Fed chair bernanke famously said "the us government has a technology called a printing press" to explain why deflation was in no way to be feared, bc unlike inflation it can be fought easily and without serious drawbacks.

Deflation is good, it means cheaper prices. A deflationary spiral due to insufficient money supply despite robust economic fundamentals can be really bad in theory sure, but it can't happen unless the monetary authorities are totally negligent and incompetent, as happened in the great depression. All you have to do is print more money and problem solved. We don't expect it to happen again because we learned from it.

See https://en.m.wikipedia.org/wiki/Bernanke_doctrine

As someone who has lots of debt, I would prefer slow, but subtle inflation.

I look forward to minimum wage jobs being 25 dollars an hour, and still poverty wages - because then the debts I have will be roughly half what they are now in constant dollars.

Hey, you're <insert billionaire here>!

Just a reminder for those not in-the-know: https://www.propublica.org/article/billionaires-tax-avoidanc...

I didn't see the word 'inflation' in there once.

I do think we should tax borrowing on securities though.

The ultra-wealthy can borrow phenomenal amounts of money at low interest rates, which has two effects. First, as you said, is that during times of great inflation they come out ahead (also because they manipulate the broader economy to inflate). Second, is that borrowing doesn't count as earned income and therefore is not subject to income taxes.

I think we should outlaw billionaires. The idea that a sole individual could hold so much economic, societal, and political power is totally fucking insane.

I've heard that the ultra-rich borrow a lot against potentially illiquid assets to avoid realizing gains and taxes, but I'm confused how it works long term. Do you just keep taking out new debt to pay back your old debt, and continue doing that until you die? It seems like eventually you would need to sell something to pay back your older creditors.

You don’t even need to do it for illiquid assets, the important bit is to have appreciating assets.

You avoid taxes by not getting cash in a tax inefficient way (income, capital gains) and instead you get it in loans (which can be tax deductible!)

Then when an event happens that allows you to pull cash efficiently (capital losses, inheritance asset step up etc) you service the loan.

Your lender is happy to do this both because the loans are fully backed by real assets and they want to sell you or your businesses other services.

I guess if you have, say, $50 billion in assets, you can take out a new $5 million loan each and every year, and by the time you die, and never have to pay yourself back. You've barely leveraged 1% of your assets. Their reality is unfathomable to us little people.

$5 million, to someone that rich, is like $50 dollars to us. It's chump change you might find laying around your house.

Furthermore borrowed money increases the money supply, and at that scale, the money you're borrowing can even be used to increase the price of the assets that you're using as collateral, allowing you to borrow even more.

It can also unwind just as quickly if you need to pay those debts back in a hurry, causing your asset prices to tumble on the way down. But if you're big and have borrowed enough money, whole jobs and industries will be dependent on your continued solvency, and so you can sometimes maneuver to put the public on the hook.

Do you think that slow, subtle inflation won't be priced into the interest rate on your debt?

Based on prior experience? No, I dont think so - interest rates go up, and they go down. I look at all the folks who bought houses in the early 80's between appreciation and inflation they won in the end.

This also works out for unsecured debt too largely.

But surely you notice that when interest rates go up and down, that movement is tied to changes in expectations of inflation?

The '80s homebuyer did great on their purchase, but not because borrowing at 20% was such a steal. They profited because their home subsequently went up in price faster than inflation did.

Everything else being equal, you almost always win when buying a house in inflationary times. Even if you pay a high initial rate you can always refinance to a lower one later. If rates stay higher for longer than anticipated your income is most likely rising as well. In either scenario your debt service expense is trending down as a percentage of your nominal income, and your asset is trending up with inflation.

> unless the monetary authorities are totally negligent and incompetent

See Japan for the last 3 decades!

The standard of living in Japan for the vast majority of people is orders of magnitude better than it is here. It might not look good according to metrics that optimize ploughing society's wealth into the hands of a few billionaires, but it says something that an Uber delivery person can live walking distance to the popular restaurants that he delivers from.

> The standard of living in Japan for the vast majority of people is orders of magnitude better than it is here.

But is that because of their economic policy or because of social norms?

> It might not look good according to metrics that optimize ploughing society's wealth into the hands of a few billionaires […]

Sweden also has a pretty good standard of living, less inequality than the US, decent economic growth (better than JP, lower than US), and has more billionaires on a per capita basis than the US:

* https://en.wikipedia.org/wiki/List_of_countries_by_number_of...

