Here is another factor you might consider. What happens to government finances during deflation ?
Well, deflation means falling prices. Prices sponsor wages. Falling prices means falling wages. The large majority of government tax income is a tax on wages, or a tax on consumption. Both of these go down.
Now this wouldn't be so bad, except ... Governments loan money both to fund expenditures and to pay interest on their old loans. Inflation effectively means they can spend 2% of the total amount of their old loans "for free" (by loaning it) (they key thing to realise here is that doing so does not increase the burden on their income, it was 2% of taxes, and it still is). They get this double, since they get it both on the income side, and on the new loans.
Deflation means the opposite. Tax revenues go down, interest payments go up. Unless they want to drastically cut spending, that means they have to use pretty much all of their yearly new loans just to pay back interest.
The problem is also the difference between years :
year 1 : 2% inflation -> government can spend 104% of it's budget
year 2 : 2% deflation -> government can spend 96% of it's budget
So 2% inflation necessitates a 10% cut in loan-based spending, which is about half of government spending. So a seemingly tiny amount of deflation requires a 5% spending cut by the government at minimum.
But that is not all. Government taxes have always been effectively a percentage of GDP. Governments have historically been unable to raise tax income. Deflation will lead to a fall in GDP, historically of at least double the amount of the deflation, sometimes much more.
So the other half of government income goes down by ~4% (very, very optimistically).
Now because falling prices and wages mean that the stress on social services increases (for obvious reasons), government expenditures go up, usually again by much more than the amount of deflation you see. It leads to pretty much every part of social security going up. Unemployment, for obvious reasons. But also pensions (people will go on a pension earlier because there's no work) and even illness and disability (well we all know why).
So 2% deflation effectively means the government has to cut spending by ~10%, WHILE social security expenses go up.
The government controls central banks. QE, ostensibly to "cause inflation" hasn't caused inflation (rather the opposite). So in order to absorb this financial shock, the U.S. government has instead decided to finance it's operations by direct money printing, by lending from the money printer. They ran a risk by lending the way the constitution said they should lend, so they "cheated". Now we see the EU (and dozens of other governments, including China and lots of smaller ones) doing the same.
This is also an extremely important factor in central bank behaviour, as they are controlled by governments, and it is the reason that we have not seen the end of QE (except maybe in America, but to be honest, I think there is a non-negligeable chance the US will lower rates instead of raising them, in 6 months).
I would believe these types of pop-economics articles a lot more if they could actually find and example of a deflationary spiral causing a long term depression.
Prices for many things already do decrease regularly. Every time I purchase a new computer I'm faced with the knowledge that, in 6 months time, a better, cheaper (or at least better value) model will come out. This myth that consumers will endlessly postpone purchases in the face of falling prices ignores the fact that a lot of ourchases cannot be postponed indefinitely.
And even if consumers postpone spending, it means they are saving. Which builds the investment base necessary for growth.
The point is that a currency cannot deflate to an infinite value, but it can be inflated to a zero value. There has been plenty examples of the latter, but zero examples of the former.
The real reason for the FUD around deflation is that it's not good for central banks. They, and their supporters are just talking their book. Fair enough, but like high or low currency values relative to other currencies, there are always winners and losers with deflation and inflation. One side is not inherently more evil than the other.
What would be really great is constant value of currencies over time. That would be mildly deflationary as technology increases production efficiency, and it would ward off a lot of bad investment decisions which excarbate the boom/bust cycle.
Congratulations for confusing micro and macroeconomics.
What happens to the price of a single good over the lifetime of that good is not a useful lesson in what happens as a result of broad, economy-wide deflation.
Frankly, the issue with purchase postponement isn't the biggest problem (although it's certainly a concern, as is hoarding). In my mind the biggest problem is wages being inelastic downward. As all prices deflate, income for employers goes down (or thought of another way, the value of money goes up which makes each employee more expensive). That forces two options: fire employees, or cut salaries. The latter is very difficult. So instead you see the former.
So you get broad based increases in unemployment. That leads to reduced consumer spending, which forces prices down even further, and so on.
As for real life examples, perhaps the Great Depression qualifies?
Salary is somewhat elastic if nothing else fire and rehighering works. The real issue is debt is not elastic. So it becomes an unbound risk durring deflation.
Yup, also a great point. In the small, anyone holding a mortgage during a deflationary spiral is steadily squeezed. In the large you'll see businesses and government penalized for taking out loans to invest in capex, market expansion, etc, and existing loans become steadily more and more expensive.
Firing and rehiring destroys morale. A perfectly stable and functional company can destroy itself by trying something like this. Employees will start to realize that no matter what they do they're getting shafted and their productivity will drop. Some will seek employment elsewhere, but those are often the ones you want to keep. You'll be stuck with mediocre and bad employees. When you try to fill in positions with new employees, they see a dysfunctional shop and start looking for the exit.
That greatly depends on overall economic conditions. In many places unemployment approaches 50% at which point wages become far more elastic.
PS: Talking about economics goes beyond software developers or illigal day labiors in the US. It includes peasants in the middle ages, factory workers in ‘Soviet Russia’ and even gally slaves on a Roman warship.
For example if prices were to start falling I'm going to start putting off the following purchases:
1. New computer
2. New TV
3. New stereo
4. Toilet paper
5. Food
6. Gasoline
7. Rent
8. A new-to-me used pickup truck
9. Clothing
10. Several dozen other things which I can't really wait for but which I will pretend I could for the sake of making a point
EDIT: Yes guys, I do realize that it's a marginal effect and that people aren't going to STOP buying TP. The point I'm trying to make, though, is that the "deflationary spiral" told as a story isn't entirely accurate either. People don't STOP buying things, they simply reduce their consumption ever-so-slightly and if EVERYONE does that, it cuts growth.
My point, though, is that there are a whole bunch of things which aren't really elastic or which already have falling prices but don't cause general malaise. Yes TV purchases do get put off for the next best model, but eventually people do buy TVs and the industry has models that work even given this reality.
In my personal opinion it's not that deflation itself is bad it's that it takes a long time for the deflation to work through the economy and for expectations to readjust. And given the maniacally long maturity of mortgages it takes half a lifetime to reset expectations and it's simply unrealistic.
Something tells me the average HN commenter living in Silicon Valley making six figures doesn't represent the average American.
While there are certainly fixed costs to being alive (like toilet paper), most people do cut back and this behavior is observed. And when it gets very bad, even those "fixed costs" start being cut - cheaper toilet paper, moving in with mom and dad, etc. Not because they want to save now to buy more TP later, but because when discretionary spending falls, people lose jobs, which further reduces discretionary spending, and more people lose jobs, wages fall (because of the surplus of labor), and eventually it all starts affecting you.
The gap between getting a new phone every 18 months vs 2 years is fewer purchases over the long term. (~1 fewer phones every 8 years.)
The same thing works for durable goods not just improving goods like PC's. Consider if you wait 1 month when buying a chair it's 1 month newer so you’re likely to wait an extra month before replacing it. Multiplied by 100 million a people and even just 1 month becomes significantly lower consumption.
'This' starts a vicious cycle where fewer durable goods are produced so make fewer goods and thus have less money which reduces consumption of durable goods and non-durable goods. Using the TP example if your broke you can slightly cut back on TP use.
Because by the time people are looking at cutting TP costs, it's because their household income is down probably substantially, or they're afraid it will be in the near future.
Deflation makes employees more expensive even as demand slows. Even in some kind of ideal economy without downward nominal wage rigidity (which leads to people getting outright fired instead(, their wages get cut. But that can end up being almost as bad: almost everyone has mortgages, student loan debt, car notes, or credit card debt, and suddenly that debt is consuming more of their annual income, forcing them to cut back.
It's a problem with aggregate behavior and feedback loops. As long as you're zoomed in on the individual level, it doesn't make sense.
This is exactly what happened during the 2008 recession. Once triggered (in that case by the housing bubble, subprime mortgages, etc) it spreads through the economy and it's hard to break out of - we still haven't really done so. The Fed is still failing to meet the target inflation rate despite extraordinary monetary measures.
If you better represent the average American and what you would actually do in a deflationary economy, yes. Most Americans even in boom times don't just buy new flatscreens and computers on a whim, because they can't afford to.
