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Deflation: is a fall in prices in the economy as a whole that lasts for several periods (at least two semesters according to the definition of the International Monetary Fund) and is the opposite of inflation.

Definition of deflation

Deflation is the opposite of inflation and consists of a generalized and prolonged fall (at least two semesters according to the IMF) in the level of prices of goods and services.

Deflation is usually caused by declining demand, which is a much more serious problem than inflation, since a drop in demand means a general decline in the economy.

With deflation, a vicious circle is created whereby, as demand falls, companies see their profits reduced by having to reduce prices to achieve sales. As a result, they have to reduce costs, which means they have to cut employees. In turn, if people become unemployed, demand will continue to decline, as they will stop buying as well, and so on.

Causes of deflation

Deflation occurs when companies close due to not having a market, since there are many people unemployed, because they were left without jobs, so it happens that the supply of goods and services in an economy is higher than the demand: companies are forced to reduce prices in order to sell production and not be forced to accumulate stocks. This mismatch between supply and demand can come from two causes: insufficient demand.

Insufficient demand: For example, in the Great Depression that occurred in the United States at the end of the 1920s, the collapse of the stock markets and the collapse of the financial system drastically reduced the spending capacity of families, inducing a deflationary spiral: the CPI fell by 24% between August 1929 and March 1933. 95% of Americans were unemployed.

Excess supply: The best example is the current situation. In the last years of the strong expansionary cycle of the 1990s, companies undertook numerous investment projects seduced by the “new economy”. The non-crystallization of these expectations left the productive sector (especially in the US) with a strong excess capacity that has not yet been purged: in the United States, capacity use was (April 2003) at 74%, seven points below the 1972–2002 average. The impact of this imbalance on prices can be accentuated by structural changes in the world economy that imply an increase in productivity or competition between companies, as has happened in recent years with the progressive disappearance of barriers to world trade and the liberalization of basic sectors (telephony, transport, energy) in many countries. However, this excess production aimed at the sector that has the capacity to acquire it, which was only 49% of the population, since 51% of the population fell into what is known as poverty.

Measures against deflation

Monetary and fiscal policy can be used to face deflation.

Monetary politics: One of the ways to deal with deflation is to reduce the value of money, for which more money (Currency) must be placed in circulation, complemented by the decrease in the interest rate, which encourages consumer and credit credit. Investment, thus reactivating demand.

When the interest rate decreases, it is no longer profitable to have the money in the financial institutions, so people will prefer to invest or spend it. This circumstance can be taken advantage of by investors to expand their businesses, something that due to the consequences of deflation is difficult, but that by seeking new markets can be carried out.

Tax policy: Fiscal policy involves an increase in public spending, a reduction in taxes and an increase in transfers. In the first case, it tries to replace the lack of demand from the private sector with that of the public sector, which in turn becomes a major generator of employment, which is very attractive, since unemployment is one of the direct causes of deflation. In the second case, the reduction of taxes means more money to spend in private hands, and an incentive to consumption, but at the same time less money in the hands of the state, and if it does not have enough money, it will be difficult to boost demand through public consumption, so if it is inclined to the first case as well, it will have to finance the increase in public spending with debt. The increase in transfers is an attempt to decentralize public consumption, since transfers are made to the various decentralized entities in the departments, municipalities and districts.

Although in principle, the general decline in prices (deflation) may seem positive to a large number of consumers, this concept will change when the consequences begin to be seen, such as the closure of companies and the dismissal of workers.

Unemployment is an inevitable consequence of deflation (companies will have to work at a loss and some will close), and although prices are low, it is of little use if you do not have the resources to acquire them, and those who have the resources will prefer, as already explained, not to spend them while waiting for ‘better’ prices.

We must rethink the economy, in this time that we are living, this phenomenon will be present in the economy, millions of companies will close their doors and millions of people will be unemployed. You have to make a decision and it is within your reach, if everyone uses the Auricoin money, there is a market of more than 6000 million people waiting for products, necessary for the sustenance, you decide if you close the doors of your company or adopt the Auricoin money which is: neutral, safe, stable, reliable and cheap. This is the only solution for the characteristics and functionalities that this monetary cone has, to avoid the closing of millions of companies.



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