In news and other mass media, there are often different economic terms, and because of ignorance of their meanings, different misunderstandings can arise. Useful information will be about what deflation is and what situations it provokes.
What is deflation?
If you are guided by the origin of this word, then in Latin "deflatio" means "blown away". If deflation is of interest - what is it, it is worthwhile to know what this term means to increase the real value of money and its purchasing power. When there is deflation in the country, there is a constant decline in the price of goods and services.
At first glance, it may seem to many that increasing the purchasing power is good, but if you look at the reasons, the prospects do not seem so rosy. Another worth paying attention to such a notion as the deflation factor or, as it is also called the deflator. It is understood as an annually established value, which takes into account changes in consumer prices for goods and services in the previous period. This coefficient is subject to official publication.
Deflation is good or bad?
The process of falling prices can be viewed from two sides, but if you turn to specialists, they often talk about the negative consequences. In order to verify this, it is necessary to consider what the deflation is bad:
- The emergence of a deflationary spiral. When the population watches a decline in prices, they try to delay the purchase of expensive goods, waiting for discounts. This behavior leads to a reduction in growth in the economy, that is, even greater deflation. This situation can be repeated many times. Finding out what deflation is, and what its consequences, it is worth noting that the deflationary spiral can affect not only the turnover of goods, but also money. Recently, people have begun to take large amounts of deposit investments, which can cause a drop in market liquidity and aggravation of the situation.
- As a result of lower prices for goods, the profit of enterprises decreases and their development stops. As a result, management can not pay wages in full and have to fire employees.
- Negative consequences also concern the sphere of crediting, since people stop taking loans, since they will have to pay a large amount, because the value of money will increase.
What is deflation and inflation?
The value of the first term was presented above, and as for inflation, it increases the general level of prices for goods and services, which affects the purchasing power of the monetary unit. Hence, one can draw a conclusion about the difference between deflation from inflation, since these are two opposing phenomena. Both states can be provoked intentionally or arise from incorrect decisions.
Deflation and inflation were carefully studied, and it was concluded that the first state is more dangerous for the economy than the second. Experts found that inflation of 1-3% per year is considered as a phenomenon that indicates economic growth, but a deflation of 1-2% per year can lead to a serious crisis. An example is deflation in America in 1923-1933, which ended in the Great Depression.
Causes of Deflation
Experts identify the following factors that provoke deflation:
- Reduction of lending. If banks start to give less money to the population, this leads to a decrease in money in circulation.
- Increase in production volumes . The price for goods will decrease, if the incomes of the population do not change, and the output will be produced more. The process of deflation can be the result of the application of new technologies in production. Often, innovations lead to lower prices and unemployment.
- Increased demand for money . If people start to postpone more, the money goes out of circulation, which increases their value.
- Politics of a tough economy . Often the tactic of reducing government spending goes out of control and leads to deflation (for example, Spain in 2010).
Deflation-signs
There are several main factors that can indicate that the country is experiencing a depreciation of money. First, average wages are reduced, and people are massively reduced. As a result, there is an increase in unemployment. Secondly, monetary deflation leads to http://foxysister.ru/node/add/article?task_id=7198 reducing the cost of production and a drop in consumer demand. In addition, the price of loans in banks increases and it becomes more difficult for people to repay the amounts they took earlier.
Deflation - how to fight?
The only correct method to quickly deal with the depreciation of money without any consequences, no. The right decision as to what to do if deflation is to use the experience of countries that have been able to cope with such a phenomenon. For example, the state can apply a soft monetary policy, that is, the Central Bank reduces interest rates on loans, people take loans, and this increases the demand and price. Another option is easing tax pressure and increasing the volume of sales of securities.
What should I invest in deflation?
Many people, when observing changes in the economy, do not know how to deal with their own funds, where to invest them or what to buy, which often leads to errors. The deflation of money leads to a gradual reduction in the value of all assets, that is, money will be the most profitable investment, since everything else will depreciate, including goods purchased as needed.