Low inflation might be the first step towards deflation. Many economists would argue that deflation is a worse situation for the economy because it leads to a sharp drop of consumption and therefore a huge recession follows?
The Great Depression was caused by a deflationary spiral. Inflation encourages spending, while deflation discourages it, and spending is what props up the entire economy. You need money constantly circulating, and deflation makes that grind to a halt because it's individually more financially sensible to delay as many purchases as possible during deflation.
We should probably add in that it's the RIGHT amount of inflation promotes consumption. Too high of inflation has similar outputs with different motivators.
The banking failure was worsened and lengthened by deflation. We wouldn't call it the Great Depression if not for the deflationary part. It wouldn't have been nearly as long or as intense, and the economic recovery would have been much faster.
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u/StuartMcNight 9h ago
Low inflation might be the first step towards deflation. Many economists would argue that deflation is a worse situation for the economy because it leads to a sharp drop of consumption and therefore a huge recession follows?