4 ms·

> Although wage growth has slowed in Switzerland, it was 0.6% on an annual basis in the second quarter A big part of the reason that economists think that defl

by evanpw 11y ago

> Although wage growth has slowed in Switzerland, it was 0.6% on an annual basis in the second quarter A big part of the reason that economists think that deflation is bad is that people are very resistant to cuts in their nominal wages (much more than to cuts in real wages, like getting no raise with positive inflation). If the price of everything else suddenly dropped 10%, then cutting everyone's wages 10% would make them exactly as well off as they were previously, but the more likely outcome is that wages would drop by less than 10% and unemployment would increase. If nominal wages are still increasing in Switzerland, maybe that's part of the reason there haven't been many adverse consequences.

AnimalMuppet 11y ago
> If the price of everything else suddenly dropped 10%, then cutting everyone's wages 10% would make them exactly as well off as they were previously... Only if they had no debt.
- dnautics 11y ago
  If the price of everything increases 10% then the increased cost of living disproportionately affects the poor for the duration of time that it takes for the wages to match the increase. Compared to this the amount of debt held is basically trifling. For example, if you are poor and are spending 80% of your income on living expenses, and 10% increase in prices drops your margin of survival from 20% to 12%, which is a 40% hit. If you are wealthy and spending 20% of your income, then your margin goes from 80% to 78% which is a 5% hit. If you were in the 'poor' case, would you rather have the 10% devaluation of your debt or would you rather have a 40% hit to your livable margin? The converse is true in a system of deflation. If you are spending 80% of your income on living expenses, a 10% DECREASE in prices increases your margin of survival from 20% to 28%, which is a 40% increase, which you would almost certainly take over a 10% increase in real value of your debt. Moreover the notion that the rich are not in debt is rediculous. A lot of things that the rich are able to partake in more easily (e.g. playing shorts on the short markets, options trade, margin trading, all currency FX trading) are debt-based instruments, so basically having secular inflation helps the rich play with money in innumerable ways.
  - AnimalMuppet 11y ago
    > If the price of everything increases 10% then the increased cost of living disproportionately affects the poor for the duration of time that it takes for the wages to match the increase. True. > Compared to this the amount of debt held is basically trifling. False. Let's say you're middle class. You have a house, for which you have a mortgage. You have a car loan. You have credit card debt. You have a steady income, but your debt consumes 40% of your income. Your (non-debt) living expenses consume another 55%. (Your example of the poor person understates your case. Poor people don't have 20% survival margins to start with, so the impact of inflation on the poor is worse than you said.) Now deflation happens. Your non-debt expenses drop 10%, and so does your salary. But your debt expenses don't drop at all. Now where are you? Labeling your previous income as 100%, your debt still takes 40%. Your non-debt living expenses now takes 55% * 90% = 49.5%. Your total expenses are now 89.5%, and your income is 90%. Your margin went from 5% to 0.5%. Now, in fairness, as a middle class person, you have much more room than the poor person does to cut your expenses before you hit the edge of survival. Never the less, this shows how bad deflation can be if you're in debt. (Note well, though: The deflation has to be sustained enough to affect your income. If prices drop but your income stays the same, deflation is wonderful even if you are in debt.)
    - dnautics 11y ago
      Uhm, why would your salary go down when there's deflation? It's not like your employer is actively tracking living expenses daily and adjusting your salary to match.
      - AnimalMuppet 11y ago
        Not daily, but yearly, certainly they are. Where do you think they get the cost-of-living adjustment numbers from?
nickff 11y ago
It is possible to find an infinite number of differences between Switzerland and any other country. It is very tempting to look for reasons not to update your beliefs in response to new data, but we must not give in to this temptation. Bayesian logic would dictate that events in Switzerland should cause us to be more skeptical of arguments in favor of inflation.
- evanpw 11y ago
  Absolutely, but to know how much more skeptical to be, you have to know likely this outcome was, given your prior hypothesis. And for that purpose, knowing ways in which this situation differs from textbook, across-the-board deflation is very relevant. P.S., I found this discussion (http://www.wsj.com/articles/john-cochrane-whos-afraid-of-a-little-deflation-1415919082 http://www.wsj.com/articles/john-cochrane-whos-afraid-of-a-l...) to be pretty convincing. His guess is that sudden, dramatic, Depression-style deflation will have effects that are a lot different from slow, predictable, Swiss-style deflation.
- marcosdumay 11y ago
  The same theory that says that deflation is bad is saying that this one is not big enough to produce much effect. The result is perfectly supported by the theory. Whatever mathematical names you bring on can not change this. Now, if you came up with examples of countries with decreasing nominal salaries and a growing economy, you could make a point. There's a paper with a few in another thread.
- snowwrestler 11y ago
  > Bayesian logic would dictate that events in Switzerland should cause us to be more skeptical of arguments in favor of inflation. Depends on prior evidence. Current thinking on inflation/deflation did not drop into economists' heads from space yesterday. It was developed by analyzing hundreds of years of real experience in real economies. Before we alter our beliefs too much today, we should at least be aware of the full scope of evidence on the topic.
  - mike_hearn 11y ago

by evanpw 11y ago

AnimalMuppet 11y ago

> If the price of everything else suddenly dropped 10%, then cutting everyone's wages 10% would make them exactly as well off as they were previously... Only if they had no debt.

