Deflation

The reduction of prices in an economy over time. Occurs when the supply of goods and services increases faster than the supply of money, or when the supply of money is finite and spending decreases. This leads to more goods or services per unit of currency, requiring less currency to purchase them. Deflation, according to some, is undesirable. When people expect prices to fall, they stop spending and hoard money in the hope that their money will go further in the near future. This phenomena can depress an economy. On the other hand, a deflationary currency will reward saving, allow salaries to naturally increase in value, and make financial planning more certain. A deflationary currency favors those furthest from the money supply, which may explain why politicians, economists and bankers tend to oppose the idea. Most currencies in circulation today are inflationary. Governments produce more money to pay their debts. The increased money supply drives prices up. When the supply of a currency is finite, (such as bitcoins), its value will adjust to demand, and in most cases the costs of goods and services will tend to go down.

Reference:

Malone, J.A (2015). Glossary of Bitcoin Terms and Definitions. United States: Lulu Press, Inc

Leave a Reply

Your email address will not be published. Required fields are marked *