6 ms·

I'm not very versed in economics, but can you explain "No inflation is bad because the economy stops."?

foobarian 4y ago
There are some other comments that probably described it better, but as an example: let's say inflation is negative. That means it is good to keep cash. What happens is everyone starts hoarding cash under their mattresses and there is no liquidity around to help exchange goods, and everything slows down. With a small inflation, there is no incentive to hoard cash, and there is enough liquidity to make sure goods get exchanged without too much delay. At the end of the day that is what an economy is, exchanging goods.
- IncRnd 4y ago
  But, the economy doesn't stop when there is no inflation or deflation. Well, I suppose that depends on your meaning of the word economy.
  - foobarian 4y ago
    Certainly I was wrong if you take those words literally. You got me. At the end of the day hopefully you got positive insight out of it. :-)
    - IncRnd 4y ago
      I didn't "get you". What is your non-literal definition of economy?
    - rolisz 4y ago
      No, I didn't get it either. People will still need food, electricity, gas, clothing. Buildings will need maintenance. Are you saying people will decide to not eat because deflation? Or not fix their broken windows?
      - mypalmike 4y ago
        In deflation, prices are going down. So I know it will cost me less next week to fix that broken window than doing it today. So I wait a week. But the logic doesn't change - when next week comes, I'll wait another week to get a better price. Apply this across the board, and people mostly just buy what they need. Producers of goods stop producing. R&D disappears. Etc.
        JamesianP 4y ago
        Seems more like a good thing you've turned upside down. As long as some R&D has an average payoff that outperforms the rate of deflation, people will be motivated to take the risk. Deflation would disproportionately hurt risky investments, whereas inflation causes worse and worse choices to become increasingly attractive. I'd say we already got way more stupid investments than we needed in the last few decades of low inflation.
        colinmhayes 4y ago
        Deflation forces real interest rates up which kills investment and immediately lowers gdp. It is unequivocally an awful thing that leads to massive unemployment.
        JamesianP 4y ago
        Lowering prices is a good thing for consumers and businesses who need to buy those things. There's nothing "unequivocal" about the argument here. Including the value of speculative investments (good investments will still pay better than real interest rates) or the position of economists as you surely are aware. And by the way those historic periods of massive unemployment had other causes with deflation as a side effect, not the cause. Other times in history had deflation during periods of growth.
      - imtringued 4y ago
        They will decide to not eat because the medium of exchange is scarce. Some rich people see their big bank accounts go up in value and keep it there but poor people will keep spending until they have no money. Because the medium of exchange is blocked they can't sell their labor to obtain a medium of exchange which they can then use to buy food. Deflation is like turning off the internet and no longer being able to pay with your credit card but it also affects paper money. The problem isn't a lack of productivity or a lack of capable workers. If the medium of exchange didn't act as a gatekeeper people would keep trading in some beautiful purely theoretical economic model via barter. How do we keep money flowing without inflation?
- ephbit 4y ago
  > ... and everything slows down. Agree. And ... this is exactly what the ecosphere needs right now. People continuing to consume all the usual necessities as they always have and always will. And consuming less of all the extra wasteful unnecessary stuff that gets pumped out of factories because of a destructive culture of "increasing GDP is good".
  - foobarian 4y ago
    Yes this is a great point. I wonder if to achieve that, a back pressure is required in the system that we are just not willing to put up with. Example, cruel warlords keeping the serfs in misery, or hunter gatherer tribes annihilating each other. Or more modern, some central authority allocating resources.
    - ephbit 4y ago
      > I wonder if to achieve that, a back pressure is required in the system that we are just not willing to put up with. By back pressure you mean some kind of negative feedback, I assume. I think, more precisely, the problem is not that negative feedback is completely missing. The problem is, that technology and societies have implemented (mostly involuntarily so) lots of systems that effectively distribute the entirety of the negative feedback very widely across the members of society. Like in a shared living situation where some people take great care to clean up after themselves and others do not. As a whole it somehow "works", without cleanliness getting out of hand, but only because some people are doing more than others. This way, those who do not clean up their own dirt, never even learn their real impact on the whole, because it's continuously remedied by others. Their negative feedback is effectively missing, so they get the impression that everything is fine. On the worldwide scale it's an analogous situation. Widespread governmental subsidies for energy are one of the biggest issues I see there. They redistribute a big part of production costs across all tax payers and eliminate a big part of negative feedback.
Aunche 4y ago
Zero inflation is fine, but a small hiccup would cause it to spiral into deflation. Deflation sounds good in a micro-scale because money gets more valuable. However, this is actually a terrible thing because the only way this can happen is when money gets destroyed through defaults, which is why you only see deflation during a financial crisis. When technology increases increases productivity and society has a fixed supply of paper money, you'd think you'd see deflation because there are more goods and the same amount of money. However, actually during those periods of times, banks lend out money, which increases the money supply. This is a good thing because they're enabling economic activity that otherwise wouldn't have happened like a loan to start a new business. However, this system is fragile because if depositors lose faith in the bank, everyone will try to withdrawal their money, which is called a bank run. The bank doesn't have enough money because they leant some of it out, so they default and depositors that aren't quick money lose their money. One of the purposes of central banks is to ensure that this doesn't happen.
- imtringued 4y ago
  There is also the problem that if you pay off your debts at a faster rate than people spend off their savings your debt will shrink at the rate others are spending their money, not at the rate you are paying it off. If we expect people to be personally responsible why do we treat them as if they aren't when they do the right thing? This is why we can't have nice things.

