A couple of weeks ago, we looked at a piece on deflation and its effects on the economy. We talked about how deflation is assocated with depressionary economies but that usually it’s not a concern-mostly countries try to avoid inflation like the plague, to the point where they’re a bit flat-footed on the deflation issue.
What words are commonly associated with deflation? Depression, economic downturn, debt, debt consolidation, job loss, are just a few answers that may come to minds of many. But here’s a piece from Salon.com, reprinted in the Financial Post, where author Daniel Gross says hey, what’s so bad about deflation? He starts out calling deflation “inflation’s evil twin,” and then defines deflation as a widespread fall in prices as measured by the consumer price index.
But, he asks? What’s so bad about deflation? After all, it’s a pleasant surprise when prices of many items fall. Generations of Econ 101 students and central banks have been schooled to think that inflation is the great boogeyman, since it erodes the value of savings. And for much of our lifetimes, moderate inflation has been the norm.
So, much like cholesterol, there are good and bad kinds of inflation according to economists and experts on the subject. For example, during the Great Depression, prices fell on average by 15%. The decline was driven by declining output, demand and perhaps causally-credit. There was not enough money to pay for all the goods and services available. This depression made companies and people unable to pay debts acquired previously.
The good kind of inflation, apparently, happens when prices fall as other economic markers boom. This happens, for example, during a time of innovation. The example given is the “Roaring 20s,” a time when innovations like the telephone, widespread adoption of the auto and so forth were taking place. The economists in this piece claim that as long as the economy is growing-albeit at a more muted pace-that deflation isn’t anything to worry about. Rather, deflation combined with slow growth is the doomsday scenario.
