decrease in the general price level of goods and services

In economics, deflation is a decrease in the general price level of goods and services.[1] Deflation occurs when the inflation rate falls below 0% (a negative inflation rate). This should not be confused with disinflation, a slow-down in the inflation rate (i.e., when inflation declines to lower levels).

Quotes edit

  • Ziyauddin's sarcasm is incisive. Occasionally his sardonic humour helps him to sum up his ideas in a few words. His remark that in Alauddin's days "a camel could be had for a dang," but wherefrom the dang?" - shows at once how the reforms of Alauddin had made articles cheap and people poor.
  • The big, looming, monetary issue is "quantitative easing": that is, printing money. What happens is that the government borrows from the Bank of England, not from the markets. It expands the money supply to keep the economy going and also to counter deflation without simultaneously increasing government debt. The attractions are obvious, as are the dangers. The Robert Mugabe school of economics provides a salutary warning about uncontrolled monetary expansion in generating hyper-inflation. The road to Harare is not as long as we might hope. Monetary easing may prove to be necessary but will have to be managed with great skill and care: Too little easing and the crisis drags on – as in Japan. If there is too much, the authorities face the messy task of mopping-up liquidity by issuing bonds which add to the burden of borrowing or else we lurch back from deflation to inflation. So interest rates may soon become yesterday's story.
  • See your disappointments as good fortune. One plan's deflation is another's inflation.
  • Between August 1921 and August 1929 the Dow Jones Industrial index increased by a factor of 4.4. Other prices, however, had not risen so far. Some were already falling. For those fortunate enough not to be fighting it, the First World War had been a two-fold boon. The temporary diversion of so much European production into the business of destruction had allowed Asian and American producers to expand mightily, but they could not wholly compensate for the disruption caused by the war. It was a global seller's market. At the same time, the inflationary financing of the war, as governments printed money to pay for their deficits, pushed up world prices. The spot price of wheat in the Chicago market - a reasonably good proxy for traded primary commodity prices - hit roughly treble its pre-war average in 1917 and again in 1920. The twin stimuli of dearth and currency depreciation ended thereafter, and a global recession in 1920-21 saw steep declines in the prices of primary products and manufactures. Thereafter, they barely recovered. The price of wheat peaked in February 1925 at 182 cents a bushel (compared with 294 cents in May 1920) and by May 1929 it was down to 102 cents. Similar forces were driving down the world prices of other key commodities like iron and steel. This deflation was the overture to the Great Depression. In the 1920s it meant poverty for farmers, but easy living for those who received the profits of industry and finance.
    • Niall Ferguson, The War of the World: Twentieth-Century Conflict and the Descent of the West (2006), pp. 191-192 
  • The clear and present danger is, instead, that Europe will turn Japanese: that it will slip inexorably into deflation, that by the time the central bankers finally decide to loosen up it will be too late.
  • The declared object of deflation was the restoration of the gold standard at pre-war parity. Its actual effect has been to create unemployment by the restriction of industrial credit. By the lever of unemployment it has forced down wages and has thus facilitated the return to gold through the reduction of prices. An incidental effect has been to transfer purchasing power from the workers, whose wages have been reduced, to the bondholders, whose interest has remained the same. It has also doubled the real burden of Debt since 1920, and was largely responsible for the mining lock-out last year, by the reduction in terms of sterling of the money which we receive for coal sold abroad. Deflation, in fact, has been responsible for a sinister catalogue of disasters which can be substantiated in detailed argument that has never yet been rebutted.
    • Oswald Mosley New Leader (20 September 1927), quoted in Robert Skidelsky, Oswald Mosley (Papermacs, 1981), pp. 152-153.

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