> But is that because of their economic policy or because of social norms?

You think the distribution of living standards across a population could be a matter of social norms? How?

> You think the distribution of living standards across a population could be a matter of social norms? How?

Taxation and social programs:

* https://en.wikipedia.org/wiki/Redistribution_of_income_and_w...

People choose to vote for / elect people who are willing to implement various policies to achieve it. What is acceptable to the population is (partly?) determined by the norms of that population and society, and the acceptance of various ideas will determine what politicians will campaign for.

But that's economic policy, even if it is at least in part driven by social norms.

> But that's economic policy, even if it is at least in part driven by social norms.

Social norms come first, and they determine which economic policies you are willing to even consider (and then implement or not).

* https://en.wikipedia.org/wiki/Overton_window

Japan's economic system was crafted in post-war reconstruction by General MacArthur. It's literally the furthest you can get from "social norms precede policy."

> Japan's economic system was crafted in post-war reconstruction by General MacArthur.

Japan's economic system has been under Japanese control and self-determined (for both good and ill) for decades:

* https://www.goodreads.com/book/show/16144575-how-asia-works

Lots of things about the Japanese standard of living have little to nothing to do with monetary policy. Being able to park your bike just about anywhere without locking it up and without worrying about it being stolen, for example.

>have little to nothing to do with monetary policy.

False. A monetary policy that prioritizes universal access to basic needs leads to less overall crime. It may not be sufficient, but it is a major factor[1].

1. https://www.nature.com/articles/s41598-020-80897-8

I think you're both right. IMO, Japan has a very high standard of living, but they could also be better off today if they'd been looser with fiscal spending (and spent that fresh-printed money wisely). For example, one of their major issues is an aging population; they could have directed spending towards subsidizing childcare, fertility treatment, parental leave subsidies, or even offering a salary to stay-at-home parents, to compensate and incentivize that valuable work. (They do have some of these policies, but their low inflation suggests they had room to do much more!)

> […] but it can't happen unless the monetary authorities are totally negligent and incompetent, as happened in the great depression.

Or if you do not have monetary policy flexibility, like when you're on the Gold Standard, as happened in the Great Depression (until FDR went off of it).

See Bernanke and James (1990):

> However, Temin (1989) argues that, once these destabiliz- ing policy measures had been taken, little could be done to avert deflation and depression, given the commitment of central banks to maintenance of the gold standard. Once the deflationary process had begun, central banks engaged in competitive deflation and a scramble for gold, hoping by raising cover ratios to protect their currencies against speculative attack. Attempts by any individ- ual central bank to reflate were met by immediate gold outflows, which forced the central bank to raise its discount rate and deflate once again. According to Temin, even the United States, with its large gold reserves, faced this con- straint. Thus Temin disagrees with the suggestion of Friedman and Schwartz (1963) that the Federal Reserve's failure to protect the U.S. money supply was due to misunderstanding of the problem or a lack of leadership; instead, he claims, given the commitment to the gold standard (and, presumably, the ab- sence of effective central bank cooperation), the Fed had little choice but to let the banks fail and the money supply fall.

* https://www.nber.org/system/files/chapters/c11482/c11482.pdf

For a fuller treatment, see Eichengreen:

> This book offers a reassessment of the international monetary problems that led to the global economic crisis of the 1930s. It explores the connections between the gold standard--the framework regulating international monetary affairs until 1931--and the Great Depression that broke out in 1929. Eichengreen shows how economic policies, in conjunction with the imbalances created by World War I, gave rise to the global crisis of the 1930s. He demonstrates that the gold standard fundamentally constrained the economic policies that were pursued and that it was largely responsible for creating the unstable economic environment on which those policies acted. The book also provides a valuable perspective on the economic policies of the post-World War II period and their consequences.

* https://www.goodreads.com/en/book/show/775143

Following the rules of the gold standard is what caused the initial "negligent and incompetent" action. Of course later (1937) on they raised rates too soon (and the government dialled back deficit spending), which caused an economic slowdown.

It was not until the giant stimulus packaged often referred to as "World War Two" that the economy picked up again.

In the context of the original chart which covers a long period of US history ... is Bernanke's statement still true for most of it?

Clearly, I am not a monetary policy buff, but certainly I've heard people talk about the US getting off of the gold standard in 1971. When the currency is by policy backed by something, you can't just print money (unless you dig a new mine, I suppose), right? When I google around for what our policy was in the 1920s, I see that it was a bit complicated in that many countries suspended the gold standard during WWI and in some cases there were pegged exchange rates, and the US intervened in gold imports.

