Lets talk econonics........Whats so bad about deflation?

[ⒶⓁⒾⒶⓈ]

Everyone who has taken a basic econ class has heard about Inflation and how the government must "control it" keep it at some arbitrary level as a sound economic policy.But nobody ever brings up its alternative.
The talking heads yammer about the dangers of hyperinflation and conjure up images of taking a wheelbarrow load of money to the store to get a loaf of bread

and establishment toadies like Krugman grunt out steaming piles like this

http://krugman.blogs.nytimes.com/2010/08/02/why-is-deflation-bad/?_r=0

A number of readers have asked me to explain why deflation is a bad thing; and the truth is that while I’ve alluded to the issue a number of times, I’m not sure if I’ve ever laid out the whole case. So here goes.

There are actually three different reasons to worry about deflation, two on the demand side and one on the supply side.

So first of all: when people expect falling prices, they become less willing to spend, and in particular less willing to borrow. After all, when prices are falling, just sitting on cash becomes an investment with a positive real yield – Japanese bank deposits are a really good deal compared with those in America — and anyone considering borrowing, even for a productive investment, has to take account of the fact that the loan will have to repaid in dollars that are worth more than the dollars you borrowed. If the economy is doing well, all this can be offset by just keeping interest rates low; but if the economy isn’t doing well, even a zero rate may not be low enough to achieve full employment.

And when that happens, the economy may stay depressed because people expect deflation, and deflation may continue because the economy remains depressed. That’s the deflationary trap we keep worrying about.

Total bullshyt..Nobody spends LESS when their cash buys MORE..its actually what stores count on when they have sales like on Black friday..the prices are slashed in half and people spend more..even when you travel to countries with weak currency people buy tons of jewelry and luxury products they couldnt afford at home.

As an example when cellphones first came out they cost $4000 ..only millonaires and big companies bought them...now you can buy a disposable one for $20 and everyone has one and people are still buying them.

A second effect: even aside from expectations of future deflation, falling prices worsen the position of debtors, by increasing the real burden of their debts. Now, you might think this is a zero-sum affair, since creditors experience a corresponding gain. But as Irving Fisher pointed out long ago (pdf), debtors are likely to be forced to cut their spending when their debt burden rises, while creditors aren’t likely to increase their spending by the same amount. So deflation exerts a depressing effect on spending by raising debt burdens – which, as Fisher also points out, can lead to another kind of vicious circle, in which depressed spending because of rising real debt leads to further deflation.

More nonsense because the debtor also benefits from lower prices..basically in simple terms he is saying that buying a $24 k new car is bad for someone who will be making payments and the same car will sell for 23k next year..assuming the debtors income stayed the same they will be fine because theyre spending less on buying food and paying bills.
Of course the real danger is that the debtor may abandon this liability meaning the Bank will be stuck with reselling it but they can always peg the payments to inflation

Finally, in a deflationary economy, wages as well as prices often have to fall – and it’s a fact of life that it’s very hard to cut nominal wages — there’s downward nominal wage rigidity. What this means is that in general economies don’t manage to have falling wages unless they also have mass unemployment, so that workers are desperate enough to accept those wage declines. See Estonia and Latvia, cases of.

Now, alert readers will have noticed that none of these arguments abruptly kicks in when the inflation rate goes from +0.1% to -0.1%. Even with low but positive inflation the zero lower bound may be binding; inflation that comes in lower than borrowers expected leaves them with a worse debt burden than they were counting on, even if the inflation is positive; and since relative wages are shifting around all the time, some nominal wages will have to fall even if the overall rate of inflation is a bit above zero. So the argument that deflation is a bad thing is also an argument saying that some economic problems get worse as inflation falls, and that too low an inflation rate may actually be economically damaging. That’s why the fact that inflation, while still positive, is below the Fed’s target is bad news; and it’s why respectable people like Olivier Blanchard(pdf) have suggested that a higher target, something like 4 percent inflation, might make sense.

And no, 4 percent inflation wouldn’t turn us into Zimbabwe. I remember when we had stable inflation of around 4 percent – and it was morning in America.

