Why Is Economic Deflation a Bad Thing?

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Deflation is very dangerous to the economy and the government will do anything to avoid it.

Imagine wanting to buy new sofa that costs 1,000. Next month it will be 900. Month after it will be 700. Would you buy it now? Or would you wait and save 300 bucks?

Think about how deflation would affect super-rich people investing their money.

Richie Rich has 10 million bucks. If there is 2% inflation, he needs to do something with that money (put it in the stock market, open a restaurant, lend it out, etc) or he will lost 2% of his buying power every year. This is what usually happens, and it is good – we want him to invest his money and do something with it. Our economy runs on dollars moving around, not dollars sitting in a mattress somewhere.

If there is 2% deflation then he can put his money in a safe, sit on his butt and do absolutely no work, and get richer. Each year his buying power will increase by 2% while he does no work, takes on no risk, and basically leeches off everyone else.

If the 2% deflation lasts forever, and he only spends 1% of his money each year, he can get richer forever.

Deflation causes the economy to come to a screetching halt because people dont want to spend more than they need to, so they decide to save their money instead.

Because of this, a small level of inflation is the healthiest spot for the economy to be in. Somewhere around 2% is generally considered healthy. This way people have a reason to buy things now instead of wait, but they also wont struggle to keep up with rising prices.

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