Grant sez..

Doug Henwood dhenwood at
Tue Sep 15 08:40:41 PDT 1998

Max Sawicky wrote:

>Deflation is worrisome because in advanced industrial
>economies, for broad categories of consumer goods, it
>is rare and usually reflects a slowdown in economic
>activity, even to the point of a contraction of an

I'd say deflation is bad for at least two reasons, one "real," one financial. On the real side, since production takes time, firms find that plans made (parts procured, workers hired) at one expected price for their output find themselves making smaller profits, or even losses, when the price level falls. On the financial side, falling prices make the real debt burden larger, so firms and households find themselves earning smaller nominal incomes (as the price level falls) without any offsetting fall in their debt burden. This is the mirror image of the familiar fact that inflation makes life easier on debtors.

Of course, if you've got a big wad of cash, safely invested, deflation can be a windfall.


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