Quite often, people perceive deflation as a positive process. But is it really so? Maybe in order to understand how serious this is, it is worth learning about what deflation is in simple words? This is what this article was written for. Together we will figure out the question: is deflation bad or good?
The importance of the macroeconomic process
What it is? Deflation (in simple words) is a macroeconomic process characterized by the withdrawal of large money supply from circulation. This leads to an increase in the purchasing power of money and lower prices. The word "deflation" came to us from the Latin language and, according to etymology, means "deflation". At its core, deflation is the opposite of another well-known indicator - inflation. Recall that inflation is a process characterized by the depreciation of money in connection with its redundancy.
Given the fact that many have heard about the fight against inflation, deflation may seem not only positive, but also an absolutely harmless process in the country. However, this is not quite true. But before making a conclusion regarding deflation (good or bad), it is worthwhile to understand the causes of its occurrence and the consequences of this phenomenon.
Causes of Deflation
Considering the causes of this phenomenon, we can distinguish a sufficiently large number of them. After all, every economic action or inaction leads to fluctuations at the macroeconomic level. However, the most global situations leading to a decrease in the money supply are only three:
- Growth in cash requirements. If we turn our eyes to economically developed countries and conduct research on population behavior, it will become obvious that people there began to save more than spend. The trend is that most people prefer to put their money in the bank at a percentage, which reduces the amount of money in circulation. Such behavior leads to the fact that the demand for cashless and cash means is growing, therefore, the consumer price index is declining, and prerequisites for deflationary processes appear.
- Reduction in consumer loans. There are many reasons why banks cease to issue consumer loans in large volumes: raising the refinancing rate, increasing the quality of life of the population, lowering the cost of goods and services, etc. However, it can be asserted with certainty that when ceasing to issue loans, banks cease to issue loans. money supply circulation. This again causes deflation.
- Money supply control by the state. This reason is the most common, especially if the state has experienced an increase in inflation. One of the control tools is to increase the refinancing rate. By setting a new percentage, the Central Bank discourages commercial banks from taking money. Against this background, the amount of money in circulation decreases, which increases the demand for them.
Consequences of deflation
It is time to determine: is deflation bad or good? In fact, protracted deflationary processes are a rarity in the modern world. When preparing monthly reports, literally at the first stages, it becomes clear what to expect - the depreciation of money or an increase in their purchase value. Having told what deflation is, in simple terms, we will try to just as easily explain the consequences of this phenomenon.
Each consequence leads to a new, even more significant. This happens both with inflation and with deflation. Consider them in detail, in increasing degree of influence on the country's economy.
Decrease in consumer demand for goods and services
As already noted, deflation increases the need for money. This affects both consumers and manufacturers. Manufacturers are forced to lower prices for goods and services in order to some extent be able to recoup production costs. However, the cost is reduced not due to a technological breakthrough leading to a drop in cost, but due to artificial interference in pricing. The population, expecting a further fall in prices, is trying not to acquire anything, which only strengthens the deflationary processes.
Bankruptcy Closure
Amid the fact that the population buys less, and manufacturers lower prices to stabilize demand for their goods and services, production is declining. Against this background, "unnecessary" labor is released and equipment that is simply idle is being sold. The inability to get out of this situation leads to bankruptcy of companies and their closure.
Investment outflow
Against the background of the closure of production, the purchasing power of the population is declining. Revenues are falling faster than prices. Banks cease to issue loans, as there is a serious risk of default on money. The general economic situation leads to the depreciation of assets, which causes an outflow of investments. Investing in production becomes risky. As a result, a region or state loses its investment attractiveness.
Thus, answering the question of whether deflation is good or bad, it can be argued that it is terrible. No wonder many countries, in particular Japan, are trying their best to avoid this phenomenon. To do this, use a lot of monetary instruments. The most favorite way is a negative loan rate, designed to collect all the money from the population. Deflation also forces the state to turn on machine tools and print money intensively. However, this method is too risky - a transition from deflation to hyperinflation is possible, the consequences of which are also colossal. Conclusion: slight inflation should be present, and the state needs to make every effort to maintain it at an insignificant level.