Here is another factor you might consider. What happens to government finances during deflation ?
Well, deflation means falling prices. Prices sponsor wages. Falling prices means falling wages. The large majority of government tax income is a tax on wages, or a tax on consumption. Both of these go down.
Now this wouldn't be so bad, except ... Governments loan money both to fund expenditures and to pay interest on their old loans. Inflation effectively means they can spend 2% of the total amount of their old loans "for free" (by loaning it) (they key thing to realise here is that doing so does not increase the burden on their income, it was 2% of taxes, and it still is). They get this double, since they get it both on the income side, and on the new loans.
Deflation means the opposite. Tax revenues go down, interest payments go up. Unless they want to drastically cut spending, that means they have to use pretty much all of their yearly new loans just to pay back interest.
The problem is also the difference between years :
year 1 : 2% inflation -> government can spend 104% of it's budget
year 2 : 2% deflation -> government can spend 96% of it's budget
So 2% inflation necessitates a 10% cut in loan-based spending, which is about half of government spending. So a seemingly tiny amount of deflation requires a 5% spending cut by the government at minimum.
But that is not all. Government taxes have always been effectively a percentage of GDP. Governments have historically been unable to raise tax income. Deflation will lead to a fall in GDP, historically of at least double the amount of the deflation, sometimes much more.
So the other half of government income goes down by ~4% (very, very optimistically).
Now because falling prices and wages mean that the stress on social services increases (for obvious reasons), government expenditures go up, usually again by much more than the amount of deflation you see. It leads to pretty much every part of social security going up. Unemployment, for obvious reasons. But also pensions (people will go on a pension earlier because there's no work) and even illness and disability (well we all know why).
So 2% deflation effectively means the government has to cut spending by ~10%, WHILE social security expenses go up.
The government controls central banks. QE, ostensibly to "cause inflation" hasn't caused inflation (rather the opposite). So in order to absorb this financial shock, the U.S. government has instead decided to finance it's operations by direct money printing, by lending from the money printer. They ran a risk by lending the way the constitution said they should lend, so they "cheated". Now we see the EU (and dozens of other governments, including China and lots of smaller ones) doing the same.
This is also an extremely important factor in central bank behaviour, as they are controlled by governments, and it is the reason that we have not seen the end of QE (except maybe in America, but to be honest, I think there is a non-negligeable chance the US will lower rates instead of raising them, in 6 months).
Well, deflation means falling prices. Prices sponsor wages. Falling prices means falling wages. The large majority of government tax income is a tax on wages, or a tax on consumption. Both of these go down.
Now this wouldn't be so bad, except ... Governments loan money both to fund expenditures and to pay interest on their old loans. Inflation effectively means they can spend 2% of the total amount of their old loans "for free" (by loaning it) (they key thing to realise here is that doing so does not increase the burden on their income, it was 2% of taxes, and it still is). They get this double, since they get it both on the income side, and on the new loans.
Deflation means the opposite. Tax revenues go down, interest payments go up. Unless they want to drastically cut spending, that means they have to use pretty much all of their yearly new loans just to pay back interest.
The problem is also the difference between years :
year 1 : 2% inflation -> government can spend 104% of it's budget year 2 : 2% deflation -> government can spend 96% of it's budget
So 2% inflation necessitates a 10% cut in loan-based spending, which is about half of government spending. So a seemingly tiny amount of deflation requires a 5% spending cut by the government at minimum.
But that is not all. Government taxes have always been effectively a percentage of GDP. Governments have historically been unable to raise tax income. Deflation will lead to a fall in GDP, historically of at least double the amount of the deflation, sometimes much more.
So the other half of government income goes down by ~4% (very, very optimistically).
Now because falling prices and wages mean that the stress on social services increases (for obvious reasons), government expenditures go up, usually again by much more than the amount of deflation you see. It leads to pretty much every part of social security going up. Unemployment, for obvious reasons. But also pensions (people will go on a pension earlier because there's no work) and even illness and disability (well we all know why).
So 2% deflation effectively means the government has to cut spending by ~10%, WHILE social security expenses go up.
The government controls central banks. QE, ostensibly to "cause inflation" hasn't caused inflation (rather the opposite). So in order to absorb this financial shock, the U.S. government has instead decided to finance it's operations by direct money printing, by lending from the money printer. They ran a risk by lending the way the constitution said they should lend, so they "cheated". Now we see the EU (and dozens of other governments, including China and lots of smaller ones) doing the same.
This is also an extremely important factor in central bank behaviour, as they are controlled by governments, and it is the reason that we have not seen the end of QE (except maybe in America, but to be honest, I think there is a non-negligeable chance the US will lower rates instead of raising them, in 6 months).