To understand the fragile world of economics, might like to read up about why money has value (unless you are an economist – you will already know). Money is just pieces of paper, it has no intrinsic value, except maybe to light a fire or to use a toilet paper (not very good for either of those applications). But money can be exchanged to things that do have value, so everyone wants it. The money-go-round is all about sharing. I’ll share my money with everyone else who is sharing. But now, no-one is sharing.
For most of the last century, inflation has been the big bogey, inflation increasing and getting out of control. Prices increase steadily over the years, but they mustn’t increase too fast. But people got a bit greedy with their houses and suddenly, things got hairy, governments intervened, everything began to slow down again, but now it’s all contracting too far and we’re looking at the advent of deflation.
This is the Glossary of Economics definition of deflation: “Deflation occurs when prices are declining over time. This is the opposite of inflation; when the inflation rate (by some measure) is negative, the economy is in a deflationary period.”
Sounds like a good thing, surely. Lower prices mean more for your money. But, when low prices are driven by a lack of demand, businesses face problems.
Towards the end of the last decade, the Japanese banking sector went into meltdown. The Japanese Government tried all sort of things to help ease the crises, but eventually, the economy landed in a deflationary cycle. Prices dropped, cut-price stores emerged, it became trendy to eat the cheapest menu items at restaurants. But the longer-term effect of declining sales was falling profits, and businesses had to cut costs, which often meant laying off employees.
So now, it was up close and personal. The Great Depression was a deflationary spiral. People hoarded their money in case they lost their jobs, therefore they spent less, and there was no money going to businesses to pay employees.
A quick Google search reveals a proliferation of opinion on how to counteract deflation. The Japanese Government adopted a method known as quantitative easing – basically printing money. But this is a two-edged sword, as it can lead to spiralling inflation.
There are no easy answers. People will need to live on their wits in these times, and I suggest, look out for their friends and loved ones. If nothing else, perhaps this will strengthen our society. I just hope it doesn’t lead to war as it did last century.