9 ms·

Can someone please school me on why that would be bad?

slg 4y ago
The simplest answer is that it discourages spending because people don’t want to buy anything today if it will be cheaper tomorrow. People not buying things is a quick way to stall the economy.
GenerocUsername 4y ago
Because rich people like to make more money, not less
oneoff786 4y ago
You’re incentivized to avoid spending money.
- sprash 4y ago
  Why would that be bad?
  - woodruffw 4y ago
    Because your paycheck is someone else's "spending money." Edit: Meaning that, presumably, you like being paid. So you probably don't want to incentivize being paid less, or not at all. Deflation does both of those things.
  - stu2b50 4y ago
    Causes a positive death loop that leads to huge demand shocks.
  - eberkund 4y ago
    It may not be bad, economics involves a lot of unfounded speculation IMO. It's true that deflation would encourage delaying certain types of spending but that is already the case with electronics and some other types of goods. But that has not led to the downfall of society. A deflationary economy would be a drastic change from the system we operate under now but I don't think it would be all bad. Maybe in a deflationary economy people would feel like they could actually save money. Or it could put an end to the 40 hour work week. I doubt demand of necessities would change much in a deflationary environment: food, medicine, shelter, etc.
    - A4ET8a8uTh0 4y ago
      I think I agree. A lot of it is models that don't predict things ( but that is waved away by saying those are not complex enough to reflect real life ), psychology and opinions. Personally, long term I am perfectly willing to accept that deflation is a bad thing for society, but at this time? We should welcome deflation with open arms. Things are way out of whack already and decent price correction is needed for just about everything.
  - msbarnett 4y ago
    You only have to look at Japan for the last few decades to see what the long term effects of deflation look like. Negative economic growth, few job opportunities for young people, investment and lending are de-incentivized so innovation and industry growth moves to other countries, while owning property becomes a liability, etc. Managed decline is about the best case scenario for a deflationary economy.
runako 4y ago
If the expectation is that everything will be cheaper next month than this month, that creates an incentive for everyone (and every business) to delay purchases as long as possible (because they will save money buying in the future). When everyone slows spending at once, it can lead to severe a recession or depression.
- krsrhe 4y ago
- geye1234 4y ago
  Perhaps for businesses this may be true. It's hard to imagine for a consumer. I'm not going to delay the purchase of groceries, a fridge, a new roof or (if I'm feeling rich) a new car just because they may be 3% cheaper next year. I'm not saying this conventional wisdom is wrong, but it's not obviously right.
  - nativespecies 4y ago
    I wouldn't underestimate peoples' want (or need) to save extra money right now. Most working people will do anything they can to save in this economy.
  - TremendousJudge 4y ago
    Yes, that's exactly why deflation is bad for the average person. You can't afford to save your money (which is increasing in value just sitting there) because you HAVE to spend it on food, rent, etc. People who can afford to, don't spend their money and they get nominally richer. Anything you buy will decrease in value, so people tend to avoid it. This isn't hypothetical, it has happened every time there's deflation in an economy. It widens the gap between the rich and poor.
  - christophilus 4y ago
    Generally speaking, periods of deflation are a symptom of an existing economic malaise. Prices might drop because of solid gains in efficiency, but they generally drop because of a loss of demand. That loss of demand is generally caused by economic hardship. Therefore, deflation is correlated with economic hardship, but I think it's a correlation, not a causation. So, I'm with you. I've had it explained to me many times, and it still doesn't make much sense to me. I'm going to buy cars / houses / investments / goods / services when I need them and can afford them-- not based on speculation about their future prices (well, except for investments, if I have some magic insight). From a business perspective, I've been involved in many purchasing decisions and never once was "it might be cheaper or more expensive in the future" a part of the decision making process. It really feels like "deflation is bad" is an economic theory that should be tested. Yes. We've had deflationary shocks, and those were bad, but that was because a) it was a shock rather than a gradual slope and b) it usually followed a period of marked excess. I'm not convinced that deflation itself was the enemy as much as the other ancillary issues. It's hard to disentangle that, though.
