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Deflation: Not a Bad Thing

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Every once in awhile we hear econo pundits telling us how evil deflation would be.

Why? Well ... deflation is often a symptom of bad times. If a lot of people are out of work and have no purchasing power, demand for a wide range of products will drop and so will the general level of prices, i.e. there will be deflation. This is one way of getting to deflation, and the causes of that symptom are, to those directly affected, bad things indeed.

BUT ... deflation there is only a symptom, not a cause of the trouble, and this doesn't rule out the possibility that deflation in other contexts may be harmless, or better-than-harmless.

One often encounters a suspicion of deflation that goes beyond any real justification, and this is the background of an expectation that a central bank should program into an economy a mild level of price inflation, say 2 to 3%. Just to keep those deflationary demons away?

These thoughts are motivated by Apple's product launching event on March 21. The take-away from this event seems to be: the price of new Apple phones, capable of doing essentially everything earlier models of Apple phones could do, is on the way down.  This is a consequence of Apple's desire to penetrate the China market, which has been so far resistent to its high-priced charms. No doubt it also has much to do with the improvement of the underlying technology, which lets designers do more with less for present and future phone buyers.

Presumably enough such events in enough such industries will show up as a macro-level deflation. Yet wouldn't that be ... a good thing?


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