Software & Finance - Monthly Magazine Online

Volume 3 - Issue 5

May 2013

Economics - Deflation is Good for the Economy


Inflation or Deflation - Which one is good for economy? It differs from time to time. But excessive inflation or deflation can only lead to serious economic crash for a country.


Moderate inflation around 2-4% is good since people can feel rich on their properties and their precious metals and other commodities. But when demand and supply comes into picture along with interest rate and stock market bubble, the inflation can sky rocket. We have seen in the history that oil price shoot up by more than 15% in one month? Is it realistic? It would be considered as speculative bubble and all bubbles can only burst at the end.


When there is a deflation, home and other commodities prices will go down. People invested in real estate will feel poor and tighten their vallent. However it can lower the oil and food prices that can help middle class people. When there is a deflation, the local curreny get stronger and stronger. Even though the country can print more money, foreign investors around the world will buy the currency to take advantage of deflation. When there is a point, the deflation comes to an end, every foreign investor will start selling the currency and it can lead to banking system collapse for a country. This kind of collapse would occur only in a very smaller country, it is unlikely to happen in world largest and developed countries.


Excessive inflation that is more than 10% for a consequtive years which happened in India is not good. Since people are feeling too rich because of the appreciation of the properties. The real estate prices in India went up because of excessive inflation, demand and supply and low interest rate set RBI couple of years ago. Even now the interest rate is high, home prices are staying flat and number of sales are less compared to earlier years. It greatly affects the speculative playes in Indian Market. The home prices in India went up and currently trading on 100% to 150% premium when compared to rental market with home pricing model. If there is an significant rise in unemployment, that can lead to clear collapse of real estate market in India. Alternatively if RBI can stick to its high interest rate for a while, that is for 1-2 years, that can also collapse the bubble in Indian real estate market.