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You’re assuming that in a deflationary environment, your hypothetical family’s nominal income will stay constant over a 20-year period. Nice work, if you can g
by sethg 16y ago
You’re assuming that in a deflationary environment, your hypothetical family’s nominal income will stay constant over a 20-year period. Nice work, if you can get it.
If I work in a widget factory and the price of widgets goes down because of deflation, while my nominal wages remain constant, then my wages as a share of that price goes up. That situation can’t continue for very long. The factory’s shareholders want a real return on their investment, especially since they could just cash in their stock, put the cash under a mattress, and wait for the price of everything to go down further. If the factory itself is in debt, the creditors will be demanding the same nominal payment as before, further squeezing the shareholders.
So either I have to accept a cut in my nominal wages, or I have to make more widgets per hour for the same nominal wage, or I get laid off. And when I and lots of people like me have less money to spend, the people who manufacture all the things that we buy have to reduce their prices further, thus increasing the squeeze on their employees’ wages, etc., etc.
- dnautics 16y agoWhy would you have to accept a cut in your nominal wages? I'm pretty sure the era from 1860-1900 was generally deflationary in the USA, and I don't think that there was much of an issue with people taking cuts in nominal wages. Most jobs in our inflationary real world have promotions, which, typically outstrip the rate of inflation. Where is that money coming from? You also have to consider why the price of widgets is going down because of deflation. If it's going down because the widget is obsolete relative to other technologies, then either the manufacturer is beating margins by improving efficiencies (and growing the scale of the company), leaving it okay for the employee to be paid the same nominal wage... Or else, yes, the person will lose a job. But if it's the case that the manufacturer isn't able to keep up with developing technology, then not even inflation will help that person keep a job, or at the worst, it's just keeping a person in a job that is inefficient for the economy and society. All this hoarding stuff is nonsense. If people keep hoarding money, then in order to compete with saving, (absent a centrally-decided interest rate) banks have to issue loans at lower interest rates... Which, of course, expands the money supply, and creates competing inflation.
- sethg 16y agoI'm pretty sure the era from 1860-1900 was generally deflationary in the USA, and I don't think that there was much of an issue with people taking cuts in nominal wages. http://en.wikipedia.org/wiki/Panic_of_1873 http://en.wikipedia.org/wiki/Panic_of_1873 http://en.wikipedia.org/wiki/Panic_of_1893 http://en.wikipedia.org/wiki/Panic_of_1893 http://en.wikipedia.org/wiki/Panic_of_1907 http://en.wikipedia.org/wiki/Panic_of_1907