Inflation / Deflation

Q&ACategory: QuestionsInflation / Deflation
Joey Ting asked 8 years ago

Is inflation / deflation good on a country level and a individual level?

Joey Ting replied 8 years ago

Coz Singapore is experiencing some deflation.

1 Answers
pcwong Staff answered 8 years ago

The problem with the current economic situation is that the central banks have pumped in so much money and yet the economy fails to take off, with inflation being very low whereas by right, the action was to stimulate inflation. The negative interest rate policy instead of stimulating spending is causing people to hoard money. 
Recession is actually good for the economy because recession will result in those companies which are weak to fail and go bankrupt, but in the last recession, the central banks bailed out the risky banks and financial institutions. So instead of allowing them to fail, they got bigger and taking on even more risks. Even when the central banks bailed them out, they did not impose any restrictions against risk taking and now the banks have taken even greater risks.  
When there is a recession, central banks normally ease their policies to stimulate growth. So as growth expands, it will create demand for resources which will drive up the price of commodities. Therefore we have inflation. The central banks combat inflation by increasing interest rates sot hat growth will slow and reduce the demand for resources. So this is how the cycle of economy goes, but what we have now is an abomination due to excessive money printing.
Excessive money printing could cause hyperinflation which means the value of goods will skyrocket due to the loss of value in currencies. So far it last happened in the US from the 1970s to 1980. During this period the price of gold went up 325%.
Generally, we are in the midst of a deflation in many parts of the world. But in the US we have slow growth and growing inflation. This is could cause a stagflation.
Stagflation and deflation are the economists’ worst nightmares.
Hope this helps.