Deflation

We sometimes read of inflation as a threat to the health of our economy. But now there is the chance of a phenomenon that occurs much less often, that of deflation. This is, as the name imples, a drop in prices, the opposite of inflation. With such a sustained drop in prices, business owners are unable to make money and cut back on production.

Deflation was last seen on a large scale during the 1930s. The inevitable decline in our standard of living relative to the rest of the world unless the western countries develop enough new technology to balance the fact that so many goods and services can be produced more cost-effectively in the eastern countries. Deflation has the same economic effect as the increases in production relative to wages resulting in recessions that I described in "Recessions Made Really Simple" on this blog.

The way I see it, deflation is a symptom of exactly the same thing that causes recessions, consumers not being paid enough money to buy all the goods and services that have been produced. This means that the solution that I proposed in "Recessions Made Really Simple", manipulation by the government of the money supply and use of the extra money to lower income taxes on everyone earning a paycheck, can also be used to manage deflation, should it occur. It will get more money in the hands of consumers, without them actually being given raises, to increase demand.

Industry in the U.S. keeps closing and relocating offshore to produce goods that they expect to sell to consumers back home. But if industry keeps doing this, those consumers will not have enough money to buy those goods. The drop in home prices are deflation that is already underway. Home prices are dropping not because of a lack of demand for a place to live but because workers are not being paid enough money to buy the houses. When production increases, as it usually does, the government can help remedy this by increasing the money supply and using the extra money to lower income taxes.