What is deflation?
The question what is deflation is
easy to answer. But, defining the word is different
than understanding the threat – because widespread
public ignorance of the effects
of deflation and the deflationary
spiral makes deflation a menacing risk now more
than ever.
Define Deflation and Inflation
Webster's says, "Inflation is an increase in the volume
of money and credit relative to available goods,"
and "Deflation is a contraction in the volume of money
and credit relative to available goods." To understand
inflation and deflation, we must understand money
and credit.
Define Money and Credit
Money is a socially accepted medium of exchange,
value storage and final payment. A specified amount
of that medium also serves as a unit of account.
According to its two financial definitions, credit
may be summarized as a right to access money.
Credit can be held by the owner of the money, in the
form of a warehouse receipt for a money deposit, which
today is a checking account at a bank. Credit can
also be transferred by the owner or by the
owner's custodial institution to a borrower in exchange
for a fee or fees – called interest – as specified
in a repayment contract called a bond, note, bill
or just plain IOU, which is debt. In today's
economy, most credit is lent, so people often use
the terms "credit" and "debt"
interchangeably, as money lent by one entity is simultaneously
money borrowed by another.
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