What Happens When Inflation Is Negative (Explaining Economic Deflation)

    See you all again Welcome to the Ahuna Talking about Money channel. Be careful these days. There are many goods and services whose prices have fallen, for example the price of housing, the price of a book trolley, commodities such as coal and oil, and even staples such as chicken and eggs. Autumn, you are the one we...

What Happens When Inflation Is Negative (Explaining Economic Deflation)

    Why do prices keep rising? Does that mean our economy is bad? If the economy is good, prices will go down. When do product prices go down? Does the fact that prices have fallen due to the incident mean that the economy is doing well? No. On the contrary, our economy is really depressed. In macroeconomics, this phenomenon of falling prices is called deflation or negative inflation. This deflation is the opposite of inflation.

    There are conflicting symptoms, such as the economic crisis caused by hyperinflation in Venezuela after 2016 and the economic crisis caused by deflation in 2016, but if the level is too high, it becomes economically dangerous, and both can cause economic crises. There is a nature. America in the 1930s.

    Why does deflation cause economic crises? It would be nice if prices were cheaper, but we need to understand that when we look at macroeconomics, we can see the economy not only from the consumer's point of view, but also from the producer's point of view. .

    Remember, the money we spend is someone else's income. What does price mean? Cheaper prices are a sign that people's incomes are declining and this could lead to a very dangerous deflationary spiral if not addressed soon .

    Before going into detail about the effects and dangers of excessive deflation, let me first explain the root of the problem. The first thing I want to explain is why the prices of goods and services go down. What compels merchants to lower the price of their goods? The cause can be two factors. The first is the excessive availability of goods, commonly referred to as oversupply. The second factor, declining demand for goods and services, or what is commonly called low demand, is clearly dangerous.

    The second factor, the decline in consumer demand, is due to a variety of causes, but generally due to a decline in consumer purchasing power, which can be caused by a variety of factors. . Massive congestion, such as that in the United States in 2008, could be due to post-war conditions, such as in Europe in the 1920s, or pandemic outbreaks, such as now in 2020. There is a possibility. Weakening consumer purchasing power, deflation, and declining consumer purchasing power can cause this stagnant trade deal to turn into a deflationary spiral that forces entrepreneurs to lower prices, making it even more dangerous. Loss settlement may lead to mass layoffs.

    Unemployment again causes a decline in consumer purchasing power and so on. This causal chain can continue to get worse, so it's called an even worse deflationary spiral. country even now. Because, of course, the impact of declining transactions could be anywhere from declining family income, to declining corporate income, to declining national tax revenues. -In a recession, called a recession, characterized by two consecutive quarters of negative GDP growth or Gross Domestic Product, the psychological effects generated ironically tend to make people delay spending. It could exacerbate the deflationary spiral that occurs in the case. Entrepreneurs don't want to make financial decisions to avoid business risk. A new deflationary spiral could get worse.

    Pie - as long as they choose not to see any more work, in some cases taking makeshift produce as needed and burning or simply letting the rest of the crop rot for the cost of harvesting There are even farmers. Transportation costs can be higher than selling prices, which are already too low. The question is, what solutions can be implemented to prevent or mitigate the effects of deflation in these spirals? That means we need to re-stimulate trade so the economy can recover.

    It can also restore some of what governments normally try to revive economic enthusiasm. That is, the first to bring the benchmark interest rate down to very low levels, zero or even negative. What is your goal? So that entrepreneurs can borrow money from banks to finance their businesses and eventually have the courage to create new jobs.

    This was a policy enacted by the Franklin D. Roosevelt administration in the United States in the 1930s to combat the Great Depression in economic history. Rosevelt's policy is known as his third, The New Deal. The central bank buys securities such as Bank Indonesia bonds and money market papers on the money market. Known as open market trading in Indonesia.

    Overseas, it is often called quantitative easing. by tax rates that set reserve requirements or reserve requirement policies by lowering the reserve requirements that commercial banks must meet, allowing commercial banks to channel more funds to venture capital borrowers; It is hoped that people will have more money and that more money will be owned by the masses, thereby increasing the level of mass consumption.

    In fact, many policies can be implemented beyond the five points mentioned above, including: Examples: increased government spending activity, higher minimum wages, etc. The goal is the same: to revive previously stagnant economic transactions, employment and productivity.

    But of course, stopping deflationary spirals, recessions and even economic recessions is not easy. Following the wrong policies or taking the wrong measurements can lead to new problems such as: B. High inflation or massive budget corruption. It also means that as a society, we must have sufficient economic knowledge to make more prudent financial decisions while democratically controlling our government in making targeted economic decisions to overcome this problem. Must have.

    Well, I hope this discussion of mine was helpful and increases your knowledge.See you in the next article. We never stop talking about money.

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