Debt and Deflation

Contrary to today,deflation-prices falling from year to year instead of rising-wasn't perceiving as a threat every time.The alive Economies faced that phenomenon in stages before 20th century along several century.In fact, Milton Friedman has upholded that in theory that governments should endure a certain amount of deflation..

                  While the prices in market was falling slowly,this means every dollar and pound in your pocket,were getting value.Even if your income does not increase every year,your purchasing power increases.Like an economy with high inflation,you don't need to worry about that your money value falling.

                   Deflation and Crisis The innocent deflation left its place to bad experiences with in 20th century falling prices.This status was same in 1930's crisis too.Crisis followed the pretty rising prices of share(shares was being purchased with debts instead of savings money.) in 1920s.In 1929,the investors noticed the winnings does not based on reality,it based on more hope and speculation,and the stock market collapsed.Followed by US economy and the other national economies the most darkness years were lived.The banks were went bankrupt with heavy debts,and the real estate prices were fell,companies were shut down and millions people be unemployed.The basic of in crisis the most important problem was deflation.Prices began to fall when people understood that the era of economics, defined as "The Crazy Twenties," was artificially driven by greed and frenzy.Share and real estates prices fell,but the value of the debts that people took to buy them remained stable.So while prices are falling by 10 percent per year, the cost of borrowing at the cost of $ 100-the current purchasing power- was became $ 110.Millions of people in the digits, which are not directly affected by the collapse of the stock exchange,because of unexpectedly increment of the value of debt,defeated by inflation.

                  A Hard Spiral Deflation doesn't only debtors,it affects whole economy.As prices drop, people start stacking money because they know everything will be cheaper in a few months time.The money spend unwillingness reduce prices even more.Moreoever,companies notice the money cost rises because of people salaries arranging by legal contracts.The previous was $ 1000 salary,and now its value $ 1100.It is a kind of disaster for employers because even if the employer sell the goods and services more less,employer have to fulfill the same price cost.At first sight,even if it looks good for workers,practically,it does mean companies will fire many workers for carry on.At the same way, even if the banks will take more mortgage payment from some of debtors(compared to other prices in the economy),cannot collect any payment from the other debtors.

                   Some of this symptoms reminds like during the high inflation.Both of them contain in real prices uncontrollable rising in certain products.The difference is that while inflation increase the value of consumption goods, deflation contain inflating debt and other liabilities.One of the huge risks of deflation,in response to the steady decline in prices the companies who is in retrenchment, that their losses are getting bigger and that means pulling the prices further down.This creates a situation even more difficult than the inflation spiral,because in modern economies the mechanism of struggle against inflation has developed even more.

                    Diagnosis and Solutions The economic explaing of deflation,reduction of the money quantity in system or increase in the supply of goods and services.In that case,while a lot of money is in pursuit of little goods in inflation,this situation will the exact opposite in deflation.In the period of Great Depression,the cause of this in Japan 1990s and 2000s was the shortage of money.The reason for the benign inflation of the 19th century, on the contrary, was a surplus of supply that emerged more productively.

                   Generally,central bank checks the inflation with interest rates.Even so,they cannot fall below zero of that rate.That is mean they will apply more unusual methods while the prices down. So,they have to apply more unusual methods when prices are falling.Contrary to the inflation situation where the money in the economy is being kept constant,Central Banks start to cash transpose to system.It could make it in different ways;they buy assets such as bonds and shares or increase the money in the banks of commercial banks.To all this method called as "Quantitative Easing."
   
                At the end of the millennium,in Japan,kind of methods were used in USA and UK after 2008 crisis too.From debt-borne financial crises,tried to get out of like this way.

Main Message

Declining prices could damage the economy too.