Us Economy Headed for an Inflation or Deflation?
Inflation and deflation are two different aspects of an economy. Inflation is a general rise in the price of commodities. Deflation is decrease in the price of commodities. Both aspects decide the growth of an economy. Let’s study both these aspects individually.
An increase in the money supply leads to a decrease in the purchasing power of the currency. The prices of essential commodities would increase. This causes people to spend more and get less. Inflation is caused if the government is having huge debts and is finding it hard to recover them through taxes or any other means. What happens next is common in history. The government prints more money and this results in inflation. If an individual spends more than what he is earning this causes an imbalance in his financial situation where his debts increase. Similarly when the government is not recollecting enough funds back it increases the general prices because they have to print more to keep up. This results in inflation.
Inflation also affects several industries. As a result of all this unemployment also increases. Inflation is almost an unavoidable aspect of every economy that is going through a recession. The only way out is for the government to improve its financial situation and overtime inflation will decrease on its own.
Deflation gives more purchasing power and hence you can buy more for less money. This situation is usually caused after a recession or an economic crisis. In a recessive economy government reduces interest rates and provides more liquidity. This causes more circulation of dollars. Overall demand for commodities decreases this causes the prices to come down. This can cause huge losses to banks and may result in another recession.
Neither inflation nor deflation is good for our economy. The government must be responsible for striking the balance between both and help ease us into economic recovery.