The problem with deflation is that people end up hoarding all their cash because you get a return on it without doing anything with it.
So large swathes of money start getting taken off the playing field. Investment dries up, growth slows, people get laid off, and this cycle continues, one thing causing the next, causing the next in a circle. It’s one of the most destructive forces possible to an economy.
That’s why the central banks strive for around 2%. It’s enough to force people with cash lying around to invest it in something useful which will create jobs, etc, but not so high that it will make everyone panic and run the banks.
This excuse only affects fractional reserve banking and investments. It does nothing to non capital focused economies, and China’s economy is less than 40% capital.
That’s a pretty important caveat. I would take it one step further to say that it only matters in non-communist governments. Yes, maybe China can pull it off. But even losing a large chunk of 40% of the economy will be pretty bad and they’d have to switch to something pretty close to fully communist pretty quick to pick up the slack.
Which is the plan anyway, especially after the failure of allowing privatized luxury housing development.
But more importantly, a country that doesn’t privatize any of the essentials has nothing to fear from the collapse of private markets; everyone will still be housed, fed, and cared for.
Im no economist but with negative inflation it drives consumers to put off that next purchase.
Why buy the car you have been saving for, or put a bid on a house, upgrade your TV or get replacement running shoes if prices are staying the same or potentially going down? A way to make sure that people spend now and dont put it off is that they know the longer they wait the higher chance that the shoes are going to be $5 more in a months time or two.
If people arent spending then conversely people arent selling, building, labouring, etc and then everything grinds to a halt. People get laid off, people cant pay rent or mortgages, things go to shit.
At least this is the way i understand it, and like i said im no expert.
Consumers living paycheck to paycheck don’t have the time or energy to pay attention to inflation. If they can afford something they need then they buy it. If you need gas for your car then you buy it regardless of the price.
The problem with deflation is that people end up hoarding all their cash because you get a return on it without doing anything with it.
So large swathes of money start getting taken off the playing field. Investment dries up, growth slows, people get laid off, and this cycle continues, one thing causing the next, causing the next in a circle. It’s one of the most destructive forces possible to an economy.
That’s why the central banks strive for around 2%. It’s enough to force people with cash lying around to invest it in something useful which will create jobs, etc, but not so high that it will make everyone panic and run the banks.
This excuse only affects fractional reserve banking and investments. It does nothing to non capital focused economies, and China’s economy is less than 40% capital.
That’s a pretty important caveat. I would take it one step further to say that it only matters in non-communist governments. Yes, maybe China can pull it off. But even losing a large chunk of 40% of the economy will be pretty bad and they’d have to switch to something pretty close to fully communist pretty quick to pick up the slack.
Which is the plan anyway, especially after the failure of allowing privatized luxury housing development.
But more importantly, a country that doesn’t privatize any of the essentials has nothing to fear from the collapse of private markets; everyone will still be housed, fed, and cared for.
Im no economist but with negative inflation it drives consumers to put off that next purchase.
Why buy the car you have been saving for, or put a bid on a house, upgrade your TV or get replacement running shoes if prices are staying the same or potentially going down? A way to make sure that people spend now and dont put it off is that they know the longer they wait the higher chance that the shoes are going to be $5 more in a months time or two.
If people arent spending then conversely people arent selling, building, labouring, etc and then everything grinds to a halt. People get laid off, people cant pay rent or mortgages, things go to shit.
At least this is the way i understand it, and like i said im no expert.
Consumers living paycheck to paycheck don’t have the time or energy to pay attention to inflation. If they can afford something they need then they buy it. If you need gas for your car then you buy it regardless of the price.