dnautics 11y ago
If the price of everything increases 10% then the increased cost of living disproportionately affects the poor for the duration of time that it takes for the wages to match the increase. Compared to this the amount of debt held is basically trifling. For example, if you are poor and are spending 80% of your income on living expenses, and 10% increase in prices drops your margin of survival from 20% to 12%, which is a 40% hit. If you are wealthy and spending 20% of your income, then your margin goes from 80% to 78% which is a 5% hit. If you were in the 'poor' case, would you rather have the 10% devaluation of your debt or would you rather have a 40% hit to your livable margin? The converse is true in a system of deflation. If you are spending 80% of your income on living expenses, a 10% DECREASE in prices increases your margin of survival from 20% to 28%, which is a 40% increase, which you would almost certainly take over a 10% increase in real value of your debt. Moreover the notion that the rich are not in debt is rediculous. A lot of things that the rich are able to partake in more easily (e.g. playing shorts on the short markets, options trade, margin trading, all currency FX trading) are debt-based instruments, so basically having secular inflation helps the rich play with money in innumerable ways.
- AnimalMuppet 11y ago
  > If the price of everything increases 10% then the increased cost of living disproportionately affects the poor for the duration of time that it takes for the wages to match the increase. True. > Compared to this the amount of debt held is basically trifling. False. Let's say you're middle class. You have a house, for which you have a mortgage. You have a car loan. You have credit card debt. You have a steady income, but your debt consumes 40% of your income. Your (non-debt) living expenses consume another 55%. (Your example of the poor person understates your case. Poor people don't have 20% survival margins to start with, so the impact of inflation on the poor is worse than you said.) Now deflation happens. Your non-debt expenses drop 10%, and so does your salary. But your debt expenses don't drop at all. Now where are you? Labeling your previous income as 100%, your debt still takes 40%. Your non-debt living expenses now takes 55% * 90% = 49.5%. Your total expenses are now 89.5%, and your income is 90%. Your margin went from 5% to 0.5%. Now, in fairness, as a middle class person, you have much more room than the poor person does to cut your expenses before you hit the edge of survival. Never the less, this shows how bad deflation can be if you're in debt. (Note well, though: The deflation has to be sustained enough to affect your income. If prices drop but your income stays the same, deflation is wonderful even if you are in debt.)
  - dnautics 11y ago
    Uhm, why would your salary go down when there's deflation? It's not like your employer is actively tracking living expenses daily and adjusting your salary to match.
    - AnimalMuppet 11y ago
      Not daily, but yearly, certainly they are. Where do you think they get the cost-of-living adjustment numbers from?

nickff 11y ago

It is possible to find an infinite number of differences between Switzerland and any other country. It is very tempting to look for reasons not to update your beliefs in response to new data, but we must not give in to this temptation. Bayesian logic would dictate that events in Switzerland should cause us to be more skeptical of arguments in favor of inflation.

evanpw 11y ago
Absolutely, but to know how much more skeptical to be, you have to know likely this outcome was, given your prior hypothesis. And for that purpose, knowing ways in which this situation differs from textbook, across-the-board deflation is very relevant. P.S., I found this discussion (http://www.wsj.com/articles/john-cochrane-whos-afraid-of-a-little-deflation-1415919082 http://www.wsj.com/articles/john-cochrane-whos-afraid-of-a-l...) to be pretty convincing. His guess is that sudden, dramatic, Depression-style deflation will have effects that are a lot different from slow, predictable, Swiss-style deflation.
marcosdumay 11y ago
The same theory that says that deflation is bad is saying that this one is not big enough to produce much effect. The result is perfectly supported by the theory. Whatever mathematical names you bring on can not change this. Now, if you came up with examples of countries with decreasing nominal salaries and a growing economy, you could make a point. There's a paper with a few in another thread.
snowwrestler 11y ago
> Bayesian logic would dictate that events in Switzerland should cause us to be more skeptical of arguments in favor of inflation. Depends on prior evidence. Current thinking on inflation/deflation did not drop into economists' heads from space yesterday. It was developed by analyzing hundreds of years of real experience in real economies. Before we alter our beliefs too much today, we should at least be aware of the full scope of evidence on the topic.
- mike_hearn 11y ago