Every nominal asset that can be sold to take advantage of lower prices on goods and services is someone else's nominal liability that they have to cover with weakened earning power. Deflation is straight up bad compared to mild and predictable inflation, it's easy to fight off sure but it's definitely something to avoid.

> But what conditions made deflation and growth possible together in the 1920s?

They didn’t go together, the chart shows two severe episodes of deflation, one of which was the Great Depression, and the other was this:

https://en.m.wikipedia.org/wiki/Depression_of_1920%E2%80%931...

It’s not clear why the chart lumps them into one period.

I think deflation independent of anything else is neither good or bad. Deflation gets a bad rap because it tends to correlate with market crashes and contractionary periods. If you are a senior on fixed income, or have a ton of cash, it is better than high inflation.

And if you're at home buying age housing deflation would be a gift. Unfortunately for buyers it's not something we'll likely see again for a while.

> I've always heard that deflation is awful and must be avoided.

That doesn't mean anything. People talk about god/gods all the time, it doesn't mean they are real or exist.

Inflation/Deflation are meaningless without linking them to the system in question. Growth also, in my opinion, has little to do with inflation/deflation and more about the positive inflow of energy into the economy.

We had a system. We saw deflationary collapses in that system. We've seen them. They're real, and they are very destructive.

So we mostly kept the same system, but tried to tweak them to make deflation 1) much rarer and 2) less destructive.

What system collapsed due to deflation?

I didn't say the system collapsed. I said we saw deflationary collapses within the system.

Look at the Panic of 1893, the Panic of 1907, and the Great Depression. If that's not enough, there are several others.

This is an odd statement to make, in most contexts deflation is good for the economy. It is mostly when deflation is coupled with an asset bubble and large underlying debt that it's an issue and leads to a financial crisis. Why do you think deflation is bad?

I think it is called a deflationary spiral.

When your money becomes more valuable if you don't spend it, people spend less, which depressed prices further, so people spend even less, which even further depresses prices.

https://web.mit.edu/krugman/www/spiral.html

This mixes up the reason and the cause. A deflationary spiral occurs when you have a financial crisis, e.g. due to a debt-based asset bubble, and the economy is not strong enough to stimulate growth through policy changes, e.g. interest rates are already zero etc. This then in turn leads to reduced spending to ensure liquidity, that is reduced demand, which leads to lower prices, which is deflation. Deflation is the result, not the cause. From that point onward, yes, it is possible for the situation to spiral in a feedback loop, but deflation is not why the spiral started.

Yes, but this is easy to avoid. It's only happened when the governmental authorities foolishly believed they should respond to deflation with austerity, which is now obvious to us that this is backwards. See https://en.m.wikipedia.org/wiki/Bernanke_doctrine

That said, the fact that austerity has been tried recently suggests the perverse impulse to respond to deflation with belt tightening instead of expanding credit is still with us. But all we have to do is just print money to match the deflation. The 1990s through 2019 are a great example, there was constant economic deflation because of new technology and the fed just printed credit like crazy to match said deflation and keep the inflation at 2pct.

The pie was getting bigger, so eroding the value of each slice to make it a smaller portion of the pie kept slice sizes stable while not making anyone lose pie.

They had an easy time with that. Now that the pandemic caused real eocnomic inflation due to supply shocks, dealing with excess inflation is a lot harder. The only way to keep pie slice size stable is to take away pie from someone and nobody wants be the loser, so capital and labor are in a game of chicken to see who blinks first and has to eat more of the inflation.

> the fed just printed credit like crazy to match said deflation and keep the inflation at 2pct

There's no rational basis for the 2pct inflation target [1], it's entirely baseless, in some sense it's now a matter of conservatism, mere tradition from a random fad decision in the 90s.

And the point is that monetary expansion directs the energy of the economy and effectively steals savings, forcing the economic energy of people into consumerism and CEOs pockets.

[1]: https://archive.ph/5abTC

> There's no rational basis for the 2pct inflation target [1] […]

Except that it seems to work.

Hitting an inflation rate of exactly 0% is practically impossible: you're going to be either a little high, or a little low. So the option is: do you want "too high" or "too low" (negative)?

In the last little while how we've all seen how painful high(er) inflation is for people. Lessons from periods of the 1930s (and others in the linked-to PDF) show how bad deflation is.

