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> The entire thing rests on the assumption that there's a class of investments that people would refuse to invest in if left to their own devices, but which sud

> The entire thing rests on the assumption that there's a class of investments that people would refuse to invest in if left to their own devices, but which suddenly become attractive only if their savings are shrivelled by a few percent a year. Such a class of investments certainly does exist: they're called bad investments! That makes so much sense. The main argument against inflation is that if people see the value of their money increase, they will stop spending it and instead hold onto with the expectation that the value will rise further. That's certainly true of investors, who tend to panic sell anything that fails to outperform the dollar. But most people don't see their money as a commodity - they will only notice that the price of consumer goods is falling, and use that as a justification to spend more. So deflation is only really bad for Wall Street. Inflation subsidizes the stock market.

eric_h 11y ago
> The main argument against inflation is that if people see the value of their money increase this is the main argument against DEflation, is it not?
Mikeb85 11y ago
One problem with deflation is that it means wages go down too. Even if price levels go down (which, as you said, should spur demand), lower wages cause consumers to hoard money, which causes the value of money to go up, which causes more hoarding, which causes prices to go down, etc... It's not called a deflationary spiral for nothing. There are many reasons why inflation is a good thing - wages go up (people like that), the value of investments goes up (people like that), and while it doesn't always correlate to inflation, the money supply needs to increase over time as the population increases, otherwise you'll have some major demographic issues...
- hectormalot 11y ago
  I don't think deflation has to drive wages down actually. Deflation simply means that your dollar (or CHF) can buy more tomorrow than today, and hence unless you can invest in something that appreciates faster than that rate, you would keep the money in cash rather than spending it, unless your expense is really necessary (say food). Inflation then of course means that your money is worth more today than tomorrow, and therefore you are more likely to spend it (and more investments become attractive, as long as they perform better than the currency). Will wages come down, over time in a purely deflationary economy probably yes. But unlike most inflationary economies where it is usual to have a x% salary growth y/y, I think the barrier to sign a contract that says: "your salary is X, and will decrease by z% per year" is a lot higher. So, if a country has only mild deflation - like Switzerland - the real value is actually likely to go up. > wages go up (people like that) That's also not a given, its likely to have a raise in contracts, but if I promise you a 2% yearly raise with inflation of 3% you are not really getting a great deal, are you? > [..] major demographic issues True, I see inflation as a great way to equally tax 'old money', and in a way that is almost impossible to escape. In the end inflation is good for those with debt (governments/corporations are first in line), deflation is great for those with cash (but not necessarily other assets, those will probably adjust to the new price level).
  - Mikeb85 11y ago
    In a true deflationary atmosphere, firms will receive less money and eventually the equilibrium of the economy hits a 'tipping point' where wages will have to go down. Switzerland isn't there, the price of domestic goods has actually gone up slightly, only the price of imported goods has gone down drastically. And you're also right about the stickiness of wages - generally firms don't reduce wages, but lay off workers then re-hire at lower wages. Either way the effect at the macro level is the same.
- mike_hearn 11y ago
  Deflation is defined as a fall in prices. Economists theorise that this leads to a drop in wages and a downward spiral that ends in depression, but actual evidence to support this theory is (as I posted above) lacking. In practice, Switzerland shows that you can have zero percent inflation for many years (Swiss deflation is recent but lack of inflation isn't) and yet still have sky high wages. Obviously the theory is wrong, as reality contradicts it.

eric_h 11y ago

> The main argument against inflation is that if people see the value of their money increase this is the main argument against DEflation, is it not?

Mikeb85 11y ago

One problem with deflation is that it means wages go down too. Even if price levels go down (which, as you said, should spur demand), lower wages cause consumers to hoard money, which causes the value of money to go up, which causes more hoarding, which causes prices to go down, etc... It's not called a deflationary spiral for nothing. There are many reasons why inflation is a good thing - wages go up (people like that), the value of investments goes up (people like that), and while it doesn't always correlate to inflation, the money supply needs to increase over time as the population increases, otherwise you'll have some major demographic issues...

hectormalot 11y ago
I don't think deflation has to drive wages down actually. Deflation simply means that your dollar (or CHF) can buy more tomorrow than today, and hence unless you can invest in something that appreciates faster than that rate, you would keep the money in cash rather than spending it, unless your expense is really necessary (say food). Inflation then of course means that your money is worth more today than tomorrow, and therefore you are more likely to spend it (and more investments become attractive, as long as they perform better than the currency). Will wages come down, over time in a purely deflationary economy probably yes. But unlike most inflationary economies where it is usual to have a x% salary growth y/y, I think the barrier to sign a contract that says: "your salary is X, and will decrease by z% per year" is a lot higher. So, if a country has only mild deflation - like Switzerland - the real value is actually likely to go up. > wages go up (people like that) That's also not a given, its likely to have a raise in contracts, but if I promise you a 2% yearly raise with inflation of 3% you are not really getting a great deal, are you? > [..] major demographic issues True, I see inflation as a great way to equally tax 'old money', and in a way that is almost impossible to escape. In the end inflation is good for those with debt (governments/corporations are first in line), deflation is great for those with cash (but not necessarily other assets, those will probably adjust to the new price level).
- Mikeb85 11y ago
  In a true deflationary atmosphere, firms will receive less money and eventually the equilibrium of the economy hits a 'tipping point' where wages will have to go down. Switzerland isn't there, the price of domestic goods has actually gone up slightly, only the price of imported goods has gone down drastically. And you're also right about the stickiness of wages - generally firms don't reduce wages, but lay off workers then re-hire at lower wages. Either way the effect at the macro level is the same.
mike_hearn 11y ago
Deflation is defined as a fall in prices. Economists theorise that this leads to a drop in wages and a downward spiral that ends in depression, but actual evidence to support this theory is (as I posted above) lacking. In practice, Switzerland shows that you can have zero percent inflation for many years (Swiss deflation is recent but lack of inflation isn't) and yet still have sky high wages. Obviously the theory is wrong, as reality contradicts it.