3 ms·

>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

by 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?
- billswift 16y ago
  The only real problem is that wages are sticky, there is significant resistance to reducing wages, which means the cost of labor is going up relative to everything else - which in turn means lay-offs; which will be a major problem now, since unemployment is already high from the recession.
  - gte910h 16y ago
    You don't think everyone spending less money on everything is a real problem? You don't think people buying fewer cars, computers, software, video games, ipods, houses and groceries is a bad thing for the economy? When just holding your money makes it more valuable, people do that like crazy.
    - grandalf 16y ago
      Do you believe the converse, that inflation is good for the economy (people buying things now bc the price will double in a year)? Unless you're willing to prescribe a specific policy remedy, I suggest you clarify your thoughts before making the argument you're making.
      - gte910h 16y ago
        Large amounts of inflation is bad as well. Small-moderate tends to be good, as it causes investment, and stops us from accidental deflation. I'm arguing to keep the current "small amounts of intentional inflation" doctrine that's currently the goal.
        grandalf 16y ago
        The Fed shows no signs of stopping its approach. With quantitative easing, etc., the Fed has actually created negative real interest rates. If anything I'd be worried that there are powerful interests lobbying for targeted booms. The housing/building sector has been a huge beneficiary of transfers of wealth from taxpayers and users of currency as a store of value, and probably has its sights on another Fed-fueled building/housing boom. Right now lots of Americans make payments on credit cards which are useless bc the limit has been reduced, etc. There is also pressure on the Fed from banks who know that there could be waves of new defaults in consumer credit cards. So on balance I think the fear is an over-reaction by the Fed rather than an under-reaction. There is also an interesting meme coming into focus in which credit is viewed as a right just like healthcare.
grandalf 16y ago
Your critique also applies to inflation. If a vacation that costs $1000 this year will cost $2000 next year, people have an unnatural incentive to purchase it today rather than wait until they actually wanted to purchase it. Further, inflation means that you have no incentive to save money since it will be worth less in the future. You are making a broad generalization that deflation is bad, when in reality what I think you are going after is price stability. However prices are not naturally stable b/c an economy is a dynamic, ever-changing thing.
- gte910h 16y ago
  >Your critique also applies to inflation. If a vacation that costs $1000 this year will cost $2000 next year, people have an unnatural incentive to purchase it today rather than wait until they actually wanted to purchase it. While the family's vacation buying decision is changed indeed in both case, they end up making the economy better in the inflationary case, thereby increasing the real money value they'll eventually get back in wages from the increase economic activity. No one wants runaway inflation, but some inflation is better than any deflation. >Further, inflation means that you have no incentive to save money since it will be worth less in the future. Savings in general (as in cash in the bank) is not that valuable to the economy as a whole. Investment is much more useful. Savings (macroeconomically speaking) are only really useful for flattening out peaks and nulls in the monthly income vs expenses. >ou are making a broad generalization that deflation is bad, when in reality what I think you are going after is price stability. No, I'm not. Broad based inflation from too little money in circulation itself is extremely bad. You can have a LOT of inflation and still have a pretty good life, but the economy suffers under even a little broad deflation.

by gte910h 16y ago

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?

billswift 16y ago
The only real problem is that wages are sticky, there is significant resistance to reducing wages, which means the cost of labor is going up relative to everything else - which in turn means lay-offs; which will be a major problem now, since unemployment is already high from the recession.
- gte910h 16y ago
  You don't think everyone spending less money on everything is a real problem? You don't think people buying fewer cars, computers, software, video games, ipods, houses and groceries is a bad thing for the economy? When just holding your money makes it more valuable, people do that like crazy.
  - grandalf 16y ago
    Do you believe the converse, that inflation is good for the economy (people buying things now bc the price will double in a year)? Unless you're willing to prescribe a specific policy remedy, I suggest you clarify your thoughts before making the argument you're making.
    - gte910h 16y ago
      Large amounts of inflation is bad as well. Small-moderate tends to be good, as it causes investment, and stops us from accidental deflation. I'm arguing to keep the current "small amounts of intentional inflation" doctrine that's currently the goal.
      - grandalf 16y ago
        The Fed shows no signs of stopping its approach. With quantitative easing, etc., the Fed has actually created negative real interest rates. If anything I'd be worried that there are powerful interests lobbying for targeted booms. The housing/building sector has been a huge beneficiary of transfers of wealth from taxpayers and users of currency as a store of value, and probably has its sights on another Fed-fueled building/housing boom. Right now lots of Americans make payments on credit cards which are useless bc the limit has been reduced, etc. There is also pressure on the Fed from banks who know that there could be waves of new defaults in consumer credit cards. So on balance I think the fear is an over-reaction by the Fed rather than an under-reaction. There is also an interesting meme coming into focus in which credit is viewed as a right just like healthcare.

grandalf 16y ago

Your critique also applies to inflation. If a vacation that costs $1000 this year will cost $2000 next year, people have an unnatural incentive to purchase it today rather than wait until they actually wanted to purchase it. Further, inflation means that you have no incentive to save money since it will be worth less in the future. You are making a broad generalization that deflation is bad, when in reality what I think you are going after is price stability. However prices are not naturally stable b/c an economy is a dynamic, ever-changing thing.

gte910h 16y ago
>Your critique also applies to inflation. If a vacation that costs $1000 this year will cost $2000 next year, people have an unnatural incentive to purchase it today rather than wait until they actually wanted to purchase it. While the family's vacation buying decision is changed indeed in both case, they end up making the economy better in the inflationary case, thereby increasing the real money value they'll eventually get back in wages from the increase economic activity. No one wants runaway inflation, but some inflation is better than any deflation. >Further, inflation means that you have no incentive to save money since it will be worth less in the future. Savings in general (as in cash in the bank) is not that valuable to the economy as a whole. Investment is much more useful. Savings (macroeconomically speaking) are only really useful for flattening out peaks and nulls in the monthly income vs expenses. >ou are making a broad generalization that deflation is bad, when in reality what I think you are going after is price stability. No, I'm not. Broad based inflation from too little money in circulation itself is extremely bad. You can have a LOT of inflation and still have a pretty good life, but the economy suffers under even a little broad deflation.