What Is Deflation?

Deflation is when prices decrease over time. It stands in contrast to inflation, which is when prices rise. Deflation can be driven by many different factors, including an increase in productivity and the abundance of goods and services, a decrease in total or 澳洲幸运5开奖号码历史查询:aggregate demand, or𝐆 a decrease in the supply of money and credit. Most of the time deflation is a good thing, but sometimes❀ it can indicate a contraction of the economy.

When deflation occurs throughout an economy, this typically means there is a 澳洲幸运5开奖号码历史查询:fall in the overall level of prices and an increase in the 澳洲幸运5开奖号码历史查询:purchasing power of the currency.

Understanding Deflation

Changes in consumer prices can be observed in economic statistics compiled in most nations by comparing changes in a basket of diverse goods and products to an index. In the U.S. the 澳洲幸运5开奖号码历史查询:Consumer Price Index (CPI) is the most commonly referenced index for evaluating inflation rates. When the index in one ༒period is lower than in the previous period, the general level of prices has declined, indicating that the economy is✱ experiencing deflation.

This general decrease in prices is a good thing because it gives consumers greater purchasing power. To some degree, moderate drops in certain items, such as food or energy, even have some 澳洲幸运5开奖号码历史查询:positive effect on increasing nominal consumer spending. Beyond these basic staples, a general, persistent fall in all prices not only allows people to consume more but can promote economic growth and stability by enhancing the function of 澳洲幸运5开奖号码历史查询:money as a store of value and encouraging real saving. 

However, under certain circumstances, rapid deflation can be associated with a short-term contraction of economic activity. In general, this can occur when an economy is heavily laden with debt and dependent on the continuous expansion of the supply of credit to inflate asset prices by financing speculative investment, and subsequently, when the volume of credit contracts, asset prices fall, and speculative over-investments are liquidated. This process is known as 澳洲幸运5开奖号码历史查询:debt deflation.

Otherwise, deflation is normally a 澳洲幸运5开奖号码历史查询:positive feature of a healthy, g📖rowing econ♎omy that reflects technological progress, increasing ab꧒undance, and rising liv♛ing standards.

Deflation: Causes and Effects

If, as the common sayiཧng goes, inflation is the result of too much money chasing not enough goods in the economy, then conversely de𒊎flation can be understood as a growing supply of goods and services being chased by a constant or slower-growing supply of money.

This means that deflation can be brought about either by an increase in the supply of goods and services or by ꦰa lack of increase (or decrease) i🉐n the supply of money and credit. In either case, if prices can adjust downward, then this results in a generally falling price level.  

An increase in the supply of goods and services in an economy typic🌌ally results from technological progress, the discovery of new resources, or an increase in productivity.

Consumers' purchasing power increases over time. Living standards rise as the increasing value of wages and business incomes allow consumers to purchase, use, and consume more and better quality goods and services.

At times, some economists have expressed fears that falling prices would paradoxically reduce con🦋sumption by inducing consumers to hold out or delay purchases in order to pay lower prices in the future. However, there is little evidence that this actually occurs during normal periods of economic growth accompanied by falling prices due to improvements in productivity🤪, technology, or resource availability. 

Moreover, the vast majority of consumption is made up of goods and services that are not easily deferred to the future, such as food, clothing, housing services, transport꧋ation, and healthcare.

Beyond these basic needs, even for luxury and discretionary spending, consumers would only choose to reduce current spending if they expect the rate of decrease in prices to outweigh their natural time preference for present consumption over future consumptio💜n.

The one type of consumer spending that would suffer from falling prices would be items that are routinely financed by taking on large debts, since the real value of𒀰 fixed debt will increase over time as prices fall.  

Debt, Speculation, and Debt Deflation

Under spe𒐪cifi﷽c conditions, deflation can also occur in and after periods of economic crisis. 

In a highly 澳洲幸运5开奖号码历史查询:financialized economy, where a 澳洲幸运5开奖号码历史查询:central bank, another monetary authority, or the banking system, in general, engages in the continuous expansion of the supply of money and credit in the economy, the reliance on new♚ly created credit to finance business operations, consumer spending, and financial speculation, results in ongoing inflation in commodity prices, rents, wages, consumer prices, and asset prices. 

Increased investment activity starts to take the form of speculation on the price appreciation of financial and other assets, rather than profit and dividend🍷 payments on fundamentally sound economic a𒅌ctivity.

Business activities tend likewise to depend more and more on the circulation and turnover of newly-created credit rather than real savings to finance ongoing operations. 🧜Consumers also come to finance more of their spending by borrowing heavily rather than using their savings. 

To compound the problem, this inflationary process usually involves the suppression of market i🍸nterest rates, which distorts decisions about the type and time horizon of business investment projects themselves, beyond simply how they are financed. Conditions become ripe for debt deflation to set in at the first sign of trouble. 

At that point, either a real economic shock or a correction in market interest rates can put pressure on heavily indebted businesses, consumers, and investment speculators. Some of them have trouble revolving, refinancing, or making their payments on various debt obligations such as business loans, 澳洲幸运5开奖号码历史查询:mortgages, car loans, student loans, and credit cards.

The resulting delinquencies and defaults lead to debt 澳洲幸运5开奖号码历史查询:liquidation and write-downs of 澳洲幸运5开奖号码历史查询:bad debts by lenders, which start to ꦗeat away some of the accumulated supply of circulating credit in the economy. 

Banks' balance sheets become shakier, and depositors may seek to withdraw their funds as cash in case the bank fails. A bank run may ensue, whereby banks have over extended loans and liabilities against inadequate cash reserves and the bank can no longer meet its own obligations. Financial institutions begin to collapse, removing 澳洲幸运5开奖号码历史查询:liquidity that indebted borrowers hav꧂e become ജeven more desperate for.

This reduction in the supply of money and credit then reduces the ability of consumers, businesses, and speculative investors to continue to borrow and bid up asset and consumer goods prices so that prices may 𝐆stop rising or even begin to fall.

Falling prices put even more pressure on indebted businesses, consumers, and investors because the 澳洲幸运5开奖号码历史查询:nominal value of their debts remains fixed as the corresponding nominal value of their revenues, incomes, and collateral falls through price deflation. And at that point, the cycle of debt and 澳洲幸运5开奖号码历史查询:price defla꧒tion feeds back on itself. 

In the near term, this process of debt deflation involves a wave of business failures, personal bankruptcies, and increasing unemployment. The economy experiences a 澳洲幸运5开奖号码历史查询:recession, a🔥nd economic output slow♉s as debt-financed consumption and investment drop.

The Bottom Line

A little bit of deflation is a product of, and good for, economic growth. But, in the case of an economy-wide, 澳洲幸运5开奖号码历史查询:central bank-fueled debt bubble followed by debt deflation when the bubble bursts, rapidly falling prices can go hand-in-ha𝕴nd with a financial crisis and recession.

Thankfully, the period of debt deflation and recession that follows is 𒉰temporary and can be avoided entirely if the perennial temptation to inflate the supply of money and credit in the f🍰irst place can be resisted. 

All in all, it is not deflation, but the inflationary period that then leads to debt deflation that is dangerous for a country's economy. Perhaps, unfortunately, consistent and repeated inflation of this kind of debt bubble by central banks has become the norm over the past century or so.

At the end of the day this means that while these policies persist, deflation will continue to be associated with the 澳洲幸运5开奖号码历史查询:damage it causes to the economy.