Why is deflation bad and inflation good? Have you ever asked yourself this? When ever the economy comes up there is always talk of inflation and that it is low or that it is too high. But honestly what does this mean. Most people would say that you would want the value of your money to stay the same, right? What you can buy right now should be the same as what you can buy tomorrow. Hence we have a minimum wage? The 7.50 should be able to buy the same amount today as tomorrow. However in reading what Paul Krugman says and Yahoo answers that is not the case. http://krugman.blogs.nytimes.com/2010/08/02/why-is-deflation-bad/?_r=0
His argument boils down to loans become more costly, prices would go down and there for profits would go down and then unemployment would go up. The arguments he states do make some sense, especially when you would want to keep people spending because if they don’t the value of their money goes down. However, what this also means is that they have to either spend it or put into the stock market and try to keep up with inflation. This seems like a very normal event, most people put their money into the stock market and overtime it accrues value. The really big down side to all of this is that it doesn’t always accrue value and then there is the possibility of a crash. Imagine you are getting ready to retire and the stock market crashes. All of a sudden you cannot retire or even consider using the money you have invested.
Charles Hughes Smith says: “The critical error made by the “inflation is good” camp is their assumption that wages will rise along with everything else in inflation. Alas, wages for the bottom 90% have stagnated for decades in real terms (i.e. purchasing power), and so “mild” inflation has dramatically decreased their earnings.” What he is saying is that wages don’t go up but the actual value of the dollar earned goes down. So while people are not making more money the price of everything else rises, even the new push for a higher minimum wage is showing that this is the case. Thirty years ago most people spent 30 percent of their income on rent, today it is 50 percent.
The main concern is that if deflation hits too hard then there is a chance that people will lose their jobs or get paid less. This would lead to a revolt or cause civil unrest. Charles Hughes Smith says”The “frog in the pot” syndrome applies. If deflation is modest, on the order of 1%-2% annually, that won’t spark insurrection. If the water in the pot is heated slowly, the frog doesn’t notice much except a gradual reduction in earnings and government benefits as more government revenue is funneled to debt service.” This could be overcome if Federal Reserve would reduce printing money and allow the dollars out there to gain value and it would allow people to retain their dollars which would be their investment. It would also allow people to retire on the money they have earned over time and not rely on Social Security and other government programs to survive.
Businesses Insider (good discussion): http://www.businessinsider.com/why-deflation-is-a-bad-thing-2013-11
Charles Hughes Smith: http://www.oftwominds.com/blogjuly12/deflation7-12.html
Successful retirement: https://libertariandad.wordpress.com/2013/11/13/successful-retirement/