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Deflation is the endless terrifying boogieman of economists and academics and drives the constant obsession with creating inflation by central banks. Prices com

Deflation is the endless terrifying boogieman of economists and academics and drives the constant obsession with creating inflation by central banks. Prices coming down? Oh dear, we can't possibly have that!

Osiris 9y ago
I used to think that also until I studied economics in college. If you don't understand how deflation can be a bad thing, I suggest spending some time reading up on it. Deflation isn't just about prices drop while all else remains equal.
- grillvogel 9y ago
  why don't you enlighten us?
  - AnimalMuppet 9y ago
    I'll take a stab at it. In a real deflation, prices fall. That's wonderful (unless you're selling). Then wages fall, which is less wonderful, but (I think) they don't usually fall more than prices do. The problem is, your mortgage doesn't fall. Neither do the payments on any other debt you owe. They stayed at a constant number of dollars, but each dollar is now worth more. So your mortgage payment, for example, becomes a bigger fraction of your paycheck. If you have debt when deflation happens, it can crush you. Then you have the second-order effects. People go bankrupt, and their creditors sell off their assets. Or people sell assets, trying to avoid bankruptcy. In either case, the supply (of many things) increases, due to people trying to get what they can. This drives prices down. So we get more deflation, which puts even more people in a pinch, so even more people sell what they can...
    - pishpash 9y ago
      > If you have debt when deflation happens, it can crush you. In a slowly deflating world, (say central bank targeting -2% instead of +2%), debt will be priced at negative interest rates. There is no theoretical problems with this, and in fact negative yielding bonds have already happened.
      - AnimalMuppet 9y ago
        Negative yielding bonds have already happened. But for most of us (as individuals), the debts we owe aren't in the form of bonds. How about negative yielding mortgages? Credit cards? Theoretically, they could happen. In practice, they probably won't, at least for a while after the start of the deflation.
        pishpash 9y ago
        What difference does it make? In a competitive money market, negative rate loans will appear. Lenders still make a spread. The issue is not positive or negative rates, but whether the price expectation is stable or unstable. As long as the absolute value of price change is small the price is stable. As for why central banks prefer positive rather than negative, that's the better question.
- pishpash 9y ago
  Economists and psychotics are the only creatures who, when they and the universe do not agree, believe that it is not they who are wrong but the universe. More to the point, you may not want uncontrollable deflation just like you don't want uncontrollable inflation, those are system instabilities due to feedback. But a controlled deflation that responds to long-run demographics and economic reality is no problem. In fact, forcing the opposite is stupid.
  - MaysonL 9y ago
    But a controlled deflation that responds to long-run demographics and economic reality is no problem. Except for people with mortgages or student loans to pay.
    - pishpash 9y ago
      They can refinance just like they refinance now to a lower rate.
      - pcardh0 9y ago
        You can't refinance the principal. You are paying off a larger amount with deflated dollars.
- notadoc 9y ago
  > I used to think that also until I studied economics in college Right so you kind of proved my point, that deflation is the academic economist boogieman.
toomuchtodo 9y ago
If you had to wager between central banks attempting to stoke inflation to make people work versus technology creating a never ending deflationary effect, who would you bet on?
- notadoc 9y ago
  Given the effectiveness of QE and ZIRP creating 10%-20% annual asset inflation for the past decade while most wages are flat? I'd have to bet on the central banks, not that I agree with the policy.
  - toomuchtodo 9y ago
    But are younger generations jumping onto the treadmill to acquire these assets at overinflated prices? That's the question. Housing and equities might continue to go up in price, most everything else will decline (especially energy and transportation). Wouldn't that mean you could live well off of little if you opted out of high cost of living areas?
jhj 9y ago
Prices include wages too. If all wages and prices adjusted instantaneously, then there is no real difference between inflation or deflation. However, people are mentally resistant to being paid less (nominally) for a job, even though in inflation-adjusted terms they would be making the same thing (or more) as they did before. This "wage stickiness" leads to unemployment as companies choose to lay off people instead of paying them more (by holding their wages constant over time), and are also resistant to hiring new people at lower wages while keeping current employees stuck at higher wages, for fear that this would discourage current employees or cause internal conflict.
- pishpash 9y ago
  This is baseless speculation. Corporations do and people accept all sorts of things including wage cuts.
  - skybrian 9y ago
    It may be controversial but it's not baseless speculation. It's a thing economists study, though apparently they've been unable to agree: http://www.investopedia.com/articles/economics/09/wage-stickiness.asp http://www.investopedia.com/articles/economics/09/wage-stick...
- xbmcuser 9y ago
  My solution be for let's say Japan would be to peg everything from wages to mortgages to the US dollar. Now with deflation you will be making losses in yen as the value of yen to the $ will keep increasing but in dollar terms and in actual buying strength you will still be improving. Though this will be something very hard to do and everyone would want to keep the yen instead of holding any asset.

