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Comment by mjhay | Hacker News Reader

As a corollary to 2), a reduction in inflation does not return prices back to previous levels. That's a misconception I see all the time. Negative inflation, or deflation, can reduce prices of course, but you really, really don't want deflation.

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Why?

I'd guess because it makes hording cash a good investment and thus disincentivizes economic activity.

Edit: corrected misspelling (cache -> cash)

If saving is a better investment than stocks or business, isn't that a healthy way to counter speculation, risk, malinvestment, and scammy exuberance cycles? Seems like a direct answer to the whole-market financialization that people complain inflation incentivizes.

It incentives holding cash and letting it sit, not putting it into productive investments. Deflation was a big part of Japan's economic woes for years. It's hard to climb out of.

Well it doesn't only counter the bad kinds of economic activity, it also counters the good kinds. If a mom-and-pop store with low margins can make more profit by hoarding cash than by expanding their business and employing more people, it can't be good.

If everybody is hoarding cash, then, if we assume markets control interest rates and not a central bank, would banks not lower their interest rates as the supply of deposits increases? Loaning money would become cheaper, and at the same time withdrawing to invest in other things would become incentivized. In sum, high savings would signal that it's safe to start lending and investing.

Because it makes debts grow in real terms. https://en.wikipedia.org/wiki/Debt_deflation

Periods of deflation have been very bad historically. Economists debate whether it was cause or effect.

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