boredumb 4y ago
People, entities and states with debts benefit from the money they borrowed last year being worth less than it is today in terms of paying things back, debt to income, etc. Also by using inflation to deteriorate savings and cash on hand, it encourages people to invest their money into something that won't lose value over time.
monero-xmr 4y ago
When considered logically the correct amount of inflation should be 0% - neither inflation nor deflation. This would give us stable prices and make it much easier to calculate what is increasing or decreasing in price without this other fuzzy “inflation” metric affecting it. However governments / central banks have convinced us that 2% is “correct” despite no evidence or research. It does help them print money and bail out governments, however!
- slg 4y ago
  0% inflation would mean there is no penalty for sitting on your money. People putting their cash under their mattress instead of in savings accounts, CDs, bonds, and the like is bad for the economy. That is why economists generally prefer a small positive rate of inflation. It adds more incentive to both spend and invest.
  - monero-xmr 4y ago
    There should not be a penalty for saving money. Furthermore you can give your money to the bank as a deposit (loan) and the bank will pay you some rate based upon what they can invest it on. Nowhere here does this require any level of inflation.
  - dsfyu404ed 4y ago
    >0% inflation would mean there is no penalty for sitting on your money. People putting their cash under their mattress instead of This is an absurd claim. Nobody seriously considering mattress vs CD (or bonds in a low rate environment like we had 2008-2020) is swayed by a return of less than a couple percent. It is a security vs liquidity vs trust calculation, not a return based one. Furthermore, as the other commenter points out, rates are correlated but not necessarily in lock step with inflation. The rate on your savings account is probably still sub 1% (although bonds have gone up).
    - slg 4y ago
      Maybe not for you. Maybe not in the short term. But there are all sorts of people involved in the economy with all sorts of risk tolerances. Lots of people don't like losing their money. Putting their money some place with zero risk is attractive for people. It isn't the most up-to-date data and survey results are always a little questionable, but here is some data from 2015[1]: >A new survey of more than 1,800 people from the American Express Spending and Savings Tracker, however, found that 43% of Americans keep their savings in cash. An alarming 53% of those cash-hoarders "plan to hide bills in a secret location at home." Those numbers are big enough that even if they are way off, there is still a sizable number of people who are holding onto their savings in physical cash. That would go up if there was no inflation. [1] - https://www.businessinsider.com/americans-hide-money-under-the-mattress-2015-2 https://www.businessinsider.com/americans-hide-money-under-t...
francisofascii 4y ago
During the Great Depression they had 7% Deflation, but of course the depression probably caused the deflation which perhaps made the depression worse.
avbanks 4y ago
It's actually nuanced, deflation CAN be bad, but most people seem to interpret that as ALL deflation is bad.
- jonnycomputer 4y ago
  I'd guess that short-term deflation, say after a spike in inflation, would be not that bad, though price uncertainty has its own costs.
bryanlarsen 4y ago
Prices on most goods, services and wages are fairly sticky for psychological reasons. So suboptimal prices are likely to persist longer than they should. Inflation provides a mechanism for price movement by making the real price of a "constant" price continuously decrease. If that's the right direction it's an invisible helper, if it's the wrong direction it forces the increase to happen more regularly.
cjbgkagh 4y ago
Rich people won’t be getting as rich, they’ve spent a lot of money and time convincing people that that would be bad for everyone. Also they pay for the media and politicians who decide which economists get attention. As far as they’re concerned inflations is only a problem when wages are going up (their input cost) at which point the media and establishment screams bloody murder.
godelski 4y ago
A consumer based society requires people to consume, or buy things. Because of this you want a low level of inflation so that people buy things now rather than next year and keep the money in the system moving around (ironically this theory of money also makes people that have more money than they can spend unhealthy to the system). You want the money constantly moving through the system instead of pooling up.