But since the average American (or, well, citizen of any country) has been consistently observed over centuries not to behave in the manner described by that rebuttal, it doesn't matter. To be fair, the article is simplistic and almost encourages that kind of rebuttal. Your edit essentially addresses that and I don't disagree with it - anyone who is saying that spending "stops" is clearly being silly. It begins as a marginal effect that worsens over time, and TV purchases are the first to go while TP and rent takes a while longer.
It's a marginal effect. The point isn't that you as an individual are going to put off buying all those things, the point is that buyers in aggregate will put off buying those things (or perhaps, immediately shift to a new, lower price that they are willing to pay for them).
"So you get broad based increases in unemployment." I know it sucks to go from making 70k to making 60k but in a world where prices are going lower someone will still be able to have a similar quality of live at 60k. What kind of economic "Theory" would assume that people would rather starve to death than take a salary cut at another job?
Except they won't keep the same quality of life, because their mortgage payments are not going to go down, even though the value of their house will. Renters won't get a break, either, because their landlords have to pay their mortgage with the rent money. Deflation equals disaster for our economy.
Can you point out what they did in the EU with this?
GP is referring to the idea that, under deflation, your debt grows in real value while retaining its nominal value, but the nominal value of your income will be decreasing.
If I take out a $100k mortgage and can put 10% of my salary to it each year, say I make $100k as well for easy math. I'll pay it off in 10 years if my nominal salary remains the same. (I'm ignoring the interest on the loan, it changes the timeline but not the fundamentals.)
If we have inflation, my salary will likely go up over time so each year I'll be spending the same nominal ($10k) amount, but its a smaller percentage of my income and a lower real amount.
If we have deflation, my salary will likely go down over time (assuming its consistent it'd likely be negotiated into employment contracts, like cost of living adjustments are now for inflation). So each year I have to pay the same nominal amount ($10k), but its an increasing real amount and a larger percentage of my income each year.
But how can you ignore the interest? If the interest drops to along with your salary, you won't have to pay the same nominal amount each year - which is exactly what's been happening in the EU.
For the calculations I ignored it. The discussion was inflation/deflation. Putting it in only changes my example by adding more arithmetic (calculating interest paid per period), but doesn't offer any insight into paying debts under inflation or deflation. EDIT: For the sake of this discussion pretend that the $100k paid includes the interest if you really want it to be there.
So in the EU interest rates are pegged to salary? Can it go negative? Because that's what needs to happen for loans under deflation to make sense. Your effective interest rate in a deflationary economy is deflation rate + interest rate. If you take out a 2% loan with 2% deflation your effectively paying 4% rates. The higher the deflation, the worse your rates become.
Now, if interest can go negative, then borrowing under deflation makes sense. But lending doesn't. Because the lender would be handing over money that would be more valuable kept under a mattress than loaned out at a negative interest rate.
Your loans would become more expensive, certainly. It's still not correct to say that the "mortgage payments are not going to go down", which is what I replied to. They would - to a certain point, at least.
With deflation, interest rates might be low [0], but they aren't likely to decline over time (unless the rate of deflation is increasing), whereas salaries will decline over time. So the interest rate won't drop along with your salary. Your salary will drop, and while the interest rate might (with the caveat noted previously) be low, its not likely to go down over time (if it does do so constantly due directly to deflation, that means your salary is likely not only declining, but doing so at an accelerating rate), your salary will be dropping both in nominal terms and proportional to the interest payments on your debt.
[0] but probably not; availability of credit will be low because risk-free instruments -- cash -- with a positive expected real rate of return exist, so there is little incentive to lend. Low credit availability doesn't make low interest particularly likely (it does make high interest rate volatility more likely, though.)
This is largely an intentional policy outcome, Freddie Mac and Fannie Mae were both intended to make mortgages cheaper (I think an interesting thing is that this doesn't necessarily make buying a house cheaper). It's increased since the recent crisis, part of the US response was to make money even cheaper (which favors locking in the rate).
> Are most mortgages in the US not pegged to some reference rate like Euribor?
There are both fixed and variable rate mortgages in the US, but variable rate mortgages usually have a minimum interest rate regardless of how low the index it is pegged to goes.
The renter will get a break actually because newly constructed apartments are cheaper than the older apartments so he can move to a newer/nicer/cheaper place.
Deflation is a big problem for highly leveraged businesses and individuals. But for savers deflation is not a disaster at all.
The wage issue isn’t that people are choosing unemployment over pay cuts. It’s that companies will generally opt for a hiring freeze over a pay cut. Most places aren’t going to cut the salary of every team member by $10k so they can hire a new person, they’re going to put off hiring a new person and try to make do with what they have.
Depending on your definition of temporary - as Keynes said “in the long run we’re all dead.” Eventually things will work themselves out, but how many years of self-imposed pain will it take? Employees are going to be much less likely to quit in a tight job market, especially if they’d be paid less at their new job (since, per your example, new hires would be paid less). If you’re waiting for employees to die (or retire, and they’re more likely to retire late in a tight job market), you’re talking about a price correction that happens once every several decades.
Totally right about downward wage pressure. The worst effect of all of deflation is that it increases the value of debt. So every company and household with debt will see their debt grow in relation to their earning potential. At any level of deflation, suddenly it's a terrible idea to ever borrow any money, which means no new housing, no new factories, no new cars.
Our economy relies on inflation to make it work. A lot of the persistent sluggishness of the current economy is due to the remarkably low inflation, meaning that all the debt people built up prior to the crisis in 2008 is still hanging around and will be for years to come. People are stuck under student loans and underwater mortgages, and unable to invest in their own future. With stagnant wages, digging out from under the debt will take a long time, and until that happens, the economy will continue to trudge along.
>At any level of deflation, suddenly it's a terrible idea to ever borrow any money, which means no new housing, no new factories, no new cars.
Why is this such a horrible thing though? Obviously, less lending is bad for the banks, but I fail to see how it would be bad for the consumer if they actually saved up money and paid cash for a car. Although I do understand why lending is important for starting a business; it would be hard in many markets to save enough capital to get off the ground. I'm talking about small stuff, like housing, cars, TVs.
I have little to no economics knowledge, but it does seem to me that this pervasive, cultural thinking that we need this now is the source of many problems. I know some retailers like Ford even attempted to curb the practice of buying on credit, but ultimately caved to pressure from customers wanting to live above their means.
So, can you explain, in a way that doesn't involve trickle-down economics, how borrowing money is a net gain for consumers? (I'm genuinely not being snarky here, just curious.)
Not "trickle down" but circularity: if you borrow money you get to bring forward consumption and the workers making your goods get paid earlier as well. Enabling them and the factory to pay off their loans. Ford uniquely went in the other direction of trying to push money round the economy by raising wages; that would be great but isn't happening at the moment.
Getting credit solves cashflow problems. If you're spending $10/week at the laundry, buying a $250 washing machine pays for itself very quickly. Except you can't save $250 because you keep needing to do laundry.
> Obviously, less lending is bad for the banks, but I fail to see how it would be bad for the consumer
Its not generally bad for consumers qua consumers (though there are ways that it can be, because it prevents large purchases that save in the long term), but its bad for the same people that are consumers as laborers because less borrowing by business and less investment in business (both effects of deflation) mean less paid work available, and less utility produced regardless of the distribution.
> So, can you explain, in a way that doesn't involve trickle-down economics, how borrowing money is a net gain for consumers?
It enables you to do things like buy a car to go to work at a job that pays well before you have amassed sufficient retained income from that job to pay for the car. Without the ability to borrow money, you may not be able to take (or, if you take it, keep) the job because you can't get to it.
The other responses are good as well. Key thing is that you're right that credit gets used for lots of wasteful things in our traditional consumer economy. Buying a television on credit is not a wise financial decision. However, purchases that improve efficiency or allow new kinds of labor can be good uses of credit.
If you can make $1000 more per month at a job that's inaccessible to you via transit, but you don't have $10,000 to buy a car, it would be worth it to get a loan with a $300/month payment, and say another $300/month worth of car-related expenses to net out $400/month income that can be used for saving up for that TV or what-have-you.
