If inflation is defined as exceeding the growth rate of consumer demand over production capacity, then deflation can occur in two situations:
- Excess money with insufficient supply of goods.When the population has an excess of money, but the market does not offer enough goods and services to spend it on.
- Lack of money with sufficient supply.When aggregate demand falls due to a lack of money from the population, despite the fact that the market is able to offer all the necessary goods and services to meet the needs.
In both cases, there are situations when prices do not rise or even decrease in relation to those goods that are available on the market.
In the first case, the money supply does not work to stimulate production, but to degrade it. This means that many different goods are produced for which people are paid money (wages), but these manufactured goods are not in demand by the market. In this case, the excess money goes into savings. In turn, savings for the most part settle in banks for deposits/deposits, which are credited to the same degrading industries with their "necessary" nomenclature for the market. The result is an accumulated lump of toxic liquidity - money is not spent on the work of the economy. This is pure hidden inflation and the resulting consequences.
In the second case, everything is natural. The economy has prerequisites for its decline due to a decrease in the solvency of the population and an incentive to spend.
Balance is important in everything, when both a person is well and the economy is not bad. This is the main goal of the monetary system of any state.