- mistrial9 4y ago
  people always consume and buy things.. the situation in the USA is that there has been money printing, asset inflation, cheap products from China and cheap gas for decades.. the system is exhausted in some parts, yet money isnt being exchanged the way it used to be, at small retail, among individuals.. some intermediaries have made so much money in the last two decades that they go into "castle" mode, while people who tried to work for a living, saw their income drop, wages actually go down in many industries due to "illegal" workers and "gig work" setups .. and essential costs of living like medical, housing and some others.. costs are much higher now. This is well documented. Since covid, whole industries in retail, food and travel have shut down almost completely.
  - godelski 4y ago
    I don't think what you've said counters the idea that money needs to move hands and be exchanged. That's the root idea of inflation under a consumer based economy. Like I said, it is similarly bad when people (or large corporations) pool money and are not spending it. It is true for any type of actor, that we'd want to encourage them to spend the majority of their wealth and save very little (for the median person a retirement savings would be inconsequential and that money is just delayed anyways, so wouldn't affect the system much. Especially since it is staggered).
bryanlarsen 4y ago
The times we've experienced deflation have been horrible periods in history. We're fairly convinced that deflation is an effect rather than the cause, but nobody's really 100% sure that it's 100% effect and that deflation doesn't make things worse, so we try and avoid it.
bryanlarsen 4y ago
It's not so much that deflation is bad, it's that inflation and employment are very correlated. Given the choice between 0% inflation and high unemployment or 2% inflation and low unemployment, we choose to have low unemployment along with a little bit of inflation.
thinkharderdev 4y ago
If people expect deflation then they will defer buying things because their money will buy more in the future than it will right now. This should reduce aggregate demand and also feedback on itself as falling demand should put further downward pressure on prices, causing more deflation. It sounds nice if you are only a buyer but almost everyone in the economy is both a buyer and a seller. Beyond that it's an issue for investors. Interest rates have a nominal lower bound at 0% (because you can always just hold money instead of lending it) so the minimum real interest rate becomes effectively the rate of deflation. So imagine that deflation is 4% and I have a use of capital with a real rate of return of 3%. It won't get funded because investors can achieve a higher real return (4%) by just sitting on capital instead of investing it.
Aunche 4y ago
In a healthy economy deflation isn't possible because the money supply naturally grows with the economy. This was true even when we were on the gold standard because banks will be more aggressive with lending, which effectively creates more credit money. The deflation has historically only occurred when a large quantity of credit money gets destroyed in defaults. The purpose of money is to facilitate mutually beneficial transactions. When the money supply contracts, the "price" of money goes up. People are incentivized to hoard money for the sake of hoarding money, which adds friction to mutually beneficial transactions. This causes a feedback loop, which leads to even more deflation and even less economic activity.
AnimalMuppet 4y ago
Deflation is bad because some people owe money. Lets say I buy a house for $500,000. I put $25,000 down and get a mortgage for $475,000. Then deflation hits. It's not just that my house becomes worth less in dollar terms (though it does), but also that I'm paying my mortgage with more expensive dollars. (In a real deflation, your salary can decrease.) That hurts. Some people lose their houses. The mortgage holders sell the houses for what they can get, which does two things. It drives down the price of houses. Also, it decreases the amount of dollars that are theoretically in the economy, so dollars become more valuable, and the deflation continues. Historically, this has caused enormous amounts of damage, wiping out businesses and families. Now, 1% deflation this month won't do any of that. The problem is that the deflation can gain momentum and be very difficult to stop (similar to inflation in fact, but deflation can happen faster). So the Fed prefers to stay away from deflation, preferring something like 2% inflation to give them a bit of margin to work with. And they've been nervous since 2008 because they couldn't get back up to 2% inflation.

