**Note: This is a first draft only. I have yet to read through it thoroughly, but I will do. There will be more contents added and mistakes corrected in the 2nd version**
This article will mark my first attempt to really connect culture and economics and to produce, at best, some surmises about these two distinct social elements and their correlation.
Culture certainly has a broad meaning. I myself would have a hard time defining it without the help of online dictionaries. I think the definition that really suits what I would like to convey in this article is the one that defines culture as collective ideas, customs, and behaviors of particular groups of individuals ranging from a whole society within a nation to its sub-sets which can even be that of a group of workers/students. Please note that culture is not a biological inheritance. That means a British who were born in Mexico is highly likely to be influenced by Mexican culture, not British culture. It has to do with one's surroundings, the things that a person most frequently encounters in life, that shape the mindset and define the cultural characteristics of that one person.
Why are we doing this? How does culture have anything to do with Economics in the first place? Based on my first article, I have clearly given you my own definition of Economics. I also specifically mentioned the scope of this particular discipline, the large area it encompasses.
That is why there is a branch of economics called "Cultural Economics" that studies the relation between culture and economic outcomes. Well, I myself am not well-versed on this particular area, but I think it does not hurt to try using the fundamental economic knowledge we have discussed so far to see the economic side of culture, and by the same token, the cultural side of economics. Just a warning though, whatever I typed down here is not to be used as reference, but you can read it for fun. Still, I will try my best to really engage in logical and meaningful thoughts, not just random, out-of-nowhere ideas.
You see, from the first time I understood some of the basics of Economics and its applications, I have been amazed by the distinct characteristics of the Economic systems, practices and thinking in each country. Even following an identical economic ideology, each country almost always developed its own unique economic traits that really set itself apart from the others. If my perception is not distorted by what I want to believe, a national culture really helps shape the economic frame of a country, and this means that an economic model that works well for a society will not yield the exact same outcome for another.
Allow me to explain through an example. Let us consider the case of Japan. Now what I am trying to do is to link this article to the previous one about deflation. We are not concentrating on the causes, but rather, the factors that help nourish and sustain deflation to continue its reign over Japan.
I think the issue is connected to both Japanese traditional and modern cultures . This really is an intricate problem, and merely scratching its surface will not be enough to really grant you an understanding of its correlation with deflation, so bear with me as I go through it step by step.
I remember reading an article about Japanese workaholism. Yes, workaholism has become a Japanese culture, probably a modern one. It really portrays the hard working nature of the Japanese. However, working comes with the cost of time. When people work that hard, they end up with less time for themselves, their family, and to be frank, for reproduction, which is worsened by gender issue. That is, women at the age of marriage (expected to bear children/go through pregnancy) and those who have children have a hard time finding employment. This problem is tied with the Japanese traditional culture (though not clearly visible in its modernized state) which regards men as superior who take the leading role in family while women are given the caring role. So when they have children, and thanks to the expensive childcare service, women either have to stop working or work less (as it is extremely difficult to manage both working life and maternal life simultaneously). Also, though I do not know if it is true, Japanese men takes their job seriously. They work really hard for wealth and status, but at the same time, provide little help with taking care of their children and inside their household (no offense to any Japanese men out there). As a consequence, all the factors described above force women out of the labour force. Having children limited freedom and poses financial burden, especially for women. Because of this, women in Japan who are highly educated, those with non-traditional way of thinking who want to liberate themselves from the culturally dictated role, they prefer to either marry late and/or have fewer children than the previous generation did.
As a result, Japan has become a country with rapidly aging population and low fertility rate causing its population to decline rather fast. Japan birthrate is 1.37 births per woman, much lower than the replacement fertility rate set at the global standard of 2.1 births per woman. This means that a Japanese couple (wife and husband, 2 people in total) during their marriage life only produces a little more than 1 offspring. Now put it on a national scale, this means that the next generation in Japan will be much less in number comparing to the former generation. With the shrinking number of the younger generation, Japanese population pyramid has changed its shape, inverted from one with larger base and narrow top to narrower base and larger middle and top sections. When you think about it logically, in whatever we construct, the ideal structure is the one with larger base so it can support its top. Same goes for the population pyramid. By having larger top, meaning more retired old people who are depending on pensions and other benefits from government services, and narrower base, meaning less young people to work, demand (consume), pay tax and drive the economy onward, the whole system is out of balance. The few is now providing for the many, and as you can imagine, this is problematic for the Japanese economy. With less younger people, the drive to demand and consume for the Japanese economy is getting lower and lower as well. Furthermore, since women are also an important part of the labour force, having less women working (women are not counted in the labour force) means weaker labour force which translates into less production for the whole economy.
