No. of Recommendations: 12
"I think it's more about asymmetrical risk. Deflation is more dangerous than inflation."
This is exactly right. Excess inflation is destabilizing and hard on an economy, but deflation (even mild) can be very hazardous and really hard to eliminate.
The reason deflation is so hard to eliminate is that it trains people (or businesses) to delay purchases for as long as possible. If you are considering buying a new truck, if your delay the purchase a year, you can get the truck cheaper. It becomes a death spiral. Consumers delay purchases, so businesses cut back on production and lay people off, this causes consumers to buy even less (they need to save because they might lose their jobs). It feeds on itself.
Also, imagine what regular deflation means for an economy?
It means that every year, your boss calls you into the office and gives you a small pay DECREASE. Wages go down. Even though the relative spending power of your lower wages might stay the same (i.e. your lower wages buy the same number of Big Macs because the costs of Big Macs drop as well). That is not good for moral for workers to get pay cuts every year.
It also makes businesses less likely to hire because any hiring mistakes are magnified by deflation. In an inflationary environment, mistakes made can be grown out of. In a deflationary environment, mistakes are more costly.
Furthermore deflation hurts almost everyone. It is not good for investments, it is not good for the government, it is not good for workers.
The only people who really do well in a persistently disinflationary environment are those who put their money under that mattress or in coffee cans. Encouraging people to buy cash under the matress is not good for an economy.
