3 ms·

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.

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.