Why the FED and other central banks fear deflation.

Deflation is defined as a reduction in inflation. It is accompanied by (and may even be caused by in part) by a reduction in the money velocity and the money supply. Basically it means, in plain terms, that cash will buy more. Why should the FED fear this?

Because deflation is accompanied by events that are contrary to FED policies.

1. Deflation reduces many things:

    a) Reduces tax revenues. If fewer dollars are taken in by business, they will pay less taxes.
    b) Makes it harder for business and govt to pay their bills. Smaller income, lower ability to pay;
    c) Increases chances of bankruptcy by marginal businesses. Income is reduced but not debts;
    d) Lowers stocks. People need to raise cash to supplement earnings;
    d) Reduces employment. Businesses need to fire people in order to boost revenue.
    f) Reduces economic growth. Less money to invest.

2. Deflation increases some things:

    a) The value of cash;
    b) Stock Market volatility;
    c) Taxes. Since govt obligations are not increased, taxes are raised.

Responses to deflation

1. Increased govt borrowing or printing of money.
    Eventually, increased taxes lead to a Depression. Increased money printing causes inflation. Increasing borrowing eventually causes default.

2. Treating economic slowdown by supply side economics.

    a) A reduction of govt spending (austerity) can stabilize growth. This is being tried in Greece. It   
        was also done in the US after WWI under President Coolidge. It ignited the roaring twenties;
    b) Cutting taxes also increases economic activity. This worked under JFK and RR.

3. Why the Elites keep doing Keynesian economics instead of supply-sided economics.

        The Elites are basically Socialists. They want govt control under their leadership. Economic
        growth is NOT their goal. In fact, they want to reduce economic activity because they think
        that economic activity pollutes the planet. The chattering class (from which the Elite comes)
        does not need to make and service things. They get paid for chattering.