With lower demand for goods and services and weaker force to propel the economy in the long run, producers who want to sell their products have to lower their price, and this leads to deflation which persists in the long run.
The good thing, or so most people would think, is that the Japanese lives, on average, much longer than the rest of the world. The food culture in Japan creates a healthy diet for its people. The Japanese culture in general also results in a healthy way of life. This is good for its people, but as already mentioned, the problem is that it builds up a strong demand for government spending as people who live long consume less, pay little tax, and depending on the retiring age, their absorption of pensions and other government services might last longer than it should, which leads to another problem, bequest.
Bequest is the property & money (wealth) passed on from one generation to the next normally when the former deceases (vertical bequest). Sometimes, it also occurs within the parallel generation (horizontal bequest). Since their culture is one that encourages thrift, the Japanese saves a lot and accumulates wealth over time. Most of the time, the parents bequeath their wealth to their children. However, due to the longer lifespan, by the time the children inherited the wealth, they also turn old, and as a result, there will be no much use of the wealth received, and thus, only little increased consumption and investment in the economy.
That per se is not a deadlock for Japan because it can always allow more immigration to make up for the declining population. This will also allow it to absorb more skilled workers that are currently in high demand in Japan, especially, healthcare workers to serve its ailing elders. However, cultural barrier makes this to be quite hard to achieve. Japan, as a country, is made up of a homogeneous population. The Japanese culture is so unique on its own that it even develops "galapagos syndrome". Wiki defines it as an isolated development branch of a globally available product. To some degree, the Galapagos syndrome has isolated the Japanese market from the rest of the world. It creates a market demand so unique in Japan that the suppliers who produce the products to meet the domestic demands find it hard to tailor their products for the international market, and likewise, foreign suppliers find it hard and costly to adjust to the Japanese market. This isolated market further diverges the Japanese consuming culture from other countries'. As a result, when domestic economic downturn happens, Japanese producers are not well-prepared to buffer the effects through the use of export function. This particular characteristics of Japan is intriguing, and to say that it only yields negative effects would be an ignorant statement. Nonetheless, in one way or another, it is troublesome. Due to this homogeneous culture (everyone and everything is Japanese), in addition to the Japanese policy to support and preserve such culture, it really hinders the inbound migration flow, which might otherwise be beneficial for the Japanese economy.
So you see, Economics is strongly tied to the cultural aspect of a country. Problems like shrinking population in Japan is not a cultural problem, but it still stems partly from the Japanese cultural practice. All that have been discussed so far have, I believe, to a certain extent, contributed to the prolonged deflation clinging to this nation for the past 2 decades. Is expansionary monetary policy enough to solve the problem? I doubt it. In Economics, we have to really deal with the roots. Superficial treatment will most likely only be a short-term remedy. An immediate solution that I would suggest is to first discourage the cultural practice that fosters gender inequity. By creating a strong policy foundation that supports women who have or plan to have children and bring them back to the labour force, this will certainly contribute to additional percentages in Japanese economic growth. Second, it is crucial to seek alternative sources of demand and income. If immigration is not a feasible goal in the near future, then the best bet is to promote tourism. Only by dealing directly with the heart of the problems can we expect to obtain substantial positive outcomes. This is the rules by which I abide, and I feel strongly that it is one of the ground rules that all economists must keep in mind. Trace the problem to its root, and that is where actions should be taken.