A "little" high seems to have been a pretty good compromise.

This is not true though? Japan had interest rates around zero for decades and likewise inflation which bounced around the zero mark, sometimes over, sometimes under. It is both possible and feasible, it's simply a matter of policy. See [0] and [1], choose "max" as the date range to see what I mean.

[0] https://tradingeconomics.com/japan/interest-rate

[1] https://tradingeconomics.com/japan/inflation-cpi

> It is both possible and feasible, it's simply a matter of policy.

It is been their policy and their desire to get out of the situation that you describe, and not to be living in it:

* https://en.wikipedia.org/wiki/Abenomics

They want(ed) to hit higher inflation:

> Under Kuroda, the BOJ deployed a huge asset-buying programme in 2013, originally aimed at firing up inflation to a 2% target within roughly two years.

> The central bank introduced negative rates and YCC in 2016 as tepid inflation forced it to tweak its stimulus programme to a more sustainable one.

* https://www.reuters.com/markets/asia/japan-poised-end-negati...

Yes and Japan's economy has been stuck in the 90s for the past 30 years with very little growth.

What you're describing wasn't their goal, they have been keeping interest rates at ~0% since the late 90s to avoid deflation and to stimulate the economy (and therefore increase inflation) with limited success.

But few people seem to find Japan’s past decades a desirable example because they had no growth either.

> Except that it seems to work.

I'd still like to know according to who. Practically everyone agrees the economy is worsening for average people during many decades of nearly universal control by "mainstream" economists, advisors and bureaucrats.

> Practically everyone agrees the economy is worsening for average people during many decades of nearly universal control by "mainstream" economists, advisors and bureaucrats.

Look at the chart that this story is about: when things go negative, what do you think happened to people's employment opportunities? What do you think happened to their debts (deflation makes it worse)?

Do you want to perhaps look at the economic historical record of the ~80 years before 1945:

* https://en.wikipedia.org/wiki/Panic_of_1910–1911

* https://en.wikipedia.org/wiki/Panic_of_1901

* https://en.wikipedia.org/wiki/Panic_of_1896

* https://en.wikipedia.org/wiki/Panic_of_1896

* https://en.wikipedia.org/wiki/Panic_of_1893

* https://en.wikipedia.org/wiki/Panic_of_1873

There have not been as near as many widespread economic collapses post-WW2 as there were pre-WW2. 2008 is probably the only one that came even close.

The main contributor to the working class getting a raw deal since the ~1970s is (IMHO) the idea of shareholder value (primacy):

* https://en.wikipedia.org/wiki/Friedman_doctrine

the dominance of equities is something precisely caused by the shift in the monetary system in the 1970s, which ushered in devaluation of money and forced ordinary people to seek yields from investments in businesses

The 1930s show the consequences of inflation, speculation and credit expansion, and then bungled government response that dragged out economic contraction which is needed to clear out malinvestment.

Any common person realizes their ability to lead a dignified life is being squeezed out by monetary expansion gone amok, with those closest to the govt spigot getting the benefits and none of the costs (cantillon effect).

And it brings up a good point which no one answers satisfyingly: why shouldn't the average person just enjoy price savings produced by technology?

> The 1930s show the consequences of inflation, speculation and credit expansion […]

The 1930s were nothing special when it comes to wild swings in prices (as the article show), speculation was not new (see canal mania, railroad mania, etc)

* https://en.wikipedia.org/wiki/Canal_Mania

* https://en.wikipedia.org/wiki/Railway_Mania

What is special is the post-WW2 era (where there was no deflationary bust, especially after a major war), and the decades that followed (when there was no gold standard to handcuff monetary policy, and when Keynesian economics allowed for fiscal flexibility).

> And it brings up a good point which no one answers satisfyingly: why shouldn't the average person just enjoy price savings produced by technology?

There's a difference between deflation through innovation, and deflation through economic turmoil (e.g., mass unemployment, collapse of aggregate demand).

One of my favourite examples of 'invisible deflation' that no one notices (often while they're complaining about inflation) is a 1991 Radio Shack ad:

* https://www.huffpost.com/entry/radio-shack-ad_b_4612973

* Via: https://awealthofcommonsense.com/2021/01/inflation-truthers/

You realize Canal Mania & Railway Mania happened during eras where interest was artificially low below the historical rate of 7~8%?

