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I've just seen an article where the author states that deflation has the possibility of reducing wealth inequality. His rationale is as follows:

When deflation occurs, the prices of assets falls (he assumes that richer people own more assets, so their net worth will decrease) and the value of savings rises (which he argues is good for low-income earners as their purchasing power increases). Putting the two together, this leads to a narrowing of the wealth gap.

Is this a sound argument, or are there flaws to it? I always thought that deflation is disadvantageous, (e.g. it can lead to higher unemployment, as sticky wages coupled with deflation will mean higher labour costs for producers - costs they'll respond to by cutting their workforce - this will impact low-income earners the most, arguably contributing to an increase in wealth inequality...)

I'd be very grateful for your comments on this. Thanks!

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  • $\begingroup$ Even if the argument is true (as you relate it), I'm not seeing much practical significance. World war also reduced inequality. Neither deflation nor war are terribly desirable for other reasons. A bit of googling finds hardly any research on deflation vis a vis of inequality. $\endgroup$ – Fizz Oct 25 at 22:03

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