Glamor Economics

Chapter 167

Chapter 21 Section 3 Prelude to Recession—Deflation
Many people are familiar with inflation. The most mentioned in history textbooks is that in the 20s during the Kuomintang rule, the currency depreciated severely. In the morning, a bag of legal currency or gold coupons can buy a bag of rice, but in the afternoon, it may only be able to buy. A grain of rice is not enough to make a living. In the late 40s, inflation also occurred in China: At that time, prices soared, and people desperately moved things to their homes, grabbing what they saw, and the most grabbed items were daily necessities such as soap and washing powder.But for deflation, many people feel strange.What is deflation?Simply put, there are fewer popular currencies on the market, money is more valuable, and the same money can buy more things.

In 2008, the price of a real estate in a certain city was 2800 yuan per square meter when it opened at the beginning of the year, but no one cared about it at 1800 yuan; A few days ago, a bundle of cables was 6000 yuan, but after a few days, it was only 3000 yuan; the price of pork was still 1.5 yuan a catty at the beginning of the year, and it quickly fell to about 90 yuan.

Many people will think that this means that the goal of curbing inflation has been achieved?This is a good thing.actually not.The continuous decline in prices will turn inflation into deflation, and the consequence of severe deflation is that businesses will close down, unemployment will increase, commodity supply will exceed demand, bank bad debts will increase, and the economy will experience a severe recession.

After the devastating economic crisis of the 20s, there was no large-scale asset price bubble for decades.By the 30s, bubbles and depressions were considered distant history, and people were more worried about high oil prices and the resulting inflation.But suddenly, this peaceful situation was completely broken by Japan's violent economic turmoil.Japan suffered from a severe bubble crisis, and its economy continued to stagnate for more than a decade.Even more frightening is the ghostly reappearance of deflation, which had been extinct since the 20s.Once again, Japan's history sounds the alarm: inflation can easily lead to deflation, making recessions worse and recovery more difficult.

When the amount of currency circulating in the market decreases, the people's income and purchasing power will decrease accordingly, and prices will start to fall, causing deflation.Samuelson defined deflation in this way: "Prices and costs are generally falling, which is deflation." The economists generally believe that when the consumer price index (CPI) falls for two consecutive quarters, it means that deflation has occurred.Deflation means that prices, wages, interest rates, food, energy and other prices all continue to fall without stopping, and all of them are in a state of oversupply.

Therefore, in economic practice, to judge whether a price drop in a certain period is deflation, firstly, it depends on whether the inflation rate turns from positive to negative, and secondly, it depends on whether the decline lasts beyond a certain time limit.The impact of deflation on economic growth can be divided into short-term and long-term. Moderate deflation is beneficial to economic growth for the following reasons:

1. Deflation will lead to a decline in long-term interest rates, which is conducive to enterprises investing in improving equipment and increasing productivity.

2. In a state of moderate deflation, the duration of economic expansion can be extended without threatening economic stability.

3. If deflation is associated with technological progress and increased efficiency, then the decline in price levels and economic growth can promote each other.

And long-term deflation will inhibit investment and production, leading to higher unemployment and economic recession. The reasons are:

1. The continuous decline in prices will reduce the profits of producers or even lose money, and then reduce or stop production.

2. The continued decline in prices will damage the debtors, which in turn will affect production and investment.

3. The continued decline in prices and the reduction in investment in production will lead to increased unemployment, reduced income of residents, and aggravated insufficient aggregate demand.

[links to related words]

Deflation When the currency in circulation in the market decreases, the people's monetary income decreases and their purchasing power decreases, which affects the decline in prices and causes deflation.Long-term monetary tightening will inhibit investment and production, leading to higher unemployment and economic recession.

Demand-deficit deflation refers to deflation that occurs due to insufficient aggregate demand, which makes the normal supply appear relatively excess.

Excess supply deflation refers to the deflation caused by the absolute surplus of product quantity in a certain period of time due to technological progress and improvement of production efficiency.

(End of this chapter)