Deflation: Deciphering Deflation, Unveiling Economic Enigma

By Fouad Sabry

What is Deflation

In economics, deflation is a decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0%. Inflation reduces the value of currency over time, but deflation increases it. This allows more goods and services to be bought than before with the same amount of currency. Deflation is distinct from disinflation, a slowdown in the inflation rate; i.e., when inflation declines to a lower rate but is still positive.

How you will benefit

(I) Insights, and validations about the following topics:

Chapter 1: Deflation

Chapter 2: Macroeconomics

Chapter 3: Gold standard

Chapter 4: Inflation

Chapter 5: Monetarism

Chapter 6: Fiscal policy

Chapter 7: Monetary policy of the United States

Chapter 8: Monetary policy

Chapter 9: Causes of the Great Depression

Chapter 10: Liquidity trap

Chapter 11: Disinflation

Chapter 12: Real economy

Chapter 13: Quantitative easing

Chapter 14: Biflation

Chapter 15: Monetary inflation

Chapter 16: Debt deflation

Chapter 17: Great Depression

Chapter 18: Currency intervention

Chapter 19: Bernanke doctrine

Chapter 20: Lost Decades

Chapter 21: Inflationism

(II) Answering the public top questions about deflation.

(III) Real world examples for the usage of deflation in many fields.

Who this book is for

Professionals, undergraduate and graduate students, enthusiasts, hobbyists, and those who want to go beyond basic knowledge or information for any kind of Deflation.

• Language: English
• Publisher: One Billion Knowledgeable
• Release date: Jan 19, 2024

Book preview

Chapter 1: Deflation

Deflation is a decrease in the general price level of goods and services in economics.

Deflation is caused by a shift in the supply and demand curve for goods and services, according to the IS–LM model (investment and saving equilibrium – liquidity preference and money supply equilibrium model). This may be the result of an increase in supply, a decrease in demand, or both.

When prices are falling, consumers are incentivized to postpone purchases and consumption until prices fall further, which reduces economic activity overall. When purchases are postponed, productive capacity is idled and investment decreases, resulting in further decreases in aggregate demand. This is the spiral of deflation. The fastest way to reverse this would be to implement an economic stimulus. The government could increase spending on infrastructure and other productive endeavors, or the central bank could begin expanding the money supply.

Deflation is also associated with risk aversion, in which investors and buyers begin to hoard money because its value is rising over time. This can create a liquidity trap or lead to shortages that encourage investment, resulting in more employment and commodity production. Normally, a central bank cannot charge negative interest on money, and even charging zero interest has a lesser stimulative effect than slightly higher rates. This is because, in a closed economy, charging zero interest also results in zero return on government securities, or even a negative return on those with short maturities. It creates carry trades and devalues the currency in an open economy. A devalued currency results in higher import prices without necessarily stimulating exports to the same extent.

Deflation is the natural state of economies when the money supply is fixed or does not grow at the same rate as the population and economy. When this occurs, the amount of available hard currency per person decreases, thereby making money scarcer; consequently, the purchasing power of each unit of currency rises. Additionally, deflation occurs when production efficiency gains reduce the overall price of goods. The competitive nature of the market frequently compels these producers to apply at least a portion of their cost savings to price reductions. When this occurs, consumers pay less for these items, resulting in deflation because their purchasing power has increased.

During the accelerated productivity era from 1870 to 1900, rising productivity and declining transportation costs caused structural deflation, but there was mild inflation for roughly a decade prior to the establishment of the Federal Reserve in 1913. During World War I, there was inflation, but deflation returned after the war and during the Great Depression of the 1930s. Most nations abandoned the gold standard in the 1930s, so there is less reason to anticipate deflation under a fiat monetary system with low productivity growth, other than the collapse of speculative asset