people are less likely to spend a dollar if they know it will be worth more in the future
That means they're more likely to save it, and savings provide the capital for new businesses to start. The savings provide capital for just the right number of new businesses, in fact, rather than a glut of businesses during booms, which all have the same idea and then crash and burn in a huge cluster. (This is due in large part to there not being enough room for all of them to start up and make their way at once, due to a limited number of consumer dollars and a limited labor pool.)
In any case, the only dollars people will not spend are discretionary dollars. They still have to eat, and they still have to fill their tank, and they're still probably going to pay their utility bills and rent/mortgages (unless they own outright), and they're still going to buy consumer necessities. They might eat a little less, or a little thriftier, but they're still going to pay to eat (and keep the farmers producing
).
It's only luxury items that people will hold out on, and even that is pretty hypothetical. Do you know why? It's because we already have a test case in the real world, right now: Look at the technology industry. Because it is not highly regulated, it has not stagnated, and it's progressing fast enough to defy even inflation. Consumer tech devices become more capable and less expensive every single year. Look at hard drive prices, memory prices, processor prices, etc. They all keep going down, but people keep buying them. Until the recession, we had a nonstop consumer spending spree on items that endlessly went down in price (actually, buying is picking back up again, although I really think people should be saving still...). Do you know why? It's because people have time preferences, and not everyone is going to sit around and endlessly wait for things to get cheaper and cheaper and cheaper if they want/need something now. Especially if people know their wages/salaries will be worth more next year, they're not going to be extraordinarily tight with their money.
Also, note that technology prices go down DRAMATICALLY every year. In contrast, price deflation in other sectors (due to gradually increasing production) would be more on the order of a few percent. Given that, the technology industry already has far "worse" price deflation than the more gentle economy-wide deflation that a steady monetary base would create...yet it hasn't created a deflationary spiral of non-spending.
Still, what if it really did happen, and people suddenly engaged in disproportionate saving? Well, first, interest rates would drop, which would reduce some incentives for that. Anyway, if people do decrease their spending, demand for luxury products goes down, and there's no sense in continuing to produce more than demand allows. What's wrong with that though? The reduction in supply begins to increase prices again, which encourages people to say, "Oh crap, I'd better spend my money now before it's worth nothing" according to your mental model...although really, I'd say it encourages people to say, "Meh. I'll wait for prices to go down again," and continue saving. Maybe they'll eventually buy the same luxury products again, or maybe not (in which case, were they really all that necessary?
). Either way, the increased savings lead to capital investment and people being able to realize new companies to produce goods/services that are or will be in high demand (and those new companies can reduce the unemployment caused by the downswing in demand for another company's product).
