I am not too well versed in Austrian economics and one person on another site said that:
''Deflation is bad for debtors who owe a lot of money. And when most people in the country are deeply in debt. Then worrying about deflation is the most popular thing for the government to do.
During deflation, property prices and asset prices go down. While the loans that were used to buy the properties and assets remain unchanged. And if people’s incomes go down at the same time due to deflation. Then repaying these loans becomes impossible for many debtors.
In a country full of debtors, deflation doesn’t just bring down prices. It also bankrupts a lot of borrowers and those who loaned them the money. And letting the majority of the people in the country go bankrupt is not a popular thing for any government to do.
Deflation is not a problem only when there is no debt. But when there is a lot of debt. Then deflation is a big problem.‘’
Now I know those who are well versed could spot some flaws and fallacies in this paragraph.
Could you please enlighten me? Thank you in advance.
Also somebody else wrote this:
‘’
Deflation also makes it almsot impossible for the economy to expand. Given our growing population, if our economy does not expand we will experience a relative decline.
Think about it: if my goods are selling for less, I cant pay you more. In fact, your salary may go down. Your living standard would probably never improve. Thus, inflation allows an economy to grow.
Deflation also is much, much harder to control than inflation. Inflation can usually be controlled through adjustment to monetary policy – deflation is a much different issue.
*Note: A good model is where GDP growth outpaces inflation.‘’
Actually I think those first set of quotes are basically correct and should be noncontroversial. Deflation would hurt debtors, and asset prices would fall (likely in both nominal and real terms).
Keep in mind you would be going from a period of inflationary expectations to deflation. So adjustments would be painful for many people, you can hardly argue otherwise.
The long-term effects of deflation in a growing economy is a different story
What kind of deflation are we talking about? Deflation, as in, the elimination of fake computer dollars? Or an increase in the purchasing power of money through increased production? The latter condition does not mean a fall in the value of assets in real terms, why should it?
It’s not a contradiction at all. The thread title is, “is deflation bad in our environment,” with “bad” apparently meaning bankruptcies and debtors being hurt. Do you disagree that those would be consequences?
If there are bankruptcies and layoffs as people adjust to deflation, asset prices can hardly be only expected to fall in nominal terms, but will also fall in real terms. Do you disagree?
Again, what kind of deflation are you talking about? Either way, deflation does help the creditor at the expense of the debtor. Inflation/deflation always mean arbitrary redistributions of wealth; but so what?
The “so what” is precisely what was at issue – a widespread contraction of economic activity and a decline in real asset prices. You just said that wouldn’t happen.
In the current environment, it wouldn’t matter what kind of deflation you’re talking about – it would still require an adjustment period.
In this economic environment, there couldn’t be a gradual increase in the purchasing power of money. It happens quickly due to a contraction of credit, and a sharp increase in the market rate of interest towards the natural rate. So no, this condition is only suitable for one kind of deflation.
Gradual deflation, that is, the natural increase in the purchasing power of money, due to an increase in production, must mean a fall in the real values of homes? If you can just explain why this is necessarily the case.
If we’re talking about the current environment, then you just answered it in your first quote.
If we have deflation in the near future, do you think it would also come with a contraction in activity and a fall in real asset prices or not? Empirically, it seems obvious to me.
That is not to suggest that deflation is always bad, or even that we should prevent it. We’re not talking about an increase in production leading to an increase in the purchasing power of money – that’s why I distinguished the long-term case for deflation, a distinction that you claimed was false.
Yeah, I misunderstood the question. In our current condition, deflation would certainly have negative consequences, but they’re necessary. The alternative is the complete destruction of our currency.