Friday, May 16, 2014
Saturday, May 10, 2014
Why favoring a low and steady inflation rate? -> An Introduction to Deflation
1. An Introduction to Deflation
The last few articles make inflation seem like an evil force corrupting the economy. However, the dark side is not always so dark after all. Despite all the talk about the bads of inflation, it might be surprising to you if I were to inform you that economists actually prefer a low and steady positive inflation rate. That is exactly what I am going to do. Ready?
Economists actually prefer a low and steady positive inflation rate. I said it again, and I still want to say it once more. You heard me right. However, note that, it must be at a POSITIVE but at the same time, LOW rate. In other word, we follow the rule of thumb: "too much of anything is never good, but a moderate amount is almost always perfect". This rule actually applies to many facets of life. Think about it by yourself.
Have you ever heard of "inflation target"? That is what central banks in every country do first thing in the morning. Yes, even before breakfast. Although the inflation rates between 1%-2% are normally considered acceptable and most of the time, desirable, but in reality, most inflation targets, if I'm correct, would be in the range of 1%-5% to adapt to the current settings of different nations.
All the talk, where is the explanation? Why? Why do we want a slowly growing price (or slowly deteriorating currency value)? Like the great wise man once said, you can only realize the true significance, the real value of something when you lose it. By the same token, to really understand why inflation should remain in existence, we have to imagine a world without it, or to be more precise, not just a neutral world with 0% inflation (because trust me, this is really hard to achieve, not with capitalism, not with free market), but a world with deflation (i.e. negative inflation).
Before going any further, it is best that we get to know deflation first. What is deflation? Deflation is the exact opposite of inflation. Whereas inflation is an economic phenomenon made up of rising price/falling money value, deflation is an economic nonemonehp (spell it backwards) of falling price/rising money value. However, short-term fall in price due to competitive nature of the market and improved efficiency (ex: advanced technology lowering cost ==> lowering price) can be defined as a good deflation. The bad one mostly persists in the long run for a year or more. So to sum up, you can think of it this way. Short-term deflation is generally good. It signifies efficiency and high productivity which are vital for economic growth. Long-term deflation, in contrast, almost always results in false incentive and loss. Let me elaborate it in details below.
The idea, when first introduced to people, sounds like a good plan. Who does not want cheaper clothes? Or even better, cheaper luxurious cars, houses and vacations. That is why some might think: What a horrible world we are living in! Everything seems to always become less and less affordable! If only things could fall in price, that would make life a lot easier. You think so too? If you do, I am sorry to inform you that you are about 90% wrong. 10% really wrong. Like said, short-term deflation does not spell doom for the economy, but the longer term one usually does.
Individually, you will gain in short-term simply because of the sticky wage effect. That means your hourly wage/monthly salary resists downward pressure. So if you money becomes more valuable as a result of deflation, in the short run, you will be able to buy more goods and services. Due to income effect (more income --> buy more), you will just do so. You would feel richer, and you would make more purchases, living a life of a king/queen.
How long will this fleeting bliss last? Not that long I would say. Complacency is not an option during deflation. Most governments would take action immediately to tackle this problem. Wait, why is it a problem in the first place if everyone is so happy buying more of cheaper goods? Why can we not perpetuate this happiness of ours?
You see, the greatest fear for a government is probably not inflation but persistent deflation. Deflation is an insidious disease that is, to my understanding, even harder to cure than inflation. Deflation entails a huge loss for the aggregate economy. Try thinking from a businessman point of view. Your company manufactured a car. At the beginning of the year, you purchased raw materials and other inputs on top of incurring expense on input-to-output converting process/technology at a total sum of $100. Sadly, due to deflation, the market price was put under downward pressure as currency value suddenly increased. So if the car was priced at $110 ($100 total cost + $10 profit) before, due to deflation and competitive market pressure, you were forced to reduce price to $90, or else, you would not be able to sell the car at all. Long-term deflation creates this problem for almost every industry within an economy. It becomes a real headache when firms' technologies, efficiency, and cost-cutting measures cannot keep up with this falling price. Their profit margins would shrink drastically, and most would be forced to cut production, layoff workers (since wage is sticky, it is difficult to lower wage), and eventually, exit the market (i.e. declare bankruptcy). Now you might question yourself, if falling price occurs, then should it not be applied to both production cost and revenue? And since money gains more value, how can $90 be a loss? Could this economind's author be mistaken? Well, if you are thinking about it (at this very moment), then I must commend you for your swift economic mind. But the one thing about deflation is that prices of different goods and services do not fall uniformly. Which one falls quicker? The one on the cost side or revenue side? And that is what ultimately decides the fate of businesses.
