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this post was submitted on 11 Nov 2024
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Deflation just doesn't happen in a bubble though.
From my understanding the primary lever that can be pulled for this is the Fed interest rate. With a high interest rates you're trying to decrease the amount of money institutions spend and rather increase the amount that they invest/save. As it becomes easier to make money by buying bonds than by reinvesting into your business. This in effect removes money from the economy.
The problem here is this means businesses also spend less on salaries, thus triggering layoffs. This then also has a downward pressure on inflation as the working class ends of being layed off as unemployment rises. This puts more and more pressure on businesses to cut costs as more and more people have less disposable income to spend.
This is the downward spiral that's being referred to here.
In effect you can't create defationary policies without causing high unemployment, at least in a capitalist society.
Take a look at the history of the Great Depression and the New Deal that helped the U.S. get out of it. Effectively the government had to create jobs to stimulate the economy as businesses couldn't or wouldn't shoulder that cost but the government could. As disposable income rose, so did spending and in turn inflation turned positive again as unemployment fell.