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?
Try and think of our global system as an engine that's purpose is to make fuel for itself. It needs to keep it's input above the output in order to keep powered on. As soon as the input drops below output the machine starts to slow down and can no longer sustain itself. The engine is not designed to slow down so it very quickly breaks down
So the global system is based on the concept of a perpetual motion machine? Why is that a laughable thing in physics but a totally reasonable premise in economics?
Probably helps that economics is mostly imaginary, I guess. I'm not saying that it isn't related to certain realities, but people are far from simple enough and predictable enough even in large groups to make it make much sense. That is both good and bad.
Arguably, they didn't exain that very well. All the mechanisms here have a reasonable explanation and it's not just made up.
Let me give it a try:
The problem with deflation is that it creates a strong incentive for businesses to infinitely accrue cash reserves on the expectation that large purchases like new machinery or maintenance and the likes are going to be cheaper in the near future. This means that consumption is declining, which means that productive businesses shut down, which means people working in those businesses are fired and in turn have less money to purchase goods and services from other businesses which means that even more factories/businesses shut down and now you're in an infinite downward spiral with no available monetary policy instrument to stop it. That's why minor inflation is seen as a necessity.
For the "infinite growth" argument, that builds on a bit of a misunderstanding: If I sell you a service and you sell it back to me, we have created GDP growth and we can do that indefinitely and keep creating GDP from essentially nothing... That part of the economy truly is just made up but it's just a way of comparing economies so it's effectively meaningless anyway.
4.3k
u/StuartMcNight 8h 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?