Osiris 9y ago

I used to think that also until I studied economics in college. If you don't understand how deflation can be a bad thing, I suggest spending some time reading up on it. Deflation isn't just about prices drop while all else remains equal.

grillvogel 9y ago
why don't you enlighten us?
- AnimalMuppet 9y ago
  I'll take a stab at it. In a real deflation, prices fall. That's wonderful (unless you're selling). Then wages fall, which is less wonderful, but (I think) they don't usually fall more than prices do. The problem is, your mortgage doesn't fall. Neither do the payments on any other debt you owe. They stayed at a constant number of dollars, but each dollar is now worth more. So your mortgage payment, for example, becomes a bigger fraction of your paycheck. If you have debt when deflation happens, it can crush you. Then you have the second-order effects. People go bankrupt, and their creditors sell off their assets. Or people sell assets, trying to avoid bankruptcy. In either case, the supply (of many things) increases, due to people trying to get what they can. This drives prices down. So we get more deflation, which puts even more people in a pinch, so even more people sell what they can...
  - pishpash 9y ago
    > If you have debt when deflation happens, it can crush you. In a slowly deflating world, (say central bank targeting -2% instead of +2%), debt will be priced at negative interest rates. There is no theoretical problems with this, and in fact negative yielding bonds have already happened.
    - AnimalMuppet 9y ago
      Negative yielding bonds have already happened. But for most of us (as individuals), the debts we owe aren't in the form of bonds. How about negative yielding mortgages? Credit cards? Theoretically, they could happen. In practice, they probably won't, at least for a while after the start of the deflation.
      - pishpash 9y ago
        What difference does it make? In a competitive money market, negative rate loans will appear. Lenders still make a spread. The issue is not positive or negative rates, but whether the price expectation is stable or unstable. As long as the absolute value of price change is small the price is stable. As for why central banks prefer positive rather than negative, that's the better question.
pishpash 9y ago
Economists and psychotics are the only creatures who, when they and the universe do not agree, believe that it is not they who are wrong but the universe. More to the point, you may not want uncontrollable deflation just like you don't want uncontrollable inflation, those are system instabilities due to feedback. But a controlled deflation that responds to long-run demographics and economic reality is no problem. In fact, forcing the opposite is stupid.
- MaysonL 9y ago
  But a controlled deflation that responds to long-run demographics and economic reality is no problem. Except for people with mortgages or student loans to pay.
  - pishpash 9y ago
    They can refinance just like they refinance now to a lower rate.
    - pcardh0 9y ago
      You can't refinance the principal. You are paying off a larger amount with deflated dollars.
notadoc 9y ago
> I used to think that also until I studied economics in college Right so you kind of proved my point, that deflation is the academic economist boogieman.

toomuchtodo 9y ago

If you had to wager between central banks attempting to stoke inflation to make people work versus technology creating a never ending deflationary effect, who would you bet on?

notadoc 9y ago
Given the effectiveness of QE and ZIRP creating 10%-20% annual asset inflation for the past decade while most wages are flat? I'd have to bet on the central banks, not that I agree with the policy.
- toomuchtodo 9y ago
  But are younger generations jumping onto the treadmill to acquire these assets at overinflated prices? That's the question. Housing and equities might continue to go up in price, most everything else will decline (especially energy and transportation). Wouldn't that mean you could live well off of little if you opted out of high cost of living areas?

jhj 9y ago

Prices include wages too. If all wages and prices adjusted instantaneously, then there is no real difference between inflation or deflation. However, people are mentally resistant to being paid less (nominally) for a job, even though in inflation-adjusted terms they would be making the same thing (or more) as they did before. This "wage stickiness" leads to unemployment as companies choose to lay off people instead of paying them more (by holding their wages constant over time), and are also resistant to hiring new people at lower wages while keeping current employees stuck at higher wages, for fear that this would discourage current employees or cause internal conflict.

pishpash 9y ago
This is baseless speculation. Corporations do and people accept all sorts of things including wage cuts.
- skybrian 9y ago
  It may be controversial but it's not baseless speculation. It's a thing economists study, though apparently they've been unable to agree: http://www.investopedia.com/articles/economics/09/wage-stickiness.asp http://www.investopedia.com/articles/economics/09/wage-stick...
xbmcuser 9y ago
My solution be for let's say Japan would be to peg everything from wages to mortgages to the US dollar. Now with deflation you will be making losses in yen as the value of yen to the $ will keep increasing but in dollar terms and in actual buying strength you will still be improving. Though this will be something very hard to do and everyone would want to keep the yen instead of holding any asset.