# How would deflation occur in a small country?

This question is (just like my first) quite hard to ask just in the title, sorry!

Short summary: (no extra information, if you're interested, read the explanation, not summary)

In a novel I'm writing, a country undergoes an emigration crisis due to outside causes, losing around 60% of its population, (also up for change, 60% is a lot for a country of 50 million, ) and creating moderate (or severe, I don't have many other deflations in the real world to compare it to) deflation. This makes the value of 5 USD be 1 USD. I have problems with this, including that 5-1 deflation from supply and demand differences may be insane. Read more if you'd like to know the whole question!

Explanation:

I've recently been writing a novel, where, in the past, the country that it takes place in, undergoes moderate deflation. As an example, what I'm imagining is that this deflation would be enough to make the value of (the equivalent of) $5$ USD would go down to $1$ USD. The reason for this would be a recent emigration crisis, (due to outside causes) making the population go from ~50-60 million to ~10-20 million. This would leave businesses overproducing, creating so much product that there aren't enough consumers to buy the product itself. This difference between supply and demand would create this deflation. Extra details will be listed at the bottom.

My main problems with this idea:

First of all, an obvious problem of mine is that 5-1 deflation is insane. This question has an easy answer either way, either to change it or to not. Another problem of mine is that this amount of emigration may be a bit much, ~30-40 million people emigrating is A LOT, especially for a country of only ~50-60 million. I don't think that emigration of this size is too probable, but if it is, tell me why! One more is that, a country with (the equivalent of) a GDP of ~100 billion USD is alright, especially for a country of around the size of modern day Macedonia (FYROM). If the country is this small and has a great GDP, would it actually deflate? If you have any questions for this question too, comment, unless you have an answer and a question, just answer with that! Thanks for reading, I'll list some extra details in a list now!

Details:

-The country is the around the size of Macedonia (FYROM).

-The country has a GDP of ~100 billion USD.

-The country's population before the emigration crisis was ~50-60 million.

-The country's population after the emigration crisis is ~10-20 million.

-The country recently went through an emigration crisis.

-This deflation is 5-1.

Not said yet, new information

-The emigration crisis took ~5-10 years.

-The main market of the country is farming, specifically crops like corn and soybeans.

-The cause of the crisis would be due to threats of nuclear war from a violent neighbor country.

-The country borders the ocean. (Lets the emigrants go via boat to another continent.)

-The country is most Democratic.

(please make sure to tell me if you have any other questions or want an edit)

Other 2 questions relating to this story, unrelated to this question: Would a fascist rebellion be able to take over a mostly libertarian country? | How long would a utopia last until it would collapse?

• I don't think mass emigration will cause deflation. I think if you have that large an exodus, you'll probably find a much more crippled economy. Those factories aren't going to keep churning out goods. First off, half the work force has left the country! Half the teamsters, half the packers, half the floor managers. Most companies will be lucky if they can just remain in business with a severely reduced workforce. Also, whatever goods are produced in excess won't be held within the borders while the owners watch the values fall and fall. They'll export before they take such reduced prices. – elemtilas Oct 13 '17 at 1:24
• "This makes the value of 5 USD be 1 USD." This doesn't make sense. If the purchasing power of what is denominated as 5 Universal Singular Denominations over time becomes the same as that of 1 USD at the beginning, then what you have is more likely inflation (in the form of loss of purchasing power for a given number of units of currency), not deflation (in the form of loss of units of currency overall circulating in the economy). – a CVn Oct 13 '17 at 13:11
• When currency's value inflates, it becomes worth less. When currency's value deflates, it becomes worth more. So what you could buy with $5 now you can buy with$1. Inflation is caused by an expansion in the money supply, while deflation is caused by a contraction in the money supply. If stopped printing any money, the amount of money in circulation would gradually diminish as it becomes more scarce. – Andrew Neely Oct 13 '17 at 14:28
• A basic condition for deflation to occur in an economy which uses fiat currency is for that economy to be largely self-sufficient. Macedonia is very far from self-sufficient. And if 60% of the people leave, who works in those factories led by idiots who continue production in the face of falling demand? – AlexP Oct 13 '17 at 15:45
• @AndrewNeely If you want to include dollar signs in comments (or posts) on Worldbuilding, use \\$. The backslash escapes the dollar sign, which otherwise marks the start of Mathjax. That's why your comment above looks different from what you most likely intended. – a CVn Oct 13 '17 at 19:32

The biggest problem with the scenario is economists are not in agreement on what causes deflation. Inflation is pretty simple, as Milton Freidman tells us:

Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.

Now it seems that the opposite should be true, and in a general sense it is, but trying to explain the cause is difficult because different historical periods have seen deflation triggered by seemingly different causes. The Infogalactic page on Deflation lists Debt deflation, Money Supply side deflation, Credit deflation and shortage of official money deflation.

In the specific case of your nation, the massive outflow of people wold trigger several different issues. Assets would become devalued as there would be no buyers for properties which have been abandoned by the outflow of the population. The Japanese deflation seems to have been caused by a massive devaluation of assets (although in this case it is due to the popping of the real estate bubble at the end of the 1980's)

Productivity deflation (such as the American "long depression" where economic output and productivity increased at an amazing pace) will be unlikely in this setting, unless it coincides with a "singularity". Economic output will, however be far greater than demand since the physical population will be dropping.

As fewer and fewer people are around, there will be a massive credit contraction (no one to loan money to, and the potential for people to simply be leaving and not paying their debts)

So the conditions for deflation should be occurring in your nation, but which of these conditions takes primacy, how fast deflation will take hold and how deep the deflation will become is not something which I think can be predicted either with the information we are given, or even using econometric calculations assuming we have a "real" economy to model. Economies and markets are complex adaptive systems, so outputs are not linear or contemporious (the effects might not be felt for a considerable period of time even after the triggering event), so as an author, if you want to have the deflation occur at a 5:1 rate, that is entirely up to you.

We are often told by very smart looking government economists and central banker about how things will pan out over the coming months and years. Unfortunately their track record is in most cases very bad. As Woody Allen once said, it’s always hard to make predictions, especially about the future. So given vaguely favourable conditions it might just happen anyway, despite all the arm waving by the economists.

One factor which is worth thinking about is the debt. Governments tend to hate deflation because they are more often than not deep in debt and deflation makes debt worse. So perhaps this Government is far into the black and as a big creditor doesn’t mind deflation making its credits worth more.

You could also consider having a gold standard in place. Not sure it would make a lot of difference but it would make everything more tangible.