Last time we concluded our talk of inflation and today we are going to discuss inflation's flip side; deflation.
Deflation can be defined as too many goods seeking too little money.
The concept of deflation sounds good: over time, the prices of goods and services decrease. We've seen this in the electronics market: wait six months and that gadget will be half-price.
But deflation has its dark side as well. If people put off purchasing something today because it will be cheaper next week, then they will. However, businesses will not produce products because of the inventory problem. It also produces a cash problem. If it costs me $1,000 to produce a television set, I am going to have to receive $1,000 just to meet my expenses. I would be a fool to sell that TV set for $900. I would rather stop making TV sets than “flood the market” and lose money with every set I make.
If I am working at this plant which makes television sets, I am not going to be pleased that my plant is shutting down for a month because no one is buying TV sets because they'll be cheaper a month from now. I, as the worker, want to get paid. My bank is going to want the mortgage payment and of course, we all need to eat.
This sort of “waiting to purchase” behavior shuts down an economy.
People waiting to purchase items that they otherwise would desire and could purchase now is not a good thing for anyone. For those interested, Japan's “Lost Decade” is partially due to people “hoarding cash” and not spending it on goods and services.
This concludes our section on inflation and deflation. Next time I am going to veer back into Magic and what Wizards of the Coast does to deal with these issues.
No comments:
Post a Comment