The New Money episode 6: “Why don’t we want deflation?”

GB In Het Nieuwe Geld, Reinjan examines our monetary system, how it works, where it gets stuck and how it will change in the future. In this episode of Het Nieuwe Geld, Reinjan Prakke looks for the answer to the question: what is deflation and why is it considered undesirable?

Why don’t we want deflation?

Where his father used to go out as a reporter with a kilo tape recorder, Reinjan now travels the country with a handy little recording device. Reinjan?????s device is not only smaller, lighter and can record more audio. The contemporary instrument is also a lot cheaper.

The tape recorder of Reinjan’s father cost about 4800 guilders at the time (about 9000 euros at current prices). Reinjan’s recorder costs about 400 euros. This illustrates the deflationary power of technological advances where things become better and cheaper. Yet many economists see deflation as something undesirable. Why?

Edin Mujagic makes a distinction between good and bad deflation in this episode of Het Nieuwe Geld. When inflation is bad, the prices of goods fall because consumers have no appetite to buy those goods. That may be because they have no faith in the future. With good deflation, sellers can lower the prices of goods because the cost price of those goods has fallen. This is possible if, for example, production can be made cheaper due to new technological developments.

Could it be that the emergence of new technologies such as artificial intelligence could send us into a deflationary spiral? Who knows. With deflation due to technological progress, the economic contraction can go hand in hand with growing prosperity. But unfortunately, in a deflationary world, existing debts are weighing more and more heavily on the overall economy.

In this podcast:

  • Edin Mujagic, chief economist of OHV Asset Management and has written several books on macroeconomics and economic history.
  • Jan Luiten van Zanden, professor of economic history
  • Wim Boonstra, special advisor and economist at RaboResearch Global Economics & Markets. He is also professor by special appointment of Economic and Monetary Politics at VU University Amsterdam
  • Sylvester Eijffinger, Emeritus Professor of Financial Economics at Tilburg University

Listen

You can listen to this episode of Het Nieuwe Geld via the BNR site, or via all well-known podcast apps.

The New Money is made possible in part by Bitonic

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