The deflation process can have different types, caused by one or another reason. Wage growth is prevented. A country's budget carries less expense. The purchasing power possessed by the national currency is increasing. Further from the article we learn the processes and factors that occur during deflation.
The essence of the phenomenon
In economics, there is a process like deflation. What are these simple words? This implies a phenomenon in which the percentage of price increases does not rise above zero. Goods and services are getting cheaper. Money is withdrawn from circulation. Currency and trading are under vigilant control.
Inflation and deflation are two opposing processes. In the second case, government securities are sold, government securities are actively issued, taxes increase.
Why arises
A number of reasons can be caused by deflation. What is this, in simple words can be explained if we study the basics of the phenomenon:
- The cost of money rises due to the fact that the production of goods rises in price. For example, high labor costs in gold mining.
- Less resources have to be given for goods, because labor productivity is growing. The value that natural money has does not change.
- Little currency is available to cater to trade. Deflation is an artificial increase in monetary value. Now you can often meet with this reason. To many, this was stimulated by rejection. gold standard.
Currency Preservation
The word "deflation" also means that the Central Bank is reducing the circulation of money. Also, this measure can be taken by the central government. Inflation and deflation are polar processes that can neutralize each other. As part of procedures to slow down the movement of currency increases discount rate, as well as compulsory reserves are replenished, for which the bank sets its own standards. Taxes are rising. Salaries should remain the same or go down.
The state budget spends less of its money. The structure of the credit system is changing. Deflation is also the introduction of restrictions on behalf of the Central Bank. The size and number of loans issued are kept under control. State securities are sold intensively.
Lack of adequate valuation of resources
The speed at which the funds turn around decreases. Deflation is a process caused by objective reasons. For example, difficulties arising in the transportation and change of capital routes. The rate of turnover of the natural money supply must be taken into account. It can decrease because the funds in the economy increase too much - all because of changes in prices that occurred before that.
The population refuses to make costs because it is waiting for price increases. People want to accumulate goods for the future so that the funds remain in their material form. There is less confidence in accounts opened by credit institutions.
The reaction of people to the process
Deflation is the growth of people's ability to acquire new material goods with national money. The price index is rapidly declining. This can not be called a positive factor, sometimes it is even worse than inflation. Here you can’t calculate anything in advance, it’s difficult to play it safe. There is a negative rate of price growth.
The cost of goods and services is restated, starting from the previous period.There is a place to apply a set of measures on behalf of the state, thanks to which it is possible to neutralize the widespread increase in the amounts required for the purchase of things needed by the population. Excessive foreign currency is withdrawn from circulation, the issuance of documents for ownership of property ceases. Theoretically, all these changes should not have an effect if prices are balanced at all levels, that is, there will be a balance between wages, pensions and acquired goods.
However, it often happens that there is a skew when the balancing occurs only at one level, and the rest remain the same. This introduces disharmony into the economy.
What can be gained and lost
For example, merchants own a certain product, for the acquisition of which they spent their money. If the value of these material goods is reduced, the return on sale will be completely different from the one expected to be received. A trade operation will be unprofitable and will introduce the entrepreneur to minus. Therefore, doing business during the transition period is extremely dangerous, it is fraught even with bankruptcy. And when the subjects of the market have their hands tied, they cannot expand their activities to their full potential, the degradation of the economic system is observed. But it all depends on the circumstances.
Thus, an agent may have money in the account. With falling prices, he can buy more. Production is very affected during this period, since there is a period between the purchase of raw materials and the release of goods during which the situation may not turn out in the best way for the plant. Therefore, many prefer not to take risks.
Historical example
During the Great Depression, which took place in the 20-30s. last century, it was possible to observe strong deflation. Governments have taken measures to avoid this process. Artificially removed money from the circulation, which was considered excessive. Thanks to this, they tried to blunt the process, increasing tax penalties, making the discount rate more, selling state securities. The regulation of currency and foreign trade operations has intensified.
As prices plummeted, real interest rates were higher than nominal. The economy was falling, and investing in an enterprise was simply unprofitable. Everyone who made large investments risked falling into the so-called liquidity trap. Because of this, business activity was rapidly falling, there was no effective demand. As a rule, financial authorities acted deliberately.
Inflationary pressure towards the economy, of course, is decreasing, but confidence in the future does not increase from this. In general, any fluctuations and lack of ability to plan their expenses and revenues for business entities is a negative phenomenon. Without confidence in the future, it is impossible to bring the economy to a high and fruitful level. Few people are pleased with the increased taxes, as well as the lack of prospects for an increase in wages. Money is held in the budget, loans are not issued, but securities are actively sold.
Sharpness does not lead to good
As a rule, such measures do not bring lasting results and are similar to a patch glued to a rotting wound that has not been disinfected. Of course, it is not so striking in the eye, but the essence of this does not change too much. After all, the withering away of the economy is just like the death of vital tissues covered by a bandage of emergency measures.
After some time, the realization comes that the limb can no longer be saved. Personal savings will increase. “Doctor, we are losing him!” Whom sister? The trust of citizens. ” It will not be so easy to break the inflationary consciousness of the consumer. It is impossible to drastically reduce certain budget items. Reforms should be carried out gently to give the population a chance to adapt to new economic conditions.
