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What's deflation and why it can be dangerous for the economy

Deflation is an economic condition characterized by a general decline in prices for goods and services, often accompanied by a reduction in the supply of money or credit. While falling prices might initially seem beneficial for consumers, deflation can lead to severe economic issues. It discourages spending because people anticipate further price drops, leading to decreased demand, which in turn forces businesses to lower prices even more, creating a negative feedback loop. This can result in lower production, wage cuts, higher unemployment, and can potentially spiral into a depression. Deflation also increases the real burden of debt, making it harder for borrowers to repay loans, which can lead to defaults and financial instability. Historical examples like the Great Depression illustrate how deflation can exacerbate economic downturns, making it a dangerous phenomenon for economies.

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