3 ms·

Deflation - Are lower prices scarier than higher ones?

23 points by chwolfe 16y ago

j_baker 16y ago
This is what I love about slate. It seems to do a better job of reporting on issues like this without a lot of partisan ideology.
- kevbin 16y ago
  Slate is partisan ideology packaged as Kinsley-ism: "the common wisdom is right, but not for the reason everyone thinks!" He brought that shtick over from The New Republic and it seems to have taken root, even Jack Shafer can't fix it. If there's any doubt about Slate's partisan leanings, here's how Slate's editors voted in 2008: Barack Obama: 55 John McCain: 1 Bob Barr: 1 Not McCain: 1 Noncitizen, can't vote: 4 http://www.slate.com/id/2203151/pagenum/4 http://www.slate.com/id/2203151/pagenum/4
viggity 16y ago
FTA: "For decades, politicians and pundits on the right have told us that we need to balance the federal budget in order to keep inflation low; this remains a staple of libertarian thinking (even though economic research demonstrates that except in wartime, there is effectively no relationship between the size of government spending and the existence of inflation)" Sure there is no correlation between size of government and the existence of inflation, but that isn't what the "politicians and pundits on the right" have said, they said "we need to balance the federal budget in order to keep inflation low". It isn't overall government spending is going indicate inflation, but rather large deficit spending and/or large gov debt that is going to lead to inflation because the only way to pay off creditors is to print more money, the more money in circulation the less value it has => inflation. Am I wrong? Isn't there some awful inflation going on right now in Zimbabwe because they government keeps printing more and more money to pay off its debt?
- noelchurchill 16y ago
  You're right. Inflation actually refers to an increasing number of dollars in the economy, not increasing prices of goods. More dollars in the economy will lead to higher prices of goods and services, so this leads to the common misconception. But like you said, if government spending is larger without larger deficits, this would mean they're spending more existing dollars, no new dollars are created, and prices of goods stay the same.
  - deleted 16y ago
    [deleted]
    - lionhearted 16y ago
      Well, you're both right, or you're both wrong, depending on how you look at it. From your Wikipedia link: > The term "inflation" originally referred to increases in the amount of money in circulation. Today, the term monetary inflation is generally used to distinguish such an occurrence from a general rise in prices, sometimes called price inflation. "Price inflation" is the increase of prices. "Monetary inflation" is increases in the size of the money supply. Economists originally used to use the term "inflation" to mean monetary inflation (larger money supply), and if it's an economist not speaking to a popular audience, that's probably what he means. A larger money supply (monetary inflation) typically results in higher prices (price inflation).
    - jakehow 16y ago
      Gotta love the confidence. You are talking about price inflation, the parent is talking about currency inflation. Maybe you guys should stick to Merriam Webster's definition which masterfully butchers them into one: "a continuing rise in the general price level usually attributed to an increase in the volume of money and credit relative to available goods and services" http://www.merriam-webster.com/dictionary/inflation http://www.merriam-webster.com/dictionary/inflation
- chrismealy 16y ago
  That's not been the case for Japan. The cause of the inflation in Zimbabwe is the collapse of their economy, not the other way around. More here: http://bilbo.economicoutlook.net/blog/?p=3773 http://bilbo.economicoutlook.net/blog/?p=3773
- gahahaha 16y ago
  There is actually deflation in Zimbabwe now. From Wikipedia: """In an effort to combat inflation and foster economic growth the Zimbabwean Dollar was suspended indefinitely on 12 April 2009. Zimbabwe now allows trade in the United States Dollar and various other currencies such as the South African Rand, Euro, Sterling, and Botswana Pula. The use of the US Dollar yielded enormous results within weeks as inflation actually fell below zero to -3 percent.""" Also, a brief repetition of what we have learned from Keynes: """Economies can and often do suffer from an overall lack of demand, which leads to involuntary unemployment.The economy's automatic tendency to correct shortfalls in demand, if it exists at all, operates slowly and painfully. Government policies to increase demand, by contrast, can reduce unemployment quickly. Sometimes increasing the money supply won't be enough to persuade the private sector to spend more, and government spending must step into the breach""" This is the point we are at now "government spending must step into the breach". And we can borrow to our harts content because we are in a liquidity trap where rates are zero, and deflation is the clear and present danger, not inflation. If inflation comes back, we should cheer, because that means that the economy is doing better again. Comparing the US to Zimbabwe is complete nonsense.
chrismealy 16y ago
Folks interested in deflation will want to check out Irving Fisher's debt deflation and Hyman Minsky's work: http://en.wikipedia.org/wiki/Debt_deflation http://en.wikipedia.org/wiki/Debt_deflation http://en.wikipedia.org/wiki/Hyman_Minsky http://en.wikipedia.org/wiki/Hyman_Minsky
noelchurchill 16y ago