In terms of items that retain their value, like houses, apartment buildings, factories... no one would be wise to invest in those items in a deflationary environment because if you're interested in growing your net worth, you'd be better off keeping your money in the bank.
The increase of value of debt is the big problem, which is in the original op because banks get stuck with a lot of bad debt and many would fail.
While this is unfortunate, I see it as garbage collection for the economy. Once completed, there are new resources ready to go for the next phase of growth. If there is a deleveraging and saving phase, that provides the capital base for the next growth event. Keeping old processes running forever out of fear of a reboot is worse for the long term. Incentivising bad decisions during boom times with a Greenspan put creates moral hazard.
> What happens to the price of a single good over the lifetime of that good is not a useful lesson in what happens as a result of broad, economy-wide deflation.
True. But why then the article is titled "Why Falling Prices Are Actually a Really Bad Thing" and not "Why Deflation Is Actually a Really Bad Thing"?
I can imagine economy where you don't have deflation, prices of all products fall, and the economy is actually growing, because people produce and buy completely new products they could not afford before.
You're assuming macro-economics is concrete, peer reviewed science. Lot's of people disagree. The great depression lasted way longer than it should have because of the anti-deflationary measures put into place, like slaughtering millions of livestock to prop up commodity prices while starving, out of work people looked on in horror. If prices had been allowed to fall, wage rates could have come down to a price where hiring made sense.
Read Rothbard's "America's Great Depression" for a good overview of the case against macro-economics and deflationary interventionism.
Well, yes. But those who insist that deflation is terrible are hardly going to agree that the depression was made worse by all the ham fisted attempts to fix it.
> But those who insist that deflation is terrible are hardly going to agree that the depression was made worse by all the ham fisted attempts to fix it.
Pretty much everyone, everywhere on the political spectrum, irrespective of what they think about deflation, agrees that the depression was made worse by "all the ham fisted attempts to fix it".
There's some disagreement about which of the particular policy responses fall into the category of "ham fisted attempts", sure, but the Fed's initial deflationary policy is one of the most widely accepted (I mean, its a point on which Keynesians and Hayek agree.)
Hoarding is Keynesian fantasy, and can only exist if people stuff gold or cash in their mattress. Paying down debt or saving is a healthy base for a a economy to grow from.
Japan suffered a deflationary event, but has not had a deflationary spiral. The problems for japan have been exacerbated by following the madness of Keynesian policy prescription, to the point where they have increased their debt to 2x GDP over two decades, redirecting their resources towards building bridges to nowhere, instead of allowing entrepreneurs and innovators to allocate capital.
All while they have their demographic death spiral in place.
Plenty of other Asian countries have suffered large setbacks, particularly during the Asian financial crisis, but by avoiding the same path that Japan slavishly followed, have rebounded with strong growth ever since.
What is necessary is a short sharp correction, which will include bad debts and higher unemployment. This will be bad. This is still better than two decades of a zombie economy where an entire generation don't experience a growing economy and the benefits that entails.
The other reason for so much FUD is that the modern economy is entirely based on debt -- personal, corporate, and (especially) government. Therefore central banks needs to keep the bubble growing perpetually so that the debt can be serviced. But it can't continue forever...
Historically, debt neither increases forever nor collapses catastrophically. Individual sectors collapse, and new ones develop. In the early modern period, governments would simply refuse to repay their debts. Nowadays we have things like stock market crashes and mortgage crises.
We'll really be able to find out in the next 20 years. If it can survive the retirement of the boomer generation and the stagnation of China's economy, it will prove itself as almost entirely durable.
I think the true test of this system comes sometime in the next century when human population peaks. Expansionist policies assume growth (growing population) and don't handle shrinking or stable populations well.
The usual example of a deflation spiral is the 29's crisis. Altough it's not helped by the fact that most developed countries got into a crisis by about the same time, with several kinds of monetary policies, from US deflation to Germany iperinflation, with everything in the middle.
The only point of the article that makes any sense is #5. The author does even ignore the keynesian theory of sticky salaries pricing people out of the labor market (however true it is). It's an almost thought-free article.
I don't agree that a reduction in growth (recession or depression) is a deflationary spiral. Yes, there was deflation, but it didn't go into an uncontrolled tailspin.
The problem was the old canard of irrational exuberance and excessive bad debt. Which must be cleared by letting bad choices come home and businesses go broke so that resources can be reallocated. The measures to 'fight' it, like confiscating and refining the price of gold, and other measures, most likely prolonged it.
> I would believe these types of pop-economics articles a lot more if they could actually find and example of a deflationary spiral causing a long term depression.
The obvious example would be bitcoin. No one ever spends their BTC, because of the fear that something that costs 1 BTC today will cost only 0.5 BTC tomorrow.
I don't care whether bitcoin goes up or down tomorrow; I only care whether it goes up or down between the time I buy the bitcoin and the time I send it to someone. That is: bitcoin is a medium of exchange, not a store of value.
> I would believe these types of pop-economics articles a lot more if they could actually find and example of a deflationary spiral causing a long term depression.
The US depression of the mid-1800s and the UK depression starting in the late 1920s are usually cited as examples, and the Fed's deflationary policy after the 1929 crash in the US is often cited -- even by libertarian economists -- as a contributor to the US's Great Depression.
> Prices for many things already do decrease regularly. Every time I purchase a new computer I'm faced with the knowledge that, in 6 months time, a better, cheaper (or at least better value) model will come out. This myth that consumers will endlessly postpone purchases in the face of falling prices ignores the fact that a lot of ourchases cannot be postponed indefinitely.
Postponing consumption isn't really the issue, reducing investment is. If holding on to cash has positive expected utility, there is less incentive to to use funds that are beyond what is desired for immediate consumption and invest them in productive assets.
Also, see the comments by other posters on debt in deflation.
I agree on this: debt in deflation is rough. Maybe the lesson is that people/governments should stay out of debt, not that deflation is the boogeyman. That'd certainly be more anti-fragile.
"When shoppers see persistent price declines, they hold out on buying things." and yet I keep buying computers... I don't think I agree with this statement (unless there is massive deflation).
Of course not, but that's the fallacy they like to use to convince people that deflation is a bad thing. It's only a problem for those in debt.
They want to inflate away those debts and this goes contrary to that. There's a reason why a Coke no longer costs a nickel and these guys will tell you it's a good thing when it costs a $1000. Never mind that you will essentially be earning the same wages when that comes about. You saw that just a few years ago in CA when oil was close to $150 and people were quitting their jobs because of the cost of the commute.
Bloomberg, like the Economist and FT represent the status quo. They print whatever propaganda they're instructed to by the state. When you hear about the CIA and MI6 having agents working for news organziation, these guys are at the top of the list. Ooooooh 'conspiracy'... that has been documented a thousand times over many decades.
This game has been played out many times before over the past century and then some. It's a tiresome old debate.
Hmm, I’ve heard multiple people talk about jumping in during the housing bubble because they thought if they didn’t buy right then the price would keep going up. And I’d say that there’s pretty good evidence that people will buy things sooner if they think that waiting would entail a price increase (which is why sales are so effective).
So if people are expecting the price to rise, they’re more likely to make a purchase, and if they aren’t expecting the price to rise they’re less likely to. I don’t think it’s too much of a jump to think that if the price of something is going to go down next week, people are more likely to hold off on purchases.
Though I imagine a bigger issue is the need for investment. When there’s stagnation firms tend to sit on a lot of cash, because they believe that money slowly losing value (low inflation) or even gaining value (deflation) is preferable to the few and possibly risky investment opportunities they see. This causes credit and investments to dry up. This hording behavior, as well as the wage inflexibility mentioned above, ends up being a major drag on the economy. On the other hand, with a decent rate of inflation firms are going to be making sure that their money is working, because if it’s just sitting there it’s going to be losing money year after year.
This depends on the assumption that people hold out on buying non-urgent goods in the belief that prices will continue to fall - leading prices to fall further. But in the current economic climate, almost nobody is buying non-urgent goods anyway. (Yet we have seen consistent inflation)
The current 'deflation' is primarily led by a sharp downtick in oil prices that won't be repeated - there's no immediate suggestion that prices will continue to fall.
