What is Deflation?
Currently we are still at the crossroads of beating the current economic recession, and one effect of this has been "deflation" in some sectors of our economies. What is deflation, and what are its actual effects?
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What is Deflation?[/caption]Our economies are all different, despite the fact that most Countries do follow the free market economic modal to some degree. After 2008, interest rates were lowered to encourage savers to spend, as the great recession kicked in, and one effect of this has been deflation in some sectors of all our economies.
Deflation in academic terms is the effect of goods and services decreasing in price, usually in a recession, but in the business world common when some new products naturally decrease in price over time eg. computers, and electronics.
When we think of deflation in modern terms, we think of Japan. As Japan in the early 1990's faced a sharp recession, and the nations banks offered zero percent interest rates. This encouraged savers to spend, whilst the struggling economy saw the basic price of many goods and services tumble- leaving cash rich consumers with more money power, but creditors with less wealth.
One example of deflation in many economies has been the erosion of property values, which have left many banks in a paradox. Several of these banking institutions have creditors who now owe more, than what their property was 'worth," when they first took out a loan on the property- the liquidity trap.
This negative effect of deflation is seen as one reason, Governments fear deflation as much as inflation, as it does lower prices and living costs, but at the same time punishes creditors who bought on the old price- who are still repaying the debt.
Deflation also effects a nations monetary policy, which cannot be stabilized, because of the liquidity trap. It also transfers the wealth from the borrowers and holders of deflated assets to those who have capital and currency assets. One reason in 2010, whilst many people are struggling with debts, the wealthiest proportion of people in several economies have grown richer.
Another negative cause of deflation is that it punishes those stuck in the liquidity trap, and forms a trickle up, rather than a trickle down effect on the wealth inside an economy. It leads to problems in the money supply, and also social problems inside more liberal economies. Greece today is one example of how, deflation on some prices eg. Businesses, and property- has started an "us and them" attitude towards the increasingly wealthy elite.
Depending on your financial status, there are those who welcome deflation, and others who are adversely affected by the instability it causes. Whilst many things get cheaper, so does the wealth gap in many countries, which creates economic instability, and a stagnant economy. One reason most economist agree combating deflation is as important as its ugly sister, inflation.
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