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Why do you say that softening demand will cause prices to go up? That sounds contrary to every economics lesson I've ever had.

godelski 4y ago
Nuance matters. In this case people start saving but also EXPECT prices to increase. So prices are able to increase under that speculation. Sellers can then demand higher prices while demand decreases. [0] discusses self-fulfilling oil price increases due to speculation of oil price increases. This is more what I was pointing at but conveyed (extremely) poorly. There's also the matter that people treat econ 101 as facts but the truth of the matter is economics is really fuzzy and there are no hard rules and there are always (ALWAYS) exceptions. Even what I said can happen or can not. I was just pointing out that it ,,can'' happen. It's all very statistical. But you may notice that the real world very much does not follow anywhere near the econ 101 models. It's like doing physics where everything is a spherical cow. Truth of the matter is that if we actually understood economics we wouldn't run into situations like this. It isn't like economies benefit from major downturns and inflation. It'd be like knowingly shooting yourself in the foot. Over and over again. [0] https://www.investopedia.com/ask/answers/033115/how-does-law-supply-and-demand-affect-prices.asp https://www.investopedia.com/ask/answers/033115/how-does-law...
- rvbissell 4y ago
  I have no quarrel with your second paragraph. As to your first: if people expect prices to increase tomorrow, they don't save today; they spend today, to lock in value prior to inflation. And even if people actually did as you claim and saved funds today despite their expectations of higher prices tomorrow, guess what: seller's can't eat expectations. They need actual sales. And in your scenario, the people aren't buying.
  - godelski 4y ago
    Well people do both. And different people do different things. I also think a big factor is the amount of inflation. Like the fed targets a 2-3% inflation because that encourages people to spend for exactly the reason you're talking about. Basic monetary theory. But inflation based recessions are a different story and people prepare for the shock. People will hold money because they also expect inflation to reduce and this be a temporary issue. If you expect prices to fall back down, then you should save instead of spending now.

godelski 4y ago

Nuance matters. In this case people start saving but also EXPECT prices to increase. So prices are able to increase under that speculation. Sellers can then demand higher prices while demand decreases. [0] discusses self-fulfilling oil price increases due to speculation of oil price increases. This is more what I was pointing at but conveyed (extremely) poorly. There's also the matter that people treat econ 101 as facts but the truth of the matter is economics is really fuzzy and there are no hard rules and there are always (ALWAYS) exceptions. Even what I said can happen or can not. I was just pointing out that it ,,can'' happen. It's all very statistical. But you may notice that the real world very much does not follow anywhere near the econ 101 models. It's like doing physics where everything is a spherical cow. Truth of the matter is that if we actually understood economics we wouldn't run into situations like this. It isn't like economies benefit from major downturns and inflation. It'd be like knowingly shooting yourself in the foot. Over and over again. [0] https://www.investopedia.com/ask/answers/033115/how-does-law-supply-and-demand-affect-prices.asp https://www.investopedia.com/ask/answers/033115/how-does-law...

rvbissell 4y ago
I have no quarrel with your second paragraph. As to your first: if people expect prices to increase tomorrow, they don't save today; they spend today, to lock in value prior to inflation. And even if people actually did as you claim and saved funds today despite their expectations of higher prices tomorrow, guess what: seller's can't eat expectations. They need actual sales. And in your scenario, the people aren't buying.
- godelski 4y ago
  Well people do both. And different people do different things. I also think a big factor is the amount of inflation. Like the fed targets a 2-3% inflation because that encourages people to spend for exactly the reason you're talking about. Basic monetary theory. But inflation based recessions are a different story and people prepare for the shock. People will hold money because they also expect inflation to reduce and this be a temporary issue. If you expect prices to fall back down, then you should save instead of spending now.