Posted on 03/21/2020 7:16:34 AM PDT by ConservativeMind
Typically, deflation is a sign of a weakening economy. Economists fear deflation because falling prices lead to lower consumer spending, which is a major component of economic growth. Companies respond to falling prices by slowing down their production, which leads to layoffs and salary reductions. This further lowers demand and prices.
However, for a period of approximately five years, prices of consumer goods went down in Switzerland without any widespread negative impact on the country's economy. In fact, their economy prospered in the midst of falling prices. This has caused some economists to revise their opinion about the ill effects of deflation, with some arguing that as long as there isn't too much deflation, consumers and producers in an economy can find an equilibrium.
The Switzerland Case for Deflation
In early 2015, Switzerland's central bank introduced negative interest rates in an attempt to curb investor demand for the country's overvalued currency. The debt crises in neighboring countries, in combination with economic instability in Eastern Europe economies, had driven up demand for the Swiss franc by investors looking for a currency safe haven.
In the aftermath, economists expected the Swiss economy to go into a recessionary tailspin. On the contrary, the economy grew and the country posted a low unemployment rate of 3.3% in 2016. Prior to the central bank's activity, wages had declined by 0.6% on an annualized basis but this was offset by a decrease in the general level of prices. Overall, the country experienced a net increase in spending power.
You don’t mean “wage inflation.” You mean higher wages without inflation.
“Inflation and deflation are monetary phenomena. Deflation is a general decrease in prices across an economy. Inflation is a general increase. One particular item dropping in price is not deflation.”
What happens when you can buy double the benefit for the same price as before? You either choose to pay half the amount and get what you got before or you pay the same amount and get double. This is true deflation as a monetary phenomena.
When energy prices are cut in half, virtually the whole economy has money freed up for everything else they may desire. People have the same amount of money, but are now using it elsewhere. The cost of living decreases because they got a chunk for free they needed, plus they can get other benefits they wouldn’t have afforded, as they see fit. Maybe it’s a vacation, maybe it’s elective surgery, maybe it’s paying off debt. There is no limit on what can be bought, and even those things to be bought will naturally go down in price, due to energy being cheaper for them, too. Assume a small blip to stay the same price if demand for “everything” is higher, until it settles downward.
Taxes raise the cost of everything affected. If taxes were not so high, total price for everything would be lower, which is also deflation (buying the same goods for 30% less is deflation).
Interest rates being lowered do not increase the money supply or decrease supply. Lowered interest rates enables more money to be spent productively—which decreases the cost of goods sold without increasing money supply.
I have never experienced deflation in my lifetime, and I’m no spring chicken. We might as well try it now.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.