[adanthar]

Yes, being the debtor is worse than being the creditor. However, a proper lending economy requires both of those statuses to be present in order to work [img]/images/graemlins/tongue.gif[/img]

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Prolonged and extreme inflation is bad also. What I don't understand is why mild or temporary deflation is so terrible. If mild inflation isn't so bad then why is mild deflation so bad?

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Mild deflation still crashes the lending cycle.

Think of it this way: inflation is simply another factor to be subtracted from the future value of money, and is therefore factored into the interest rate of any given loan. If a proper interest rate would be 5%, a 2% inflation rate makes that rate 7%. That's basically all that (mild) inflation does.

Now let's assume we have a deflationary economy and *add* a deflation % to the future value of money, thereby making it worth more than the present value. (Again, I want to emphasize that the very first thing that would happen in a deflationary economy is a cascade of bankruptcies all the way up, but we're speaking solely about basic economics here.) Theoretically, because I'm now guaranteed some return on a loan by simply putting it under my mattress, there is almost no risk to the lender and interest rates should be zero. However, a zero interest rate means there is no incentive for the lender to loan money at all, while an interest rate substantially above zero is a usurious rate that only a sucker would take. The actual percentage of deflation doesn't matter.

(Now, take this one step further. In the real world, most loans are given out for two reasons: for consumer spending and for business growth. If consumers are discouraged from spending, what happens to businesses? If businesses are already in a crunch from the former, and now cannot take out new loans at reasonable rates because it's far less risky to put the money in a mattress, what happens to them?)

Moreover, although IIRC you did say you weren't crazy about the gold standard, a deflationary economy caused by a return to the gold standard would by no means be mild.

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edit: or how about neither inflation nor deflation; my guess would be that that would be better than either.

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Mild inflation is more or less simply a side effect of the lending economy/business cycle/population and GDP growth (for example, a nation that has doubled in population in fifty years should, for a variety of reasons - some obvious, some not - certainly have more money supply available than it did fifty years ago). I'm not well enough informed on modern economic theory to know whether a small amount of inflation is currently seen as a necessary evil or beneficial on its own (both views have been widely held in the past), but any sort of present value > future value equation can already adapt to account for it and the market easily adjusts to any reasonable number.