Deflation is usually defined as either a contraction in the money supply or a fall in prices. They usually go hand in hand.
For some reason, academics and the Fed seem worried about deflation. Why? It is fast medicine and fixes the woes of the past.
Oh, but lots of senior bankers tend to lose their jobs.
Two examples that’s I’ve lived through were the Asian Financial Crisis of 1997 and the US economic crisis of 2008.
In Asia in the leadup to the Asian Financial Crisis, companies were borrowing dollars to finance their capital expansions. When they couldn’t finance their loans they started going bankrupt and left the banks with gaping holes in their balance sheets. In an attempt to shore up their liquidity, banks had to stop lending, resulting in a vicious cycle of defaults and ever tightening of money supply.
Prices plummeted.
Housing prices fell, land prices fell, company share prices fell, wages fell, and the currencies collapsed as well. I heard about a guy who bought an island for $15,000 at the height of the crisis.
Periods of deflation are great if you have cash.
I think most are aware of the deflation in 2008. Even though the government and the Fed created several trillion dollars to reinflate, this just went to the banks rather than into the economy, so there was some contraction in the money supply, and a drop in velocity, as well as price deflation.