This one is just stupid...if the deflation is severe enough to require wage cuts most people would willingly renegotiate but thats never happened

The bottom line is Inflation is good for the people who print the money(the Fed),the people who get the new money FIRST after its printed(the banks) and the people who are first in line to spend that new money (Govt and big corporations)..it called money velocity
Its good for governments because they can sell bonds to people and create debt since they become more attractive than just saving cash.
Its good for lenders because they now have to charge interest and the terms will be long.
Its bad for people who save money and people at the bottom of the money supply chain.
Its bad for pensions and retirement funds because they MUST put that money into the stock market to beat inflation otherwise they wont be able to pay people who paid into them


What does HL think

 

[Cynic]

You underestimate the level of entitlement western citizens have....

Nobody is going to renegotiate wage cuts for anything. People are greedy

Stocks aren't the only asset class out there but falling prices whether in energy, commodities or real estate mean a lot of pressure on funds and even debtors as well...

The upside is speculative investors are weeded out. So yeah if you love saving and love autonomous yields....go deflation

But if you love trading on margin and appreciation....

 

[ⒶⓁⒾⒶⓈ]

You underestimate the level of entitlement western citizens have....

Nobody is going to renegotiate wage cuts for anything. People are greedy

Stocks aren't the only asset class out there but falling prices whether in energy, commodities or real estate mean a lot of pressure on funds and even debtors as well...

The upside is speculative investors are weeded out. So yeah if you love saving and love autonomous yields....go deflation

But if you love trading on margin and appreciation....

Yup i cant disagree with that...people take alot of shyt for granted and they have swallowed the myth of a benevolent state that feeds you when your hungry,gives you shelter when you need it and funds your retirement when you get old and pays your heaithcare

 

[Domingo Halliburton]

Ask Japan, I don't know.

 

[Broke Wave]

Why would you ask such a question without googling? If the real cost of goods is X and there is deflation, and the current cost of goods its Y, how could it be beneficial to the economy when X>Y? Do you realize deflation was one of the outcomes of the Great Depression that prolonged it so thoroughly? Think about it deeply, how was it positive for the economy during the Depression that the profit from selling goods reduced every year 10%?

 

[ⒶⓁⒾⒶⓈ]

Why would you ask such a question without googling? If the real cost of goods is X and there is deflation, and the current cost of goods its Y, how could it be beneficial to the economy when X>Y? Do you realize deflation was one of the outcomes of the Great Depression that prolonged it so thoroughly? Think about it deeply, how was it positive for the economy during the Depression that the profit from selling goods reduced every year 10%?

Think big picture nikka..I wasnt specifically asking about price deflation due to destruction of demand in an economic downturn...like in your great depression example prices had to drop because a)there had been previous inflation and b)The customer base had been obliterated so most people didnt have the money and c)monetary contraction by the fed was the driving force .

i was asking in more of a larger systemic sense...say the money supply is one million and the goods available are equal to that..if there is production of new goods added to what there was before then logically the prices would drop since now theres a million dollars chasing 2 million worth of goods and services.
In such a scenario why wouldnt the price of things fall yet the standard of living would go up.

 

[Domingo Halliburton]

Think big picture nikka..I wasnt specifically asking about price deflation due to destruction of demand in an economic downturn...like in your great depression example prices had to drop because a)there had been previous inflation and b)The customer base had been obliterated so most people didnt have the money and c)monetary contraction by the fed was the driving force .

i was asking in more of a larger systemic sense...say the money supply is one million and the goods available are equal to that..if there is production of new goods added to what there was before then logically the prices would drop since now theres a million dollars chasing 2 million worth of goods and services.
In such a scenario why wouldnt the price of things fall yet the standard of living would go up.

So why be in business? All i get are diminishing returns.

 

[ⒶⓁⒾⒶⓈ]

So why be in business? All i get are diminishing returns.

Not returns but diminishing currency receipts but since its worth more the profit is still in there the value isnt necessarily lost...however i do see your point how it would seem that way if the deflation was really high.

would it be that noticeable if it was minimal like say 1% per year..you start the year selling a product that costs $100 but at the end of the year its going for $99 and your markup is 10%.
So yes it would seem like you lost $1 of profit but your supplier also has to cut prices because your dollar is worth more so everyone across the board is accepting less.
in such a case the impact is mostly aesthetic ..right?

