I was at work today and my boss and I were talking about inflation and deflation. It eventually got around to the point where he said "deflation CAN be a very bad thing. For instance back in (forgot the year) deflation occurred and the value of my house dropped." I replied, yes, but your money increased in value." To whcih he replied, "I'm not lecturing you in economics, I am just saying that is what happened."
Was my answer sufficient or am I missing something here? Do explain!
lol,
deflation certainly can be a very bad thing for certain interest groups - i.e. homeowners. It also could be bad if the government decides, much like if they decided to inflate the currency, to deflate it - but you can basically bank on that never happening.
Steady, small amount of deflation from economic growth are not going to hurt society, they will in fact make it better off.
As far as your particular point, about were you better off with your house being less valuable - the answer is maybe. Are you planning on selling the house? If your income decreased due to deflation, does the greater deflation that comes in consumer goods (in real terms your income goes up) make up the higher percentage of income your mortgage payment require?
My point is he's right that deflation can, in some circumstances be bad, although nothing like it is demonized in mainstream economics, and it certainly can be bad for certain groups. It can also be very good for society; it all depends.
blog on economics among other things: www.acceptancetake.com
Basically, inflation is good for debtors and deflation is good for savers. Inflation encourages spending now, and deflation encourages spending later.
Deflation causes credit to tighten, so yeah... It would cause his house to be less valuable than in an inflationary environment, because houses tend to be traded on credit. In an inflationary environment, housing loans would be more easily accesible, and so more people would want to buy his house, driving up the value.
But consider that if inflation was being encouraged by an artificially low interest rate, which it was, then some of those loans would be malinvestments. His inflated house price was part of a bubble, which had to collapse inevitably when too many such malinvestments were made, with severe ramifications for the whole economy.
Neither inflation nor deflation are inherently good nor bad when it's happening naturally - it will self-regulate - but interference with the interest rate to influence things either way always causes malinvestments, which lead to bubbles and collapses.
Deflation is natural. As an economy grows, it will produce more goods. This means, with sound monetary policy, there will be the same amount of money chasing a larger amount of goods, thus, driving down prices. However, few lay people would see this as a problem. For this reason I'm guessing he was talking about a large deflation which came about during a bust. This deflation is necessary, however, in order to arrest the misalocation of resources. Without this deflation, the economy cannot begin to recover.
'' The greatest enemy of knowledge is not ignorance, it is the illusion of knowledge.'' Stephen Hawking
(especially the two PDFs at the bottom.)
Let's not kid ourselves. The result of deflation will not be benign and will produce extreme results. While deflation may be a necessity to cure past excesses, the process itself will result in devastation. That is a guarantee. Because of the extremely leveraged position of our financial institutions, just a little deflation will start a domino effect that will absolutely pummel the world economy. This, I am not worried about. What I am worried about, are the behavior of human beings during this time. What I am even more worried about are the radical leaders that get elected into office by these same people. Protectionist policies will be a given, which will lead to trade wars and eventually actual wars. A dictator like Hitler will likely emerge. It will be something akin to the years following the Great Depression - our last deflationary period. But perhaps even worse.