I asked the ever-so-patient Mish what the downside to deflation was. His response:
“There is no downside except for
1) banks that have lent out more money than they have and asset prices fall.
2) overleveraged consumers who borrowed more than they can afford”
#2 can be chalked up to mere stupidity. #1 is far more sinister in that this is the government approved practice of fractional-reserve lending, i.e. lending out 5 or 10 magically created dollars for every dollar on deposit at the bank – this is what leads to inflation, the inventing of these magical dollars. But when things go sour, poof! all those consumers from #2 suddenly can’t pay back these imaginary dollars and then banks start to go broke. If they had only lent out dollars on deposit, our economy would grow slower, but would not kaboom like this.
Tags: deflation, depression 2.0, yes this is really how I amuse myself