Editing Deflation (section)

==Effects==
{{More citations needed|section|date=September 2022}}

=== On spending and borrowing ===
Some believe that, in the absence of large amounts of debt, deflation would be a welcome effect because the lowering of prices increases [[purchasing power]].<ref>{{cite journal| last =Selgin| first =George| title =Less Than Zero: The Case for a Falling Price Level in a Growing Economy| journal =IEA Hobart Paper| volume =32| page =87| publisher =[[Institute of Economic Affairs]]| location =London| date =1997| url =http://www.iea.org.uk/sites/default/files/publications/files/upldbook98pdf.pdf| issn =0073-2818| access-date =4 December 2014 }}</ref> However, while an increase in the purchasing power of one's money benefits some, it amplifies the sting of debt for others: after a period of deflation, the payments to service a debt represent a larger amount of purchasing power than they did when the debt was first incurred. Consequently, deflation can be thought of as an effective increase in a loan's interest rate. If, as during the [[Great Depression]] in the United States, deflation averages 10% per year, even an interest-free loan is unattractive as it must be repaid with money worth 10% more each year.

Under normal conditions, most central banks, such as the Federal Reserve, implement policy by setting a target for a short-term interest rate{{snd}} the overnight [[federal funds rate]] in the U.S.{{snd}} and enforcing that target by buying and selling securities in open capital markets. When the short-term interest rate hits zero, the central bank can no longer ease policy by lowering its usual interest-rate target. With interest rates near zero, [[debt relief]] becomes an increasingly important tool in managing deflation.

In recent times, as loan terms have grown in length and loan financing (or leveraging) is common among many types of investments, the costs of deflation to borrowers has grown larger.

=== On savings and investments ===
Deflation can discourage private investment, because there is reduced expectations on future profits when future prices are lower. Consequently, with reduced private investments, [[#Deflationary spiral|spiraling deflation]] can cause a collapse in [[aggregate demand]]. Without the "hidden risk of inflation", it may become more prudent for institutions to hold on to money, and not to spend or invest it (burying money). They are therefore rewarded by [[saving]] and holding money. This "hoarding" behavior is seen as undesirable by most economists.{{citation needed|reason=Hayek's word alone is not a reliable source regarding what most economists think, especially when he was writing in 1932. Other sources are needed, particularly reflecting the state of the field in the 21st century.|date=September 2022}} [[Friedrich Hayek]], a [[libertarian]] [[Austrian school|Austrian-school economist]], wrote that:

{{Blockquote|It is agreed that hoarding money, whether in cash or in idle balances, is deflationary in its effects. No one thinks that deflation is in itself desirable.|source=Hayek (1932)<ref>{{cite web |url=http://butnowyouknow.net/those-who-fail-to-learn-from-history/hayeks-1932-letter-on-the-great-depression/ |title=Hayek's 1932 Letter on the Great Depression |work=But Now You Know|date=25 November 2010 }}</ref>}}