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What is this thing they call deflation?
Published on 16th December, 2008 at 15:36 by Eric Mowinski.
For years we have been worried about the possibility of inflation, now economists are talking about deflation.
Our world has changed unimaginably over the past 12 months and people now sit around discussing the events and the trouble they see ahead. One of topics which has started to appear on the news broadcasts is the problem of deflation.
Deflation is the persistent decline in the general price level. Its important because of the affect on the economy and investors.
In periods of deflation consumers put off spending because they believe that prices of products will be cheaper in the future. The level of debt rises as wages reduce and the the debt becomes more difficult to service. Real returns on interest rates rise because rates cannot be reduced below zero.
Japan has recently gone through a period of deflation and western governments are anxious to avoid similar problems. We may see new strategies to combat this threat which will seem very strange after years of battling against price rises.
Posted under the following tags: deflation, inflation, investors, economicpolicy.
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