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"Deflation" is a technical term in finance, as opposed to what we know as "inflation". Simply put, inflation refers to an increase in the money supply, a decrease in purchasing power, and a general rise in commodity prices;
Deflation, on the other hand, is a general decline in commodity prices. But the economic logic behind deflation is not exactly the same as inflation, which often means a slowdown or contraction.
So, if deflation does come, what will be the impact on us ordinary people? Here are some insiders' "outspoken" views.
First, the general decline in prices of goods and services may sound like a good thing. After all, who doesn't love going to the supermarket to find that the price is cheaper than before?
However, behind this may be the risk of companies reducing production, laying off employees or even going out of business. Because in an environment where prices continue to fall, companies' profit margins will be squeezed, which may lead them to reduce production or lay off employees.
Secondly, the real estate market will also be affected. If deflation does come, then house prices could fall. This is good news for people planning to buy a property, but for people who have already bought and held a property, their assets may shrink.
At the same time, banks may tighten mortgage policies for fear of further falling home prices, making it harder for people who want to buy a home to get loans.
Third, the debt problem is likely to get worse. In a deflationary environment, the purchasing power of money increases, which means that the real burden of debt also increases. For those who are already heavily indebted, the interest and principal they need to pay will become heavier.
In addition, the job market could also be hit. Due to the increased operating pressures faced by companies, they may choose to lay off employees or freeze recruitment. This will lead to higher unemployment and may become more difficult for job seekers and young people who are just entering the society to find a satisfying job.
Finally, banks and financial institutions will also be affected by deflation. In an environment of falling prices, people may consume less and save more. However, this does not mean that the bank's business will increase.
Because in a deflationary environment, both businesses and individuals may reduce lending, which is a huge blow to banks.
In contrast to inflation, many countries have experienced little or no real deflation in the past few decades. But when it does happen, its effects are often far more profound than we think.
Investment is another area that could be affected by deflation. In an environment where prices are generally falling, investors may be pessimistic about the future economic outlook, causing prices in the stock market and other asset classes to fall. And the instability of financial markets may further exacerbate the effects of deflation, creating a vicious circle.
So, how can governments respond to deflation? Usually, central banks adopt loose monetary policies, such as lowering interest rates and increasing the money supply, in an attempt to stimulate economic growth.
But in an environment of zero or negative interest rates, traditional monetary policy tools may become less effective. At this point, fiscal policy, such as increasing public spending, may become a more critical means of stimulating the economy.
It is important for the average person to understand deflation and prepare accordingly. First, we should look at our finances to make sure we don't take on too much debt, because in deflation, the burden of debt gets heavier. Second, we should also consider reevaluating our investment strategy.
In a deflationary environment, some traditional assets, such as equities, may face greater downside risks. While other assets, such as Treasuries or gold, may be considered safe-haven assets, their prices may be relatively stable or rising.
In addition, deflation may affect our consumption habits. With the expectation that prices will be lower in the future, consumers may postpone purchasing decisions, which further slows economic growth. Therefore, deflation is not a good thing in the long run.
Finally, for young people and those nearing retirement, deflation may mean that their retirement plans need to be reassessed.
In a deflationary environment, the purchasing power of fixed income, such as pensions, may increase, but investment income may take a hit. Therefore, it is crucial to plan early and make appropriate adjustments.
While deflation may lead to lower prices of goods and services in the short term, in the long run it may present a series of challenges for the economy and ordinary people. Therefore, it is important for everyone to have an in-depth understanding of its impact and prepare accordingly.
What do you think about deflation? Welcome to discuss in the comment area!