THE PROBLEM OF DEFLATION

The “problem of deflation” in the Western societies and Turkey provides evidence to correctness of our statement that needs are limited and resources to satisfy them are infinite. This issue originating from the lack of demand would not be so important, were resources more scarce compared to needs.

Since we touched upon this theme, we should talk about deflationary disorder, which can be fixed by the National Economic Model.

Deflation is manifested in decline of general price level. This problem, being even more dangerous than inflation, poses today a hazard almost everywhere on Earth, including our country.

Decrease in aggregate demand leads to downturn in general price levels. In such situation companies have to reduce their production and lay off their workers. On the one hand, consumers reduce their level of consumption in expectation of further decrease in prices. On the other hand, increased unemployment depresses consumption even more.

The classical capitalist school falsely assumes that prices and wages of workers are flexible and that market will sort out its problems itself.

The Keynesian approach, rejecting the idea of automatic equilibrium of the markets, defended the idea of supporting demand by increase in social expenditures. The proposed tactic did partially produced results. However, because money used for social expenditures had its cost in the form of interest, in due course of time this policy brought the countries to both inflation and huge debt burden. Governments borrowing money at interest had to increase taxes and ultimately cut both current expenditures and social expenditures in order to repay loans.

In such situation, on the one hand, due to increase in tax level the cost of production went up; on the other hand, inevitable measures to restrict mid-term operating expenditures and collection of taxes from population with low-income led to contraction of consumer demand. As a result, a new disorder called stagflation, i.e. combination of unemployment and inflation, emerged in the world economy. The capitalist concept was not able to explain reasons behind deflation. These reasons are explained within the framework of the National Economic Model.

Before we proceed to solution of this issue by means of the National Economic Model, it is important to answer the following question: “Why do developing economies stall in their growth after a while and thus fail to achieve sustainable economic growth?”