What is Deflation?

Deflation refers to the decrease in the currency circulating in the market, the decrease in people's currency income, and the decline in purchasing power, which affects prices to decline.

Basic Information

Chinese name

Deflation

Foreign name

deflation

resulting in

Rising unemployment and recession

Classification

deflation and disinflation

Field

economics

Related nouns

inflation

for

in accordance with

The classification of deflation is necessary for a comprehensive and accurate grasp of the nature of deflation,

Marxism

In economics research, it was Marx who raised the issue of deflation earlier.

Although the specific reasons for deflation in different countries in different periods are different, from the theoretical analysis of deflation by economists at home and abroad, the general causes of deflation can still be summarized:

1. Tight monetary and fiscal policies

If a country adopts a tight monetary and fiscal policy to reduce the money supply,

For a long time, the dangers of deflation have often been underestimated, and it is considered to be far less than the threat of inflation to the economy. However, the historical lessons of deflation and the grim reality of global deflation have forced people to realize that deflation, like inflation, can cause serious harm to economic development.

1. Accelerating recession

The economic recession caused by deflation is manifested in three aspects: First, the sustained and widespread decline in prices has caused corporate product prices to fall, corporate profits have decreased or even suffered losses, which will severely discourage producers enthusiasm and cause producers to reduce or even stop production. Economic growth has been suppressed. Second, the sustained and widespread decline in prices has raised the real interest rate, which will benefit creditors and harm the interests of debtors. Most of the debtors in the society are producers and investors. The increase in debt burden will undoubtedly affect their production and investment activities, which will have a negative impact on economic growth. Third, the decrease in corporate profits and production enthusiasm caused by falling prices will increase the unemployment rate, the actual employment rate is lower than the full employment rate, and the actual economic growth is lower than natural growth.

2. Cause social wealth to shrink

When deflation occurs, the overall price level of the whole society drops, and the price of the company's products naturally decreases, and the profit of the company decreases accordingly. The decline in corporate profitability has reduced the market price of corporate assets. In addition, the decline in the price level of products makes it difficult for a single enterprise to sell its products. In order to maintain production turnover, enterprises have to increase their liabilities. The increase in the debt ratio further reduces the price of enterprise assets. The decline in corporate asset prices means a decline in corporate net worth and a reduction in wealth. Under deflation, a relative oversupply will inevitably make many workers unemployed. At this time, oversupply in the labor market will reduce workers' wages and personal wealth. cut back. Even if wages are not reduced, the increase in the number of unemployed will reduce the overall income of social residents and cause the wealth of social individuals to shrink.

3 Negative distribution effects

The distribution effect of deflation can be examined in two aspects, that is, the distribution of social wealth between debtors and creditors, and the distribution of social wealth between government, enterprises, and residents. In general, debtors in the economy are generally businesses, while creditors are generally residents. Therefore, the distribution of social wealth between debtors and creditors is also the distribution between residents and enterprises.

In the case of deflation, due to lower product prices, corporate profits have decreased, while real interest rates have risen, so that the income of the debtor-based company has been further transferred to creditors, which has increased the difficulty of the company. In order to maintain their livelihood, companies have to choose to raise more debts for turnover. In this way, the total debt of the company will inevitably increase, and its debt burden will become heavier. Therefore, the company will be in a worse position in the process of wealth redistribution. In this cycle, the distribution effect of this wealth has been continuously strengthened.

4 May trigger a banking crisis

In contrast to inflation, deflation benefits creditors and hurts debtors. Deflation has made money more expensive. This actually increased the debt burden of the borrower, making the borrower unable to repay the loan, which caused the bank to form a large number of non-performing assets, and even caused the bank to fail and the financial system to collapse. Therefore, many economists point out that "currency appreciation is the common cause of all economic problems in a country."