 

[Broke Wave]

Think big picture nikka..I wasnt specifically asking about price deflation due to destruction of demand in an economic downturn...like in your great depression example prices had to drop because a)there had been previous inflation and b)The customer base had been obliterated so most people didnt have the money and c)monetary contraction by the fed was the driving force .

i was asking in more of a larger systemic sense...say the money supply is one million and the goods available are equal to that..if there is production of new goods added to what there was before then logically the prices would drop since now theres a million dollars chasing 2 million worth of goods and services.

In such a scenario why wouldnt the price of things fall yet the standard of living would go up.

No offense breh but I really don't think you've done any real research on this topic, so I'm gonna try and break it down for you once again.


There is a true cost of goods. Every economist agrees on that. There is a cost associated with the production and sale of goods. That true cost is represented by X. If Y is the sale price of goods, and X>Y, it becomes unprofitable to invest as a whole, if this is the case for most things as it is during deflation. During deflation most businesses simply go out of business because there is not enough profit to sustain the business. Then there is also the lack of money changing hands which leads to a slowing in the velocity of money, which is also terrible for the economy.

Even classical economists like Hayek talked about the dangers of deflation. It's literally the economy drying up and dying.


Edit : As for your final scenario where prices must drop and 1 million dollars chasing 2 million dollars worth of goods, that scenario assumes :

1. Perfect competition between the providers of those goods and services

2. Rational choice by the purchasers of those goods and services

3. No cartels or monopolies

4. Equal access for the 1 million dollars to the 2 million dollars worth of services; perfect alignment of goods to services

It implies a multitude of scenarios which are and always have been impossible in the real world.

 

[ⒶⓁⒾⒶⓈ]

No offense breh but I really don't think you've done any real research on this topic, so I'm gonna try and break it down for you once again.


There is a true cost of goods. Every economist agrees on that. There is a cost associated with the production and sale of goods. That true cost is represented by X. If Y is the sale price of goods, and X>Y, it becomes unprofitable to invest as a whole, if this is the case for most things as it is during deflation. During deflation most businesses simply go out of business because there is not enough profit to sustain the business. Then there is also the lack of money changing hands which leads to a slowing in the velocity of money, which is also terrible for the economy.

Even classical economists like Hayek talked about the dangers of deflation. It's literally the economy drying up and dying.


Edit : As for your final scenario where prices must drop and 1 million dollars chasing 2 million dollars worth of goods, that scenario assumes :

1. Perfect competition between the providers of those goods and services

2. Rational choice by the purchasers of those goods and services

3. No cartels or monopolies

4. Equal access for the 1 million dollars to the 2 million dollars worth of services; perfect alignment of goods to services

It implies a multitude of scenarios which are and always have been impossible in the real world.

Thank you for your answer i see your point and i appreciate the courteous response
i see now money supply must ideally expand at the same rate as the value of the goods just for the sake of stability

 

[Broke Wave]

Thank you for your answer i see your point and i appreciate the courteous response
i see now money supply must ideally expand at the same rate as the value of the goods just for the sake of stability

No prob breh sorry if I came across as condescending, i got plenty respect for ya.

Since your more of a Libertarian, the proper argument here for you or the worldview here is that real value increases should be the reason why the money supply increases. I.e we find a natural resource or the economy grows so we increase the money supply to facilitate the movement of goods and money. Instead of increasing the money supply in order to spur investment or intice investment which Classical evonomists would say leads to bubbles.

 

[BaggerofTea]

The problem with deflation is the higher chance of a reduction in the standard of living.

 

[TLR Is Mental Poison]

Deflation has a short term stimulative effect but over the long term it's bad. Makes debts harder to pay off and kills employment prospects. A little inflation is ideal. Drives consumption and makes debt manageable

 

[714562]

Ask Japan, I don't know.

/thread.

I used to sit down and type out long posts explaining basic economics to people. I don't have the patience anymore.

 

[hashmander]

thanks for taking a shot at krugman's rational explanation very early in your post so i would know that nonsense was ahead. since i did read your first rebuttal, i might as well say something quick.

"Total bullshyt..Nobody spends LESS when their cash buys MORE..its actually what stores count on when they have sales like on Black friday..the prices are slashed in half and people spend more..even when you travel to countries with weak currency people buy tons of jewelry and luxury products they couldnt afford at home."

it's not total bullshyt. black friday is a once a year EVENT, not a "you know that tv is $100 now, but next week it'll be $95 and then when you go back next week you say man i can hold off until next week when it will be even cheaper" continuous event.