Why inflation is worse than deflation

[BASE1190]

Lately the media, politicians, and lobbyists are crying about falling prices as if that was a bad thing. Some people fear deflation because it makes their debts harder to pay off. The truth is that for those of us who are fiscally responsible and choose not to mortgage our future, then our cost of living actually decreases, and the saver's standard of living increases. A favorite cry of those who wish to "prevent deflation" is that the economy will suffer under deflation because people will delay purchases due to the belief their money will have greater purchasing power in the future. Although this statement is partly true, it leaves out a huge part of the equation. It is important to realize that money is a medim of exchange and is usually not a good substitute for food, clothing, shelter, or fuel, etc. These are just a few of the items that people will continue to purchase at some point (as they need them, etc.) even with money that may have greater purchasing power if they were to delay these purchases. At some point people will find it worthwhile to spend their money on their needs and wants, and during deflationary times, money maintains (if not increases) its value. The opposite of this equation is inflation which is much worse. Since during inflation, especially a hyper-inflation, people spend their money as fast as possible before it loses purchasing power. At some point the money becomes worthless as people become more and more reluctant to accept the money in exchange for real, tangible goods. It is for this reason that inflation is much worse than deflation since during deflation goods and services remain available and people are more than happy to sell them in exchange for money, but during hyper-inflation goods and services become unavailable as people become more and more reluctant to exchange them for ever more worthless dollars.

[Mac]

I think the subject is more complex than one is worse than the other. Admittedly the media will choose the negatives over the positives whilst reporting. If we have inflation, they report its bad for us, if we have deflation or disinflation, then they report its bad for us..... there are so many areas to consider (eg with deflation the demand may fall and cause a deflationary spiral which is not a good thing), and this is such a complex area subject, that its hard to put your finger on exactly who what or where its better or worse. In fact, its so complex I have to admit I dont really know what the hell I am talking about!! Bwhaha! :)

I agree by many of your points, but cant agree with the simplicity of your statement.

[BASE1190]

Well the best scenario would be a free-market monetary system where the market not only determines what the value of money is, but what is money. My idea that inflation is worse than deflation is not to say that either is preferable to the ideal of a free-market monetary system, but rather based on the fact that during deflation goods and services remain available and are readily exchanged for dollars. Under hyperinflation however massive shortages of goods and services will arise, and the economy will be effectively reduced to a barter system.

[Mac]

.....in addition, am I correct in remembering from my accountancy exams, that inflation can also be seen as another hidden form of taxation by the government controlling the money supply? If so, that has to be another reason why its worse than deflation!? :)

I certainly don't know enough to enter discussion of thought on the subject (although a lot of people I work with whom have little knowledge love to preach about what it all means!), but I do find it interesting, especially in today's environment.....

I read with interest.... cheers!

M

PS) On a really weak link to economics, have you read Freakonomics? Applying economic thinking to everyday situations? I thought it an entertaining read......

[BASE1190]

You are correct, inflation is a form of taxation. I did read Freakonomics, and it was interesting but not so much that I held onto my copy.

[base_bin]

bo77ocks last comment

inflation is a form of taxation but they (govt) have to pay the inflated prices so they do not benefit

i am no economist, but when the (us & uk) governments print money to provide liquidity / growth / consumerism, & when all major financial institutions follow suit to create revenues unregulated, & when market conditions turn against them their unrealised profits materialise as massive losses, that has nothing to do with inflation or deflation.

that has everything to do with the f*cking dispicable myopic greed loving devil f*cking jockeying for a top quality of life of baseball,billiards & banksy.

[Mac]

that has everything to do with the f*cking dispicable myopic greed loving devil f*cking jockeying for a top quality of life of baseball,billiards & banksy.

I think that's what it said verbatim in my old study texts :)