Is Deflation Good?

20 Nov

Deflation is a word that seems to scare a lot of people.  But I have been wondering why it causes so much dread?  Afterall, if prices drop then we are all richer (relatively).  I wass happy to see a piece about the topic in today’s news.

Over the past 10 years we’ve been trained to treat deflation — an actual fall in prices, as shown in today’s consumer price index (CPI) release — as a horror to be avoided. Could it be that in this case a whiff of deflation may help us get out of the crisis?

There are a couple of reasons why deflation is bad.

  1. It reduces the governments ability to control the economy by adjusting interest rates.
  2. It reduces the wealth of those who have assets.  The more assets you have, the more deflation will hurt you.
  3. It reduces the incentive for investment.  If the value of assets is going down then people aren’t going to produce them.

On the other hand if you’ve just lost your job, have no income (or are on a fixed income), have no home and no significant assets couldn’t depreciation be a good thing in the short term? 

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