The Razor of Economics

“What if everyone else does it too?”

Deflation crops up from time to time as something the central banks fight. This is often a matter of some confusion, because on the face of it, deflation sounds like a good thing. As time goes by, our money gains in value. Prices go down. That means if you’re saving for something, the price will come down as your savings go up, and that seems pretty good.

Suppose you’re buying windows. Windows are expensive, so if we had deflation, one would save up and hope the price comes down.

Let’s apply the razor of economics. What happens if other people start reacting the same way?

Imagine everyone else was saving up and not buying windows, hoping the price would come down.

Installation professionals, contractors, and independent businessmen would go out of business, because they would have no business. Everyone was waiting and saving, remember.

A) They’re out of business, either on welfare or starving. B) They’re not buying windows from the manufacturers. C) They’re not buying anything because they have no money.

So the window manufacturers go out of business. The cycle repeats.

But it’s not just windows.

Imagine another business, a baker. The baker makes good bread.

The window installers aren’t buying good fresh-baked bread. They’re buying the cheapest bread they can, because they have no money. So the baker goes out of business.

And so on, and so on.

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