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Deflation just means prices are going down. This is a good thing for people who want to buy those things. Of course, after a bubble bursts prices will be lowe

Deflation just means prices are going down. This is a good thing for people who want to buy those things. Of course, after a bubble bursts prices will be lower. No price is intrinsically "good" or "bad". Price is a measure of supply and demand. The idea behind the typical Fed policy of slow inflation is that by constantly adding a bit of inflation, the Fed has something to take away when the economy needs to be slowed. Keep in mind that it is US policy to inflate housing prices, so it's no wonder that after a while it just wasn't sustainable. As a renter I find this practice abhorrent and wish that somehow the brunt of the economic crisis could be foisted upon all the mortgage debtors who thought they were Warren Buffet just before the crash. After the crash billions more were poured into housing in the hope that nobody would realize it was way, way overvalued. I think that most of this is built upon the desire not to have more people walk away so that there is still a remote numerical chance of deeming a the typical mortgage debtor aka "homeowner" credit worthy.

nostrademons 16y ago
The problem with deflation is that it tends to be very unevenly distributed. You rarely see prices drop by 5%; instead, you'll see some prices stay the same, and others drop by 25+%, and some even increase. In practice, this means that this is a good thing - if you're one of the people who keeps their jobs. Wages tend to be one of those prices that is least likely to drop; this is known as the "sticky wage problem" and is because employers have found that cutting nominal pay rates almost universally causes bad employee morale. So if you have a 5% drop in aggregate employment expenditures, it usually manifests itself as 95% of employees keep the same salary, and 5% get laid off entirely. Of course, I'm absolutely certain that I'll be in that 95%, right? Because I'm clearly above average. ;-)
stretchwithme 16y ago
yeah, we have two contradictory goals with housing: making it more affordable, while simultaneously inflating housing prices. If you removed the interest deduction, the first time buyer subsidies, the capital gains exclusion of $250k and whatever else they do, you'd see an even steeper decline.
- grandalf 16y ago
  Why should making housing affordable be a goal? What exactly does that mean? Why is someone earning a low income better off being locked into a 30 year mortgage at a rate of 6% on something that will appreciate at 1% per year on average?
haberman 16y ago
There are real problems with deflation. It discourages both spending (people wait to buy until prices are lower) and investment (profit margins are lower, and just sitting on money increases its value without the risk). Put another way, modest inflation is the kick in the pants that we need to get off our asses and ante up into the economy. Deflation encourages everyone to sit tight and hold onto what they have.
- barmstrong 16y ago
  Is it possible that spending less and saving more is, at times, exactly what people should be doing more of?
  - chopsueyar 16y ago
    No, you fool! We need more investment in mortgage-backed securites and credit swaps. Also, if we can get a bunch of startups to IPO without any real revenue, that would also be a huge help. Remember, we are consumers, not citizens.
gte910h 16y ago
>Deflation just means prices are going down. This is a good thing for people who want to buy those things. You have no clue what deflation is like if you think it "just means prices are going down". Deflation means people have great incentive to just hold on to money and not spend it. A vacation that costs $1000 today will only cost $950 next year. Deflation also means you have no need to invest your money to get a return. This makes people pull money out of circulation as they can just hold it and get richer. This causes even more value accretion per day, which causes even more people pull their money out. With all this money going out of circulation, and everyone putting off purchases, people are fired, laid off and downsized. Which causes people to have even less money, and the cycle spirals onward (This is what happened during the Great Depression btw).
- nradov 16y ago
  Microcomputer prices have been dropping for decades. Yet for some reason we keep buying them, usually more and more every year. Consumer price deflation is not something to fear or try to prevent; it's a necessary step in clearing market imbalances. http://globaleconomicanalysis.blogspot.com/2009/10/deflation-threat-what-deflation-threat.html http://globaleconomicanalysis.blogspot.com/2009/10/deflation...
  - gte910h 16y ago
    That's supply side deflation of a specific industry, which isn't harmful. It's a isolated thing. (And a good thing) The "other type" is when the entire economy does it because there isn't enough money. That's a horrible thing and what happened in the Great Depression
- barmstrong 16y ago
  I've never bought this explanation of why deflation is bad for a few reasons: 1. as someone else pointed out, computers gets cheaper per unit each year but if you want a computer now you still buy one (as many people do). In fact, you may just end up buying one now AND in a year as they keep getting cheaper. 2. In the same way, taking a vacation right now might be worth an extra $50 bucks. Delaying a vacation for a year might not sound fun. 3. If people stop investing their money they might save it instead. Why assume that saving money is bad? Americans have record levels of credit card debt, mortgage debt, car debt, etc. Why is saving more money such a bad thing? I've never seen any convincing proof that this is a positive feedback loop where people saving money causes more people to save money, in some sort of run away saving binge. It looks a lot more like a natural ebb and flow of saving vs. spending, returning to a market equilibrium. What am I missing?

