What’s the typical argument for why systematic deflation would be fine? Is it that demand wouldn’t be affected by appreciating money or that supply wouldn’t be affected by demand?
#asknostr #economics
Discussion
Having deflationary money encourages savings and discourages lending, which decreases time preference. People will choose more carefully how to invest their money also because they have to factor in natural deflation.
Ok, but this would lead to decreased demand, which would imply supply needs to decrease as well to bring things into balance, which then means less economic activity, people losing their income, and the general prosperity decreasing.
Which may be a good thing. There are people actively calling for ‘degrowth’ due to environmental reasons.
But speaking purely from the economics point of view, this doesn’t seem that great. 🤔
You would definitely have less zombie companies. In a deflationary world, there is no malinvestment because there is no credit to create an artificial boom.
An individual would have less units of currency, but due to the implicit deflationary nature of technology, your money will buy more stuff eventually.
What's the price of a calculator? It's practically 0 because most PCs and phones have it as a free app. Deflation is what true wealth looks like. You can do and buy more stuff today than a caveman can because technology has created real wealth, regardless of any monetary policy.
You're still thinking like a Keynesian. By that particular branch of economic logic, a person who breaks a shopkeeper's window has increased the demand for glass and repairmen, which is good for the economy (false).
Inflationary currency enables fake growth, deflationary currency encourages real growth.
Do you think the central banks could achieve a similar effect by having a negative inflation target? So, keeping the rates high enough to have inflation at say -2%?
That should also discourage superfluous crediting and encourage saving.
Central banks couldn't even keep their touted 2% target. If central banks and people in general were trustworthy enough to not steal easily available money, we would still be on the gold standard and we wouldn't need bitcoin.
Savings and Investment Perspective: Systematic deflation would increase the value of money over time. This leads to an increased incentive for individuals to save, as the purchasing power of their money grows. While some economists argue that this can lead to decreased consumer spending and thus dampen demand, proponents of systematic deflation counter that these savings would likely be invested in banks or financial instruments. Banks could then lend out these funds, supporting investment in businesses and capital goods, possibly offsetting the decline in consumer demand.
Supply-side Perspective: Systematic deflation may not necessarily impact the supply side negatively. If deflation is the result of increased productivity and technological advancements (supply-side deflation), it can lead to lower production costs. These cost reductions can then be passed on to consumers in the form of lower prices, increasing real incomes and potentially maintaining or even boosting demand.
It's essential to distinguish between "good deflation" caused by supply-side factors like increased productivity and "bad deflation" stemming from a fall in demand. Good deflation might be seen as beneficial or at least not harmful, whereas bad deflation, if persistent, could lead to a deflationary spiral where reduced demand leads to further price reductions, resulting in decreased business profits, lower wages, and a subsequent further decline in demand.
Critics of deflation often point to the risks of a deflationary spiral, especially in the context of bad deflation. The Japanese experience in the 1990s is often cited as an example of how persistent deflation can lead to economic stagnation. Critics also argue that deflation might make it more difficult for governments to service debt, as the real value of debt would increase.