> The idea that people won't spend money today because something may be cheaper in the future is bad? No. Think about what happens to any large organization du

> The idea that people won't spend money today because something may be cheaper in the future is bad? No. Think about what happens to any large organization during deflation. The counterintuitive part here is that every large organisation, including the government, is worth exactly nothing. Now you might think "But Obama sure has a nice little white house, lots of employees, ... that's gotta be worth something". That's true. Those are the assets. Then you have the liabilities. This includes loans that need to be repaid (plus interest), and any remaining capital is effectively loaned to the shareholders (though in practice this will, nearly always, be zero. The exceptions are Apple, Google and Facebook, but there's other major caveats there). Now what happens when you have 11% deflation (making an extreme example, nobody's expecting more than 1.1% at the moment). Before: * Assets(t-1) = What was produced (sold) - what was consumed (yes, even for the government) * Liabilities(t-1) = What was loaned * Worth(t-1) = Assets(t-1) + Liabilities(t-1) = 0 After 11% inflation: * Assets(t) = 0.9 * What was produced (sold) - 0.9 * what was consumed * <> Assets(t) = 0.9 * Assets(t-1) * Liabilities(t) = What was loaned ~= Liabilities(t-1) (Liabilities, especially loans, but many other instruments as well, are not affected by inflation) * Worth(t) = 0.9 * Assets(t-1) + Liabilities = Worth(t-1) - 0.1 * Liabilities(t-1) So there you have it : the organisation (say, the US government), effectively has to pay 10% of it's liabilities without getting anything in return for that. Zero liabilities disappear, nothing gets produced, it's literally money down a black hole. So there you have (way, way oversimplified) the problem. When you have deflation, every organisation that is balanced (assets + liabilities = zero), including the government, every large organisation, ... all their loans effectively increase by the deflation amount. So what would the effect be of 1% deflation : The US government loaned $17 trillion, so every 1% of deflation means raising tax income by 170 billion (or loaning it, worsening the problem quickly) without getting anything in return at all. Note that this is just the primary effect. The fact that every loan suddenly becomes more expensive to repay will have all sorts of indirect effects, like say a housing price crash (because banks can be pretty sure nobody will be able to repay even small loans with low interest rates). Deflation, effectively, is a tax on loans. It will very quickly destroy anyone and anything holding loans, which is to say everyone. Incidentally, fractional reserve banks have a capital buffer of 2%, which means they loan out 50 times more money than they have in capital, all of which will suddenly and simultaneously have problems getting repaid. What do you think will happen to your savings ? Cynics would say, because the effect this will have on governments, they will go to war. Especially the ones that don't control their own currencies. (in other words, a piece of advice : if inflation gets to 0%, you won't get interest on the bank anyway. Get your money and hide it under your mattress before everyone else does)