The Deflationary Spiral

Lower prices? Sounds like a dream come true for consumers across the world, but deflation is actually detrimental to national economies. In fact, deflation might be an even bigger concern than inflation – a fact that many people are not aware of.

Deflation, in essence, is the reduction of the general level of prices in an economy. It is also a prolonged period of little to no economic growth. But, why is that? It would be logical to assume that falling prices would urge people to buy more goods and services than ever before. The cheaper, the better – a philosophy that is seemingly embedded in human nature. Yet, instead of maintaining such a mindset, consumers now are thinking of the long term effects.

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The basic idea is that if prices keep falling, people can just wait till the goods and services they want to buy are at their lowest cost. Consequently, consumers will simply put off major purchases till prices reach their absolute minimum. It’s indeed a reverse perception of lower prices, but it is prevalent today and is hurting both the American and global economy.

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In such a case, it would be unreasonable to hope that people will change their way of thinking. Consumers will always seek out the better deals, even if it means waiting to get their hands on their desired good or service. But, that doesn’t mean that the deflationary spiral can’t be stopped; it is actually quite possible if certain steps are taken.

To begin with, the Federal Reserve could print more money and disseminate it throughout banks, which in turn would have more money to lend out to borrowers who have the spending power needed to boost the economy. The resulting inflation could also help counteract deflation, since a spike in the supply of money would cause prices to rise. In addition, businesses and retail stores could use more sales as incentives to attract consumers during a period of deflation. Although the businesses themselves have to deal with the damage caused by price reduction, temporary sales could serve as indications for consumers to stop waiting and start spending.

Many people don’t realize the danger of deflation because lower prices have always had a positive connotation. Yet, deflation has been an issue from the Great Depression to the present, and it is important that everybody is aware of its deleterious effects. After all, we are the only ones who can stop the spiral from growing.

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