Remember, companies have assets and liabilities. Most of the time, liabilities are where deflation hit the most. Say, before deflation, the liability-to-asset ratio of your company is 30%. That means out of all the assets you own, 30% belongs to other people. You owe them. Say, that 30% = $1 million. Your business operate normally, but suddenly, deflation hits and persists for a whole year. Keep in mind that you owe other people in nominal value. That means you have to pay back $1 million (+interest). Even though price falls and currency value rises, you still have to pay exactly $1 million back in principal. What if you can only sell your products at reduced price (due to deflation effects)? How are you going to pay $1 million if, say, the expected revenue of $1.5 million turns into $0.9 million actual revenue? You would be forced to sell some of your assets. Now you see how deflation impact on businesses can turn out pretty ugly.
Falling price has a far-reaching effect. It has to do with human perception of the economy within which they reside. In the short-run, consumers in general might not notice the fall in price of goods and services. That is one of the reason, why short-run deflation is not considered harmful. However, humans are curious beings. Most put self-interest up front, and they are quick to discern any emerging opportunity favorable to their advantages. Thus, if the falling price trend lasts long enough, people would be able to notice it.
Based on historical observation, what would occur in this specific scenario is hoarding. Again, hoarding? Remember, we talked about this once before in an article: "Why is Economics important?". Yes, hoarding is once again involved. You see, people hoard for a reason. People love having lots of anything they value or is valued highly by those surrounding them. So it is a very rational decision to start hoarding money speculating high return at the end of the day. With the falling price/rising value of money trend continues, most people expect price to keep on falling even further, and with that in mind, they begin hoarding money. To put simply, if you expect your $1000 saving (that means all the expense on necessities such as food, medical care, utilities... have already been incurred) to equate to $1500 (50% return) in the next 6 months, then would you spend it now? or wait a bit longer? Most rational people would hold on to their money a bit longer. I meant 50% semi-annual return is actually a better deal compared to almost any other investments you can possibly think of, which leads to an adverse economic situation.
First, consumption falls. People spend less, and by using our "paradox of thrift" learnt from the past article (spending = earning), we know that they will also earn less as well. When taking "Multiplier" into consideration, the loss is actually bigger than the face value.
Second, people become less willing to borrow, and thus, lowering investment. It creates a scenario where wealth is redistributed from borrowers to lenders. Think about it. If the value of currency rises by 20% a year, then the $100 you received from your boyfriend A (or girlfriend of course) on valentine's, by the end of the year, would worth roughly $120. So it has come to a situation when banks find it hard to make loans. If A borrowed $100 from RipUoff Bank with 5% interest (just so he/she could give the money to you on valentine's... I meant who want a bunch of inedible roses?), A would need to pay back $105. But wait, in real term, A would actually be paying $105 + 105*20% (rise in money value due to deflation). So unless your boyfriend/girlfriend is totally insane, in a way that he/she cannot even figure out basic calculation using common sense, then he/she would not take that loan from RipUoff bank. If you did receive $100 during deflation from your boyfriend/girlfriend, then consider breaking up with him/her. Another impact of deflation. Sad. Looking from the lender side of the story, from banks' perspective, when deflation hits and people save their hard-earned cash, various assets value such as houses, lands, cars, etc., will drop, and as a result, banks would be less likely to make loans as they are aware of the expected lower value of the collateral (to back up the loan in case of default).
So when money itself becomes a safe haven for investment (with really high return), people would shift their interest towards hoarding. They would invest in cash itself, and since they also expect businesses and the whole packages of financial markets to function poorly during deflation, that creates another problem, the falling stocks/precious metals prices, and eventually, the collapse of the financial market.
