Deflation

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Effects of deflation

Direct effects

First the opposite direct effects proceed as with an inflation from a deflation; Debtors are disadvantaged, since their financed special goods at value over credits lose, but them still the same at the beginning of determined monetary value to settle to have. However creditor profits from a deflation, since its capital has now - interest-settled - a higher value than at the beginning Periode.Die purchasing power of the consumers rises, which benefits thus all. Problematic is the deflation only, because not all prices are free and thus flexible. With a constant money supply the productivity increase would affect directly the prices.

Indirect effects

Deflations have a strong tendency to the durability; if a country suffers deflation eras once from a phase, then the danger of a receiving and/or even strengthening tendency is very large: Sinking prices lead to a noticeable purchase restraint of the consumers, since these can count also far sinking prices. The sinking demand again causes a lower extent of utilization of the production capacities and thus far sinking prices. One calls this cycle in general deflation spiral.

Causes of deflation

Consumer and investment restraint

If a national economy is in the wing over of an economic cycle, humans react carefully. They expect that their income situation will worsen, it are afraid for their job, and give therefore in the expectation of a smaller income and the attitude of the existence safety device fewer money resulting from it out (consumer strike). An increased increase of personal financial reserves begins if necessary if the inflow does not sink as at money for the person strongly as the discharge at Geld.Auch the enterprises holds back itself. Only the most necessary is bought and invested few (so-called investment restraint). This decrease in demand leads to the fact that enterprises book and in the initial stage rationalize smaller conversions, thus also profits, (frequently dismissals) or finally, in last instance, becomes insolvent. Altogether now the total goods oh question sinks with approximate equal lasting goods offer (demand gap or gap). Lower profits have still the further disadvantage the fact that they absorb the investment desire of the enterprises and so that continues to heat up the vicious circle. Also the stock market suffers from the deflation, since also the capital investors have negative expectations. In addition it comes that by the smaller profits falling the courses is strengthened. Smaller needs the cause of consumer restraint are fundamental. Whether these smaller needs from self-control or money lacking result are another thing. A larger savings inclination can be likewise a reason, caused by a worsened future expectation (bad government). This phenomenon is to be observed z.Zt. in Japan.

Wage deflation

Because of the positive feedback of the development of wages and prices (inflation spiral) a deflation and/or a wage deflation leads to a cumulatively strengthening process in a national economy, with which goods and factor prices fall at the same time. If long-term deflation expectations develop, then it falls the central bank extremely heavily to break these by an expansive monetary policy. This phenomenon is called case of liquidity: Due to solidified deflation expectations in the economy even nominal interest of zero does not offer per cent incentives for the granting of credit by business banks at investors or consumers.

The credit risks of the creditors opposite the potenziellen debtors are regarded of the creditors due to the general uncertainty over the future economic development in consequence of the deflation more highly than interest proceeds attainable by the granting of credit for the creditors. Credit rationing by the business banks prevents then that the potenziell existing liquidity can be converted by the zero-interest policy of the central bank into effective demand at investors and consumers, which would be quite possible over rising granting of credit by business banks. Only if again confidence in the economy develops to a close end of the deflation, dissolves case of liquidity, in which the monetary policy is, and the normal effect connection restores itself.

Reduction of the public expenditures

A further possible source for deflation is the public sector. If a government shortens the public expenditures drastically to reduce about in order the budget deficit or obtain a budget surplus, the national demand on the markets precipitates smaller, and one arrives again with equal lasting offer at a demand gap.

Externaleconomical causes

Also the foreign country can be trips of an offer surplus deflation-bringing.

First of all, if the demand from the foreign country away-breaks, because there the economic situation meets lahmt (for example because of a world economic crisis), then this also the own national economy, above all if the export portion is large.

Secondly a revaluation of the own currency can be trips of the deflation. It makes on the one hand export for the foreign customers more expensive. If for instance the euro rises in relation to the US Dollar, the dollar prices for German cars in the USA increase and the demand for German cars sinks. At the same time the revaluation of the inland currency makes import products more favorable. This settles directly in the domestic price level.

Thirdly an offer surplus can result inland also, if foreign markets partition themselves, approximately from tariffs or other protectionist measures.

Monetary causes

After monetaristischer conception inflation and deflation are always and everywhere a monetary phenomenon (Milton Friedman). The behind it-standing idea is that across the quantity equation to lower prices it leads a restrictive monetary policy (increase of the minimum reserve, increase of the interest rate).

But also after not monetaristischer view a restrictive monetary policy leads it (for example by the higher central bank interest) to deflation, there the overall economic demand absorbs.

The free-economical theory - which is rejected by the predominant majority of the economists - the money circulation speed sinking after their conviction regards as main cause of the deflation. This "“money accumulation"” results according to free economics from the fact that an investment, whose net yield is smaller than the liquidity premium, is not lucrative any longer and the money offer on the capital market decreases/goes back therefore.