There are some other comments that probably described it better, but as an example: let's say inflation is negative. That means it is good to keep cash. What happens is everyone starts hoarding cash under their mattresses and there is no liquidity around to help exchange goods, and everything slows down. With a small inflation, there is no incentive to hoard cash, and there is enough liquidity to make sure goods get exchanged without too much delay. At the end of the day that is what an economy is, exchanging goods.

IncRnd 4y ago
But, the economy doesn't stop when there is no inflation or deflation. Well, I suppose that depends on your meaning of the word economy.
- foobarian 4y ago
  Certainly I was wrong if you take those words literally. You got me. At the end of the day hopefully you got positive insight out of it. :-)
  - IncRnd 4y ago
    I didn't "get you". What is your non-literal definition of economy?
  - rolisz 4y ago
    No, I didn't get it either. People will still need food, electricity, gas, clothing. Buildings will need maintenance. Are you saying people will decide to not eat because deflation? Or not fix their broken windows?
    - mypalmike 4y ago
      In deflation, prices are going down. So I know it will cost me less next week to fix that broken window than doing it today. So I wait a week. But the logic doesn't change - when next week comes, I'll wait another week to get a better price. Apply this across the board, and people mostly just buy what they need. Producers of goods stop producing. R&D disappears. Etc.
      - JamesianP 4y ago
        Seems more like a good thing you've turned upside down. As long as some R&D has an average payoff that outperforms the rate of deflation, people will be motivated to take the risk. Deflation would disproportionately hurt risky investments, whereas inflation causes worse and worse choices to become increasingly attractive. I'd say we already got way more stupid investments than we needed in the last few decades of low inflation.
        colinmhayes 4y ago
        Deflation forces real interest rates up which kills investment and immediately lowers gdp. It is unequivocally an awful thing that leads to massive unemployment.
        JamesianP 4y ago
        Lowering prices is a good thing for consumers and businesses who need to buy those things. There's nothing "unequivocal" about the argument here. Including the value of speculative investments (good investments will still pay better than real interest rates) or the position of economists as you surely are aware. And by the way those historic periods of massive unemployment had other causes with deflation as a side effect, not the cause. Other times in history had deflation during periods of growth.
    - imtringued 4y ago
      They will decide to not eat because the medium of exchange is scarce. Some rich people see their big bank accounts go up in value and keep it there but poor people will keep spending until they have no money. Because the medium of exchange is blocked they can't sell their labor to obtain a medium of exchange which they can then use to buy food. Deflation is like turning off the internet and no longer being able to pay with your credit card but it also affects paper money. The problem isn't a lack of productivity or a lack of capable workers. If the medium of exchange didn't act as a gatekeeper people would keep trading in some beautiful purely theoretical economic model via barter. How do we keep money flowing without inflation?
ephbit 4y ago
> ... and everything slows down. Agree. And ... this is exactly what the ecosphere needs right now. People continuing to consume all the usual necessities as they always have and always will. And consuming less of all the extra wasteful unnecessary stuff that gets pumped out of factories because of a destructive culture of "increasing GDP is good".
- foobarian 4y ago
  Yes this is a great point. I wonder if to achieve that, a back pressure is required in the system that we are just not willing to put up with. Example, cruel warlords keeping the serfs in misery, or hunter gatherer tribes annihilating each other. Or more modern, some central authority allocating resources.
  - ephbit 4y ago
    > I wonder if to achieve that, a back pressure is required in the system that we are just not willing to put up with. By back pressure you mean some kind of negative feedback, I assume. I think, more precisely, the problem is not that negative feedback is completely missing. The problem is, that technology and societies have implemented (mostly involuntarily so) lots of systems that effectively distribute the entirety of the negative feedback very widely across the members of society. Like in a shared living situation where some people take great care to clean up after themselves and others do not. As a whole it somehow "works", without cleanliness getting out of hand, but only because some people are doing more than others. This way, those who do not clean up their own dirt, never even learn their real impact on the whole, because it's continuously remedied by others. Their negative feedback is effectively missing, so they get the impression that everything is fine. On the worldwide scale it's an analogous situation. Widespread governmental subsidies for energy are one of the biggest issues I see there. They redistribute a big part of production costs across all tax payers and eliminate a big part of negative feedback.

Aunche 4y ago

Zero inflation is fine, but a small hiccup would cause it to spiral into deflation. Deflation sounds good in a micro-scale because money gets more valuable. However, this is actually a terrible thing because the only way this can happen is when money gets destroyed through defaults, which is why you only see deflation during a financial crisis. When technology increases increases productivity and society has a fixed supply of paper money, you'd think you'd see deflation because there are more goods and the same amount of money. However, actually during those periods of times, banks lend out money, which increases the money supply. This is a good thing because they're enabling economic activity that otherwise wouldn't have happened like a loan to start a new business. However, this system is fragile because if depositors lose faith in the bank, everyone will try to withdrawal their money, which is called a bank run. The bank doesn't have enough money because they leant some of it out, so they default and depositors that aren't quick money lose their money. One of the purposes of central banks is to ensure that this doesn't happen.

imtringued 4y ago
There is also the problem that if you pay off your debts at a faster rate than people spend off their savings your debt will shrink at the rate others are spending their money, not at the rate you are paying it off. If we expect people to be personally responsible why do we treat them as if they aren't when they do the right thing? This is why we can't have nice things.