The danger of a deflation
We are in the danger of a deflation as the numbers showed in the recent week in the US. A deflation is the opposite of a inflation where people refuse to spend money and keep as much cash as possible. During an economic turmoil where confidence level dropped and consumers started to take a very conservative approach by spending less and keep as much cash as possible.
This will result in drop in demand and traders will need to drop their price in order for people to buy goods. Thus deflation occurs. As demand drop, the industries will need to drop their production. This will lead to down sizing in operation and cut in labor force. These reaction will continue and many people will be left without a job and with no spending power. It will worsen the whole situation.
Policy makers will need to intervene in situation like this and introduce stimulus package like in China recently. Banks will lower down their rates so that people will not put their money inside the banks for little returns and many will be able to borrow as lending rates are cheap to buy houses and cars.
First of all confidence level need to be put back to the market so that people will start spending again. More jobs need to be created so that people will not fear for their future. Governments may need to bail out those big troubled companies and even though this is very much against capitalism, in order for the whole economy not to be torn apart, these are inevitable steps to be taken.
We have not seen any deflation data in ages and in fact I have never seen once. Could this be the beginning of a new great depression.