"For decades, politicians and pundits on the right have told us that we need to balance the federal budget in order to keep inflation low; this remains a staple of libertarian thinking (even though economic research demonstrates that except in wartime, there is effectively no relationship between the size of government spending and the existence of inflation)." Well in that case, lets just stay out of war and let the gov hand out monthly payments to everyone so we don't have to work anymore. If government spending doesn't lead to inflation then this should work out fine.
- jacquesm 16y ago
  I think there is wisdom in the first part of your plan, but I'm not so sure about the second.
  - noelchurchill 16y ago
    Lol, ya maybe we should keep our day jobs just in case.
- gaius 16y ago
  Notice the phrasing. Not government borrowing, not "quantitative easing" (printing money) but spending. In the US and UK there's never been a peacetime high-spending government that didn't also borrow unsustainably. So if you're say Sweden (high tax, high spending) then perhaps you can avoid high inflation, but you can't extrapolate from there to dissimilar economies.
  - noelchurchill 16y ago
    I don't think you read the article, or specifically the quote in my comment you're replying to. It specifically refers to the concern about balancing the budget. You can't run a unbalanced deficit budget without borrowing.
- deleted 16y ago
  [deleted]
- 16y ago
ajg1977 16y ago
Krugman wrote a good article earlier this week addressing why deflation is a bad thing. http://krugman.blogs.nytimes.com/2010/08/02/why-is-deflation-bad/ http://krugman.blogs.nytimes.com/2010/08/02/why-is-deflation...
- bfung 16y ago
  Plus the title of this post takes a naive twist to this topic. It's not the current prices that makes deflation bad for an economy, but that the (perceived?) future price will be even lower than the current price, which discourages investment since the investment will just lose. As for the comment about computer hardware (and this applies to cars), the opportunity cost of using the physical good now vs later is a bit more concrete than throwing money in a "business", esp. startups, which are by nature extremely risky.
Gormo 16y ago
Deflation poses a couple of significant threats. Firstly, it acts as a disincentive to real investment: the rate of deflation is effectively an interest rate earned on funds stuffed into mattresses. If deflation is at 5%, no one will want to invest in any project with less than a 5% return over the same period. Risk and liquidity premiums would also increase even for investments that do provide a higher return than the deflation rate. Secondly, existing long-term debts would become extremely onerous for borrowers. The implications for outstanding mortgages could make the recent default epidemic pale in comparison. However, it's worth pointing out that the 19th century was largely a period of sustained, gradual deflation, and was also a period of tremendous economic growth with little of the amplified boom-bust cycle we experienced in the 20th century. I'd conjecture that a climate in which a small amount of deflation is accepted as a given would foster economic decision making that tends to focus more on real wealth-creation, and less on the kind of financial abstractions which have led to the recent turmoil. As long as we could manage the transition from a slightly inflationary to a slightly deflationary economy (i.e. find a way to deal with the problem of outstanding debt), I'm not so sure it would be quite the disaster that the article portrays.
- jbooth 16y ago
  What? The latter half of the 19th century had ridiculous booms and busts.
  - Gormo 16y ago
    Even in comparison to the great depression and the recent financial collapse? There are always booms and busts, but inflation tends to encourage much bigger booms, and thus much bigger busts. Could you imagine the kind of risk-taking behavior that led to the credit bubble happening in an environment of anticipated deflation?
    - jbooth 16y ago
      The great depression and recent collapse are 75 years apart. There were 4 major downturns in the 1800s, 3 in the later half, and they were much more severe than the typical recession in the 20th century, 2 were full-fledged depressions: http://au.answers.yahoo.com/question/index?qid=20080304215730AAbuqyC http://au.answers.yahoo.com/question/index?qid=2008030421573... This is in the context of the industrial revolution, so yes, very much boom or bust.
sp332 16y ago
Computer hardware (and electronic hardware in general) has been in continuous deflation for decades. "Wait until the price comes down" is common advice in tech circles. And yet the market has grown exponentially regardless.
- angstrom 16y ago
  Yeah, but qualitatively you usually got more for your money by waiting with tech, the price may have gone down on the original product only because something better replaced it. The price drops are predictably cyclical. If I buy a commodity like corn, oil, or steel I'm still getting a virtually indistinguishable good regardless when it is bought. The expectation of price drop can create a deflationary feedback if it happens in enough commodities.
hop 16y ago
Information, trade and money flows at light speed around the world now. This is very different than the 1930's and with a world wide market system, and the US having the reserve currency, I think it would be tough to have spiraling asset deflation like the Great Depression. Whats not tough is abusing this and printing tons of money.
sentinel 16y ago
Not for me they ain't.