slg 4y ago

The simplest answer is that it discourages spending because people don’t want to buy anything today if it will be cheaper tomorrow. People not buying things is a quick way to stall the economy.

GenerocUsername 4y ago

Because rich people like to make more money, not less

oneoff786 4y ago

You’re incentivized to avoid spending money.

sprash 4y ago
Why would that be bad?
- woodruffw 4y ago
  Because your paycheck is someone else's "spending money." Edit: Meaning that, presumably, you like being paid. So you probably don't want to incentivize being paid less, or not at all. Deflation does both of those things.
- stu2b50 4y ago
  Causes a positive death loop that leads to huge demand shocks.
- eberkund 4y ago
  It may not be bad, economics involves a lot of unfounded speculation IMO. It's true that deflation would encourage delaying certain types of spending but that is already the case with electronics and some other types of goods. But that has not led to the downfall of society. A deflationary economy would be a drastic change from the system we operate under now but I don't think it would be all bad. Maybe in a deflationary economy people would feel like they could actually save money. Or it could put an end to the 40 hour work week. I doubt demand of necessities would change much in a deflationary environment: food, medicine, shelter, etc.
  - A4ET8a8uTh0 4y ago
    I think I agree. A lot of it is models that don't predict things ( but that is waved away by saying those are not complex enough to reflect real life ), psychology and opinions. Personally, long term I am perfectly willing to accept that deflation is a bad thing for society, but at this time? We should welcome deflation with open arms. Things are way out of whack already and decent price correction is needed for just about everything.
- msbarnett 4y ago
  You only have to look at Japan for the last few decades to see what the long term effects of deflation look like. Negative economic growth, few job opportunities for young people, investment and lending are de-incentivized so innovation and industry growth moves to other countries, while owning property becomes a liability, etc. Managed decline is about the best case scenario for a deflationary economy.

runako 4y ago

If the expectation is that everything will be cheaper next month than this month, that creates an incentive for everyone (and every business) to delay purchases as long as possible (because they will save money buying in the future). When everyone slows spending at once, it can lead to severe a recession or depression.

krsrhe 4y ago
geye1234 4y ago
Perhaps for businesses this may be true. It's hard to imagine for a consumer. I'm not going to delay the purchase of groceries, a fridge, a new roof or (if I'm feeling rich) a new car just because they may be 3% cheaper next year. I'm not saying this conventional wisdom is wrong, but it's not obviously right.
- nativespecies 4y ago
  I wouldn't underestimate peoples' want (or need) to save extra money right now. Most working people will do anything they can to save in this economy.
- TremendousJudge 4y ago
  Yes, that's exactly why deflation is bad for the average person. You can't afford to save your money (which is increasing in value just sitting there) because you HAVE to spend it on food, rent, etc. People who can afford to, don't spend their money and they get nominally richer. Anything you buy will decrease in value, so people tend to avoid it. This isn't hypothetical, it has happened every time there's deflation in an economy. It widens the gap between the rich and poor.
- christophilus 4y ago
  Generally speaking, periods of deflation are a symptom of an existing economic malaise. Prices might drop because of solid gains in efficiency, but they generally drop because of a loss of demand. That loss of demand is generally caused by economic hardship. Therefore, deflation is correlated with economic hardship, but I think it's a correlation, not a causation. So, I'm with you. I've had it explained to me many times, and it still doesn't make much sense to me. I'm going to buy cars / houses / investments / goods / services when I need them and can afford them-- not based on speculation about their future prices (well, except for investments, if I have some magic insight). From a business perspective, I've been involved in many purchasing decisions and never once was "it might be cheaper or more expensive in the future" a part of the decision making process. It really feels like "deflation is bad" is an economic theory that should be tested. Yes. We've had deflationary shocks, and those were bad, but that was because a) it was a shock rather than a gradual slope and b) it usually followed a period of marked excess. I'm not convinced that deflation itself was the enemy as much as the other ancillary issues. It's hard to disentangle that, though.

boredumb 4y ago

People, entities and states with debts benefit from the money they borrowed last year being worth less than it is today in terms of paying things back, debt to income, etc. Also by using inflation to deteriorate savings and cash on hand, it encourages people to invest their money into something that won't lose value over time.

monero-xmr 4y ago

When considered logically the correct amount of inflation should be 0% - neither inflation nor deflation. This would give us stable prices and make it much easier to calculate what is increasing or decreasing in price without this other fuzzy “inflation” metric affecting it. However governments / central banks have convinced us that 2% is “correct” despite no evidence or research. It does help them print money and bail out governments, however!