> You realize […]

I realize that the two manias were forms of speculation, and that getting overly excited about things seems to just be a thing humans tend to do.

* https://en.wikipedia.org/wiki/Technological_Revolutions_and_...

> that getting overly excited about things seems to just be a thing humans tend to do

human nature is to avoid discipline when they're comfortable and set the stage for a bubble & contraction, exactly what happens with artificially low interest rates and speculations like the manias you brought up

While deflation sounds good, its is definitely bad. When prices are falling, this provides an incentive to firms and consumers to delay purchases since prices are expected to be cheaper in the future. This reduces aggregate demand, which means goods get cheaper due to less demand, causing firms to have to fire people due to lower, causing greater economic decline that spirals out of control. We now know that deflation was a primary cause of the Great Depression.

Neither one of those is true. So long as it is not extreme, a decline in the price of goods means consumers have greater purchasing power, more financial security and hence more flexibility in their spending and saving. All of these are good for the economy as an aggregate.

Except your debts start increasing even while you're continuously paying them off and investment becomes much more lucrative.

Deflation benefits those who have a lot of capital and can invest it into ~ zero risk instruments like government bonds the most (e.g. that's basically how the rentier/aristocratic class in the 19th Britain were able to maintain their lifestyle without doing anything productive, government bonds were yielding 4-5% while the value of their capital was going up due to near continues deflation throughout much of the century).

On the other hand if you're a heavily mortgaged farmer you were basically screwed if the price food went down (that's why free-silver/loose monetary policy was so popular amongst farmers back in the 1800s in the Midwest and in much of US).

> So long as it is not extreme, a decline in the price of goods means consumers have greater purchasing power, more financial security and

Deflation means that people's debt becomes more of a burden. I'd hazard to guess that poor people have more debt that rich, and so deflation would be worse for the poor.

but debt actually having a bite cuts both ways and bad businesses should be on the hook for their debts, and middle class people who carefully save over their entire life deserve to not have their savings inflated away or otherwise forced to invest in businesses to preserve or grow the purchasing power of savings

Let's say the price of everything goes down. And let's say you owe money when it does. Now everything is cheaper (including your labor, because the price of everything went down), but you still owe the same number of dollars. That hurts.

And if you say "wages won't go down", then you're expecting that everything else goes down (including the price of whatever your employer makes), but your wages magically won't? It would be nice... but don't hold your breath.

This logic doesn't work. The past few decades have seen steady to strong inflation, while purchasing power after adjusting for inflation, depending on the country, has either not kept up with it or has straight up gone downwards. So in other words, the price of everything has gone up, but not wages. So I don't really see how the price of everything going down would mean wages going down either.

When prices rise, we'd expect revenues to rise, which is not necessarily given back to workers in the form of buying power. (See grocery stores having record profits as prices have rised, for instance - that increase in profits is probably in part the gap between prices and wages showing up.)

However, no company is going to do that the other way around - if their revenues fall, they will either cut wages or fire people in order to still be profitable, so deflation should show up faster in loss of buying power too. Companies don't generally just accept lower profits, and shareholders especially do not accept this.

but that would only happen under monetary contraction, and the norm now is monetary expansion which siphons off money from savers and redirects it into the pockets of asset holders and "Cantillionaires", and this also means you get paid less with a static wage unless you get raises which for many people is hard unless they're constantly job searching which sucks anyway

Regardless of what one thinks about deflation in general, deflation TODAY in the United States would be extremely bad(due to the debt load). That said, you should obviously want the "cost per unit of X" to be deflating. dollars per teraflop should always be falling. dollars per kilowatt hour should always be falling.

Except we really need deflation. A dollar today is 2.6x less than a pre-2021 dollar. People can't afford homes anymore, and it's not entirely because of the interest rate, but because everyone's home has doubled in price since 2020.

The market is locked up. How many families are making 133k+ a year to make the 3x rule for a 400k tiny townhome? The US Census reports the average household income is 75k.

The Feds and Deep State have played with people's lives for too long, pretending like they can offer security and order. In reality, they've screwed over the middle class.

Economics 101, deflation is very bad. Basically it is because it directly leads to economic contraction. Why produce something if you're not sure you're going to make the necessary money if you sell it, or wait if you can buy it for cheaper.

This is fundamentally flawed, I'll rather refer you to a thorough article on the subject [0]:

> Most of the time, deflation is unambiguously a positive trend for the economy, but it can also under certain conditions occur along with a contraction in the economy.