23 points by chwolfe 16y ago

This is what I love about slate. It seems to do a better job of reporting on issues like this without a lot of partisan ideology.

kevbin 16y ago
Slate is partisan ideology packaged as Kinsley-ism: "the common wisdom is right, but not for the reason everyone thinks!" He brought that shtick over from The New Republic and it seems to have taken root, even Jack Shafer can't fix it. If there's any doubt about Slate's partisan leanings, here's how Slate's editors voted in 2008: Barack Obama: 55 John McCain: 1 Bob Barr: 1 Not McCain: 1 Noncitizen, can't vote: 4 http://www.slate.com/id/2203151/pagenum/4 http://www.slate.com/id/2203151/pagenum/4

viggity 16y ago

FTA: "For decades, politicians and pundits on the right have told us that we need to balance the federal budget in order to keep inflation low; this remains a staple of libertarian thinking (even though economic research demonstrates that except in wartime, there is effectively no relationship between the size of government spending and the existence of inflation)" Sure there is no correlation between size of government and the existence of inflation, but that isn't what the "politicians and pundits on the right" have said, they said "we need to balance the federal budget in order to keep inflation low". It isn't overall government spending is going indicate inflation, but rather large deficit spending and/or large gov debt that is going to lead to inflation because the only way to pay off creditors is to print more money, the more money in circulation the less value it has => inflation. Am I wrong? Isn't there some awful inflation going on right now in Zimbabwe because they government keeps printing more and more money to pay off its debt?

noelchurchill 16y ago
You're right. Inflation actually refers to an increasing number of dollars in the economy, not increasing prices of goods. More dollars in the economy will lead to higher prices of goods and services, so this leads to the common misconception. But like you said, if government spending is larger without larger deficits, this would mean they're spending more existing dollars, no new dollars are created, and prices of goods stay the same.
- deleted 16y ago
  [deleted]
  - lionhearted 16y ago
    Well, you're both right, or you're both wrong, depending on how you look at it. From your Wikipedia link: > The term "inflation" originally referred to increases in the amount of money in circulation. Today, the term monetary inflation is generally used to distinguish such an occurrence from a general rise in prices, sometimes called price inflation. "Price inflation" is the increase of prices. "Monetary inflation" is increases in the size of the money supply. Economists originally used to use the term "inflation" to mean monetary inflation (larger money supply), and if it's an economist not speaking to a popular audience, that's probably what he means. A larger money supply (monetary inflation) typically results in higher prices (price inflation).
  - jakehow 16y ago
    Gotta love the confidence. You are talking about price inflation, the parent is talking about currency inflation. Maybe you guys should stick to Merriam Webster's definition which masterfully butchers them into one: "a continuing rise in the general price level usually attributed to an increase in the volume of money and credit relative to available goods and services" http://www.merriam-webster.com/dictionary/inflation http://www.merriam-webster.com/dictionary/inflation
chrismealy 16y ago
That's not been the case for Japan. The cause of the inflation in Zimbabwe is the collapse of their economy, not the other way around. More here: http://bilbo.economicoutlook.net/blog/?p=3773 http://bilbo.economicoutlook.net/blog/?p=3773
gahahaha 16y ago
There is actually deflation in Zimbabwe now. From Wikipedia: """In an effort to combat inflation and foster economic growth the Zimbabwean Dollar was suspended indefinitely on 12 April 2009. Zimbabwe now allows trade in the United States Dollar and various other currencies such as the South African Rand, Euro, Sterling, and Botswana Pula. The use of the US Dollar yielded enormous results within weeks as inflation actually fell below zero to -3 percent.""" Also, a brief repetition of what we have learned from Keynes: """Economies can and often do suffer from an overall lack of demand, which leads to involuntary unemployment.The economy's automatic tendency to correct shortfalls in demand, if it exists at all, operates slowly and painfully. Government policies to increase demand, by contrast, can reduce unemployment quickly. Sometimes increasing the money supply won't be enough to persuade the private sector to spend more, and government spending must step into the breach""" This is the point we are at now "government spending must step into the breach". And we can borrow to our harts content because we are in a liquidity trap where rates are zero, and deflation is the clear and present danger, not inflation. If inflation comes back, we should cheer, because that means that the economy is doing better again. Comparing the US to Zimbabwe is complete nonsense.

