From: Peter C. McCluskey (pcm@rahul.net)
Date: Sun Mar 22 1998 - 08:40:37 MST
Dan@Clemmensen.ShireNet.com (Dan Clemmensen) writes:
>I'm sure you are aware of the recent reports of a fear of deflation, and I'm sure
>you understand them better than I. However, technical areas the technological
>deflation is far greater than the economic deflation. As I understand it, one major
>
>reason tht deflation is "bad" is that consumers will defer pruchases to wait for
>the
A better way of understanding deflation (as opposed to the decline in
prices of specific goods relative to some average) is to view it as a
rise in the price of a currency. For significant deflation, think of it
as a speculative bubble where people invest in the currency because they
extrapolate past trends to justify holding increasing proportions of their
wealth as currency.
The main reason this is bad is that nominal interest rates can't go much
below zero, so that if deflation is -10%, real interest rates are an
abnormally high 10% or more, preventing most people from borrowing, which
cuts off a significant source of expenditures.
-- ------------------------------------------------------------------------ Peter McCluskey | pcm@rahul.net | Has anyone used http://crit.org http://www.rahul.net/pcm | to comment on your web pages?
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