Deflation, bad (bad deflation)

A form of deflation in which a stagnating or barely growing economy is confronted with downwardly inflexible wages. – If companies’ sales decline nominally – i.e., evaluated at current prices – because consumer prices fall and perhaps also the volumes sold decline, the affected companies end up in the red. Insolvencies occur and workers are made redundant. – The danger of rising unemployment also arises from the fact that companies tend to lay off workers because they do not have the compensation available in the form of falling wage costs; experience shows that temporary workers (contract staff) are laid off first in order to retain the core workforce for the time being. The “lost decade” in Japan – roughly between 1990 and 2000 – is seen as an example of bad deflation. – This type of deflation is mainly caused by the bursting of speculative bubbles in the real estate or stock market, especially when these assets were financed by loans. The falling asset prices now lead to the over-indebtedness of private households and companies; the loan defaults triggered by this then also cause the banks to get into trouble. – See equity bubble, deflation, deflation good, deflation ugly, deflation spiral, housing bubble, overconsumption. – ECB Monthly Bulletin of February 2012, pp. 87 et seq. (economic stagnation phase in Japan), ECB Monthly Bulletin of June 2014, pp. 70 et seq. (detailed explanation; overviews; references).

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University Professor Dr. Gerhard Merk, Dipl.rer.pol., Dipl.rer.oec.
Professor Dr. Eckehard Krah, Dipl.rer.pol.
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