With deflation comes layoffs and pay cuts which in turn affects the consumers. To top it all off with deflating prices don’t change debts so if prices and wages start falling it means less money for consumers, but your debts would not change as a result. Throughout this essay I will go into more depth about why deflation is a bad thing and give some real life examples of what it can do to an economy. One thing that many people do not understand about deflation is that it is the continuous drop in prices. Prices don’t Just drop for one week and everyone gets to o on a shopping spree.
If you notice a continuous dropping in prices would you buy something now? Or would you wait a month until the prices got lower? That is exactly what happens in a deflating economy, spending is actually reduced. “Spending is really important, since it’s the essence of how market participants interact with each other, and delaying it creates a downward spiral” (Waistlines) Without spending grocery stores wouldn’t interact with the large companies like Coca-Cola and Lays Chips. They would postpone buying, therefore cutting sales with the larger companies.
In an article written by Paul Grumman he makes a great point in saying, “After all, when prices are falling, Just sitting on cash becomes an investment with a positive real yield. ” It is a very true statement, saying that if you don’t spend when money is deflating then you end up saving more money than you would buying at cheaper prices. A very good argument too many other analysts that may think that people wouldn’t wait to spend. Deflation seriously hurts the economy, and not Just small parts of the economy, but everything in it.
Believe it or not spending is not the only thing that gets cut down, also there is borrowing money and investing. This greatly affects the economy because not a lot of people will want to take money out of the bank knowing the value of their dollar will continue to decrease while the money they owe will stay the same. When people realize that deflation puts an even greater risk on something like opening a new business or basically doing anything productive with the money they are less willing to take that chance. Entrepreneurs are a huge part of our economy and when there is deflation they do not do well.
Entrepreneurs aren’t the only ones affected with this debt problem, many college students and even the government are both seriously affected by deflation. With deflation I as a student would owe more money than I borrowed because of the deflating prices. Let’s Just take the government’s debt here for example. $16,792,699,771,744, and let’s Just say there is a continuous 8% deflation in our economy over a year’s span. The value of the government’s debt would increase Just over a one year span to 5,753,483, an increase of over 2 trillion dollars.
Now I know this is a drastic Macroeconomics Term Paper By titivating Another thing that happens with deflation is the lowering of salaries and the loss of Jobs. When companies are used to making a set amount of money each year and they start making less than because of deflation then they need to make cut backs in salaries and employees to keep their profits high enough to continue to run the company. Edward Harrison a banking and finance specialist at the Global Macro Advisors consultancy talked about this in one of his articles about deflation. “Let’s look at the house.
When prices decline, the person who owns the house has a mortgage that is suddenly greater than the value of the house. In worst case scenarios, that’s an individual who can’t move house because she is stuck with a mortgage she can’t pay off. So that’s a person who’s Job opportunities have Just shrunk dramatically’ I think this was a great example and for anybody that doesn’t understand how deflation would affect Job salaries and Job security. Whenever a contract is written it is usually written in nominal terms. So when there is deflation there are winners and losers.
This can hurt many people in various industries. It affects people who own homes that need to pay of a mortgage that does not change with deflation, it affects the people whose salaries get cut because of loss of money to businesses, and it really affects anyone with any sort of debt. You might Just think that I hate deflation because I’m a student and it hurts me a lot because of the debts I have. When in reality, if you’re reading this, it’s hurting you too. Your source of money is being cut and the value of your dollar is dropping as you read these last few lines.