What is deflation? What are the meanings and effects on currencies?
Deflation is a situation that is contrary to inflation, a condition where prices generally decline, making the value of money increase. Such conditions actually have an influence on the currency of a country in question.
In this discussion, we will explain in full the deflation and its effect on a country’s currency.
Let’s look at the explanation below.
Knowing Some Causes of Deflation
Deflation can occur when too many producers sell the same product. So that when this happens makes the competition even tighter so prices tend to fall on the market. The high level of supply that exists can be due to the ease of producers to get loans from banks, thus triggering expansion and the emergence of new products. In accordance with market law, when more offers than demand, prices will tend to decrease.
The next factor can be due to innovation in the production process that makes productivity increase and ultimately can reduce the price of products on the market.
Deflation can also occur due to a decrease in the amount of money in circulation and cause prices of goods and services to decline. Examples of cases like this have occurred in 1913, where policies set by the Fed made deflation in the United States.
Or it could also be because the government is making austerity, so the government starts cutting existing expenses.
Bad Effects of Deflation, Anything?
When deflation occurs, this will make the supply of money in the community will decrease and furthermore will cause a major depression and will also make the investment market experience chaos.
Deflation can also slow down economic activity, because consumers will delay the shopping activities they will do. This they did in the hope of getting cheaper prices for goods or services.
When economic activities begin to slow down and slow down, then the goods and services of the company will be less demand in the market. So that in the end it will have an impact on the occurrence of layoffs in various companies. When layoffs occur, the income received by the community will decrease and the amount of money circulating in the community will decrease.
When viewed from the investment side, the deflation that occurs can make the real sector and the stock market slow down. Slow business activities will make the economy more sluggish and not well developed.
Seeing the Impact of Deflation on the Currency and Economy of a Country
The interesting thing that you need to understand in relation to deflation is that this condition makes a country very difficult to run normally as usual. A simple example that you can see is Hong Kong, which from 2002 until now has not been able to improve the deflationary situation in their country. Likewise with Japan which has experienced deflation since the beginning of 1990 until now.
1. Business Sector that Has Decreased Revenue
A business can continue to be competitive, so they will reduce prices and currently continue continuously so that the profits of the business sector will continue to decline and could suffer losses in the future.
If the economy is in a normal state, the declining profits can return to normal. But when the economy is deflated, this will not happen even if the company carries out production efficiency and reduces material spending.
2. Workers’ salaries are reduced and high layoffs
This one factor is still very closely related to the previous explanation, where when the company begins to decline its income they begin to reduce expenses.There are many ways they can do to reduce spending, some of the ways that are usually done is to reduce employee salaries and terminate the existing employees.
3. Changed Consumer Expenditures
The connection between patterns of consumer spending and deflation is a bit complicated when compared to the explanations we have previously explained to you. In general, when deflation occurs consumers will take advantage of the moment of price decline by increasing expenditure than before.
On the other hand due to the termination of employment and making them unable to work again, they will reduce expenses sharply as well. When this happens, the figure of consumer spending will change sharply and decrease.
4. Drop in Stock Prices and Existing Investment
The fourth point is still closely related to the first point, which is due to the decreasing company income which has caused their share price to decline.
When this happens, investors will hold back the funds they have while waiting for other opportunities from existing deflation. Not only 1 share of the company decreased, because this will greatly affect the composite stock price index which also experienced a decline.
As a result investors will not hold their portfolios into stocks.
5. Climatic Credit Down
The next effect is that creditors begin to limit credit value or can even stop new credit. So that many leasing companies are starting to experience difficulties when there is deflation due to many borrowers who fail to pay.
Through the explanation above it can be understood that deflation is a situation where the amount of goods in circulation is higher compared to the amount of money in circulation. So that makes the prices of goods fall and the value of money goes up.
There is a chain effect of the strengthening of the currency exchange rate, namely the increasingly expensive export products which will lead to decreased demand and this of course will disrupt the performance of the industrial and manufacturing sectors. The Central Bank will usually try hard to weaken the currency exchange rates owned by buying foreign currency on a large scale.
Broadly speaking, there will be 4 causes of deflation that will be felt in the economy, namely the decreasing supply of money in the community, increased supply of goods in society, declining demand for goods, and rising demand for money.
That is the various effects of deflation that will affect the economy of the community. Hopefully the information we have conveyed above can provide many benefits to all of you who read.
Hope to inspire!