When most of us think of inflation, we think of rising prices that strain budgets and take away our 澳洲幸运5官方开奖结果体彩网:buying power. During the late 1970s and early 1980s, inflation skyrocketed as high as 14.8% in the United States, and 澳洲幸运5官方开奖结果体彩网:interest rates climbed to similar levels. Few living Americans know what it’s like to face the opposite phenomenon: 澳洲幸运5官方开奖结果体彩网:deflation.

Since too much inflation is generally regarded as a bad thing, wouldn’t it follow that deflation might be a good thing? Not necessarily, since 澳洲幸运5官方开奖结果体彩网:much d🔴epends on the cause and circumstanceওs of the deflationary cycle🐠 and how long it lasts.

Understanding Deflation

Deflation is a general decline in prices as a function of 澳洲幸运5官方开奖结果体彩网:supply and demand for products and the money used to buy them. 澳洲幸运5官方开奖结果体彩网:Deflation can be caused by a decrease in💎 the demand for products, an increase in the supply of products, excess production capacity, an increa🔯se in the demand for money, or a decrease in the supply of money or the availability of credit.

Decreased demand for products can manifest itself in the form of less personal spending, less investment spending, and less 澳洲幸运5官方开奖结果体彩网:government spending. While deflation is often associated with an economic 澳洲幸运5官方开奖结果体彩网:recession or 澳洲幸运5官方开奖结果体彩网:depression, it can occur during periods of relative prosperity if the r﷽ight conditions are present.

Practical Application

If prices are dropping because a product can be produced more efficiently and cheaply in greater quantity, that’s viewed as a good thing. An example of this is consumer electronics, which are far better and more sophisticated than ever. Yet prices have consistently dropped as the tec𝔍hnology improved and spurred more demand.

The effect on prices by fluctuations in the demand for money is usually a function of interest rates. As the demand for money increases during a period of inflation, interest rates rise to compensate for the higher demand and to keep prices from rising further. Conversely, deflation will result in lower interest rates as the demand for money drops. In that case, the goal is to spur buyer demand to stimulate the economy.

The Great Depression

Severe economic 澳洲幸运5官方开奖结果体彩网:contraction during the 澳洲幸运5官方开奖结果体彩网:Great Depression resulted in deflation averaging -10.2% in 1932. As the 澳洲幸运5官方开奖结果体彩网:stock market began to crater in late 1929, the supply of money declined along with it as 澳洲幸运5官方开奖结果体彩网:liquidity was drained from the marketplace.

Once the downward spiral had begun, it fed on itself. As people lost their jobs, this reduced the demand for goods, causing further job losses. The decline in prices wasn’t enough to spur demand because rising 澳洲幸运5官方开奖结果体彩网:unemployment undercut consumer 澳洲幸运5官方开奖结果体彩网:purchasing power to a far greater degree. The snowball effect didn’t stop there, as banks began to fold as loan defaults rose dramatically.

As banks stopped lending money and credit dried up, the 澳洲幸运5官方开奖结果体彩网:money supply contracted, and demand tanked. Although the demand for mone🦋y remained high, no one could aff💧ord it because the supply had shrunk. Once this vicious cycle took hold, it lasted a decade until the beginning of World War II.

Possible Effects

There are many reasons to be concerned about a prolonged deflationary period, even✨ w🅺ithout an event as devastating as the Great Depression:

1. Demand for goods decreases since consumers delay purchases, expecting lower prices in the future. This compounds itself as prices drop further in response to decreasing demand.
2. Consumers expect to earn less and will protect assets rather than spend them. Since 70% of the U.S. economy is consumer-driven, this would have a negative effect on 澳洲幸运5官方开奖结果体彩网:gross domestic product (GDP).
3. Bank lending drops since borrowing money makes less sense in regard to the real cost. This is because the loan would be paid back with money that is worth more than it is now.
4. Deflation ensures that borrowers who loot to purchase assets lose since an asset becomes worth less in the future than when it was bought.
5. The more indebted you are, the worse your condition since your salary will likely decline while your loan payments remain the same.
6. During inflation, there is no upper limit on interest rates to control inflation. During deflation, the lower limit is zero. Lenders won’t lend for 澳洲幸运5官方开奖结果体彩网:zero percent interest. At rates above zero, 澳洲💙幸运5官方开奖结果体彩网:lendersܫ make money, but borrowers lose and won’t borrow as much.
7. 澳洲幸运5官方开奖结果体彩网:Corporate profits usually drop during a deflationary period, which could cause a corresponding decrease in stock prices. This has a ripple effect on consumers who rely on stock 澳洲幸运5官方开奖结果体彩网:appreciation and 澳洲幸运5官方开奖结果体彩网:dividends to supplement their incomes.
8. Unemployment rises, wages decline as demand drops, and companies struggle to make a profit. This has a 澳洲幸运5官方开奖结果体彩网:compounding effect throughout the entire economy.

What to Do

Ever since the Great Depression, there has been continuing debate on how best to combat recessions and deflation. During the 2007–2009 Great Recession, then-Federal Reserve Chair 澳洲幸运5官方开奖结果体彩网:Ben Bernanke adopted a policy of 澳洲幸运5官方开奖结果体彩网:quantitative easing, which essentially amounts to printing money to buy 澳洲幸运5官方开奖结果体彩网:U.S. Treasuries. Following the 澳洲幸运5官方开奖结果体彩网:Keynesian economic theory, he used the money supply to offset the economic contraction that resulted from the 澳洲幸运5官方开奖结果体彩网:financial meltdown in 2008 and the bursting of the 澳洲幸运5官方开奖结果体彩网:housing bubble. Bernan🔥ke’s actions contributed to the recovery of the global economy, but economists argued that he flooded the economy with too much money, contributing to inflation and increased individual and corporate debt.

If the U.S. were to enter a sustained deflationary cycle, your best protection is to hold onto your job and have as little debt as possible. You don’t want to be 澳洲幸运5官方开奖结果体彩网:locked into paying off a loan with money that is increasing i𒊎n value every day. Save as much money as possible and defer discretionary purchases until prices are lower. Finally, consider selling assets that you don’t need while they still have value.

The Bottom Line

Too much⛎ inflation is generally regarded as a bad thing, but deflation might not necessarily be regarded as a good thing. It depends on the cause and circumstances of the deflationary cycle and how long 😼it lasts.

Your best protections in a sustained deflationary cycle are to hold onto your job, have as little debt as possible, save as much money as possible, defer discretionary purchases until prices drop, and sell assets you🐷 don’t need while they still have value.