No. of Recommendations: 9
The reason deflation is so hard to eliminate is that it trains people (or businesses) to delay purchases for as long as possible. If you are considering buying a new truck, if your delay the purchase a year, you can get the truck cheaper. It becomes a death spiral. Consumers delay purchases, so businesses cut back on production and lay people off, this causes consumers to buy even less (they need to save because they might lose their jobs). It feeds on itself.
I've read this before as well but never found it super compelling...
Bear in mind that folks in deflationary economies don't just delay purchases, they also defer all deployments of their capital including investments. Why invest or take any risks at all if the cash in your mattress is going to be worth more a year from now anyway? And this is as true of companies as it is of individuals. With no risk taking or capital expenditures, things get pretty slow.
I don't understand why companies would be required to pay their employees less each year in normal economic times. Wouldn't the main driver of deflation be productivity improvements allowing more goods to be produced for less, resulting in lower per unit prices?
Usually this is not anything like normal economic times. In times of deflation, things are pretty broken. The usual proximate cause is a deficiency of demand. Goods stacking up, all companies have more employees than needed. So yes, you see lower per unit prices, but it's because of companies' desperation to sell something, not because of productivity gains. It tends to be long and slow and drawn out, not a crisis, but like any chronic illness it can be as serious as a sudden crisis illness.
Jim
