Deflation is “bad” because it leads to an economic death spiral, and there’s no way to stop it.
Prices go down
People see prices going down and hold on to money thinking it’ll be cheaper if they wait.
Less purchasing despite lower prices cuts profit margins, so producers produce less.
Sellers lower prices more in a desperate attempt to make SOME money.
Repeat.
This usually leads to layoffs to try to salvage money, big sales to get rid of inventory, then eventually there’s nothing to buy, no one making it, and everyone loses their job.
Interest rates don’t fix it, taxes don’t fix it, you just cross your fingers and hold onto your butts
That's the issue, deflation doesn't cause recessions. Deflation causes depressions. People stop buying products so the economy literally freezes. Basically think about sales. You know that there's a sale next week where everything will be half off. You as a rational consumer are only going to buy the bare minimum to ensure you can last until next week. Now with a sale there's a defined end date, so you'll buy a lot of products next week, but with deflation every week will have a lower price than this week. Meaning as a rational consumer you will always be buying the bare minimum to get to the next week. If everyone is buying only the bare minimum businesses stop making money. Without money businesses can't pay workers and layoffs begin. Then the death spiral kicks in, with higher unemployment the money supply continues to shrink, this makes deflation worse, people start to not buy because they don't have a job and can't afford to spend more money, companies continue to lose more and more money and layoff more people. Until you get the Great Depression. The economy basically has a heart attack.
The only solution is to spend a bunch of money to force the economy to restart. Give people a bunch of money so they start buying again, which causes businesses to start making money again, which increases employment, which eventually gets the economy restarted.
I think you're conflating different definitions of "rational." Economics models trends. Throwing away your money on sports betting isn't "rational" if you want to put a value judgment on it, but millions of people do it, and you can be damn sure it can be modeled economically.
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u/EM3YT 7h ago
Deflation is “bad” because it leads to an economic death spiral, and there’s no way to stop it.
Repeat.
This usually leads to layoffs to try to salvage money, big sales to get rid of inventory, then eventually there’s nothing to buy, no one making it, and everyone loses their job.
Interest rates don’t fix it, taxes don’t fix it, you just cross your fingers and hold onto your butts