The Real Problem With Deflation

Deflation is negative inflation: a general decrease in the average price level and an increase in the purchasing power of money. Every school of economics considers deflation negative for economies. However the standard explanation of why deflation is terrible for economies is incorrect. The correct explanation is understanding the impact of deflation on the real rate of interest, and thus the ability for private firms and individuals to manage debt repayments.

Read the rest of this entry »