It depends entirely on your financial position. Some people win and some lose during inflation and vise versa. If you're in debt and young, inflation isn't the worst thing in the world. If you're an old saver, deflation is looking pretty good.
In theory, deflation causes people to postpone purchases. Why buy something today where it will be much cheaper 3 months from now.
Fractional reserve banking requires an exponential growth of debt. It is not reversible because of the interest paid. If the interest payments are not met, then the entire monetary system will need to be reset. A little deflation is fine for us, but a huge amount is the end of the banks and bankruptcy for the ultimate debt holders. Nothing in nature runs under exponential growth for very long. That is positive feedback. The decay curve is usually exponential growth down (AKA a collapse). We have seen how the wizards of monetary oz have done with this crisis. Imagine them dealing with one crisis this month, then 2 more the next month ( due to the one before), then 4 more the next month etc. etc. Look up the approximate 50 year cycle of the rats of Burma and imagine the citizens as being the rats. (Mautam)
Exactly. It's about keeping banks solvent. Because banks own the system. Deflation is good, and actually, quite healthy. If most people held cash in hand, real estate, gold, or other physical assets, the system could "reset" without much of a problem. That's fantasy land, as most savings is in the form or credit (held with a bank), or securities (which crash in the event of a large monetary contraction). Interesting, a lot of the old members came out to post in this thread
Its absurd to think that we can rack up debt forever. last 30 years has been lower rates during recession and add more debt. One way or another its going to disappear. through inflation or bankruptcy
I did not understand this. Debt holders should do well under a deflation. They will be paid in dollars worth more in purchasing power than the dollars lent. This raises the effective interest rate on fixed rate loans and should only harm those in debt. I thought that's the primary reason a country with large personal and government debt can not tolerate deflation. Am I wrong?
Yeah, you're wrong. During heavy deflation debt usually gets "liquidated" as in defaults. You DON'T get your money back. Hence why bankruptcies surged during the 2008 credit crisis. Hence why credit default swaps went parabolic due to defaults. Hence why firms like Lehman and Bear went under. Deflation is NOT good for bondholders. I have no clue what gave you that idea. If I lent you $100 at 5% interest and you lose your job (deflation) I'm not ever seeing that $100 again. Who gives a flying f*ck if the dollar got stronger. I'm not seeing any of those dollars.