Why Deflation is Bad For You and the Economy

While the “D” word being discussed in the media can either be a “Depression” or “Deflation, I will concentrate today on deflation and why central bankers around the world will try and do whatever they can to prevent it.

At first glance, most consumers would rejoice as lower pricing for goods and services makes everything less expensive. However, think about what would happen if you knew that something you needed to buy would become less expensive if you held off purchasing it for another month.

You would keep the money in the bank, earn some interest, and then buy it for a reduced price. The longer you waited, the cheaper things would become. So what’s the downside? The retailers offering the product would go out of business as consumers weren’t buying since they were being paid to wait as long as possible. Manufacturers would shut down operations since demand would drop off and create greater unemployment.

Since there would be an overabundance of supply in terms of workers, salaries would be cut since the ablity to hire workers would become easier at lower prices. Due to higher unemployment rates, income tax revenues that would be collected from the government would drop. Corporate tax revenues would fall as companies earned less. Government tax revenues dropping would lead to a reduction in social programs and infrastructure projects.

As you can see, deflation can be detrimental to you and the economy which is something to think about the next time you see that bargain at the mall. Japan has been in a deflationary environment on and off for almost 20 years. North America has just had its greatest reduction in producer prices and consumer prices in almost 70 years. 

What are your thoughts? Are we in for a sustained deflationary cycle or will this pass in relatively short order?