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?
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
The way to stop it is Quantitative Easing, what we did in 2008 which was a deflationary event. As was the Great Depression.
What many don’t realize is that Bernanke had just taken over the Fed before the recession, and he actually happened to be a leading scholar of the Great Depression, so he was uniquely positioned to lead the Fed through that time period and avoid the mistakes the Fed has made in the past.
That said, I think QE1 and 2 were necessary but we got QE ad nauseam and artificially low rates for too long, which made it super easy for millionaires to become billionaires and billionaires to accelerate their fortunes at a very low cost, while not really reaching the average person. Creating both equality problems and complicating the inflationary conditions we are dealing with now. Of course, all compounded by the fiscal policy as well.
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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?