Beware the Psychological Aspect of Deflation

Deflation has two main components.

There's the structural aspect, which Robert Prechter mentions in his 2002 book, Conquer the Crash:

The ability of the financial system to sustain increasing levels of credit rests upon a vibrant economy. At some point, a rising debt level requires so much energy to sustain -- in terms of meeting interest payments, monitoring credit ratings, chasing delinquent borrowers and writing off bad loans -- that it slows overall economic performance.

The book goes into more detail about the structural aspect of deflation, but you get the idea.

The other main aspect of deflation is psychological. Let's return to Conquer the Crash:

When the social mood trend changes from optimism to pessimism, creditors, debtors, producers and consumers change their primary orientation from expansion to conservation.

This psychological aspect of deflation was addressed in an April 17 Bloomberg article titled, "Japan's Deflation Mindset Could Be Contagious." Here's an excerpt:

When the maker of a popular Japanese popsicle decided to raise prices for the first time in 25 years, executives of Akagi Nyugyo Co.--which introduced the treat in 1981--felt a need to apologize to their customers. On the day of the hike, in April 2016, they ran a 60-second commercial showing the company's gray-haired chairman, backed by a phalanx of dark-suited workers, all bowing in deep contrition. Three years later, the Akagi Nyugyo manager who came up with the idea for the ad is still feeling contrite. "It's not like people have any extra spending money," Fumio Hagiwara says.

Japan is the only developed economy where wages have dropped year after year. Since 1996 inflation-adjusted pay has fallen about 13 percentage points--a big reason businesses are loath to raise prices or invest in a shrinking market. The downward spiral has led to a "deflationary mindset" that Bank of Japan Governor Haruhiko Kuroda blames for thwarting his efforts to revive the economy, using every trick in the central bankers' playbook.

Thrift has become so deeply ingrained in the Japanese psyche that a rare bump in the most recent round of seasonal bonuses paid to workers ended up powering a savings surge instead of a shopping spree. "It's not surprising when people have had negative wages for so long," says Michael Causton, an expert on Japanese spending patterns and co-founder of research firm JapanConsuming.

After six recessions in 30 years, figuring out ways to save money has turned into a national obsession.

You can read the entire article by following the link below: