Beat the Fed

People buy smartphones because they want smartphones, not to make money on them. Rational capitalists, on the other hand, use their assets in a way that maximizes gain and minimizes risk.

In an inflationary economy, the best investments are profitable businesses, or derivatives/aggregates thereof. Your capital is put to use buying means of production that makes more money than it costs and employs people along the way. Every year, the prices of the products you sell rise higher, but you've already paid for the factory! And you're incentivized to fund that factory now, because factories are only going to get more expensive.

In a deflationary economy, cash is a low-risk/high-reward investment. Business, meanwhile, is hard - high-risk, aggregate low reward. Yes, consumers have more buying power, but production capacity is created and scaled by going into debt to buy capital equipment. In a deflationary economy, the real value of debt is increasing while prices are falling. So every day, the output of your assembly line is worth less, but what you owe on the line itself hasn't changed. You just have to hope that you can pay off the factory and make some profit faster than the price of the widget it makes approaches zero.

Why isn't this the case with technology? Because with technology, the rate of descent of the price people will pay for, say, smartphones still leaves room for a profit margin compared to the rate at which production is getting cheaper, and last year's high-end production lines are still useful for making what's now a third-world phone.

When you eventually get to a point of losing money on your factory, you lay off your employees, who now have less money to buy things from other factories, and if the economy gets on the wrong side of that snowball you're looking at hell. The more this happens, the more likely investors are to stop investing in businesses and park their wealth in cash. The same checking account balance will always be able to buy a bigger factory tomorrow. You effectively stop the pump of economic activity, causing recession.

In the crudest terms, the central bank printing currency like crazy can make sitting on cash an even worse option than investing in business again, so you opt for the latter.

tl;dr deflation makes it more rational to own money and less rational to own things that try to make money by employing people.

Lets say a store has $50,000 worth of inventory bought on revolving credit. In normal times, $50k worth of inventory might sell for $100k. The $50 worth of gross margin goes to pay, labor costs, rent, and the owners take. Lets say due to deflation that 50k is now only going to sell for $90k, the business is short $10k. What's the owner going to do?

Go out out business that's what.

So the problem with deflation is it tends to rape the books of perfectly well run businesses. And then you get cascading failure. The mill has a cash flow problem, goes bankrupt, and then half the business in town close.

A most subtle problem is a lot of businesses really run on credit backed by pledged collateral. The chain of collateral forms what called a credit chain. When you have deflation and a demand slump the assessed value of the collateral becomes suspect. Credit chains shorten and collapse. And businesses can't get liquidity. And then fail.

It goes on and on.

According to the Federal Reserve Bank of Minneapolis, no: https://www.minneapolisfed.org/publications/the-region/defla...

In fact, one of the theorists there suggested a rate of -3% (or 3% deflation) might be optimal.