nostrademons 16y ago

The problem with deflation is that it tends to be very unevenly distributed. You rarely see prices drop by 5%; instead, you'll see some prices stay the same, and others drop by 25+%, and some even increase. In practice, this means that this is a good thing - if you're one of the people who keeps their jobs. Wages tend to be one of those prices that is least likely to drop; this is known as the "sticky wage problem" and is because employers have found that cutting nominal pay rates almost universally causes bad employee morale. So if you have a 5% drop in aggregate employment expenditures, it usually manifests itself as 95% of employees keep the same salary, and 5% get laid off entirely. Of course, I'm absolutely certain that I'll be in that 95%, right? Because I'm clearly above average. ;-)

stretchwithme 16y ago

yeah, we have two contradictory goals with housing: making it more affordable, while simultaneously inflating housing prices. If you removed the interest deduction, the first time buyer subsidies, the capital gains exclusion of $250k and whatever else they do, you'd see an even steeper decline.

grandalf 16y ago
Why should making housing affordable be a goal? What exactly does that mean? Why is someone earning a low income better off being locked into a 30 year mortgage at a rate of 6% on something that will appreciate at 1% per year on average?

haberman 16y ago

There are real problems with deflation. It discourages both spending (people wait to buy until prices are lower) and investment (profit margins are lower, and just sitting on money increases its value without the risk). Put another way, modest inflation is the kick in the pants that we need to get off our asses and ante up into the economy. Deflation encourages everyone to sit tight and hold onto what they have.

barmstrong 16y ago
Is it possible that spending less and saving more is, at times, exactly what people should be doing more of?
- chopsueyar 16y ago
  No, you fool! We need more investment in mortgage-backed securites and credit swaps. Also, if we can get a bunch of startups to IPO without any real revenue, that would also be a huge help. Remember, we are consumers, not citizens.

gte910h 16y ago

>Deflation just means prices are going down. This is a good thing for people who want to buy those things. You have no clue what deflation is like if you think it "just means prices are going down". Deflation means people have great incentive to just hold on to money and not spend it. A vacation that costs $1000 today will only cost $950 next year. Deflation also means you have no need to invest your money to get a return. This makes people pull money out of circulation as they can just hold it and get richer. This causes even more value accretion per day, which causes even more people pull their money out. With all this money going out of circulation, and everyone putting off purchases, people are fired, laid off and downsized. Which causes people to have even less money, and the cycle spirals onward (This is what happened during the Great Depression btw).

nradov 16y ago
Microcomputer prices have been dropping for decades. Yet for some reason we keep buying them, usually more and more every year. Consumer price deflation is not something to fear or try to prevent; it's a necessary step in clearing market imbalances. http://globaleconomicanalysis.blogspot.com/2009/10/deflation-threat-what-deflation-threat.html http://globaleconomicanalysis.blogspot.com/2009/10/deflation...
- gte910h 16y ago
  That's supply side deflation of a specific industry, which isn't harmful. It's a isolated thing. (And a good thing) The "other type" is when the entire economy does it because there isn't enough money. That's a horrible thing and what happened in the Great Depression
barmstrong 16y ago
I've never bought this explanation of why deflation is bad for a few reasons: 1. as someone else pointed out, computers gets cheaper per unit each year but if you want a computer now you still buy one (as many people do). In fact, you may just end up buying one now AND in a year as they keep getting cheaper. 2. In the same way, taking a vacation right now might be worth an extra $50 bucks. Delaying a vacation for a year might not sound fun. 3. If people stop investing their money they might save it instead. Why assume that saving money is bad? Americans have record levels of credit card debt, mortgage debt, car debt, etc. Why is saving more money such a bad thing? I've never seen any convincing proof that this is a positive feedback loop where people saving money causes more people to save money, in some sort of run away saving binge. It looks a lot more like a natural ebb and flow of saving vs. spending, returning to a market equilibrium. What am I missing?