Since the GFC of 2008, Western Economies have been struggling to recover. Part of this slow recovery has led to a reduction in demand. AS a result, this has led to deflationary pressure on prices.

Deflation, in a nutshell, is what happens when overall market prices fall. This can range from anything to your groceries to homes, and fuel. Falling prices are generally seen as a good thing. This is why people flock to sales. When all prices fall, however, this can be disasterous for the economy.

We all know the dangers of hyperinflation. The dangers of deflation are less obvious, however. The whole process is rather complicated, so a simplified version will be provided. Deflation increases the cost of debt. This reduces the incentive for firms and private individuals to wish to invest. This is grave as investment is a key driver to economic growth. The problem is that once this starts, it is hard to stop. Much like hyperinflation, which can spiral out of control, so can deflation. This is due to the fact that low investments reduce economic growth. This lowers demand, and expected returns on investment. This further lowers investment. Then the lower supply of money further reduces prices. And thus the cycle continues.

One example of this can be seen in Japan, which is still sufferring fom the deflationary trends which started in the early 1990s, following the bursting of the Japanese Asset Price Bubble.