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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

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.
gte910h 16y ago
>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. 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. (This is often called "Bad deflation" while the industry getting better at making things version is called "good deflation") > taking a vacation right now might be worth an extra $50 bucks In the specific case, yes, but in the general case, everyone spends less money in deflation than in inflation, as it is an investment. This includes businesses, which eventually turns into laid off staff. >3. If people stop investing their money they might save it instead. Why assume that saving money is bad? Savings (as opposed to investment) past a certain point is bad. It causes more deflation, as it pulls money out of circulation, which further causes a drop in prices. The Great Depression was a time of lots of savings for those who had cash. All this currency coming out of the economy caused more deflation, etc. Remember, as a thing becomes more rare, it's value goes up. As more money is saved, it's value goes up for everyone (aka more deflation occurs).

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.

gte910h 16y ago

>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. 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. (This is often called "Bad deflation" while the industry getting better at making things version is called "good deflation") > taking a vacation right now might be worth an extra $50 bucks In the specific case, yes, but in the general case, everyone spends less money in deflation than in inflation, as it is an investment. This includes businesses, which eventually turns into laid off staff. >3. If people stop investing their money they might save it instead. Why assume that saving money is bad? Savings (as opposed to investment) past a certain point is bad. It causes more deflation, as it pulls money out of circulation, which further causes a drop in prices. The Great Depression was a time of lots of savings for those who had cash. All this currency coming out of the economy caused more deflation, etc. Remember, as a thing becomes more rare, it's value goes up. As more money is saved, it's value goes up for everyone (aka more deflation occurs).