass decrease".  But then of course, a mass increase is always possible, and, as you cannot get a negative mass, the mass decrease is limited to the original mass.


I don't think the only way to increase the deflation rate is to destroy money.  It would be more based on the velocity of money and the volume of money changing hands in the form of transactions.  Even with a high money supply where no money is being destroyed, if there aren't many transactions happening (perhaps because the interest rate is high and people are encouraged to save rather than consume) it may theoretically cause deflation as sellers of goods/services would need to lower prices to sell non-essentials assuming elastic demand.

Also, it would be possible for the deflation rate to be very large; it's just that the stimulus-addicted government wouldn't think to do it.  Theoretically speaking, imagine if interest rates went to 30% tomorrow.  It would be sort of like hyper-deflation.  Spending and consumption would drop so significantly, that prices would need to fall to sell non-essential products, which would slow down retail, then slow down manufacturing, and wages would need to fall along with higher unemployment.  Realistically, this wouldn't happen though, but it is in the spectrum of possibilities.

Imagine what happens if Greece defaults on government bonds. What will people around the world think of government bonds in general, when they understand that their pensions are basically government bonds? There could be a violent contraction of credit, thus general price deflation. On the other hand, they could just blame it on one bad government, their own might be okay. Impossible to know.