Why is deflation bad?
Great question! Sometimes our subscribers ask us
"what's wrong with deflation?", and "why
is deflation bad?" For those who are
prepared, deflation can be a welcome development.
The value of your money increases while the price
of the things you want or need decreases. If everyone
was prepared for deflation, many would welcome its
coming and ask rhetorically why is deflation bad.
For those who are prepared, deflation is a win-win.
Unfortunately, virtually everyone is unprepared
for deflation, because virtually everyone has leveraged
themselves to the hilt. Years of low- and no-interest
financing schemes on houses, autos, furniture, electronics,
etc. have created years of negative savings rates
for Americans. Furthermore, many American households’
savings are tied up in investments that will go sour
in deflation: i.e. stocks, bonds, commodities and
real estate. As if a wipeout of life savings isn’t
bad enough, declining prices (one of the effects
of deflation), means lower profits for companies.
In turn this means layoffs and increased unemployment.
More on that when we discuss the price and economic
effects of deflation and the deflationary
spiral.
But just because you have a stable job and a cash
reserve doesn’t mean deflation won’t rear its ugly
head in your life. Say you not only keep your job
but you get a promotion, and the promotion requires
you to move. In order to acquire new residence, you
must sell your house. In a deflationary environment,
plummeting housing prices can make selling difficult,
especially if you expect to make a profit. Many sellers
are forced to sell at a loss, which further begets
the effects of deflation
in housing.
Thus the answer to "why is deflation bad"
is that it’s not bad if you’re prepared for it.
For more on deflation, Download Robert Prechter's FREE 60-page eBook, The Guide to Understanding Deflation.
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