Without the "hidden risk of inflation", it may become more prudent just to hold on to money, and not to spend or invest it.
Hard money advocates argue that if there were no "rigidities" in an economy, then deflation should be a welcome effect, as the lowering of prices would allow more of the economy's effort to be moved to other areas of activity, thus increasing the total output of the economy.
Deflation has effects on two main levels: on the corporate and on the governmental level.
The most obvious is on the level of companies. By definition, in the event of a deflation, Companies not only cannot raise, but have to actually decrease their prices for their products and services. If they hadn't decreased their prices, they would go out of business. Although in a deflationary environment, most likely their production costs also decrease, most majority of companies 'profit decrease also, and after a few years they are going to annual losses (there may be companies in sectors with low competition and high profitability ratios, such as utilities, and also companies that have a large portion of profits coming from either foreign operations or from exports). In such scenarios companies cannot plan for and invest in its future growth and development.
When governments want to maintain or increase the real value of their tax income in a deflationary economy, one of three options: increase the tax base, increase tax rates, or a combination of the above two.
Tax base is the number of people and companies that pay taxes. Due to the consumption and corporate environment governments have to be very careful with broadening the tax base, but especially cautious with increasing taxes, as it may cause the economy to sink more deeply into a recession (deflationary economies are also shrinking ones).
Some wages: as companies cannot afford to increase wages, the nominal value of those wages stays the same (however, their real value increases) not only for the period of deflation, but also for some time during the following stagflation and inflationary period.
Deflationary economies have many indirect socio-, political-, financial-, and economical effects:
Rising unemployment: as companies need to cut cost, they need to fire employees, which are not producing (because they don't have any work to do).
Higher government deficits: as most costs stay the same (for political reasons), and some expenditures increase (eg: rising unemployment aid payments cost of jumpstarting the economy).
Recession: no price increase; no economic growth.
More expensive imports: same foreign currency is worth more domestic currency.
More income from exports: same foreign currency income is worth more in domestic currency.
4. Alternative causes and effects
4.1 The Austrian school of economics
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