Deflation, more terrible than inflation! So what is deflation?

Since 2020, the Australian fires and the African locust plague have been like the beginning of a disaster, and the new coronavirus that has continued to spread has swept the world. The intensification of the epidemic, the oil price war caused the global stock market to plummet, and a financial crisis is imminent.

Under the influence of the epidemic, everyone stays at home, works at home, and chases dramas at home. It's just that the world's economy is not very good. The tourism market is completely abandoned, all kinds of hotels are closed, transportation has stopped for most of the time, factories are no better, and the global stock market is plummeting...

In order to deal with this pile of rotten things, countries around the world are introducing various economic stimulus policies and releasing water. Releasing water may cause inflation, but without releasing water, the world economy now will only be deflationary. And deflation is a more worrying and terrible thing for the world than inflation.

Today, we're going to talk about this unusual deflation.

What is deflation?

Deflation, referred to as deflation, refers to the phenomenon of a decrease in the amount of money in circulation, or a continuous decline in the overall price level. It is generally believed that deflation occurs when the inflation rate is below 0 (negative inflation rate).

Everyone is relatively clear about inflation, that is, the money in their hands is becoming more and more "worthless". Here's a simple example, contrasting what deflation is.

For example, in January last year, there were 10 pounds of potatoes on the market, and there were 100 yuan, so one pound of potatoes was 10 yuan. By January this year, there were still 10 pounds of potatoes on the market, but with 150 yuan, a pound of potatoes rose to 15 yuan. This is inflation, and the inflation rate of potatoes is 50%.

However, if the person who wants to buy potatoes in January this year only has 80 yuan, then a pound of potatoes is 8 yuan, and the same money can buy more potatoes, this is deflation, and the deflation rate can be said to be 20%.

At this time, people found that the price of potatoes has been falling, even if the price is already very low, everyone still does not want to buy, because everyone thinks that the price will fall to 5 yuan a pound.

Through the price change of potatoes, it can be seen that inflation will devalue the currency and prices will rise; Deflation is when the total social demand continues to be smaller than the total social supply, which will cause the currency to appreciate and the real purchasing power to rise.

Why does deflation occur?

The essence of deflation is that the total social demand continues to be less than the total social supply, that is, there are too many people who grow potatoes, but people do not want to eat so many potatoes.

Therefore, deflation occurs for two reasons.

First, too much is produced, excess. Product supply is greater than demand, resulting in a large number of products that cannot be sold. A total of 10 pounds of potatoes was enough for everyone, but because there were too many people growing potatoes, 15 pounds of potatoes were finally grown. Obviously, there are 5 pounds more.

Second, demand is sluggish. Unlike the previous case, only 10 pounds of potatoes were indeed grown this time. However, people found that tomatoes are more delicious, and only 8 pounds of potatoes is enough. That's 2 pounds more potatoes that no one buys, which is the oversupply caused by sluggish demand.

Either way, the oversupply will form a buyer's market, that is, the buyer has the final say. Of course, buyers will not raise the price, but will continue to lower the price, resulting in more and more potatoes that can be bought for the same money.

What are the effects of deflation?

It has been mentioned before that deflation leads to currency appreciation and falling prices, doesn't that look great? For the same money, I can buy more things!

Of course not!

In the simplest terms, if everyone knew that potatoes would cost less the next day, would most people still buy potatoes today? Will you go shopping for anything else? Of course not, people will just go and buy cheaper food. And other durable goods, will not buy directly.

If you don't buy it, I don't buy it, he doesn't buy it, the things in the factory can't be sold, the economic cycle will be abolished, the factory will close, and we, probably a worker in the factory, can only go home unemployed.

This is why deflation is scarier than inflation!

What will be the specific impact of that, let's talk about it in detail.

First, insufficient demand leads to losses for enterprises, which then reduce production or close down.

Everyone knows that the price of mobile phones will go down, and they all want to buy them later. The original 3,000 yuan mobile phone, now 2,000 yuan can not be sold, the company not only makes less, may also lose money. Money-losing business can be done, but continuous and stable loss of money, fools do it. Since you don't do it, then you have to reduce production, or just close the door, it's better than losing money.

Second, assets are soft and liabilities are hard.

If everyone knows that after this period, the price of mobile phones will rise, rising to 3500 yuan. Then, even if you lose money now, there will still be bosses who continue to invest money in, because the future is beautiful and assets have a chance to appreciate. But now it's different, everyone knows that prices will not rise, and they will continue to fall, so why bother with money, apparently no one will invest.

What about hard debt? For example, your mortgage, originally to repay 5,000 yuan a month, now deflation, the bank will let you repay 4,000? We all have to be sober, how can banks be kind. This is hard debt, no matter what the situation, you have to pay 5,000 yuan. It seems to be still 5000, but in fact we lost a lot!

Third, it leads to increased unemployment and reduced income, exacerbating the shortage of aggregate demand.

As mentioned before, the company wants to reduce production, and there is no new investment coming in, so the company has to close its doors. And after closing? Workers are unemployed! We people have no jobs, no income, even if the mobile phone is only 1,000 yuan, we still will not buy it. Because there is still a mortgage of 5,000 yuan a month to repay, and there is no salary, how can there be money to buy a mobile phone. Insufficient consumption of residents will cause a new round of reduced demand and reduced production, which is such a vicious circle.

If the unemployment rate is too high and a large number of loans cannot be repaid, banks will form a bunch of bad debts, which will directly lead to major problems or even collapse of the financial system.

Although moderate deflation, by intensifying market competition, it will help to adjust the economic structure and squeeze out the "bubble" in the economy, promote enterprises to strengthen technological input and technological innovation, improve the quality of products and services, and have a positive effect on economic development.

But excessive deflation is definitely an economic nightmare and a tragedy for the vast majority of people.

Historically, the dangers of deflation can also be demonstrated by a shocking example.

At the beginning of the last century, the collapse of the US stock market bubble and the run on a large number of banks led to the financial crisis, but at that time, the Fed lacked modern research tools and monetary theory, adopted a contractionary monetary policy, and the ensuing deflation seriously increased the real debt borne by the remaining businesses and households, further crushing consumption and investment demand.

This is the economic crisis of the thirties in the United States, the Great Depression.

How to deal with deflation?

In order to avoid a deflation-induced Great Depression, it is necessary to stimulate domestic demand, curb price declines, and maintain basic price stability and even moderate inflation by increasing government investment.

The solution is simple, that is, invest money to keep the economic cycle going.

The first method is to lower interest rates.

The lower the real interest rate, the lower the return on putting money in the bank and the lower the cost of borrowing money from the bank. Low real interest rates give companies and consumers less incentive to put their money in the bank and more incentive to borrow money for investment and consumption, which can give the economy more vitality and promote economic development.

The second method is to invest money directly.

If interest rates are too low to be lowered, the government will have to implement quantitative easing and adopt more aggressive measures. For example, buying assets directly from the market and injecting large amounts of cash into the market. After the 2008 financial crisis, when interest rates were already extremely low, the United States adopted an approach.

This is deflation, and it exists more terrible than inflation.