All these will cause higher and higher unemployment. Now you should get the picture. People become jobless, less spending, less saving, less investment, less government revenue (less tax), less products and services offered, and the list goes on. These certainly exacerbates the impacts of deflation, taking the total worth of damages to a whole new level.
Wasting. Wasting is bad. There was an article solely dedicated to "food waste" in this blog, so do look it up. Anyway, wasting is a result of inefficient consumption/production. Deflation can cause wasting because initially, as goods and services become cheaper, everyone feels richer and they start spending more, sometimes on something they do not even need. If those things turn of to be perishable goods, then they will be wasted. Sadly, this spending surge at the start of deflation most likely does not create enough inflationary pressure to offset deflation simply because the price does not fall steeply in a single day. Imagine this scenario. If price of a microwave drops from $100 to $50 in a single day, then there would probably be lots of people who would buy microwaves pushing up the microwave price almost immediately. Sadly, that is unlikely the case. The whole falling price process might take months, but the change normally is noticeable. That is why people hoard, and that is why there usually is not enough inflationary pressure to save the day.
Deflation, like I said, is bad, but natural deflation is mostly harmless. Deflation resulted from the movement of free market under market force (natural deflation, I made this term up) can actually be desirable. An example can be seen in computer industry where prices fall significantly, but everyone is happy. You can buy cheaper computer, they can sell more for more money. It is a win-win situation. That is the magic of knowledge and technological advancement, and efficiency improvement. The harmful one is usually man-made, a consequence of bad economic policy, especially monetary policy, either expansionary (increasing money supply) or contractionary monetary policy (decreasing money supply). Deflation can result from both. What most people would think is that deflation results from contractionary monetary policy because with decreased money supply, there would be less money in circulation, and as a result, money value goes up. For instance, the deflation in Japan that lasts for 2 decades (and is probably about to end, or not) was believed to be probably caused and/or perpetuated by its policy failure. However, deflation can also be caused by excessive expansionary monetary policy. True story (I will not explain unless you ask).
Do note that the effects of deflation witnessed in this article have been stretched to the extreme. The actual effects might fall somewhere in between with lower severity. That is why economics is sometimes called a dismal science because of its gloomy nature. Though that is actually not true and not supported by this blog!
Entertain your economic brain with the below video about how the Japanese economy was afflicted with DEFLATION (which takes you on a more realistic journey on deflationary route):
Have you ever heard of "inflation target"? That is what central banks in every country do first thing in the morning. Yes, even before breakfast. Although the inflation rates between 1%-2% are normally considered acceptable and most of the time, desirable, but in reality, most inflation targets, if I'm correct, would be in the range of 1%-5% to adapt to the current settings of different nations.
All the talk, where is the explanation? Why? Why do we want a slowly growing price (or slowly deteriorating currency value)? Like the great wise man once said, you can only realize the true significance, the real value of something when you lose it. By the same token, to really understand why inflation should remain in existence, we have to imagine a world without it, or to be more precise, not just a neutral world with 0% inflation (because trust me, this is really hard to achieve, not with capitalism, not with free market), but a world with deflation (i.e. negative inflation).
Before going any further, it is best that we get to know deflation first. What is deflation? Deflation is the exact opposite of inflation. Whereas inflation is an economic phenomenon made up of rising price/falling money value, deflation is an economic nonemonehp (spell it backwards) of falling price/rising money value. However, short-term fall in price due to competitive nature of the market and improved efficiency (ex: advanced technology lowering cost ==> lowering price) can be defined as a good deflation. The bad one mostly persists in the long run for a year or more. So to sum up, you can think of it this way. Short-term deflation is generally good. It signifies efficiency and high productivity which are vital for economic growth. Long-term deflation, in contrast, almost always results in false incentive and loss. Let me elaborate it in details below.
The idea, when first introduced to people, sounds like a good plan. Who does not want cheaper clothes? Or even better, cheaper luxurious cars, houses and vacations. That is why some might think: What a horrible world we are living in! Everything seems to always become less and less affordable! If only things could fall in price, that would make life a lot easier. You think so too? If you do, I am sorry to inform you that you are about 90% wrong. 10% really wrong. Like said, short-term deflation does not spell doom for the economy, but the longer term one usually does.
