Inflation is familiar. For Americans who are old enough, or others who’ve lived in hyper-inflationary countries, fighting inflation makes a lot of sense. One worry is that the US Fed is continuing to fight inflation when the real threat is deflation. Deflation can be more destructive than inflation. Inflation encourages people to spend money before it becomes worth less; which effectively moderates the economy (except in extreme cases) by keeping money in circulation. Deflation encourages people to save money because goods and services will be cheaper if they wait; which effectively stifles the economy because businesses have fewer customers, and the sales they make have decreasing profits because the raw materials were paid for at higher prices.
“Deflationary pressures are everywhere. From the strong dollar, to low oil prices, to low import prices, to global declines in equity markets.” – Quartz
One sign that many investors are worried about deflation is that they are willing to buy bonds that are charging negative interest rates. They know they’ll get back less than they put in, but that value loss may be less than the value lost through deflation. Some of the most active bond funds are not with high interest rates and high risk, but with negative interest rates and low risk. Investors are already betting on deflation.
(Click on the graph for the link.)