The problem with deflation is that people end up hoarding all their cash because you get a return on it without doing anything with it.
So large swathes of money start getting taken off the playing field. Investment dries up, growth slows, people get laid off, and this cycle continues, one thing causing the next, causing the next in a circle. It’s one of the most destructive forces possible to an economy.
That’s why the central banks strive for around 2%. It’s enough to force people with cash lying around to invest it in something useful which will create jobs, etc, but not so high that it will make everyone panic and run the banks.
It’s a fair point, and typical thinking, but wrong. Deflation is better than inflation.
First, in general asset inflation vs goods inflation is usually different. Then for goods inflation, there is no good measure. Substitute goods exist.
Asset inflation definitely improves lives of the rich. Your “hoarding scare” can happen when savings/bond rates are higher than inflation. That is the genuine hoarding motivation. Lower interest rates supported by deflation supports more borrowing for more production/housing, with lower financing costs passed on to consumers. Either way, all money in the banking/financial system is hoarded money, and fractional reserve lends more the more demand for money there is. Deflation is better than inflation for this.
For goods, electronics and now EVs are deflationary. Your phone from 2008 cost the same as one from this year while having 100x less power/apps/value. While it can make sense to wait on tech/value improvements, competition/innovation creates work, and the deflation is the cause of that innovation, and there is a replacement cycle. Energy, food, clothing deflation would allow for higher consumption and also more work, though rarely would there be expectation of continued sustained deflation. Deflation is always technology or imported/slave labour costs. Never domestic wage reductions, unless slavery pressures can be manifested. Tariffs can stop it though.
Any economic competition creates a deflationary pressure. Deflation can be renamed value enhancement. When you favour inflation over deflation you are saying, “scarcity good, competition bad, innovation bad”
On the flip side, we’ve seen with inflation that just amazing amounts of debt have been created, with consumers massively underwater spending way beyond their means, leading to things like house values blowing up completely unsustainably.
So inflation is not automatically better, it’s just a different kind of bad.
This excuse only affects fractional reserve banking and investments. It does nothing to non capital focused economies, and China’s economy is less than 40% capital.
That’s a pretty important caveat. I would take it one step further to say that it only matters in non-communist governments. Yes, maybe China can pull it off. But even losing a large chunk of 40% of the economy will be pretty bad and they’d have to switch to something pretty close to fully communist pretty quick to pick up the slack.
Which is the plan anyway, especially after the failure of allowing privatized luxury housing development.
But more importantly, a country that doesn’t privatize any of the essentials has nothing to fear from the collapse of private markets; everyone will still be housed, fed, and cared for.
Im no economist but with negative inflation it drives consumers to put off that next purchase.
Why buy the car you have been saving for, or put a bid on a house, upgrade your TV or get replacement running shoes if prices are staying the same or potentially going down? A way to make sure that people spend now and dont put it off is that they know the longer they wait the higher chance that the shoes are going to be $5 more in a months time or two.
If people arent spending then conversely people arent selling, building, labouring, etc and then everything grinds to a halt. People get laid off, people cant pay rent or mortgages, things go to shit.
At least this is the way i understand it, and like i said im no expert.