chrismealy 16y ago

Folks interested in deflation will want to check out Irving Fisher's debt deflation and Hyman Minsky's work: http://en.wikipedia.org/wiki/Debt_deflation http://en.wikipedia.org/wiki/Debt_deflation http://en.wikipedia.org/wiki/Hyman_Minsky http://en.wikipedia.org/wiki/Hyman_Minsky

noelchurchill 16y ago

"For decades, politicians and pundits on the right have told us that we need to balance the federal budget in order to keep inflation low; this remains a staple of libertarian thinking (even though economic research demonstrates that except in wartime, there is effectively no relationship between the size of government spending and the existence of inflation)." Well in that case, lets just stay out of war and let the gov hand out monthly payments to everyone so we don't have to work anymore. If government spending doesn't lead to inflation then this should work out fine.

jacquesm 16y ago
I think there is wisdom in the first part of your plan, but I'm not so sure about the second.
- noelchurchill 16y ago
  Lol, ya maybe we should keep our day jobs just in case.
gaius 16y ago
Notice the phrasing. Not government borrowing, not "quantitative easing" (printing money) but spending. In the US and UK there's never been a peacetime high-spending government that didn't also borrow unsustainably. So if you're say Sweden (high tax, high spending) then perhaps you can avoid high inflation, but you can't extrapolate from there to dissimilar economies.
- noelchurchill 16y ago
  I don't think you read the article, or specifically the quote in my comment you're replying to. It specifically refers to the concern about balancing the budget. You can't run a unbalanced deficit budget without borrowing.
deleted 16y ago
[deleted]
16y ago

ajg1977 16y ago

Krugman wrote a good article earlier this week addressing why deflation is a bad thing. http://krugman.blogs.nytimes.com/2010/08/02/why-is-deflation-bad/ http://krugman.blogs.nytimes.com/2010/08/02/why-is-deflation...

bfung 16y ago
Plus the title of this post takes a naive twist to this topic. It's not the current prices that makes deflation bad for an economy, but that the (perceived?) future price will be even lower than the current price, which discourages investment since the investment will just lose. As for the comment about computer hardware (and this applies to cars), the opportunity cost of using the physical good now vs later is a bit more concrete than throwing money in a "business", esp. startups, which are by nature extremely risky.

Gormo 16y ago

Deflation poses a couple of significant threats. Firstly, it acts as a disincentive to real investment: the rate of deflation is effectively an interest rate earned on funds stuffed into mattresses. If deflation is at 5%, no one will want to invest in any project with less than a 5% return over the same period. Risk and liquidity premiums would also increase even for investments that do provide a higher return than the deflation rate. Secondly, existing long-term debts would become extremely onerous for borrowers. The implications for outstanding mortgages could make the recent default epidemic pale in comparison. However, it's worth pointing out that the 19th century was largely a period of sustained, gradual deflation, and was also a period of tremendous economic growth with little of the amplified boom-bust cycle we experienced in the 20th century. I'd conjecture that a climate in which a small amount of deflation is accepted as a given would foster economic decision making that tends to focus more on real wealth-creation, and less on the kind of financial abstractions which have led to the recent turmoil. As long as we could manage the transition from a slightly inflationary to a slightly deflationary economy (i.e. find a way to deal with the problem of outstanding debt), I'm not so sure it would be quite the disaster that the article portrays.

jbooth 16y ago
What? The latter half of the 19th century had ridiculous booms and busts.
- Gormo 16y ago
  Even in comparison to the great depression and the recent financial collapse? There are always booms and busts, but inflation tends to encourage much bigger booms, and thus much bigger busts. Could you imagine the kind of risk-taking behavior that led to the credit bubble happening in an environment of anticipated deflation?
  - jbooth 16y ago
    The great depression and recent collapse are 75 years apart. There were 4 major downturns in the 1800s, 3 in the later half, and they were much more severe than the typical recession in the 20th century, 2 were full-fledged depressions: http://au.answers.yahoo.com/question/index?qid=20080304215730AAbuqyC http://au.answers.yahoo.com/question/index?qid=2008030421573... This is in the context of the industrial revolution, so yes, very much boom or bust.

sp332 16y ago

Computer hardware (and electronic hardware in general) has been in continuous deflation for decades. "Wait until the price comes down" is common advice in tech circles. And yet the market has grown exponentially regardless.

angstrom 16y ago
Yeah, but qualitatively you usually got more for your money by waiting with tech, the price may have gone down on the original product only because something better replaced it. The price drops are predictably cyclical. If I buy a commodity like corn, oil, or steel I'm still getting a virtually indistinguishable good regardless when it is bought. The expectation of price drop can create a deflationary feedback if it happens in enough commodities.

hop 16y ago

Information, trade and money flows at light speed around the world now. This is very different than the 1930's and with a world wide market system, and the US having the reserve currency, I think it would be tough to have spiraling asset deflation like the Great Depression. Whats not tough is abusing this and printing tons of money.

sentinel 16y ago

Not for me they ain't.