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Japanese deflation is brought up a lot. However it didn’t really strike me as a troubled economy when visiting - on the contrary, things looked quite well. Can

Japanese deflation is brought up a lot. However it didn’t really strike me as a troubled economy when visiting - on the contrary, things looked quite well. Can someone elaborate on why deflation is so bad?

toss1 7y ago
Deflation is bad because it is a self-reinforcing slowdown in the economy. The money gets more valuable and the assets get cheaper. so the incentive in every micro-decision is to hoard money and not spend. Why spend when the same thing will get cheaper tomorrow/next week/month/year...? So, the key factor of the Velocity of Money declines, and the entire economy either grinds or crashes to a (relative) halt. My understanding is that deflation is also very hard to get out of. Requires massive liquidity injections, and doing that without creating a crisis of confidence by overshooting is tough. For the current situation, my working conjecture (w/o running hard numbers/models) is that the Great Recession 11yrs ago destroyed so much wealth/value, and was so deflationary, that the central banks may never soon fill the hole with new liquidity. The evidence is that despite nearly continuous quantitative easing and other CB programs, over a decade later, we're still seeing this kind of phenomena - they just can't create & maintain even minimal inflation. Not sure what to do about it, but that's what I see... (edit: typos)
- chii 7y ago
  Deflationary problems seems to me a overblown issue, and the cure may be worse than the disease. Inflation prevents low income earners from saving, but they aren't in a position to take risk and invest. Therefore, it causes their networth to drop in relation to the wealthy (who can take risks to keep up by investing). Inflation also keep wages down, as it's easier to pay the same wage , and any increase must be above inflation rate to remain at the same purchasing power. Inflation also leads to speculation, rather than to invest in productivity increases. With deflation, you end up not spending as much on discretionary/luxury goods, and only spend the minimum necessary. The prevailing theory is that this leads to slowdown in the economy - but I say it leads to low to zero mal-investments. If you have a high chance that your capital is going to have more purchasing power later, you would only invest in good, known ventures that is not speculative (e.g., building basic infrastructure that has a sound business model, rather than building fad apps).
  - kyuudou 7y ago
    EXCELLENT synopsis. Also, some consider inflation outright theft from the middle and lower classes or in the least morally questionable.
  - deleted 7y ago
    [deleted]
  - toss1 7y ago
    Of course transient deflation can be a good thing. Adn deflation as we are now accustomed in the tech industry is a very good thing - it is caused by an increase in the quality/supply of available goods, rather than a decrease in the money supply. However a deflationary spiral of declining money supply (usually created by destruction of value), where labor utilization & wages decline makes things much harder for ordinary people. That said, I'd like to note the the above answer was to a question about what is bad about deflation. The good thing about deflation may be that it tends to be followed by increasing growth, possibly in no small part because central banks try to do something about it.
- mindslight 7y ago
  > Deflation is bad because it is a self-reinforcing slowdown in the economy. If you care about the environment, global warming, resource depletion, etc this is a good thing. Are we not currently producing more stuff than can be reasonably used? > Why spend when the same thing will get cheaper tomorrow/next week/month/year...? This is exactly how computing technology has been for several decades. Plenty of spending still goes on, because items have immediate utility. Being able to save by buying a loaf of bread tomorrow doesn't matter when you need to eat today.
- raxxorrax 7y ago
  But this is all conjecture from economic theories that might or might not be true.

toss1 7y ago

Deflation is bad because it is a self-reinforcing slowdown in the economy. The money gets more valuable and the assets get cheaper. so the incentive in every micro-decision is to hoard money and not spend. Why spend when the same thing will get cheaper tomorrow/next week/month/year...? So, the key factor of the Velocity of Money declines, and the entire economy either grinds or crashes to a (relative) halt. My understanding is that deflation is also very hard to get out of. Requires massive liquidity injections, and doing that without creating a crisis of confidence by overshooting is tough. For the current situation, my working conjecture (w/o running hard numbers/models) is that the Great Recession 11yrs ago destroyed so much wealth/value, and was so deflationary, that the central banks may never soon fill the hole with new liquidity. The evidence is that despite nearly continuous quantitative easing and other CB programs, over a decade later, we're still seeing this kind of phenomena - they just can't create & maintain even minimal inflation. Not sure what to do about it, but that's what I see... (edit: typos)

chii 7y ago
Deflationary problems seems to me a overblown issue, and the cure may be worse than the disease. Inflation prevents low income earners from saving, but they aren't in a position to take risk and invest. Therefore, it causes their networth to drop in relation to the wealthy (who can take risks to keep up by investing). Inflation also keep wages down, as it's easier to pay the same wage , and any increase must be above inflation rate to remain at the same purchasing power. Inflation also leads to speculation, rather than to invest in productivity increases. With deflation, you end up not spending as much on discretionary/luxury goods, and only spend the minimum necessary. The prevailing theory is that this leads to slowdown in the economy - but I say it leads to low to zero mal-investments. If you have a high chance that your capital is going to have more purchasing power later, you would only invest in good, known ventures that is not speculative (e.g., building basic infrastructure that has a sound business model, rather than building fad apps).
- kyuudou 7y ago
  EXCELLENT synopsis. Also, some consider inflation outright theft from the middle and lower classes or in the least morally questionable.
- deleted 7y ago
  [deleted]
- toss1 7y ago
  Of course transient deflation can be a good thing. Adn deflation as we are now accustomed in the tech industry is a very good thing - it is caused by an increase in the quality/supply of available goods, rather than a decrease in the money supply. However a deflationary spiral of declining money supply (usually created by destruction of value), where labor utilization & wages decline makes things much harder for ordinary people. That said, I'd like to note the the above answer was to a question about what is bad about deflation. The good thing about deflation may be that it tends to be followed by increasing growth, possibly in no small part because central banks try to do something about it.
mindslight 7y ago
> Deflation is bad because it is a self-reinforcing slowdown in the economy. If you care about the environment, global warming, resource depletion, etc this is a good thing. Are we not currently producing more stuff than can be reasonably used? > Why spend when the same thing will get cheaper tomorrow/next week/month/year...? This is exactly how computing technology has been for several decades. Plenty of spending still goes on, because items have immediate utility. Being able to save by buying a loaf of bread tomorrow doesn't matter when you need to eat today.
raxxorrax 7y ago
But this is all conjecture from economic theories that might or might not be true.