Individually, you will gain in short-term simply because of the sticky wage effect. That means your hourly wage/monthly salary resists downward pressure. So if you money becomes more valuable as a result of deflation, in the short run, you will be able to buy more goods and services. Due to income effect (more income --> buy more), you will just do so. You would feel richer, and you would make more purchases, living a life of a king/queen.
How long will this fleeting bliss last? Not that long I would say. Complacency is not an option during deflation. Most governments would take action immediately to tackle this problem. Wait, why is it a problem in the first place if everyone is so happy buying more of cheaper goods? Why can we not perpetuate this happiness of ours?
You see, the greatest fear for a government is probably not inflation but persistent deflation. Deflation is an insidious disease that is, to my understanding, even harder to cure than inflation. Deflation entails a huge loss for the aggregate economy. Try thinking from a businessman point of view. Your company manufactured a car. At the beginning of the year, you purchased raw materials and other inputs on top of incurring expense on input-to-output converting process/technology at a total sum of $100. Sadly, due to deflation, the market price was put under downward pressure as currency value suddenly increased. So if the car was priced at $110 ($100 total cost + $10 profit) before, due to deflation and competitive market pressure, you were forced to reduce price to $90, or else, you would not be able to sell the car at all. Long-term deflation creates this problem for almost every industry within an economy. It becomes a real headache when firms' technologies, efficiency, and cost-cutting measures cannot keep up with this falling price. Their profit margins would shrink drastically, and most would be forced to cut production, layoff workers (since wage is sticky, it is difficult to lower wage), and eventually, exit the market (i.e. declare bankruptcy). Now you might question yourself, if falling price occurs, then should it not be applied to both production cost and revenue? And since money gains more value, how can $90 be a loss? Could this economind's author be mistaken? Well, if you are thinking about it (at this very moment), then I must commend you for your swift economic mind. But the one thing about deflation is that prices of different goods and services do not fall uniformly. Which one falls quicker? The one on the cost side or revenue side? And that is what ultimately decides the fate of businesses.
Remember, companies have assets and liabilities. Most of the time, liabilities are where deflation hit the most. Say, before deflation, the liability-to-asset ratio of your company is 30%. That means out of all the assets you own, 30% belongs to other people. You owe them. Say, that 30% = $1 million. Your business operate normally, but suddenly, deflation hits and persists for a whole year. Keep in mind that you owe other people in nominal value. That means you have to pay back $1 million (+interest). Even though price falls and currency value rises, you still have to pay exactly $1 million back in principal. What if you can only sell your products at reduced price (due to deflation effects)? How are you going to pay $1 million if, say, the expected revenue of $1.5 million turns into $0.9 million actual revenue? You would be forced to sell some of your assets. Now you see how deflation impact on businesses can turn out pretty ugly.
Falling price has a far-reaching effect. It has to do with human perception of the economy within which they reside. In the short-run, consumers in general might not notice the fall in price of goods and services. That is one of the reason, why short-run deflation is not considered harmful. However, humans are curious beings. Most put self-interest up front, and they are quick to discern any emerging opportunity favorable to their advantages. Thus, if the falling price trend lasts long enough, people would be able to notice it.
Based on historical observation, what would occur in this specific scenario is hoarding. Again, hoarding? Remember, we talked about this once before in an article: "Why is Economics important?". Yes, hoarding is once again involved. You see, people hoard for a reason. People love having lots of anything they value or is valued highly by those surrounding them. So it is a very rational decision to start hoarding money speculating high return at the end of the day. With the falling price/rising value of money trend continues, most people expect price to keep on falling even further, and with that in mind, they begin hoarding money. To put simply, if you expect your $1000 saving (that means all the expense on necessities such as food, medical care, utilities... have already been incurred) to equate to $1500 (50% return) in the next 6 months, then would you spend it now? or wait a bit longer? Most rational people would hold on to their money a bit longer. I meant 50% semi-annual return is actually a better deal compared to almost any other investments you can possibly think of, which leads to an adverse economic situation.