With years of consistent inflation above wage increases compounding to give high prices, any deflation is just as likely to be seen by consumers as a relief from high prices - a good opportunity for people to spend the money they've been holding onto.
This is, in fact, credited in part to low consumer demand. Slack demand generally leads to job cuts, which leads to even slacker demand. That's the spiral they talk about.
> The current 'deflation' is primarily led by a sharp downtick in oil prices that won't be repeated - there's no immediate suggestion that prices will continue to fall.
This is why economists talk about core inflation, to remove as much as possible the influence of volatile commodities such as oil. Inflation will remain very low even with oil prices go up. Since 2008, inflation has actually at times been negative (i.e., deflation.)
People who think deflation is a good thing need only look at the Great Depression, Japan, the present Eurozone, and the 2008 recession. Just because high inflation is bad doesn't mean that deflation is good.
In addition, this incredibly low inflation happened in an environment with rock bottom interest rates and the fed basically printing money because you can't cut interest rates below 0.
Those moves were supposed to create hyper-inflation and be the reason for You to Buy Gold Now. Actually they barely kept us out of deflation.
I can only assume there is something that for most people just feels absolutely, intuitively true about more money = inflation = bad.
Since 2008, the Fed has increased the money supply by a factor of 5, inflation has been rock-bottom or nonexistent, real interest rates on Treasuries are negative, but hyperinflation is even now just around the corner. No matter how often the prediction is wrong, new ones are made and the failure of the appearance of hyperinflation on schedule is ignored or handwaved away with vague declarations about how the government is conspiring to hide inflation, or the Fed is using some kind of temporary monetary/balance-sheet magic trick, or as soon as the economy starts up again we're all doomed.
What I have never understood is why computer-technical types so often participate in this kind of thinking when we're usually pretty good on other sciences. To be sure, economics is a field with more cranks than usual - paid cranks, even-, but there are working, well-tested mainstream models that churn out accurate prediction after prediction and are largely ignored in favor of whatever the WSJ or Ron Paul says.
If I knew the price of everything I buy would be 1%-2% lower next quarter, it wouldn't affect my spending behavior at all. I have, in fact, known gasoline was dropping by a lot more than that for the past two quarters, and I've not put off even casual consumption. Marginal deflation isn't enough to change my spending habits, and my mortgage and utilities are pretty fixed.
This is just stupid IMO, but I'm not any economist.
You worked X time: got 1000€
Day 1: You can buy 1000 candies at 1€ each.
Day 2: Inflation, prices +100%: you can only buy 500 at 2€ each
This means that you just lost 500 candies or 500€. This means that what you worked 50% for nothing! You just lost 50% of your money, just like that! So who has my money? not me of course.
Let's think about deflation:
Day 1: You can buy 1000 candies at 1€ each.
Day 2: Deflation, prices -50%: you can buy 2000 at 0.5€ each
Now if you would only buy 1000 candies you would still have 500€ to spend on other stuff. You might save it or buy other stuff.
Let's think about none of them:
Day 1: You can buy 1000 candies at 1€ each.
Day 2: You can buy 1000 candies at 1€ each.
Today is the same as yesterday, I've worked X hours I buy Y candies, everyday. Why should it change? I know many factors change the price but why?
Well, if you can see inflation is good for the banks. They inject more money in order to make your money less valuable. So in other words you lose money (your hard earned money) while they are just printing easy money! So who is the dumb one? We can do nothing.
Again why deflation is bad?
I would buy to eat even if inflated or deflated, maybe less and more, depending by inflation or deflation. I might even buy higher quality meals.
If I need a new phone do you wait until the prices fall to 100€? No some people still buy them at 1000€. Some not, but is not inflation that will make that change. For example the same people that don't wait a few months for the price of Iphone to fall from 1000€ to 300€ will not wait for deflation to decrease the price from 1000€ to 800€. He just want the Iphone and it will buy it.
Not an economist either. But the way I see it (ignoring food and other things you can't live without)
Inflation
Day 1: you can buy 1000 candies, and you suspect tomorrow you will only be able to buy 500, so you buy 1000 candies and store them/eat them. You 'inject' money into the economy, give the government tax money, etc.
Deflation:
Day 1: you can buy 1000 candies, but suspect that tomorrow you can buy 2000 candies, you don't buy
Day 2: you can buy 2000 candies, but suspect that tomorrow you can buy 3000, you don't buy, or buy just enough for your sweet tooth today (lets say 100)
Day 3: you can buy 3000 candies, but again... etc etc
Again, this is based on needs and wants. If you have 1000 euros. If your phone breaks and you need one to work, you will buy today, no matter if we are in deflation or inflation, but if your old one still works, you may very well buy it today (in case of inflation, since it will will cost more of those 1000 euros tomorrow, or you will wait if you are in deflation since it will cost less of those 1000 euros.
Of course, if you need rice to not starve, it doesn't matter! And for average folks, deflation tends to be good since most of expenses are from needs and not wants but this causes issues to business and (possibly) to the economy as well.
If you want a smaller example, I've personally waited for weeks and months to import some goods due to the falling EUR->USD rate, saving me between 5-6% of the cost, so I don't see why others won't do the same if they expect the costs to be less in the future.
What if you really want some candy? I think that's what the theory misses. You can only hold out for so long with certain things. If you are hungry, eventually you'll have to buy something to eat.
An extreme example: I have bought a lot of computers in my life, even though I knew their value would be close to zero within two years.
And maybe there are also benefits if people only buy the stuff they actually need.
What qualifies as "really need," and how much of the modern economy is involved in producing that stuff?
If people only buy the stuff they actually need, we on HN would all be out of jobs tomorrow. Computers, smartphones, nice cars, high-end food, good booze, entertaining movies, all of this goes away. I don't want to live in that world, personally.
So you need those things, an ongoing deflation is only a factor in your evaluation. It doesn't mean you'll never buy them. You will think "is it worth for me to hold out a little longer before buying" and there will be a threshold where you think "no" and you buy.
You could just as well argue that inflation leads to a spiral of death because people won't be able to afford things. Therefore they won't buy things, nobody will produce things, and there will be no things. Sounds just as logical.
Well "really need" is in the eye of the beholder. Except for staying alive. Do you honestly believe because of Deflation people would only buy the barest minimum of things to keep them alive?
And when would you buy a sleeping bag. Maybe it is Minus 5 degrees outside but you can survive that. After all, tomorrow the sleeping back will be 1$ less tomorrow, and after all you'll only die if it's minus 10 degrees?
I'm not talking about deflation. I'm just addressing your idea that "maybe there are also benefits if people only buy the stuff they actually need." I don't think that this would be a good thing at all. I make no comment about what might cause this to happen, only that it's not a desirable outcome.
I said I don't need those things, but I want them, and I think a world where people only buy what they need is a world where those things don't exist.
If I misinterpreted what you meant by "stuff you actually need" then maybe you should explain what you meant, because I don't see how else it could go.
You're 100% right. If prices fall faster than wages, it means that gradually people have more real income and you'd expect that their consumption would increase, not decrease. While in specific circumstances some purchases might be postponed temporarily due to falling prices, it's extremely dubious that the end result would be less consumption in the economy.
You're wrong. Deflation is basic economics. If you take a college macroeconomics course it will be covered.
It's hard to summarize in a way that will convince you in an internet debate. Sort of like trying to argue electromagnetism with someone that never learned about Maxwell's equations. An econ textbook would be ideal, but another place to start would be: http://en.wikipedia.org/wiki/Deflation
(By the way, no offense intended with that. It's hard for anyone to comment on a scientific subject if they didn't learn the background, even super smart folks.)
There are several things wrong with your story, but the first one that jumps out is that some prices are more sticky than others. For example, wages are likely to not go down much, instead firms tend to cut employment. There's a lot of evidence for this: http://en.wikipedia.org/wiki/Nominal_rigidity. Another big factor is the effect of debts, which are not reduced: http://en.wikipedia.org/wiki/Debt_deflation
Inflation is good for borrowers, employers and sellers. Deflation is good for lenders, employees and buyers.
Borrowing - Inflation: I borrow $1000.00 today at 3% with an inflation rate of 2% (per year). At the end of this year I pay the loan back in full at $1030.00. I have spent a larger nominal value, however the real value of the loan is now $1030.00 * 0.98 = $1009.40. Meaning my effective interest rate was around 1%.
