Why is deflation bad?

There's a lot of problems, but this is a scenario that I think covers some of the basics:

Let's take a very simple example: you have $110 and could kind of use a new microwave, which we'll say will cost you $100. You don't need a new microwave, but it would be nice and you can afford it. Let's also (for the sake of the math) say that you have 5% inflation where you live

Now, in that scenario, when would it be most beneficial for you to buy a new microwave? The answer is "right now". If you wait a year, that microwave will cost $105, but you still only have $110, which leaves you with less money.

Because of this, a moderate rate of inflation encourages people to use their money, which allows businesses to pay employees, who can in turn use their money, etc etc etc.

"Use their money" (a non-technical term) here does not strictly mean consume, ie, buying things. It includes buying things to use (like tables and books), but also includes investments, such as getting stocks, commodity futures, buying land, and also putting it in a bank account. Banks can then use this money to extend lines of credit to people (for example).

In other words, inflation keeps money circulating in the economy.

However, let's say you have that same basic scenario but change the 5% rate of inflation to a 5% rate of deflation.

So, when do you want to buy that microwave? As far off in the future as you can. If you wait a year, the microwave will have (effectively) become worth $95, while you have $110, which means you've gone from having $10 left over to having $15 left over.

And that's the issue with deflation: you can increase the effective amount of money you have without doing anything with it. Sticking money under your mattress becomes a valid investment strategy, even if banks would give you a higher return*.

Apply that to a national level now: imagine everyone is putting off making purchases as much as they can because they know the item will cost effectively less. You'll end up with a very large depression and huge unemployment

* Not that they strictly would

/r/AskSocialScience Thread