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It's not just specific goods; technology and automation reduces the cost of almost everything in the consumer price index, from food to transportation to energy
by jbay808 5y ago
It's not just specific goods; technology and automation reduces the cost of almost everything in the consumer price index, from food to transportation to energy (although probably not shelter). I think if you search for "technology deflationary" you'll get lots of views on this, but not many in opposition to it.
That said, deflation only ends up happening in specific goods categories like TVs and computers, which are at a particularly sharp point in the technology curve, such that they deflate even faster than average. That's again because the average CPI growth is governed by a feedback loop, where the central bank adjusts interest rates to target 2% inflation, so as, say, food gets cheaper to produce, monetary stimulus is gradually added to the system to combat the falling costs and encourage more consumption. This is done to avoid the kind of deflationary cycle that you're talking about. (Central banks want to avoid deflation so that debts don't become onerous to repay, which can create a depression).
But the result is that while technology is deflationary, it does not create deflation, because that's maintained by a feedback loop; instead it manifests in gradually declining interest rates (and thus increasing valuations and real estate prices, as I mentioned).
That's what it's like to be in a feedback loop. Your computer may act as a heat source for your home but as long as the thermostat is maintaining temperature at a setpoint, the computer won't change that average temperature -- heat it produces will be offset by reduced furnace activity.
(Of course there are also long-term structurally inflationary forces as well. Environmental damage and resource scarcity, like declining fish stocks for example, are structurally inflationary forces. Demographics can go either way. Short term things like wars, debt crises, earthquakes, or pandemics can obviously have a huge impact, and irresponsible monetary policy can throw things right out the window.)
- Ericson2314 5y agoI had started to reply, but I didn't realize inflation was lower in the 19th century. I will have to mull on that. > Central banks want to avoid deflation so that debts don't become onerous to repay, which can create a depression. Agreed. In other words I didn't realize the 19th century was so bad!
- jbay808 5y agoI don't personally think low inflation, or even deflation, are so bad, but that idea is at the heart of central bank policy frameworks.
- Ericson2314 5y agoI would prefer other ways than inflation to deal with debt accumulation and miserly unproductively money hoarding, such as demurrage. But the 19th century did not do those, so I thus find myself agreeing with the Central Bank. Also, since its hard to imagine technology process with out debt in a market economy, we have have an interesting interaction here.
- jbay808 5y agoI'm not quite sure in what sense you're using the 19th century as a reference here. As an example of a time of rapid technological change? As a time before central bank inflation targeting?
- imtringued 5y agoHe means the 20th century. Governments thought they could solve the debt problem with austerity but people simply responded to the lower interest rates by literally keeping their money under the mattress. This is still true today. Interest is at zero, people keep their money in bank accounts of banks who are so heavily overleveraged vs their demand deposits that they are unable to take the risk of lending. Money is stuck and has to be replenished by more borrowing i.e. QE asset purchases give banks more reserve assets and let them pretend their balance sheet is clean.