To understand why deflation is good for economy, you have to understand what will cause deflation. Traditionally speaking, supply and demand decided inflation or inflation, deflation or inflation may not all be bad or good for the economy, it all depends on what type
of deflation or inflation it is.
Since you are asking about deflation, I will discuss about deflation
first.
Cause of deflation:
1) More suppliers, productivity is not increased, market size is not
increased accordingly or even shrunk !!!
More suppliers compete for the limitted market, even at the cost of
loss. This is not good for the suppliers, and some weak ones will
eventually be out of the market. So, this type of deflation is bad
for the economy, but it is also good for the economy, because
companies will spend more money on R&D to improve the productivity,
and eventually, only the strongest ones can survive and be more
efficient ! Those who can not increase the productivity can only
squeeze the salary of their employee, and reduce the living standard further. As the employee are the consumers, whit the
consumers having less money to consume, the economy comes to a
real woe, i.e the recession.
2) The cost of manufacturing is reduced as a result of productivity
increased, the suppliers transfer the savings in production to
consumers so that more people can afford the products and the
market size expands significantly.With this type of deflation,
the suppliers' profit margin is not only maintain as a result
of the increase in productivity, but the total revenues are also
increased as a result market expansion. The people's living standard is also lift , because with the same salary the buying power
is increased. This is what happening now in the PC industry. On the
supplier side, the profit margin and total revenues both increased.
On the consumer side, as PCs getting cheaper, more people can afford PC, and are planning to buy PCs .
3) Imported deflation:
As US dollar appreciated, one dollar can buy more.So the price of
Imported goods is cheaper, this is called imported deflation.This may not hurt the US industry, since the industry of the S.E.Asia is quite different than that of US and they are not compete with each other(Auto may be different).With dollar's appreciation against the
S.E.Asian currency, it only means the imported consumer goods from
S.E. Asian is cheaper, and people's living standard got improved.
However, for the exporters of S.E.Asia, they have to work harder and
export more to gain the same amount of dollars as before the currency
fluctuation. Since the exported goods of US to the S.E.Asia are most high Tech products and there is no replacements, the S>E>Asian countries have no choice but continues importing from US if they want to improve their productivities and build up industries at whatever cost.
The current and comming deflation were caused by bothe factor 2) and 3), that is why I said that deflation is good for the US economy.
The federal reserve now has the room to reduce the interest rate
without triggering the inflation, but reduce the capital cost for US companies to balance out the effect of currency appreciation on dollars. Do you think this is good for the economy, as well as for
the US stock market in 1998 and thereafter ?????????????????????
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