Is deflation good?

Stock market is up on news that the consumer price index rose. Inflation is good.

deflation happens during a recession. When there is too much deflation that means there isn't enough money in the economy. Ideally you want an inflation number that is roughly equal to population growth so that the amount of money in the economy is stable.

Neither one is good in extremes. Small changes in currency value one way or the other don't make too much of an impact, but rampant inflation or deflation should be avoided.

Inflation is the reduction in value of your currency. So something that would cost $1 today could cost $2 tomorrow.

Deflation is the opposite, or the increase in value of your currency. So, the expectation is that something that costs $2 today would cost $1 tomorrow, $0.50 the next day, etc. (Your money would buy you more tomorrow than it will today) Spending tends to slow way down if people can expect the same thing to be cheaper tomorrow than it is today. Deflation can also reek havoc with your exports since your goods are now (relatively) more expensive in other countries.

Having said all that, you'll almost always find fear mongers warning that 's actions are going to cause runaway inflation/deflation and a depression far worse that what we saw in the '30s will be upon us in the next 6/12/18 months. Usually this is followed by a commercial urging you to buy gold/silver/platinum or some other precious metal.

I'm sitting on a lot of cash. Deflation is good for me.

Deflation means the value of the dollar goes up. This is terrible for people who owe money, because the dollar amount stays the same but the value of what you owe has increased. It's like owing someone $10 today, doing nothing, and a year from now you owe them $100 in today's dollars. My guess is that this would have a bad effect on the economy because nobody wants to borrow. Hyperdeflation would also have dramatic effects on societal stability.

Inflation means the value of the dollar goes down. This is terrible for people who are owed money (or who have it), because the value of what they are owed decreases over time. It's like being owed $10 today, doing nothing, and a year from now you are only owed $1 in today's dollars. My guess is that this would have a bad effect on the economy because nobody wants to lend. Hyperinflation would also have dramatic effects on societal stability.

You can see from the way that I structured my post that I think too much inflation or deflation can be bad. There must be a happy medium somewhere. A small amount of inflation seems to spur investment (people will be more likely to open a business or something and go into debt) and seems to be best for the economy.

But I'm a physicist, I've never taken an economics class in my life, so you shouldn't trust my opinion as gospel.

depend what side of the fence you on. Keynes or Austrian econ? of course if you break from the acedemic line and realize the nature of reality is both deflation for asset bleeding and reinflating form policy help. at least in this current market. how else do you explain the whiplash up and downs in the market?. Buy the dips sell the rips. parcel your bets. worked for me these few years. almost too easy. keep your own counsel. you are looking for absolutes. the world doesn't work that way. be balanced don't lose focus, focusing on deflation or inflation. you are missing the woods for the single tree. step back and look at the bigger pic.

In the current financial crisis, delfation would be a good thing, because we have far too much inflation as it is. Deflation would be painful for some people, but still far less painful than the high inflation scenario which appears to be likely.

If you are not in debt, you can use deflation to your advantage. For those in debt, though, the pain of the debt will be amplified.

Imagine being $1,000,000 in debt. With 5% deflation, even a 0% loan is being repaid with money that is 5% more valuable next year. Add in the cost of borrowing and the effect of the debt is doubled. The same way inflation helps those in debt, deflation hurts those in debt.

Also, imagine getting a pay cut as a result of deflation in the same way that pay raises are there to hedge against inflation. Not a popular thought.

For one, deflation is bad if you have debt.

With deflation, costs go down, value goes down, income goes down over time.

But the amount of what you already borrowed doesn't go down while your abilty to pay it back decreases.

Now inflation is bad if the rate of rising expenses out paces rising income.

Small steady inflation is ok and leads to higher income and it makes it easier to pay prior debts.

Inflation, correctly defined, is the expansion of the money supply. Rising consumer prices are the consequence of inflation, not inflation itself.

Rational Economics wrote:Deflation would be painful for some people, but still far less painful than the high inflation scenario which appears to be likely.

Based on what indicators?

Mr. Price wrote:

Rational Economics wrote:Deflation would be painful for some people, but still far less painful than the high inflation scenario which appears to be likely.

Based on what indicators?

US government debt.

Price stability = good. Price uncertainty = bad.

Deflation would also create more unemployment... due to unions and minimum wage laws and such they couldn't decrease workers wages past a certain point to compensate and would need to lay off more workers.

I thought that deflation is mostly considered bad if you have a consumer-driven economy, like we have. If prices are falling, then why buy something today, when it'll be cheaper tomorrow? This quells economic activity, which is what it's all about in our society. But I'm no economist.

Before making any rash decisions, wait for Flagpole Willy to provie his insight. He knows a lot about this stuff.

You really fit the description of "16 year old idiot" if your news source is Fox...

WaiterOuter wrote:

Before making any rash decisions, wait for Flagpole Willy to provie his insight. He knows a lot about this stuff.

flagpole knows a lot about personal finance. he offers simple, sound advice.

he knows enough about economic policy to be dangerous. i wouldnt listen to it.

deflation is a disaster, especially for banks and all participants in fractional reserve banking (FRB).

FRB - banks holding a % of reserves against loans - is a great system, as long as total loans increase more or less continuously. If they contract, then that causes all loans to collapse in on themselves, and the economy to contract further, as banks and individuals cover loans.

So if loan balances are DECREASING, it is extremely difficult to reverse this process once started.