Which is worse Hyperinflation or Deflation?

[jaichind]

For sure I prefer deflation.  All things equal I prefer deflation over even small amounts of inflation.

[jaichind]

For sure I prefer deflation.  All things equal I prefer deflation over even small amounts of inflation.

jaichind's got money in the bank.

Yes, I am a significant creditor so all creditor prefer deflation. 

But it is more then that.  It is also a function of the fact that I reached a point in my career where I am doing a good job at megacorp with high compensation where I can argue I am overpaid.  Since I am doing a reasonably good job my megacorp will not cut my pay but they could slowing have my compensation increase fall short of inflation as a way to adjust my compensation in line with my contribution.  Deflation or very low inflation would not allow them to do this to my benefit.   I am fine with any inflation below 2% although I prefer deflation from a compensation management strategy point if view.  Looking ahead, using inflation swaps, CPI is expected to be around 2% the next three years and around 2.5% over the next 10 years.  I could live with that as I am working toward semi-retirement 3-4 years from now when this concern about being overpaid would not matter anymore.

[jaichind]

From a public policy point of view there are two types of deflation.  One I think is positive and one negative.

 There could be a case where a economy is going through rapid economic growth as well structural changes where the relative prices of different sectors are being realigned.  Because of the high productivity increases these relative price adjustments sometimes could take place with falling price levels in certain sectors which in turn mean very low inflation if not outright deflation.  Examples of this are USA in the 1870s-1880s and PRC in 1999-2006 where both had a deflationary boom.  I think there is nothing wrong with this and deflation is not something that hurts the growth of the economy.

Then there is the more familiar deflation situation where there is significant deleveraging after the bust of a credit boom.  Even with attempts to boost money supply via easy credit, it could not make up for the fall of credit due to deleveraging and leads to deflation.  Here the debt overhang of the credit boom becomes a greater burden as price level decreases which in turn leads to lower economic growth.  This is what took place in Japan starting in the mid 1990s and there is a risk of this in Europe today.  USA seems to have avoided this situation although it did have some deflation in 2009.