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Why Deflation heals the Economy

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"Despite the almost-unanimous agreement that deflation is bad news for the economy's health, that idea is false.

"As we have seen, deflation comes in response to previous inflation. This amounts to the disappearance of money that was previously generated out of thin air. This type of money gives rise to various nonproductive activities by diverting real saving from productive activities.

Obviously then, a fall in the money stock on account of the disappearance of money created out of thin air is great news for all wealth-generating activities. The disappearance of this type of money arrests their bleeding. A fall in the money stock undermines various nonproductive activities and therefore slows down the decline of the pool of real savings and lays the foundation for an economic revival."

(Frank Shostak in Mises Daily, Ludwig von Mises Institute)

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