Is deflation a positive or negative phenomenon?


In most economies of the world dominated by inflationary processes. Many economists are inclined to believe that keeping the economy at the level of 2-3% price growth is optimal for its development. And only in a few countries deflation prevails. This applies to Japan, Bahrain and Belize, where a similar situation has been observed for several years.


Of course, inflation itself is considered a negative phenomenon, especially when its rates exceed a specified threshold. The money supply is depreciating, the purchasing power of the population, while maintaining consumption decreases, which encourages people to strive to get more income. Deflation is the reverse process, the purchasing power of money grows, prices decrease, which, while maintaining the current level of consumption, gives an increase in savings. From the point of view of the average person, this situation is favorable.

But from the point of view of the state, everything is more complicated: prices are falling, and people continue to buy as much as before, which means that producers' incomes are falling, and they go bankrupt. If this does not happen immediately, then sooner or later the market is still saturated. The released funds are carried to banks and make deposits. Banks do not issue loans as unnecessary. Over time, people stop not only striving for higher wages, but also stop working altogether, since they can live on interest from deposits. Over time, this situation develops into stagnation, since there is practically no production, the financial system is also falling apart, the economy is not developing. It is believed that such consequences are threatened by deflation.


The economy is a complex system with numerous mechanisms of self-regulation, which are not yet fully understood. And although most economists tend to believe that deflationary processes are detrimental, it is impossible to call this phenomenon unequivocally negative. It is believed that in the choice between it and inflation, the latter becomes the lesser evil, while the balance is impossible.

However, some experts still think that if the money supply is controlled not by the state, but by economic agents, then both inflation and deflation will disappear. This is possible, although difficult to implement. It is difficult to verify this theory, since it is almost impossible to create a suitable site for such an experiment.

Most experts see the causes of deflation in the high growth rates of production capacity, as well as in the imbalance of the banking system in


downward lending. In general, these processes are usually still balanced by inflation. A number of apologists of the deflationary model of the economy believe that its construction is possible in practice, and any understandable difficulties of the transition period are surmountable. True, such a scheme is realizable only, perhaps, under the communist system. And whether it would be appropriate to call such an economy a market economy is a serious question.

In the meantime, an economic model with controlled moderate inflation prevails, and the new generation of economists is brought up with the thought that deflation is a negative process that must be avoided by all means.

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