Deflation is when the cost of goods decreases over time, and thereby "deflate" in their prices. For example, deflation would exist when something that cost $1 last year then costs only 95 cents this year. The value of paper money (e.g., a dollar bill) may increase during deflation. Annual interest rates on savings can even become negative rather than the usual positive, as depositors may have to pay banks to safeguard the money.
Deflation is the opposite of inflation, but liberals consider deflation to be worse. The Great Depression, for example, was characterized by deflation. Japan has struggled with deflationary forces since the mid-1990s.
Some properly disagree with the liberal opposition to deflation. As one observer points out, "[t]he period of the greatest growth in the U.S. during the nineteenth century, from 1820 to 1850 and from 1865 to 1900, was associated with significant deflation."
Forces of deflation
Forces that push an economy towards deflation include the following:
- high unemployment, or low overall employment that can occur even if reported unemployment is small. This is prevailing in 2017.
- extreme price-cutting by sellers, which can be encouraged by technological factors such as the internet or be due to intense competition such as price wars between Wal-Mart and Amazon, or between Apple and Google (now owned by Alphabet).
- inventions that sharply and quickly increase productivity, as occurred shortly after the Civil War.
- a lack of inventions combined with competition by low-wage foreign jobs can prevent real wages from increasing, which precludes inflation.
- the loss of manufacturing and other good-paying jobs, which results in less income for consumers and fierce shopping for bargains.
Effect on Gold, Interest rates, Stock market, and Bonds
Deflation causes declines in gold prices and interest rates, but increases in the value of long-term bonds and potentially the stock market as investors seek higher rates of return than bank deposits offer. However, rates of default on bonds can increase due to deflation as borrowers have difficult paying back the principal.
Food deflation was rampant in 2016, due to increases in supply and low-cost competition. Retail grocers lost in value despite increases in the stock market overall, including Wal-Mart. "Kroger, Whole Foods Market, Sprouts Farmers Market, and Supervalu lost 17%, 29%, 8%, and 31% of their respective value" in 2016.