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Some time ago we discussed negative interest rates here on Soylent News. At that time there was some discussion of deflation and why it is such a mixed bag for consumers, companies, and countries.
The Economist has an article that explains deflation rather succinctly.
It turns out that deflation is bad because we are all so burdened with Debt. Not only personal debt, but corporate debt, and national debts. You end up paying debts with money that is more and more dear as time goes on.
Deflation poses several risks, some well-understood, one not. One familiar danger is that consumers will put off spending in the expectation that things will get even cheaper, further muting demand. Likewise, if prices fall across an economy but wages do not, then firms’ margins will be squeezed and employment will stagnate or decline. (Neither of these dangers is yet visible; indeed, America and Britain are seeing strong employment growth.) A third, well-known risk is debt deflation: debts become more onerous because the amount that is owed does not fall, even as earnings do. This is a big worry in the euro zone, where many banks are already stuffed with dud loans.
But in addition, all tools of Monetary Policy become useless.
The least-understood danger is also the most serious, because it is already here. Deflation makes it harder to loosen monetary policy. All of which means that policymakers risk having precious little room for manoeuvre when the next recession hits.
While some have been eager to see monetary policy reigned in, we did see the effects of this during the height of the recent depression, (which some claim we are still suffering from).
The US Federal Reserve had run out points it could cut when lending money to large banks. There were periods in 2010 where the Fed was lending money to banks at Zero Interest Rate. The link explains a number of serious risks with this policy.
(Score: 5, Interesting) by sjames on Saturday February 21 2015, @10:42AM
The same economists who panic at the thought of take-home pay increasing in value seem unconcerned about pay remaining the same while the value of that pay falls, as it has for decades.
Surely a contracting economy isn't a good thing. People who used to do dinner and a movie every weekend having to cut back to dinner OR a movie once a month is surely not helpful. Corporate margins are at a high right now (just look at how the dow goes up and up while people have to start punching holes to tighten their belts again).
For individuals, a paycheck that goes further makes them more likely to pay back debts faster, not less. Perhaps that's the real worry, people who aren't in perpetual debt. Perhaps even, god forbid, able to afford to hold out for better pay or better working conditions.
That's not to say there are no downsides to deflation, I just find their arguments very revealing about whose side they're on.
(Score: 1, Interesting) by Anonymous Coward on Saturday February 21 2015, @09:28PM
The thing is our society has taken on trillions in debt. Not a few million, TRILLIONS.
So you 'buy a house' like most people want to do. You get a 30 year mortgage. You buy your house for 200k. Your bank loans you 200k to get this house.
Now deflation takes hold. So instead of owing the bank about 340k when you are done you end up paying back 400k. WTF? You say? Deflation adds percentage points to what you owe. You and your bank literally do not have to do anything to make this happen.
If you have borrowed money you so badly do not want inflation its not funny. Where as before lets say it took you 100 hours to pay back a chunk of your house. Now it takes 120 hours.
You get more people defaulting on the loan because to work that extra time is impossible for them to do. Banks can not loan out money as no one would bother to borrow money if they can sit and wait and the value of what they own goes up. No one buys or sells anything as waiting is better. Scarcity goes way up. The 'price' value goes way down.
The 1% litterally do not have to do anything to make themselves more valuable. As their assets are not 'erased'. The people who were the suckers and borrowed are screwed.