Inflation occurs when the value of goods increase. This can mainly be caused by two things: An increase in consumption or an increase of production costs, which causes the vendor to increase prices in order to maintain profits.
Deflation would occur when the opposite happens, aka when the value of goods decrease. This can be caused by things such as new technological improvements (old hardware has become cheaper, because new hardware has been released and the older hardware is no longer state-of-the-art), a reduction in consumption or a reduction in production costs. Perhaps I’ve missed a few cases, but these are the main things I can currently think of.
Anyway, while deflation is generally useful for consumers (they have to pay less), it’s not very good for borrowers. Let’s take a mortgage for a house, for example. You want to buy a house for €200k and have a mortgage of €200k that will cover the house. If something bad happens to you financially (for example, you lose your job), you may end up in a situation where you’ll no longer be able to pay off your mortgage. Shit happens right? Usually, the bank would take control of your house, sell your house for €200k and use the revenue from the house to pay off your mortgage.
However, if deflation has occurred and your house is no longer worth €200k, but €150k, you still have €50k to pay off to your bank, after the bank has sold your house. Simultaneously, you’re unemployed, so how are you going to do that? If you declare bankruptcy, you will no longer have to pay off your debts and the bank has lost €50k.
Besides this, deflation can also be a symptom of something worse happening, such as high unemployment rates and a decrease in consumption, for example. When more people get unemployed, people will spend less, which reduces demand, which leads to a decrease of prices.
Inflation occurs when the value of goods increase. This can mainly be caused by two things: An increase in consumption or an increase of production costs, which causes the vendor to increase prices in order to maintain profits.
Deflation would occur when the opposite happens, aka when the value of goods decrease. This can be caused by things such as new technological improvements (old hardware has become cheaper, because new hardware has been released and the older hardware is no longer state-of-the-art), a reduction in consumption or a reduction in production costs. Perhaps I’ve missed a few cases, but these are the main things I can currently think of.
Anyway, while deflation is generally useful for consumers (they have to pay less), it’s not very good for borrowers. Let’s take a mortgage for a house, for example. You want to buy a house for €200k and have a mortgage of €200k that will cover the house. If something bad happens to you financially (for example, you lose your job), you may end up in a situation where you’ll no longer be able to pay off your mortgage. Shit happens right? Usually, the bank would take control of your house, sell your house for €200k and use the revenue from the house to pay off your mortgage.
However, if deflation has occurred and your house is no longer worth €200k, but €150k, you still have €50k to pay off to your bank, after the bank has sold your house. Simultaneously, you’re unemployed, so how are you going to do that? If you declare bankruptcy, you will no longer have to pay off your debts and the bank has lost €50k.
Besides this, deflation can also be a symptom of something worse happening, such as high unemployment rates and a decrease in consumption, for example. When more people get unemployed, people will spend less, which reduces demand, which leads to a decrease of prices.
The value of things doesn’t really increase. One loaf of bread still makes my hunger go away the same amount that it does regardless of its price tag.
It’s the »measurement tool« that we are measuring/defining its value with that’s changing in alignment to the amount of supply of bread.
You forgot expansion of the money supply.
Increase in the money supply does not in itself cause prices to go up. There’s an indirect mechanicism but it’s not automatic.
Tell me: if the Fed prints a one quadrillion dollar bill but looks it into a safe so that nobody can ever use it. How much inflation do we get?
How much does the money supply go up by? It can’t really count as supplied if it’s locked in a safe.
Aha. So the sheer amount of money is not important?
Just, as if the circulation speed is the crucial point. Damn. Good for you for noticing.