Since I know very little about economics, what would this do in laymans terms? You said deflation, would that suddenly make citizens currency worth more? Im assuming its the exact opposite of inflation, yes?
Shockwave, technically, deflation should result in increased purchasing power of currency, ...however, at the rate with which Bernanke and all other central banks have been printing, ...I doubt we will see those effects. Thus far, all the money has not been filtering into the hands of the people. The banks have been keeping the money, and not loosening up the credit markets. Eventually all that money will flood back into the market into a tsunami of liquidity, drastically increasing the currency supply resulting in most likely a hyper inflationary deflation.
Sounds like an oxymoron, however, what I believe will happen, is that we will see symptoms of both deflation and inflation at the same time. Most likely a worse possible scenario in each case.
I believe we will see the inflationary effects in the price of goods & services. The US dollar will start to look like the Zimbabwe dollar with little if any purchasing power.
In deflation, the money supply shrinks, as do prices, wages, costs for good & services etc. And while prices, wages, and costs for goods & services go down, ...nominal debt does not.
eg: Take an individual who makes $120K / yr.
Lets say he pays 50% in taxes, leaving 60K for everything else.
He pays $2K /mortgage 3K /food, clothing, entertainment, savings, investments etc
During a deflationary period, everything drops 50%.
His income goes from $120 K/yr. to only $60K /yr. He still pays 50% in taxes leaving him with the princely sum of only 30K for everything else. Even if his food, clothing, etc., etc., expenses were to also shrink by 50% (highly unlikely... Most likely these costs would increase due to inflation) he would find himself in the unenviable position of having only $1K left to cover a $2K monthly mortgage, ...provided the interest rate on his mortgage remained the same. Most likely IMO, his mortgage payments would increase due to the higher interest rates that would be applicable with so much currency swashing around, ...all for a home that has probably come down in price.
It is deflation that the Gov. Fears the most, because their debt does not shrink, and the US Govt. is up to their eyebrows in debt. A 1% increase in interest rates is going to crush them. Despite the rhetoric, the Fed has no exit strategy from the printing. All they can do is print till they run out of ink so to speak.
I believe when this thing snaps, ...we are going to see the worst aspects of both inflation, and deflation simultaneously because of all the unnatural tinkering that has been practiced for so long.