Borrowing - Deflation: Let's take the same numbers, but now it's 2% deflation. I pay back the loan, $1030.00 nominal value. The real value is $1030.00 * 1.02 = $1050.60. My effective interest rate is around 5%.
Salary - Inflation: I am paid $100,000 this year for my work, inflation rate of 2%. Without a pay raise my nominal salary remains the same next year, but my real salary becomes $98,000. This is a pro for employers, I am a cheaper employee. It's a con for me, my time is worth less.
Salary - Deflation: I am paid $100,000 this year for my work, deflation rate of 2%. Without a pay raise my nominal salary remains the same next year, but my real salary becomes $102,000. This is the reverse. I cost my employer more, but without changing nominal salaries my time has become more valuable.
Purchasing - Inflation: You want a widget worth $1000.00 today and face 2% inflation. If you purchase it at the start of the year, ignoring depreciation on the widget, it's worth $1020.00 at the end of the year. So if you resell it at that point you've made 2% (nominal), though the real value is the same.
Purchasing - Deflation: Using the same widget, price and 2% deflation. If you purchase it at the start of the year for $1000.00, and sell at the end for $980.00 you end with the same real value, but you've lost 2% of the nominal value. Barring a need to purchase an item within a particular time, it makes sense for purchasers to delay purchasing as long as possible. On the other hand, vendors want to sell as early as possible because the nominal value of their goods are decreasing (and this ignores other costs of holding inventory).
Maybe it's me (I'm sure it is - I'm no ecomomist), but a basic income seems like a perfect counter to deflation:
1. It seems like it should increase consumption as everyone would simply have more money to spend. Even if things are cheaper (and seem to be getting cheaper), you now have a new stream of income that, for some people, will burn holes in pockets and beg to be spent.
2. It would allow some employees in the labor market to "opt-out" (as the basic income supplants the "need" for a minimal wage job) and decrease the surplus labor pool. This would seem to require wage growth as employers now need to make the job proposition more compelling. Maybe they would even treat their employees better. Bonus.
3. "printing money" to pay for (or maybe just a portion of) the basic income seems like it should be a nice inflationary counter to the natural deflationary pressures.
I'm sure there are other pros and some cons of this approach, but those seem like good starting points.
I'm not an economist either, but applying textbook theory from school, it could help. A lot depends on the size, and making sure it isn't too big to discourage employment. http://en.wikipedia.org/wiki/Basic_income would be a demand side stimulus, with money going to the folks most likely to spend by taxing the folks most likely to save (you wouldn't want to do it by "printing money"). That particular effect would point in the direction of increased GDP (assuming we start from a deflationary trap with inadequate demand and large private debt overhang). However the risk would be too much employment lost, which points in the direction of decreased GDP.
A safer way to do the same thing would be to just spend government money on things like building infrastructure. In current conditions, that translates into increased GDP without the reduced employment risk. Similarly reduced taxes on lower incomes would be less risky but work through the same means.
(This isn't addressing whether basic income would be morally good or bad. Just the macro effects.)
> Hasn't this shown to have been un-true in the last 5 years?
Strictly speaking, no.
> Higher profits has not meant more money going around to workers.
That doesn't mean that lower profits don't reduce the maximum that can be distributed to workers, however. (The fact that the actual amount distributed hasn't historically increased when the maximum has is a different issue.)
I wouldn't hold off on a car or housing - to assume that is ignorant - though with prices going down I would likely purchase a new vehicle much sooner than I otherwise would have.
No it's not. Millions of PC's are sold each quarter, even though they cost as much as a TV and they get cheaper all the time. When you need it, you need it. You might wait a couple of months, but at the end of the day you have to pull the trigger based on need. It's called marginal utility. When you determine that the usefulness of a good (to you) outweighs the usefulness of the cash that good would displace, you buy it.
Aside from the theory that people are going to stop buying goods because of expectations that they will get cheaper, I thought the price of consumer products were lowering because of cheaper energy, which would decrease COGS and improve margins/prices, not affect revenue?
- if you expect to get a 1% pay increase every year, is it reasonable to take out a mortgage at 3% and pay $X/mo for 25 years? Yes, and at the end of the term it will be a smaller fraction of your expenditure. And if your house goes up in value by 1% you're benefiting there as well.
- if you expect to get a 1% pay cut every year, is it reasonable to take out a mortgage at 1% and pay $X/mo for 25 years? No, that's going to be a disaster as it gradually squeezes you, unless you carefully refi regularly. And if the house goes down in value by 1% a year, that's even worse. Construction industry collapses as a result.
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[ 3.0 ms ] story [ 168 ms ] threadWell, deflation means falling prices. Prices sponsor wages. Falling prices means falling wages. The large majority of government tax income is a tax on wages, or a tax on consumption. Both of these go down.
Now this wouldn't be so bad, except ... Governments loan money both to fund expenditures and to pay interest on their old loans. Inflation effectively means they can spend 2% of the total amount of their old loans "for free" (by loaning it) (they key thing to realise here is that doing so does not increase the burden on their income, it was 2% of taxes, and it still is). They get this double, since they get it both on the income side, and on the new loans.
Deflation means the opposite. Tax revenues go down, interest payments go up. Unless they want to drastically cut spending, that means they have to use pretty much all of their yearly new loans just to pay back interest.
The problem is also the difference between years :
year 1 : 2% inflation -> government can spend 104% of it's budget year 2 : 2% deflation -> government can spend 96% of it's budget
So 2% inflation necessitates a 10% cut in loan-based spending, which is about half of government spending. So a seemingly tiny amount of deflation requires a 5% spending cut by the government at minimum.
But that is not all. Government taxes have always been effectively a percentage of GDP. Governments have historically been unable to raise tax income. Deflation will lead to a fall in GDP, historically of at least double the amount of the deflation, sometimes much more.
So the other half of government income goes down by ~4% (very, very optimistically).
Now because falling prices and wages mean that the stress on social services increases (for obvious reasons), government expenditures go up, usually again by much more than the amount of deflation you see. It leads to pretty much every part of social security going up. Unemployment, for obvious reasons. But also pensions (people will go on a pension earlier because there's no work) and even illness and disability (well we all know why).
So 2% deflation effectively means the government has to cut spending by ~10%, WHILE social security expenses go up.
The government controls central banks. QE, ostensibly to "cause inflation" hasn't caused inflation (rather the opposite). So in order to absorb this financial shock, the U.S. government has instead decided to finance it's operations by direct money printing, by lending from the money printer. They ran a risk by lending the way the constitution said they should lend, so they "cheated". Now we see the EU (and dozens of other governments, including China and lots of smaller ones) doing the same.
This is also an extremely important factor in central bank behaviour, as they are controlled by governments, and it is the reason that we have not seen the end of QE (except maybe in America, but to be honest, I think there is a non-negligeable chance the US will lower rates instead of raising them, in 6 months).
Prices for many things already do decrease regularly. Every time I purchase a new computer I'm faced with the knowledge that, in 6 months time, a better, cheaper (or at least better value) model will come out. This myth that consumers will endlessly postpone purchases in the face of falling prices ignores the fact that a lot of ourchases cannot be postponed indefinitely.
And even if consumers postpone spending, it means they are saving. Which builds the investment base necessary for growth.
The point is that a currency cannot deflate to an infinite value, but it can be inflated to a zero value. There has been plenty examples of the latter, but zero examples of the former.
The real reason for the FUD around deflation is that it's not good for central banks. They, and their supporters are just talking their book. Fair enough, but like high or low currency values relative to other currencies, there are always winners and losers with deflation and inflation. One side is not inherently more evil than the other.
What would be really great is constant value of currencies over time. That would be mildly deflationary as technology increases production efficiency, and it would ward off a lot of bad investment decisions which excarbate the boom/bust cycle.
What happens to the price of a single good over the lifetime of that good is not a useful lesson in what happens as a result of broad, economy-wide deflation.
