Market Lingo: Deflation
Expanding on the Minyanville dictionary to explain the jargon frequently used by Minyanville professors on the Buzz.
Minyanville profs often discuss deflation. Definitions of deflation generally follow one of two paths.
In its most frequent usage today, deflation refers to a decrease in prices (here #2, here). A drawback of this definition is that it focuses on outcomes rather than causes.
The original meaning of deflation was more causal in nature. Originally, deflation was defined as a contraction in the supply of money and credit. It occurs when people become risk averse and need to pay down debt and save rather than spend.
As such, the causes of deflation can be viewed as psychological in nature since deflation essentially reflects a propensity to take less risk.
A deflationary decrease in prices is not necessarily bad. After all, lower prices extend the purchasing power of money. However, It is thought that governments will go to extremes to avoid deflation.
Deflationary busts follow inflationary booms as credit demand and supply declines. The magnitude of deflationary busts may depend on how much debt and leverage was built into the financial system during the inflationary boom.
Paradoxically, severe deflation may result from the very efforts meant to avoid it.
Other terms related to inflation include inflation and stagflation.
Look up other terms at the Market Lingo Library
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