[0] https://www.investopedia.com/articles/personal-finance/03091...

The heading even leads with "why is deflation bad for the economy".

Obviously there are situations where it is good and for certain people, say a right sizing of an overheating economy/sector but on the whole, and more generally, it is bad, not something you look to as fine or alright.

It would be helpful if you could actually read the article. Then you'd see that the article outlines some specific situations where deflation is bad for the economy, but concludes that it is good in general. You'd even take away as much if you only read the key takeaways section, but sadly that seems to be a tall order.

I've read it before my prior response and it ends off with:

"A little bit of deflation is a product of, and good for, economic growth. But, in the case of an economy-wide, central bank-fueled debt bubble followed by debt deflation when the bubble bursts, rapidly falling prices can go hand-in-hand with a financial crisis and recession."

This is what I'm saying.

Saying an economy-wide, central bank-fueled debt bubble followed by debt deflation is bad is very different to saying that deflation is very bad in general. This is simply trying to reframe your argument after the fact. Deflation isn't the cause of economic contraption as you said, it is the result.

I'm pointing out the article you referenced is saying its bad, the reason it says is exactly what I'm saying. It's fine short term but it's bad overall.

They're just saying in our debt fueled world, you can't merely print money to get out of jail free in a deflationary scenario as eventually the debt obligation gets too large relative to your shrinking economy size. We live in this world unfortunately where it's bad, in a hypothetical world without all the debt, it's still bad in the long term for the other reasons I've mentioned.

There is plenty of empirical evidence from the ~130 years or so prior to the Great Depression which shows why deflation (or rather restrictive monetary policy) was bad, stifled economic growth and lead to permanent boom and bust cycles and generally very high price volatility.

> Most of the time, deflation is unambiguously a positive trend for the economy

It depends on how deflation comes about. Technological innovation? Pretty good as the 1991 Radio Shack ad illustrates:

* https://www.huffpost.com/entry/radio-shack-ad_b_4612973

Through a collapse of economic activity and mass unemployment? Not so good.

Why is this an odd statement to make who educated you to think it’s not?

I have heard what OP is talking about referred to on econ podcasts like Planet Money and Freakonomics.

> It is mostly when deflation is coupled with an asset bubble

Isn't it usually? Such as the housing price deflation of 2008-2011.

People have a strong and well-founded attachment to nominal values in the economy. You pay your rent or mortgage with a fixed quantity of dollars, so as a salaried employee certain pay cuts are intolerable, so employers balance their falling nominal revenues with layoffs instead of pay cuts.

These nominal agreements are significantly less flexible than real-valued ones; people are much more able to buy fewer steak dinners when they're $20 instead of $15, and much less able to stay in their house when their paycheck is $1500 instead of $2000.

Irrational exuberance in stock performance.

> Irrational exuberance in stock performance.

And canals:

* https://en.wikipedia.org/wiki/Canal_Mania

And railroads:

* https://en.wikipedia.org/wiki/Railway_Mania

And a whole bunch of other things:

* https://en.wikipedia.org/wiki/Technological_Revolutions_and_...

Getting overly excited about things seems to just be a thin humans tend to do.

Irrational exuberance in crypto performance.

It wasn't just the 1920s. Take a look at the 1810s-1820s and the 1870s.

>I've always heard that deflation is awful and must be avoided.

Because most modern economists are state-funded and the state benefits handsomely from the ability to print money. If you look back before economics got institutionalised you'll see a consensus that inflation is far worse than depression; plenty of states have been destroyed by debasement of the money supply (as far back as the Roman Empire artificially devaluing its currency leading up to its collapse), but there hasn't been a single one destroyed by the value of its people's money increasing.

Because deflation can only be transitionary; people need food and housing and other necessities, so there's a limit to how much they can reduce spending, and once that limit is reached the economy has just shifted to a new equilibrium, one with less spending and more savings than before. Inflation on the other hand (when it's caused by printing money/defacing the currency) has the power to destroy 100% of the populace's wealth, as we saw in Weimar Germany and Zimbabwe.

> But what conditions made deflation and growth possible together in the 1920s?

a) It was a correction to the very unusual war years, which saw unprecedented levels of government investments, price controls, and money printing

b) It also led to a lot of money getting invested in dubious overseas markets, which directly led to the Great Depression

Deflation is just prices going down. There is a difference between the good years with prices going down but people have loads of money to spend and the bad ones of prices going down because everyone's broke.