Frankly, the issue with purchase postponement isn't the biggest problem (although it's certainly a concern, as is hoarding). In my mind the biggest problem is wages being inelastic downward. As all prices deflate, income for employers goes down (or thought of another way, the value of money goes up which makes each employee more expensive). That forces two options: fire employees, or cut salaries. The latter is very difficult. So instead you see the former.
So you get broad based increases in unemployment. That leads to reduced consumer spending, which forces prices down even further, and so on.
As for real life examples, perhaps the Great Depression qualifies?
http://www.economist.com/economics-a-to-z/d#node-21529653
If you're looking for a more contemporary example, Japan experienced its own deflationary spiral:
http://www.forbes.com/sites/jamesgruber/2014/04/27/japan-def...
PS: Talking about economics goes beyond software developers or illigal day labiors in the US. It includes peasants in the middle ages, factory workers in ‘Soviet Russia’ and even gally slaves on a Roman warship.
For example if prices were to start falling I'm going to start putting off the following purchases:
1. New computer
2. New TV
3. New stereo
4. Toilet paper
5. Food
6. Gasoline
7. Rent
8. A new-to-me used pickup truck
9. Clothing
10. Several dozen other things which I can't really wait for but which I will pretend I could for the sake of making a point
EDIT: Yes guys, I do realize that it's a marginal effect and that people aren't going to STOP buying TP. The point I'm trying to make, though, is that the "deflationary spiral" told as a story isn't entirely accurate either. People don't STOP buying things, they simply reduce their consumption ever-so-slightly and if EVERYONE does that, it cuts growth.
My point, though, is that there are a whole bunch of things which aren't really elastic or which already have falling prices but don't cause general malaise. Yes TV purchases do get put off for the next best model, but eventually people do buy TVs and the industry has models that work even given this reality.
In my personal opinion it's not that deflation itself is bad it's that it takes a long time for the deflation to work through the economy and for expectations to readjust. And given the maniacally long maturity of mortgages it takes half a lifetime to reset expectations and it's simply unrealistic.
While there are certainly fixed costs to being alive (like toilet paper), most people do cut back and this behavior is observed. And when it gets very bad, even those "fixed costs" start being cut - cheaper toilet paper, moving in with mom and dad, etc. Not because they want to save now to buy more TP later, but because when discretionary spending falls, people lose jobs, which further reduces discretionary spending, and more people lose jobs, wages fall (because of the surplus of labor), and eventually it all starts affecting you.
But why, if things are getting cheaper?
EX: http://buyersguide.macrumors.com/ note the 'don't buy' recommendations.
The same thing works for durable goods not just improving goods like PC's. Consider if you wait 1 month when buying a chair it's 1 month newer so you’re likely to wait an extra month before replacing it. Multiplied by 100 million a people and even just 1 month becomes significantly lower consumption.
'This' starts a vicious cycle where fewer durable goods are produced so make fewer goods and thus have less money which reduces consumption of durable goods and non-durable goods. Using the TP example if your broke you can slightly cut back on TP use.
Deflation makes employees more expensive even as demand slows. Even in some kind of ideal economy without downward nominal wage rigidity (which leads to people getting outright fired instead(, their wages get cut. But that can end up being almost as bad: almost everyone has mortgages, student loan debt, car notes, or credit card debt, and suddenly that debt is consuming more of their annual income, forcing them to cut back.
It's a problem with aggregate behavior and feedback loops. As long as you're zoomed in on the individual level, it doesn't make sense.
This is exactly what happened during the 2008 recession. Once triggered (in that case by the housing bubble, subprime mortgages, etc) it spreads through the economy and it's hard to break out of - we still haven't really done so. The Fed is still failing to meet the target inflation rate despite extraordinary monetary measures.
Does that mean my rebuttal carries more weight then?
But since the average American (or, well, citizen of any country) has been consistently observed over centuries not to behave in the manner described by that rebuttal, it doesn't matter. To be fair, the article is simplistic and almost encourages that kind of rebuttal. Your edit essentially addresses that and I don't disagree with it - anyone who is saying that spending "stops" is clearly being silly. It begins as a marginal effect that worsens over time, and TV purchases are the first to go while TP and rent takes a while longer.
Why not? They did these past few years in the EU. Are most mortgages in the US not pegged to some reference rate like Euribor?
GP is referring to the idea that, under deflation, your debt grows in real value while retaining its nominal value, but the nominal value of your income will be decreasing.
If I take out a $100k mortgage and can put 10% of my salary to it each year, say I make $100k as well for easy math. I'll pay it off in 10 years if my nominal salary remains the same. (I'm ignoring the interest on the loan, it changes the timeline but not the fundamentals.)
If we have inflation, my salary will likely go up over time so each year I'll be spending the same nominal ($10k) amount, but its a smaller percentage of my income and a lower real amount.
If we have deflation, my salary will likely go down over time (assuming its consistent it'd likely be negotiated into employment contracts, like cost of living adjustments are now for inflation). So each year I have to pay the same nominal amount ($10k), but its an increasing real amount and a larger percentage of my income each year.
So in the EU interest rates are pegged to salary? Can it go negative? Because that's what needs to happen for loans under deflation to make sense. Your effective interest rate in a deflationary economy is deflation rate + interest rate. If you take out a 2% loan with 2% deflation your effectively paying 4% rates. The higher the deflation, the worse your rates become.
Now, if interest can go negative, then borrowing under deflation makes sense. But lending doesn't. Because the lender would be handing over money that would be more valuable kept under a mattress than loaned out at a negative interest rate.
With deflation, interest rates might be low [0], but they aren't likely to decline over time (unless the rate of deflation is increasing), whereas salaries will decline over time. So the interest rate won't drop along with your salary. Your salary will drop, and while the interest rate might (with the caveat noted previously) be low, its not likely to go down over time (if it does do so constantly due directly to deflation, that means your salary is likely not only declining, but doing so at an accelerating rate), your salary will be dropping both in nominal terms and proportional to the interest payments on your debt.
[0] but probably not; availability of credit will be low because risk-free instruments -- cash -- with a positive expected real rate of return exist, so there is little incentive to lend. Low credit availability doesn't make low interest particularly likely (it does make high interest rate volatility more likely, though.)
http://www.newyorkfed.org/research/current_issues/ci16-8.pdf
This is largely an intentional policy outcome, Freddie Mac and Fannie Mae were both intended to make mortgages cheaper (I think an interesting thing is that this doesn't necessarily make buying a house cheaper). It's increased since the recent crisis, part of the US response was to make money even cheaper (which favors locking in the rate).
There are both fixed and variable rate mortgages in the US, but variable rate mortgages usually have a minimum interest rate regardless of how low the index it is pegged to goes.
Deflation is a big problem for highly leveraged businesses and individuals. But for savers deflation is not a disaster at all.
Our economy relies on inflation to make it work. A lot of the persistent sluggishness of the current economy is due to the remarkably low inflation, meaning that all the debt people built up prior to the crisis in 2008 is still hanging around and will be for years to come. People are stuck under student loans and underwater mortgages, and unable to invest in their own future. With stagnant wages, digging out from under the debt will take a long time, and until that happens, the economy will continue to trudge along.
Why is this such a horrible thing though? Obviously, less lending is bad for the banks, but I fail to see how it would be bad for the consumer if they actually saved up money and paid cash for a car. Although I do understand why lending is important for starting a business; it would be hard in many markets to save enough capital to get off the ground. I'm talking about small stuff, like housing, cars, TVs.
I have little to no economics knowledge, but it does seem to me that this pervasive, cultural thinking that we need this now is the source of many problems. I know some retailers like Ford even attempted to curb the practice of buying on credit, but ultimately caved to pressure from customers wanting to live above their means.
So, can you explain, in a way that doesn't involve trickle-down economics, how borrowing money is a net gain for consumers? (I'm genuinely not being snarky here, just curious.)
Getting credit solves cashflow problems. If you're spending $10/week at the laundry, buying a $250 washing machine pays for itself very quickly. Except you can't save $250 because you keep needing to do laundry.
Its not generally bad for consumers qua consumers (though there are ways that it can be, because it prevents large purchases that save in the long term), but its bad for the same people that are consumers as laborers because less borrowing by business and less investment in business (both effects of deflation) mean less paid work available, and less utility produced regardless of the distribution.
