Deflation
Deflation is when the value of paper money (e.g., a dollar bill) increases over time. The cost of goods "deflate" in their prices, so that what cost $1 last year may cost only 80 cents this year. Annual interest rates on savings can 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.
But some disagree with the liberal view of this. 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."[1]
Forces of deflation
Forces that push an economy towards deflation include the following:
- low overall employment, which can occur even if reported unemployment is small.
- extreme price-cutting by sellers, which can be encouraged by technological factors such as the internet.
- inventions, as occurred shortly after the Civil War.
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