The world's biggest economic problem
Deflation in the euro zone is all too close and extremely dangerous.
I picked up this article is because the title is sensational. It states deflation as "the biggest" or "extremely" dangerous problem. Why does the Economist think so? We have to understand the risk of “deflation”.
l The logic of the article is clear as usual. In the former section, it points out the risk of deflation in Europe. Overall inflation rate of the euro zone has slipped to zero and this deflation poses far greater risk to the region and the world. The euro zone is now on the verge of tipping into its recession. In the latter section, it presents prescriptions to the issue.
l This time, I would like to rather focus on the former section which mention why deflation is dangerous for us. This article explains the danger in a short sentence; if people and firms expect prices to fall, they stop spending, and as demand sinks, loan default rise. Do you really understand the danger? For me, not yet.
(1) What kind of image do you have on "deflation"?
I don't want to discuss this academically. Whatever answer is possible. Deflation is Positive / Negative / Nothing, etc. If you have some keywords or image in your mind, please share them. My definition is that money values up as time goes by. It means money becomes attractive increasingly.
(2) What will happen when the economy is in deflation?
The article mentions that Japan fell into deflation in the late 90's and is still struggling. People in the world have a strong interest in Japan's case. What do you answer when someone asks you about life in deflation?
(3) Why does deflation harm the economy destructively?
The economist thinks deflation is dangerous because of its chain-reacting negative effects. But price of goods is decided relatively so price fluctuation seems to lead no bad effects. Can you explain why in your words?