goods. Then deflation is simply the opposite, that over time money is
becoming elatively more valuable than the other goods in the economy.
Following the logic of that article, deflation can occur because of a
combination of four factors:
The supply of money goes down.
The supply of other goods goes up.
Demand for money goes up.
Demand for other goods goes down.
Deflation generally occurs when the supply of goods rises faster than
the supply of money, which is consistent with these four factors.
These factors explain why the price of some goods increase over time
while others decline. Personal computers have sharply dropped in price
over the last fifteen years. This is because technological
improvements have allowed the supply of computers to increase at a
much faster rate than demand or the supply of money. During the 1980's
there was a sharp increase in the price of 1950's baseball cards, due
to a huge increase in demand and a basically fixed amount of supply of
both cards and money. So your suggestion to increase the money supply
if we're worried about deflation is a good one, as it follows the four
factors above.
Most economists agree that deflation is both a disease and a symptom
of other problems in the economy. In Deflation: The Good, The Bad and
the Ugly Don Luskin at Capitalism Magazine examines James Paulsen's
differentation of "good deflation" and "bad deflation". Paulsen's
definitions are clearly looking at deflation as a symptom of other
changes in the economy. He describes "good deflation" as occuring when
businesses are "able to constantly produce goods at lower and lower
prices due to cost-cutting initiatives and efficiency gains". This is
simply factor 2 "The supply of other goods goes up" on our list of the
four factors which cause deflation.
Colin Asher, an economist at Nomura Securities, told Radio Free Europe
that the problem with deflation is that "in deflation [there's] a
declining spiral. Businesses make less profits so they cut back [on]
employment. People feel less like spending money. Businesses then
don't make any profits and everything works itself into a declining
spiral." Deflation also has a psychological element as it "becomes
rooted in peoples' psychologies and becomes self-perpetuating.
Consumers are discouraged from buying expensive items like automobiles
or homes because they know those things will be cheaper in the
future."
Mark Gongloff at CNN Money agrees with these opinions. Gongloff
explains that "when prices fall simply because people have no desire
to buy -- leading to a vicious cycle of consumers postponing spending
because they believe prices will fall further -- then businesses can't
make a profit or pay off their debts, leading them to cut production
and workers, leading to lower demand for goods, which leads to even
lower prices."
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