Deflationary Spiral

Categories: Econ, Tax

No, it's not the title of a Nine Inch Nails album. But it's about as depressing.

A deflationary spiral usually occurs during some sort of economic crisis. People get spooked and stop buying stuff, leading to a spiral of shrinking demand, lower production, smaller wages, lost jobs, and deflation.

See: Recession.

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Finance: What is Deflation?4 Views

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Finance, a la shmoop. What is deflation? Alright well let's start with inflation [A football with a pump attached]

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and here's the proverbial football we pump as prices go higher and higher [The football getting bigger and starts to shake]

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until they can well go no more. But the real world doesn't have to be this [The football explodes]

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dramatic in fact prices inflate and deflate in small pieces all the time. The [Graph showing historical inflation rate]

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standard terminology for when pricing goes down relative to well everything [2 dollar price tag is replaced with a 1 dollar price tag]

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else at least the indices in its past, well that term is deflation. There are

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really two types of deflation economists drone on and on about and they come from [Students in class asleep]

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very different places. Over here is simply monetary deflation that is the [Types of deflation written on a blackboard]

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supply of money, think liquid cash sloshing around in the market places, [Tap running in a basin labelled marketplace]

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that money supply declines in monetary deflation. All right so what does that [Money running out of the tap]

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mean to the average Joe well it means that wages and money generally go

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further in times of deflation like your dollar buys more than a dollar, at least [Someone putting money into their pocket]

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what a dollar bought last month or last year. And that's the direct opposite of

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what happens in an inflationary environment, got it? [Money disappearing]

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So that's monetary deflation but the other flavor of deflation is price

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deflation which implies that prices on the basics well are simply going down

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driven usually by consumer fear of a bad moon on the horizon, where consumers [Girl looking scared and crying]

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simply don't buy things and via lack of demand prices well they just sag into an [Someone putting a bottle of wine back onto a supermarket shelf]

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overly supplied abyss and you know the saying life's abyss and then you die you [Price tag flies off a tag]

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know that's where it came from. Well alternatively if productivity goes

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way up well then consumer purchasing power also goes up with it and then we

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likely get inflation, got all that? So this is supply and demand and there's

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the graph and when demand goes down supply goes up and prices get weak [Supply and demand graph]

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Wifi used to be expensive because the technology to deliver it was really hard [Picture of a complex circuit board]

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to build and distribute and have actually work, but then tons of Wi-Fi [The circuit board starts smoking]

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devices got out there i.e. there was tons of supply and well now there's Wi-Fi

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everywhere and so pricing is cheap if not free pretty much well everywhere so [Wifi symbols popping up all over the world]

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think about that as a supply driven deflation and you know Wi-Fi prices [Graph showing price of wifi falling]

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they're going down and yeah that's really about it if you were hoping for

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more elaborate explanation we're sorry to bust your balloon... [Balloon explodes]

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