> So, can you explain, in a way that doesn't involve trickle-down economics, how borrowing money is a net gain for consumers?
It enables you to do things like buy a car to go to work at a job that pays well before you have amassed sufficient retained income from that job to pay for the car. Without the ability to borrow money, you may not be able to take (or, if you take it, keep) the job because you can't get to it.
If you can make $1000 more per month at a job that's inaccessible to you via transit, but you don't have $10,000 to buy a car, it would be worth it to get a loan with a $300/month payment, and say another $300/month worth of car-related expenses to net out $400/month income that can be used for saving up for that TV or what-have-you.
In terms of items that retain their value, like houses, apartment buildings, factories... no one would be wise to invest in those items in a deflationary environment because if you're interested in growing your net worth, you'd be better off keeping your money in the bank.
While this is unfortunate, I see it as garbage collection for the economy. Once completed, there are new resources ready to go for the next phase of growth. If there is a deleveraging and saving phase, that provides the capital base for the next growth event. Keeping old processes running forever out of fear of a reboot is worse for the long term. Incentivising bad decisions during boom times with a Greenspan put creates moral hazard.
True. But why then the article is titled "Why Falling Prices Are Actually a Really Bad Thing" and not "Why Deflation Is Actually a Really Bad Thing"?
I can imagine economy where you don't have deflation, prices of all products fall, and the economy is actually growing, because people produce and buy completely new products they could not afford before.
Read Rothbard's "America's Great Depression" for a good overview of the case against macro-economics and deflationary interventionism.
Pretty much everyone, everywhere on the political spectrum, irrespective of what they think about deflation, agrees that the depression was made worse by "all the ham fisted attempts to fix it".
There's some disagreement about which of the particular policy responses fall into the category of "ham fisted attempts", sure, but the Fed's initial deflationary policy is one of the most widely accepted (I mean, its a point on which Keynesians and Hayek agree.)
This comment would be much better without this acerbic swipe. Please don't do that on Hacker News.
Japan suffered a deflationary event, but has not had a deflationary spiral. The problems for japan have been exacerbated by following the madness of Keynesian policy prescription, to the point where they have increased their debt to 2x GDP over two decades, redirecting their resources towards building bridges to nowhere, instead of allowing entrepreneurs and innovators to allocate capital.
All while they have their demographic death spiral in place.
Plenty of other Asian countries have suffered large setbacks, particularly during the Asian financial crisis, but by avoiding the same path that Japan slavishly followed, have rebounded with strong growth ever since.
What is necessary is a short sharp correction, which will include bad debts and higher unemployment. This will be bad. This is still better than two decades of a zombie economy where an entire generation don't experience a growing economy and the benefits that entails.
Why not? Malthusian predictions have proven to be wrong so far.
We've been supposed to see hyper-inflation Any Day Now since like 2009. I'm sure it's just around the corner.
The only point of the article that makes any sense is #5. The author does even ignore the keynesian theory of sticky salaries pricing people out of the labor market (however true it is). It's an almost thought-free article.
The problem was the old canard of irrational exuberance and excessive bad debt. Which must be cleared by letting bad choices come home and businesses go broke so that resources can be reallocated. The measures to 'fight' it, like confiscating and refining the price of gold, and other measures, most likely prolonged it.
The obvious example would be bitcoin. No one ever spends their BTC, because of the fear that something that costs 1 BTC today will cost only 0.5 BTC tomorrow.
The US depression of the mid-1800s and the UK depression starting in the late 1920s are usually cited as examples, and the Fed's deflationary policy after the 1929 crash in the US is often cited -- even by libertarian economists -- as a contributor to the US's Great Depression.
> Prices for many things already do decrease regularly. Every time I purchase a new computer I'm faced with the knowledge that, in 6 months time, a better, cheaper (or at least better value) model will come out. This myth that consumers will endlessly postpone purchases in the face of falling prices ignores the fact that a lot of ourchases cannot be postponed indefinitely.
Postponing consumption isn't really the issue, reducing investment is. If holding on to cash has positive expected utility, there is less incentive to to use funds that are beyond what is desired for immediate consumption and invest them in productive assets.
Also, see the comments by other posters on debt in deflation.
They want to inflate away those debts and this goes contrary to that. There's a reason why a Coke no longer costs a nickel and these guys will tell you it's a good thing when it costs a $1000. Never mind that you will essentially be earning the same wages when that comes about. You saw that just a few years ago in CA when oil was close to $150 and people were quitting their jobs because of the cost of the commute.
Bloomberg, like the Economist and FT represent the status quo. They print whatever propaganda they're instructed to by the state. When you hear about the CIA and MI6 having agents working for news organziation, these guys are at the top of the list. Ooooooh 'conspiracy'... that has been documented a thousand times over many decades.
This game has been played out many times before over the past century and then some. It's a tiresome old debate.
So if people are expecting the price to rise, they’re more likely to make a purchase, and if they aren’t expecting the price to rise they’re less likely to. I don’t think it’s too much of a jump to think that if the price of something is going to go down next week, people are more likely to hold off on purchases.
Though I imagine a bigger issue is the need for investment. When there’s stagnation firms tend to sit on a lot of cash, because they believe that money slowly losing value (low inflation) or even gaining value (deflation) is preferable to the few and possibly risky investment opportunities they see. This causes credit and investments to dry up. This hording behavior, as well as the wage inflexibility mentioned above, ends up being a major drag on the economy. On the other hand, with a decent rate of inflation firms are going to be making sure that their money is working, because if it’s just sitting there it’s going to be losing money year after year.
This depends on the assumption that people hold out on buying non-urgent goods in the belief that prices will continue to fall - leading prices to fall further. But in the current economic climate, almost nobody is buying non-urgent goods anyway. (Yet we have seen consistent inflation)
The current 'deflation' is primarily led by a sharp downtick in oil prices that won't be repeated - there's no immediate suggestion that prices will continue to fall.
With years of consistent inflation above wage increases compounding to give high prices, any deflation is just as likely to be seen by consumers as a relief from high prices - a good opportunity for people to spend the money they've been holding onto.
Last month, the US inflation rate was 0.8%.
For 2014 as a whole, it was 1.6%.
This is, in fact, credited in part to low consumer demand. Slack demand generally leads to job cuts, which leads to even slacker demand. That's the spiral they talk about.
> The current 'deflation' is primarily led by a sharp downtick in oil prices that won't be repeated - there's no immediate suggestion that prices will continue to fall.
This is why economists talk about core inflation, to remove as much as possible the influence of volatile commodities such as oil. Inflation will remain very low even with oil prices go up. Since 2008, inflation has actually at times been negative (i.e., deflation.)
People who think deflation is a good thing need only look at the Great Depression, Japan, the present Eurozone, and the 2008 recession. Just because high inflation is bad doesn't mean that deflation is good.
Those moves were supposed to create hyper-inflation and be the reason for You to Buy Gold Now. Actually they barely kept us out of deflation.
Since 2008, the Fed has increased the money supply by a factor of 5, inflation has been rock-bottom or nonexistent, real interest rates on Treasuries are negative, but hyperinflation is even now just around the corner. No matter how often the prediction is wrong, new ones are made and the failure of the appearance of hyperinflation on schedule is ignored or handwaved away with vague declarations about how the government is conspiring to hide inflation, or the Fed is using some kind of temporary monetary/balance-sheet magic trick, or as soon as the economy starts up again we're all doomed.
What I have never understood is why computer-technical types so often participate in this kind of thinking when we're usually pretty good on other sciences. To be sure, economics is a field with more cranks than usual - paid cranks, even-, but there are working, well-tested mainstream models that churn out accurate prediction after prediction and are largely ignored in favor of whatever the WSJ or Ron Paul says.
If you are a huge company, or a government, with an extremely large negative net worth (ie. you loaned loads of money). Deflation will cause :
1) your income to go down by more than the deflation amount 2) your loans don't go down
So deflation will kill large companies very quickly, and put governments in a really difficult position.
You worked X time: got 1000€
Day 1: You can buy 1000 candies at 1€ each.
Day 2: Inflation, prices +100%: you can only buy 500 at 2€ each
This means that you just lost 500 candies or 500€. This means that what you worked 50% for nothing! You just lost 50% of your money, just like that! So who has my money? not me of course.
