There is no sound empirical evidence and no convincing theoretical justification for why deflation is such a danger to the economy. Although deflation can be the result of an economic crisis, it can also be caused by cost reductions due to falling raw material prices or technological progress. Historically, not only crises, but also periods of lasting economic success — e.g., the rise of Great Britain in the 19th Century — have both been linked to deflation.
Deflation is always the outcome of a (positive or negative) economic development and can in very unrealistic circumstances become the cause of a negative development such as a deflation spiral. There is also very little evidence that low or moderate inflation exerts a particular influence on economic growth. Could it be that it does not matter whether there is inflation or deflation — as long as inflation does not spiral out of control?
It does, however, matter for long-term investors, creditors and debtors, whose debts and liabilities are measured in nominal values. Inflation or deflation brings about a redistribution of the real value of assets between these groups. Read more ›