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I have never understood why deflation is bad. The money I earn becomes worth more over time? GREAT! I would settle for money that just keeps its value over t

I have never understood why deflation is bad. The money I earn becomes worth more over time? GREAT! I would settle for money that just keeps its value over time. The only side deflation is bad for is the government that uses inflation as a tax.

orwin 6y ago
Because unless your investment expectation in greater than the deflation value, you won't invest. Loans become too expensive and the default rate will be higher since there is less investment. And no more thing such as buying on credit. And if banks don't loan money and credit become a thing of the past, the money supply disappear. Also, unless deflationary money is decoupled from production , production will crumble and you will enter hyperinflation quickly.
- tastyfreeze 6y ago
  Those all would be temporary effects as everybody adjusts. People still need to have a place to live, food to eat, cloths to wear, and ways to be entertained. Its not like everybody just stops spending money. They just get rewarded for whatever they have in savings. With savings people have more ability to take risks on investments. Deflation builds value in an economy.
ginko 6y ago
If the value of your currency kept going up people would be incentivized to keep it in their bank accounts rather than spend it and invest in their economy. Of course this is certainly less of an issue than hyperinflation, but neither is great.
- tastyfreeze 6y ago
  That argument always seemed weak to me. Keeping money out of the economy is a temporary effect as prices adjust. Once people have savings they would start looking for ways to employ that money. People are always going to do what will benefit them most. When people have savings they have more ability to risk loss by starting a business or investing. Having more people with the ability to risk loss is a very good thing for real growth. Now if deflation is higher than any possible investment return, then people will only horde money. The goal of most people is to accumulate value, not a specific currency. Inflation destroys value, deflation creates value.
AnimalMuppet 6y ago
It's bad if you owe money. And many people do. They don't want to owe more value because the currency becomes more valuable. (They would owe the same number of dollars or bitcoin or whatever, but they'd owe more value, because each dollar or bitcoin would be more valuable.) And then comes the second-order effects. Each debtor owing more value means more of them can't pay, so more default. This leads to things like houses reverting to the lenders, who then sell them for what they can get. This reduces the price of those assets, which causes additional deflation. When this cycle really gets going, it crushes lots of people - even responsible people, whose only mistake was getting a mortgage when times were good, and maybe a car loan and a bit on their credit cards.
- cuspycode 6y ago
  Deflation is bad for debtors only if nominal interest rates don't drop to compensate for the increased value of the currency. But given that any instability of the value of a currency is bad, inflation has historically done much more damage than deflation.

orwin 6y ago

Because unless your investment expectation in greater than the deflation value, you won't invest. Loans become too expensive and the default rate will be higher since there is less investment. And no more thing such as buying on credit. And if banks don't loan money and credit become a thing of the past, the money supply disappear. Also, unless deflationary money is decoupled from production , production will crumble and you will enter hyperinflation quickly.

tastyfreeze 6y ago
Those all would be temporary effects as everybody adjusts. People still need to have a place to live, food to eat, cloths to wear, and ways to be entertained. Its not like everybody just stops spending money. They just get rewarded for whatever they have in savings. With savings people have more ability to take risks on investments. Deflation builds value in an economy.

ginko 6y ago

If the value of your currency kept going up people would be incentivized to keep it in their bank accounts rather than spend it and invest in their economy. Of course this is certainly less of an issue than hyperinflation, but neither is great.

tastyfreeze 6y ago
That argument always seemed weak to me. Keeping money out of the economy is a temporary effect as prices adjust. Once people have savings they would start looking for ways to employ that money. People are always going to do what will benefit them most. When people have savings they have more ability to risk loss by starting a business or investing. Having more people with the ability to risk loss is a very good thing for real growth. Now if deflation is higher than any possible investment return, then people will only horde money. The goal of most people is to accumulate value, not a specific currency. Inflation destroys value, deflation creates value.

AnimalMuppet 6y ago

It's bad if you owe money. And many people do. They don't want to owe more value because the currency becomes more valuable. (They would owe the same number of dollars or bitcoin or whatever, but they'd owe more value, because each dollar or bitcoin would be more valuable.) And then comes the second-order effects. Each debtor owing more value means more of them can't pay, so more default. This leads to things like houses reverting to the lenders, who then sell them for what they can get. This reduces the price of those assets, which causes additional deflation. When this cycle really gets going, it crushes lots of people - even responsible people, whose only mistake was getting a mortgage when times were good, and maybe a car loan and a bit on their credit cards.

cuspycode 6y ago
Deflation is bad for debtors only if nominal interest rates don't drop to compensate for the increased value of the currency. But given that any instability of the value of a currency is bad, inflation has historically done much more damage than deflation.