Let's think about deflation:
Day 1: You can buy 1000 candies at 1€ each.
Day 2: Deflation, prices -50%: you can buy 2000 at 0.5€ each
Now if you would only buy 1000 candies you would still have 500€ to spend on other stuff. You might save it or buy other stuff.
Let's think about none of them:
Day 1: You can buy 1000 candies at 1€ each.
Day 2: You can buy 1000 candies at 1€ each.
Today is the same as yesterday, I've worked X hours I buy Y candies, everyday. Why should it change? I know many factors change the price but why?
Well, if you can see inflation is good for the banks. They inject more money in order to make your money less valuable. So in other words you lose money (your hard earned money) while they are just printing easy money! So who is the dumb one? We can do nothing.
Again why deflation is bad?
I would buy to eat even if inflated or deflated, maybe less and more, depending by inflation or deflation. I might even buy higher quality meals.
If I need a new phone do you wait until the prices fall to 100€? No some people still buy them at 1000€. Some not, but is not inflation that will make that change. For example the same people that don't wait a few months for the price of Iphone to fall from 1000€ to 300€ will not wait for deflation to decrease the price from 1000€ to 800€. He just want the Iphone and it will buy it.
This is just a big lie thrown in my face!
please correct me if I'm wrong!!!
Inflation Day 1: you can buy 1000 candies, and you suspect tomorrow you will only be able to buy 500, so you buy 1000 candies and store them/eat them. You 'inject' money into the economy, give the government tax money, etc.
Deflation: Day 1: you can buy 1000 candies, but suspect that tomorrow you can buy 2000 candies, you don't buy Day 2: you can buy 2000 candies, but suspect that tomorrow you can buy 3000, you don't buy, or buy just enough for your sweet tooth today (lets say 100) Day 3: you can buy 3000 candies, but again... etc etc
Again, this is based on needs and wants. If you have 1000 euros. If your phone breaks and you need one to work, you will buy today, no matter if we are in deflation or inflation, but if your old one still works, you may very well buy it today (in case of inflation, since it will will cost more of those 1000 euros tomorrow, or you will wait if you are in deflation since it will cost less of those 1000 euros.
Of course, if you need rice to not starve, it doesn't matter! And for average folks, deflation tends to be good since most of expenses are from needs and not wants but this causes issues to business and (possibly) to the economy as well.
If you want a smaller example, I've personally waited for weeks and months to import some goods due to the falling EUR->USD rate, saving me between 5-6% of the cost, so I don't see why others won't do the same if they expect the costs to be less in the future.
An extreme example: I have bought a lot of computers in my life, even though I knew their value would be close to zero within two years.
And maybe there are also benefits if people only buy the stuff they actually need.
If people only buy the stuff they actually need, we on HN would all be out of jobs tomorrow. Computers, smartphones, nice cars, high-end food, good booze, entertaining movies, all of this goes away. I don't want to live in that world, personally.
You could just as well argue that inflation leads to a spiral of death because people won't be able to afford things. Therefore they won't buy things, nobody will produce things, and there will be no things. Sounds just as logical.
And when would you buy a sleeping bag. Maybe it is Minus 5 degrees outside but you can survive that. After all, tomorrow the sleeping back will be 1$ less tomorrow, and after all you'll only die if it's minus 10 degrees?
You said you need certain things like computers. So where is the problem?
If I misinterpreted what you meant by "stuff you actually need" then maybe you should explain what you meant, because I don't see how else it could go.
The governments of most western nations are in debt, hence their fear of deflation.
> please correct me if I'm wrong!!!
You're wrong. Deflation is basic economics. If you take a college macroeconomics course it will be covered.
It's hard to summarize in a way that will convince you in an internet debate. Sort of like trying to argue electromagnetism with someone that never learned about Maxwell's equations. An econ textbook would be ideal, but another place to start would be: http://en.wikipedia.org/wiki/Deflation
(By the way, no offense intended with that. It's hard for anyone to comment on a scientific subject if they didn't learn the background, even super smart folks.)
There are several things wrong with your story, but the first one that jumps out is that some prices are more sticky than others. For example, wages are likely to not go down much, instead firms tend to cut employment. There's a lot of evidence for this: http://en.wikipedia.org/wiki/Nominal_rigidity. Another big factor is the effect of debts, which are not reduced: http://en.wikipedia.org/wiki/Debt_deflation
Here's another summary on deflation, intended for a popular audience: http://krugman.blogs.nytimes.com/2010/08/02/why-is-deflation...
Borrowing - Inflation: I borrow $1000.00 today at 3% with an inflation rate of 2% (per year). At the end of this year I pay the loan back in full at $1030.00. I have spent a larger nominal value, however the real value of the loan is now $1030.00 * 0.98 = $1009.40. Meaning my effective interest rate was around 1%.
Borrowing - Deflation: Let's take the same numbers, but now it's 2% deflation. I pay back the loan, $1030.00 nominal value. The real value is $1030.00 * 1.02 = $1050.60. My effective interest rate is around 5%.
Salary - Inflation: I am paid $100,000 this year for my work, inflation rate of 2%. Without a pay raise my nominal salary remains the same next year, but my real salary becomes $98,000. This is a pro for employers, I am a cheaper employee. It's a con for me, my time is worth less.
Salary - Deflation: I am paid $100,000 this year for my work, deflation rate of 2%. Without a pay raise my nominal salary remains the same next year, but my real salary becomes $102,000. This is the reverse. I cost my employer more, but without changing nominal salaries my time has become more valuable.
Purchasing - Inflation: You want a widget worth $1000.00 today and face 2% inflation. If you purchase it at the start of the year, ignoring depreciation on the widget, it's worth $1020.00 at the end of the year. So if you resell it at that point you've made 2% (nominal), though the real value is the same.
Purchasing - Deflation: Using the same widget, price and 2% deflation. If you purchase it at the start of the year for $1000.00, and sell at the end for $980.00 you end with the same real value, but you've lost 2% of the nominal value. Barring a need to purchase an item within a particular time, it makes sense for purchasers to delay purchasing as long as possible. On the other hand, vendors want to sell as early as possible because the nominal value of their goods are decreasing (and this ignores other costs of holding inventory).
1. It seems like it should increase consumption as everyone would simply have more money to spend. Even if things are cheaper (and seem to be getting cheaper), you now have a new stream of income that, for some people, will burn holes in pockets and beg to be spent.
2. It would allow some employees in the labor market to "opt-out" (as the basic income supplants the "need" for a minimal wage job) and decrease the surplus labor pool. This would seem to require wage growth as employers now need to make the job proposition more compelling. Maybe they would even treat their employees better. Bonus.
3. "printing money" to pay for (or maybe just a portion of) the basic income seems like it should be a nice inflationary counter to the natural deflationary pressures.
I'm sure there are other pros and some cons of this approach, but those seem like good starting points.
A safer way to do the same thing would be to just spend government money on things like building infrastructure. In current conditions, that translates into increased GDP without the reduced employment risk. Similarly reduced taxes on lower incomes would be less risky but work through the same means.
(This isn't addressing whether basic income would be morally good or bad. Just the macro effects.)
Hasn't this shown to have been un-true in the last 5 years?
Higher profits has not meant more money going around to workers.
Strictly speaking, no.
> Higher profits has not meant more money going around to workers.
That doesn't mean that lower profits don't reduce the maximum that can be distributed to workers, however. (The fact that the actual amount distributed hasn't historically increased when the maximum has is a different issue.)
Who does this? For 90% of my consumer goods, I don't care what they're going to cost in a month or a year. I need to replace the one I have today.
- if you expect to get a 1% pay increase every year, is it reasonable to take out a mortgage at 3% and pay $X/mo for 25 years? Yes, and at the end of the term it will be a smaller fraction of your expenditure. And if your house goes up in value by 1% you're benefiting there as well.
- if you expect to get a 1% pay cut every year, is it reasonable to take out a mortgage at 1% and pay $X/mo for 25 years? No, that's going to be a disaster as it gradually squeezes you, unless you carefully refi regularly. And if the house goes down in value by 1% a year, that's even worse. Construction industry collapses as a result.