Here's an interesting article about deflation in China.
From a Gesellian perspective, the root cause of both inflation and deflation are the same — a flawed form of money. Conventional debt-based fiat money circulates too quickly when prices are rising (inflation) and too slowly when prices are falling (deflation). We get the worst of both worlds. Our money causes prices to rise more when they are already rising and it causes them to fall more when they are already falling. Thus money amplifies and perpetuates the natural ups and downs of the economy.
Consider this quote from the article above: "Cob Liu, founder of an education start-up in a big city in southwestern China, said his revenue has remained flat this year, which is bad for a company that used to grow 40 percent a year. Mr. Liu, in his mid-30s, has about $1.5 million in cash but is determined to keep his monthly spending around $800, half of which goes to rent."
A guy with $1.5 million in the bank is choosing to live on $800 a month!
Now, consider this passage from The Economics of John Maynard Keynes by Dudley Dillard:
Think about the consequences of behavior such as that described above from this perspective. What happens when a millionaire chooses to live on $800 a month because he’s nervous about the economy? The answer is obvious. Since “one man’s spending is another man’s income,” such behavior causes a self-reinforcing deflationary spiral.
Now, consider the following excerpts from Part 3, Chapter 11 of Gesell’s book The Natural Economic Order, in which he describes The Laws of Circulation of the Present Form of Money:
“One of these apparently trivial facts, which has, up to the present, been totally overlooked, is that the nature of our traditional money allows demand (the offer of money) to be delayed from one day, one week, one month, one year to another, whereas supply (the offer of wares) cannot be postponed a day without causing its possessor losses of every kind.”
“The nature of wares, their transitoriness, arouses the majority of us every morning from sleep, spurs us to haste and forces us to appear at a given hour in the market. The possessor of wares is commanded by them, under threat of punishment, to seek the market, and the punishment is carried out by the wares themselves. The offer of a ware for sale depends, therefore, not upon the will of its possessor, but upon the ware itself.”
“Demand, on the contrary… is not subject to this compulsion… The possessor of money can therefore postpone his demand for wares; he can use his will. He must indeed sooner or later offer his gold for sale, for in itself it is useless to him. But he is free to choose the time at which he does so.”
“Demand enters the market proudly confident of an easy victory: supply appears dejected like a beggar who expects more kicks than ha'pence. On the one hand compulsion, on the other hand freedom; and the two together, compulsion and freedom, determine price.”
“If we now consider the two conditions upon which money offers its services as medium of exchange, we see that commerce is mathematically impossible with falling prices.”
“But stop! What is it that we have just affirmed? That demand withdraws, that the circulation of money becomes mathematically impossible when prices fall! But prices fall just because the supply of money is insufficient. Does the supply of money, when it is insufficient to prevent a fall of prices, withdraw, that is, become still smaller? It is indeed so; there in no misprint or mistake in what we have just written. Money actually withdraws from the market, the circulation of money is mathematically impossible, when the supply of money becomes insufficient and a fall of prices begins or is expected.”
“Prices fall precisely because the supply of money is insufficient. An actual fall of prices is not necessary to cause the flight of money from the market. If there is a general opinion that prices will fall (no matter whether the opinion is true or false), demand hesitates, less money is offered, and for this reason what was expected or feared becomes an actual fact. Is not this sentence a revelation? Does it not give us a clearer explanation of the nature of commercial crises than is contained in any of the many-volumed explanations of the matter? … Demand withdraws… because it is insufficient to effect the exchange of wares at the present price-level! Supply exceeds demand, therefore demand must disappear entirely. A merchant writes an order for cotton. He hears that the production of cotton has increased and consigns the order to his waste-paper basket! Is that not comic? But production continues to throw new masses of wares upon the market, so the stock of wares increases if sales are interrupted — just as the water-level of a river rises when the sluices are closed. Supply therefore becomes larger and more urgent because demand hesitates, and demand hesitates simply because supply is too large in proportion to demand. Here again there is no mistake, no misprint. The phenomenon of a commercial crisis, so ridiculous to the onlooker, must have a ridiculous cause. Demand becomes smaller because it is already too small, and supply becomes larger because it is already too large… This, therefore, is the law of demand, that it disappears when it becomes insufficient.”
This brings us back to the original point. If we view money as a store of value, then there is nothing wrong with a millionaire choosing to live on $800 a month because he is worried about the economy. It is perfectly rational for him to do so from an individual perspective. In fact, many people view it as a good thing — i.e. the virtue of thrift.
But if we instead view money as a medium of exchange, i.e. as a vital public utility created by the state to facilitate the operation of the division of labor, then hoarding money looks quite different. Then it is revealed as self-serving behavior that is harmful to society.
Lastly, let’s reiterate the fact that none of this is meant to be a moral judgment of those who choose to hoard money during periods of economic uncertainty. To repeat, it is completely rational for them to do so.
BUT their ABILITY to do so is a consequence of a form of money that is designed to perform the function of store of value, which is inherently incompatible with its (much more important) function as medium of exchange. And Silvio Gesell’s proposal for demurrage currency would reverse these priorities. It would prioritize the MoE function over SoV. Such a form of money would not have the above-described characteristics whereby falling prices — or even just the expectation of falling prices — cause the circulation of money to slow, thus kicking off a self-reinforcing deflationary spiral. By denying holders of money with a safe harbor from the storm during times of economic uncertainty, money would continue to circulate in all economic environments, thus stabilizing the velocity of money and leading to less severe changes in the price level and thus greater overall economic stability.
Excelente article by Gesell, Silvio, about natural ecomic and this is a good ponin for it start in a new POV about economic.