Eurostat released data on January 7, 2015, showing that the initial value of the euro zone s inflation rate in December 2014 was negative 0.2%, the first time it has fallen into negative value since October 2009. The market is worried about the risk of deflation in the euro area Intensify. At the beginning of the new year, the declining international crude oil prices have sharply increased the risk of deflation in the global economy, and Japan and the European Central Bank may increase their quantitative easing to resist deflation. ^[1]

In general, moderate deflation will help to adjust the economic structure and squeeze out the "bubbles" in the economy by intensifying market competition. It will also promote enterprises to strengthen technological investment and technological innovation, improve the quality of products and services, and contribute to economic development. On the positive side.

Deflation can help advance repayments to curb real estate and promote some people who should be able to repay. In the case of people demonstrating currency depreciation and borrowing money continuously, resulting in the continuous expansion of debt scale, deflation is a very good containment method, which can curb people desperately borrowing money to replace fixed assets, and then use fixed asset mortgages to continue to borrow money to purchase fixed assets. Then wait for currency devaluation to profit from it. It can curb the consequences of the vicious circle caused by the growing debt scale. During deflation, certain industries can be subsidized and policy benefits can be used to direct funds in fixed assets to the real economy. Deflation can also curb capital outflows, increase the cost of capital that has flowed back after the outflows, and prevent bad blood by malicious international capital.

Deflation can also have a positive effect when the national currency is internationalized. Only slowly rising currency will be welcomed by the world. Before each currency becomes an international currency, it will experience a strong period of appreciation, so deflation does not It must mean that the economy is not working, but a means of economic manipulation, which can be used in conjunction with other auxiliary measures (such as tax reductions, subsidies, etc.) to guide the direction of funds. The dollar's "shearing" of the world is actually deflationary.

However, excessive deflation will lead to a long-term, large-scale decline in the overall price level, tightening of market money, slowing down of currency circulation, and sluggish market sales, affecting the enthusiasm of enterprises for production and investment, and strengthening residents' "buying up but not buying down" Psychology, which affects the "reluctant investment" of enterprises and the "reluctant purchase" of residents, a large amount of idle capital, which limits the effective growth of social demand, and ultimately leads to sluggish economic growth, decline in economic growth rate, long-term economic development and people The long-term interests of the masses are unfavorable. From this perspective, deflation has a negative side to economic development. To this end, we must increase government investment to stimulate domestic demand, curb price declines, and maintain basic price stability.
In contrast to inflation, deflation means increased consumer purchasing power, but continued to lead to an increase in debt burdens, a decline in corporate investment income, and consumer negative consumption. The national economy may fall into the severe situation of a vicious cycle where the price decline and economic recession interact. . The hazards of deflation are as follows: prices have fallen, but private and corporate liabilities have increased secretly because the actual value of holding assets has shrunk, while mortgage loans to banks have not decreased. For example, when people buy a house through mortgage, deflation may make the homeowner own the value of the property, which is much lower than the debt they bear.
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Because the causes of deflation are more complicated, they are not caused by a single cause, but mixed deflation caused by the combined effects of multiple factors. Therefore, the difficulty of governance is even greater than inflation. Careful study of the specific situation of the country at different times can find targeted governance measures. The following takes deflation in our country as an example, and proposes general measures to control deflation, including two aspects:

(I) Implement expansionary fiscal and monetary policies

To manage deflation, we must implement a proactive fiscal policy, increase government public expenditure, and adjust the structure of government revenue and expenditure. For high-tech industries with great growth potential, implement tax incentives, minimize loss subsidies to enterprises and various forms of price subsidies, use fiscal discounts to initiate private investment, vigorously develop the private economy, and guide their capital investment. In the area of infrastructure that is in urgent need of social development, on the basis of continuing to increase the salaries of state organs, enterprises, institutions and retirees, it is even more important to consider increasing the income level of farmers and low- and middle-income earners as a major issue. In short, the implementation of a proactive fiscal policy is to optimize the structure of fiscal revenue and expenditure on the basis of increasing expenditures. It is necessary to stimulate consumption and investment demand and increase effective supply.

