Maran was a tomato farmer in a small village. One year, due to an oversupply of tomatoes, the market price dropped drastically to just 1 rupee per kilogram! This led to Deflation, where prices fall so much that businesses and individuals suffer losses. Since the price was too low, Maran didn’t even bother harvesting his crop. Instead of hiring laborers, he let his cows graze on the fields and prepared the land for the next crop. With no work available, laborers had no income, which meant they couldn’t buy goods from the market. As a result, sales decreased further, and prices continued to fall. This created a deflationary cycle where the economy kept shrinking.  A few years later, tomato prices started rising again. This is an example of Inflation, where people tend to buy goods quickly, fearing that prices may rise further in the future. At that time, Maran happily hired workers and paid them good wages. With their earnings, laborers started purchasing more goods, which helped boost the economy. More transactions meant more cash flow, benefiting both businesses and farmers. The same situation has occurred on a global scale. In Japan, long-term deflation caused people to stop spending, believing that prices would drop even further in the future. This led to economic stagnation, where businesses couldn’t grow, and jobs became scarce. To reverse this, the Japanese central bank eliminated interest rates on bank deposits. In some cases, banks even started charging fees for holding money! This forced people to spend and invest rather than hoarding cash.

Lessons Learned:

1. Moderate Inflation is Good – It keeps money circulating, creates jobs, and fuels economic growth.
2. Deflation is Harmful – When people stop spending, businesses struggle, and the economy slows down.
3. Interest Rates Matter – High interest rates encourage saving, while low or negative rates push people to spend and invest.
4. Balanced Inflation is Key – Too much inflation makes life expensive, while too little (or deflation) causes economic collapse.

The Ultimate Truth:

Controlled Inflation is Necessary – But Deflation is Dangerous!