Quote:
Originally posted by Dragonlich
Deflation is NOT good at all. Look at Japan to see what it does: people simply stop buying expensive consumer goods because they'll get cheaper anyway.
If the US were to suffer the same fate, a lot of people would stop buying computers, VCRs, TVs and such, simply because it'll become cheaper in a month's time, and the current model is still working.
This directly affects companies, with factory production dropping, and people being fired all over the place. This leads to less income for everyone, and even less incentive to buy consumer goods...
And as you can see in Japan, it takes forever to get out of that cycle...
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Under some circumstances, deflation can be a good thing. Or at least a necessary working-out of technology/economic changes. For example, the United States had steady deflation from the Civil War through the turn of the century, a period of about 40 years, because the industrial revolution made manufactured goods cheaper and cheaper to buy.
But I will agree that the above kind of deflation is not the kind we'll get. In our case, it'll probably come just because people stop buying as much -- either because they're too deep in debt, or because they've lost a job, or they're afraid of losing a job. I think some kind of adjustment is inevitable; people keep buying consumer items, and the amount of consumer debt in this country keeps increasing to handle it. That can't go on. At some point people will no longer be able to take on more debt, and they'll start buying less. The only thing that would stave it off would be some technological advancement (really cheap energy, say) that gave the entire economy a shot in the arm. And that's always possible.
Also, one thing you don't hear about Japan is that some people are really, really happy with deflation: the retirees and other people on fixed incomes. Their pensions are worth more every year. So if deflation does happen here, no matte how painful to some, it will have its defenders. It'll be an interesting political situation.