Since deflation is a monetary phenomenon, then to manage deflation, we must adopt an expansionary monetary policy and increase the money supply to meet the demand for money in society. The way to increase the money supply is to start from two aspects, the base currency and the currency multiplier. As a central bank, it can make full use of its monetary policy tools to influence and guide the expectations and behaviors of commercial banks and the public. In a period of deflation, it is generally necessary to reduce the rediscount rate and statutory deposit reserve ratio of the central bank, buy government bonds from social subjects, and at the same time use all possible methods to encourage commercial banks to expand credit and increase the money supply. The specific operation should be flexibly grasped according to the cause of insufficient money supply.

The combined use of fiscal policy and monetary policy is the main policy measure to manage deflation and inflation. However, due to the lagging nature of monetary policy and the flexibility of interest rates during the period of deflation, the effect of fiscal policy is generally better than that of currency. Policies are more direct and effective.

(2) Strengthen reform and give full play to market mechanisms

The market economy is an economy in which resources are allocated by the market in the entire society. The market economy is not a panacea, but it has been proved to be optimal. The government's correction of "market defects" must be limited to a certain range and restricted, otherwise The destructive effect on the economy is huge. Rethinking the formation of deflation in China is all related to the government-led development strategy, such as the large losses of state-owned enterprises, severe unemployment, the distortion of economic structure caused by repeated construction, the coexistence of shortage and invalid supply, the corruption of government departments, and inefficiency. Both are closely linked to the government's distrust of the market and excessive intervention in the market. Therefore, if we want to get out of deflation as soon as possible, we must intensify reforms, give full play to the role of market mechanisms, actively promote the transformation of state-owned enterprises, shake off the heavy burden of state-owned enterprises, establish a modern enterprise system, and strengthen the vitality of state-owned enterprises. In order to make it truly play a key role in promoting economic development, improve the science and technology, education, housing, health, medical care and social security systems required by the market economy. ^[3]

1. Monetary equilibrium refers to a contrasting relationship between money supply and money demand, is an ideal state of money supply and demand, and is a dynamic process achieved during movement changes. It is closely related to the total supply and demand of goods and services. The supply and demand of money reflects the equilibrium state of the national economy to a certain extent. Currency equilibrium and credit balance are two concepts that are both different and related.

Deflation

2. Currency imbalance, whether money supply exceeds demand or money demand exceeds supply, can be manifested by social market interest rates. The supply and demand of money determines the interest rate to a certain extent, and changes in interest rates can also reflect the supply and demand of money to a certain extent. situation. In addition to interest rates, currency imbalances are also manifested by imbalances in aggregate supply and demand in society, and their typical form is fluctuations in price levels. Inflation and deflation are actually two manifestations of the imbalance between supply and demand of money.

3 Inflation is an economic phenomenon caused by too much currency in circulation, causing the currency to depreciate and the overall price level to continue to rise in different forms. Judging the occurrence and degree of inflation can be done by selecting different price indexes according to needs. According to different standards, inflation can be divided into many types, and the causes of different types of inflation are also different, thus forming an inflation theory that pulls demand, drives costs, mixes supply and demand, and influences the structure. Inflation not only affects people's daily life, but also affects all aspects of society and economy. The magnitude of this impact depends on the severity of inflation on the one hand and the expectations of people on the other. Since people have different views on the causes of inflation, the countermeasures for controlling inflation are also different.

4 Deflation is a concept corresponding to inflation. Although there is still controversy in the definition, it is common to the overall continuous decline in prices. Judging the extent of deflation also requires the use of various price indices. Regarding the cause, development and deepening of deflation, different countries are different in different periods, and different economists have different understandings, thus forming different deflation theories. The formation and development of deflation in China has special and complicated reasons. It has a profound international economic background and is affected by the multiple influences of China's internal factors. Fiscal and monetary policies and deepening reforms.