Krugman: Why Is Deflation Bad? [View All]

[Kurt_and_Hunter]

(edited for copyright purposes proud patriot Moderator Democratic Underground)

I posted an anti-deflation screed here and then went to read Krugman's blog and he had just posted this.

He says it better than I would, so I'll let him take over...


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August 2, 2010, 5:33 pm
Why Is Deflation Bad?

A number of readers have asked me to explain why deflation is a bad thing; and the truth is that while I’ve alluded to the issue a number of times, I’m not sure if I’ve ever laid out the whole case. So here goes.

There are actually three different reasons to worry about deflation, two on the demand side and one on the supply side.

So first of all: when people expect falling prices, they become less willing to spend, and in particular less willing to borrow. After all, when prices are falling, just sitting on cash becomes an investment with a positive real yield – Japanese bank deposits are a really good deal compared with those in America — and anyone considering borrowing, even for a productive investment, has to take account of the fact that the loan will have to repaid in dollars that are worth more than the dollars you borrowed. If the economy is doing well, all this can be offset by just keeping interest rates low; but if the economy isn’t doing well, even a zero rate may not be low enough to achieve full employment.

And when that happens, the economy may stay depressed because people expect deflation, and deflation may continue because the economy remains depressed. That’s the deflationary trap we keep worrying about.

http://krugman.blogs.nytimes.com/2010/08/02/why-is-deflation-bad/