Re:U.S. Population Growth Has Been Driven Exclusively by Min...
by vkou on Sunday July 05, 2020 @06:11PM
(#23742542)
Inflation/deflation is a proxy for population growth + productivity growth + looseness of monetary policy.
Loose monetary policy can't be maintained forever (You get stagflation, which is even worse - just ask Japan), year-over-year productivity growth can't be maintained forever, and the subject this thread is discussing is 'what happens to the economy when population growth goes negative?'
So yes, a deflation of 0.5% wouldn't be devastating. A deflation of 3% would be a stop-the-presses-the-world-is-going-to-hell-we-need-a-new-economic-system event.
The problem is that you can't loose-monetary-policy your way out of deflation, because one of the factors contributing to a loose monetary policy is how willing banks are to lend money to people. In a world where the money base is shrinking year-over-year, in aggregate, lending money to people is a terrible idea, because there won't be enough money in circulation next year to make interest payments. This leads to a reduction in lending, a reduced appetite for risk in lenders, and a reduction in the amount of money created by fractional reserve banking, which further pushes you into deflationary territory.
Loose monetary policy can't be maintained forever (You get stagflation, which is even worse - just ask Japan), year-over-year productivity growth can't be maintained forever, and the subject this thread is discussing is 'what happens to the economy when population growth goes negative?'
So yes, a deflation of 0.5% wouldn't be devastating. A deflation of 3% would be a stop-the-presses-the-world-is-going-to-hell-we-need-a-new-economic-system event.
The problem is that you can't loose-monetary-policy your way out of deflation, because one of the factors contributing to a loose monetary policy is how willing banks are to lend money to people. In a world where the money base is shrinking year-over-year, in aggregate, lending money to people is a terrible idea, because there won't be enough money in circulation next year to make interest payments. This leads to a reduction in lending, a reduced appetite for risk in lenders, and a reduction in the amount of money created by fractional reserve banking, which further pushes you into deflationary territory.
It's a vicious cycle that you can't escape.