First, consumption falls. People spend less, and by using our "paradox of thrift" learnt from the past article (spending = earning), we know that they will also earn less as well. When taking "Multiplier" into consideration, the loss is actually bigger than the face value.
Second, people become less willing to borrow, and thus, lowering investment. It creates a scenario where wealth is redistributed from borrowers to lenders. Think about it. If the value of currency rises by 20% a year, then the $100 you received from your boyfriend A (or girlfriend of course) on valentine's, by the end of the year, would worth roughly $120. So it has come to a situation when banks find it hard to make loans. If A borrowed $100 from RipUoff Bank with 5% interest (just so he/she could give the money to you on valentine's... I meant who want a bunch of inedible roses?), A would need to pay back $105. But wait, in real term, A would actually be paying $105 + 105*20% (rise in money value due to deflation). So unless your boyfriend/girlfriend is totally insane, in a way that he/she cannot even figure out basic calculation using common sense, then he/she would not take that loan from RipUoff bank. If you did receive $100 during deflation from your boyfriend/girlfriend, then consider breaking up with him/her. Another impact of deflation. Sad. Looking from the lender side of the story, from banks' perspective, when deflation hits and people save their hard-earned cash, various assets value such as houses, lands, cars, etc., will drop, and as a result, banks would be less likely to make loans as they are aware of the expected lower value of the collateral (to back up the loan in case of default).
So when money itself becomes a safe haven for investment (with really high return), people would shift their interest towards hoarding. They would invest in cash itself, and since they also expect businesses and the whole packages of financial markets to function poorly during deflation, that creates another problem, the falling stocks/precious metals prices, and eventually, the collapse of the financial market.
All these will cause higher and higher unemployment. Now you should get the picture. People become jobless, less spending, less saving, less investment, less government revenue (less tax), less products and services offered, and the list goes on. These certainly exacerbates the impacts of deflation, taking the total worth of damages to a whole new level.
Wasting. Wasting is bad. There was an article solely dedicated to "food waste" in this blog, so do look it up. Anyway, wasting is a result of inefficient consumption/production. Deflation can cause wasting because initially, as goods and services become cheaper, everyone feels richer and they start spending more, sometimes on something they do not even need. If those things turn of to be perishable goods, then they will be wasted. Sadly, this spending surge at the start of deflation most likely does not create enough inflationary pressure to offset deflation simply because the price does not fall steeply in a single day. Imagine this scenario. If price of a microwave drops from $100 to $50 in a single day, then there would probably be lots of people who would buy microwaves pushing up the microwave price almost immediately. Sadly, that is unlikely the case. The whole falling price process might take months, but the change normally is noticeable. That is why people hoard, and that is why there usually is not enough inflationary pressure to save the day.
Deflation, like I said, is bad, but natural deflation is mostly harmless. Deflation resulted from the movement of free market under market force (natural deflation, I made this term up) can actually be desirable. An example can be seen in computer industry where prices fall significantly, but everyone is happy. You can buy cheaper computer, they can sell more for more money. It is a win-win situation. That is the magic of knowledge and technological advancement, and efficiency improvement. The harmful one is usually man-made, a consequence of bad economic policy, especially monetary policy, either expansionary (increasing money supply) or contractionary monetary policy (decreasing money supply). Deflation can result from both. What most people would think is that deflation results from contractionary monetary policy because with decreased money supply, there would be less money in circulation, and as a result, money value goes up. For instance, the deflation in Japan that lasts for 2 decades (and is probably about to end, or not) was believed to be probably caused and/or perpetuated by its policy failure. However, deflation can also be caused by excessive expansionary monetary policy. True story (I will not explain unless you ask).
Do note that the effects of deflation witnessed in this article have been stretched to the extreme. The actual effects might fall somewhere in between with lower severity. That is why economics is sometimes called a dismal science because of its gloomy nature. Though that is actually not true and not supported by this blog!
Entertain your economic brain with the below video about how the Japanese economy was afflicted with DEFLATION (which takes you on a more realistic journey on deflationary route):
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