Benefits of Deflation

DEFLATION
Benefits and drawbacks of deflation

Thursday 25 June 2020
BENEFITS OF DEFLATION
1. Restructuring of the Market
The production scale of a deflationary society would be astounding. With such
aggressive price competition existing in the market, suppliers as well as retailers
would have to modify the way they approach customer retention. Deflationary
system is good for the average consumer with him/her being offered so much
variety of products at the cheapest of prices. Japan is often used as an example
of how deflation can result in unfavourable conditions. This is because Japan
has been struggling with deflation since the early 1990s. There are, however,
systemic reasons for Japan’s deflationary spiral. Primarily, Japan has more old
people than young people and their death rate recently superseded the birth
rate. This led to conditions of stifled growth in individual income levels. Secondly,
Japanese people had little trust in their own banks and prefered to rely on
treasury bonds as part of their saving culture. This led to the decrease of money
circulation and caused unsolicited deflation.
2. Getting Rid of the Excess

Deflation is a good way to get rid of asset bubbles building up inside the market.
This is because deflation causes a decrease in the value of financial assets and
it becomes very hard to accumulate wealth with the aim of causing artificial
inflation. Adversely, this can lead to distress selling and ultimately result in the
collapse of the market economy. However, state mandated deflation would
effectively diminish panic and force the value of accumulated wealth to drop.
Hence, deflation is a good way to bring about progressive changes to the society
that wants to specialise of financial equity.
3. Higher Standards of Living

As mentioned before, deflation causes the prices of goods and services to fall.
Ideally, from a consumerist perspective, this would essentially mean that he/she
has been afforded more spending power. Accessibility of basic requirements to
those below the poverty line is not discussed enough in the context of
economies that are obsessed with development indexes. Deflation needs to be
considered more thoroughly because traditionally capitalist means of bringing
about social equality at a monetary level, is all but failing all over the world.
4. Accessibility of Banks
Deflationary market economics would force banks to encourage spending. With
a very much dwindling supply of money powering the market, interest rates will
be decreased by the banks in a bid to encourage people to have access to cash
they could use for personal purposes. This in turn, would lead ordinary citizens
to have access to banks in a way that was not possible during pre-deflationary
times. Hence, deflationary market economics need to be studied further in order
to leverage its usefulness more to our current system.
Deflation, since the time of great depression, which led to an unabated

downward spiral of prices and in effect the collapse of the economy, has been
viewed with distrust by economists. Deflation needs to be looked at as a
conscious tactic that could be intelligently utilised for specific goals. Using it in
this manner will have tangible advantages for the ordinary citizen whose humble
financial needs are not being realised now.
2
Problems of Deflation
1. Discourages consumer spending. When there are falling prices,
this often encourages people to delay purchases because they will
be cheaper in the future. In particular, it can discourage consumers
from buying luxury goods / non-essential items, e.g. flatscreen TV –
because you could save money by waiting for it to be cheaper.
Therefore, periods of deflation often lead to lower consumer
spending and lower economic growth; (this, in turn, creates more
deflationary pressure in the economy). This fall in consumer
spending was a feature of the Japanese experience of deflation in
the 1990s and 2000s. (Japanese financial crisis).
2. Increase real value of debt. Deflation increases the real value of
money and the real value of debt. Deflation makes it more difficult
for debtors to pay off their debts. Therefore, consumers and firms
have to spend a bigger percentage of disposable income on
meeting debt repayments. (in a period of deflation, firms will also be
getting lower revenue, and consumers will likely to get lower
wages). Therefore, this leaves less money for spending and
investment. This is particularly a problem in a balance sheet
recession where firms and consumers are trying to reduce their
exposure to debt. Europe has a big burden of government debt;
deflation will make it more difficult to reduce debt to GDP ratios.
3. Increased real interest rates. Interest rates can’t fall below zero. If
there is deflation of 2%, this means we have a real interest rate of +
2%. In other words, saving money gives a reasonable return.
Therefore, deflation can contribute to an unwanted tightening of
monetary policy. This is particularly a problem for Eurozone
countries which don’t have recourse to any other monetary policies
like quantitative easing. This is another factor that can lead to lower
growth and higher unemployment.
4. Real wage unemployment. Labour markets often exhibit ‘sticky
wages’. In particular, workers resist nominal wage cuts (no one likes
to see their wages actually cut, especially when you are used to
annual pay increases. Therefore, in periods of deflation, real wages
rise. This could cause real-wage unemployment. Unemployment in
Europe is a major problem – and low inflation is one reason.

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DEFLATION

Benefits and drawbacks of deflation

2. Getting Rid of the Excess

3. Higher Standards of Living

Deflation, since the time of great depression, which led to an unabated

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