slg 4y ago
0% inflation would mean there is no penalty for sitting on your money. People putting their cash under their mattress instead of in savings accounts, CDs, bonds, and the like is bad for the economy. That is why economists generally prefer a small positive rate of inflation. It adds more incentive to both spend and invest.
- monero-xmr 4y ago
  There should not be a penalty for saving money. Furthermore you can give your money to the bank as a deposit (loan) and the bank will pay you some rate based upon what they can invest it on. Nowhere here does this require any level of inflation.
- dsfyu404ed 4y ago
  >0% inflation would mean there is no penalty for sitting on your money. People putting their cash under their mattress instead of This is an absurd claim. Nobody seriously considering mattress vs CD (or bonds in a low rate environment like we had 2008-2020) is swayed by a return of less than a couple percent. It is a security vs liquidity vs trust calculation, not a return based one. Furthermore, as the other commenter points out, rates are correlated but not necessarily in lock step with inflation. The rate on your savings account is probably still sub 1% (although bonds have gone up).
  - slg 4y ago
    Maybe not for you. Maybe not in the short term. But there are all sorts of people involved in the economy with all sorts of risk tolerances. Lots of people don't like losing their money. Putting their money some place with zero risk is attractive for people. It isn't the most up-to-date data and survey results are always a little questionable, but here is some data from 2015[1]: >A new survey of more than 1,800 people from the American Express Spending and Savings Tracker, however, found that 43% of Americans keep their savings in cash. An alarming 53% of those cash-hoarders "plan to hide bills in a secret location at home." Those numbers are big enough that even if they are way off, there is still a sizable number of people who are holding onto their savings in physical cash. That would go up if there was no inflation. [1] - https://www.businessinsider.com/americans-hide-money-under-the-mattress-2015-2 https://www.businessinsider.com/americans-hide-money-under-t...

francisofascii 4y ago

During the Great Depression they had 7% Deflation, but of course the depression probably caused the deflation which perhaps made the depression worse.

avbanks 4y ago

It's actually nuanced, deflation CAN be bad, but most people seem to interpret that as ALL deflation is bad.

jonnycomputer 4y ago
I'd guess that short-term deflation, say after a spike in inflation, would be not that bad, though price uncertainty has its own costs.

bryanlarsen 4y ago

Prices on most goods, services and wages are fairly sticky for psychological reasons. So suboptimal prices are likely to persist longer than they should. Inflation provides a mechanism for price movement by making the real price of a "constant" price continuously decrease. If that's the right direction it's an invisible helper, if it's the wrong direction it forces the increase to happen more regularly.

cjbgkagh 4y ago

Rich people won’t be getting as rich, they’ve spent a lot of money and time convincing people that that would be bad for everyone. Also they pay for the media and politicians who decide which economists get attention. As far as they’re concerned inflations is only a problem when wages are going up (their input cost) at which point the media and establishment screams bloody murder.

godelski 4y ago

A consumer based society requires people to consume, or buy things. Because of this you want a low level of inflation so that people buy things now rather than next year and keep the money in the system moving around (ironically this theory of money also makes people that have more money than they can spend unhealthy to the system). You want the money constantly moving through the system instead of pooling up.

mistrial9 4y ago
people always consume and buy things.. the situation in the USA is that there has been money printing, asset inflation, cheap products from China and cheap gas for decades.. the system is exhausted in some parts, yet money isnt being exchanged the way it used to be, at small retail, among individuals.. some intermediaries have made so much money in the last two decades that they go into "castle" mode, while people who tried to work for a living, saw their income drop, wages actually go down in many industries due to "illegal" workers and "gig work" setups .. and essential costs of living like medical, housing and some others.. costs are much higher now. This is well documented. Since covid, whole industries in retail, food and travel have shut down almost completely.
- godelski 4y ago
  I don't think what you've said counters the idea that money needs to move hands and be exchanged. That's the root idea of inflation under a consumer based economy. Like I said, it is similarly bad when people (or large corporations) pool money and are not spending it. It is true for any type of actor, that we'd want to encourage them to spend the majority of their wealth and save very little (for the median person a retirement savings would be inconsequential and that money is just delayed anyways, so wouldn't affect the system much. Especially since it is staggered).

bryanlarsen 4y ago

The times we've experienced deflation have been horrible periods in history. We're fairly convinced that deflation is an effect rather than the cause, but nobody's really 100% sure that it's 100% effect and that deflation doesn't make things worse, so we try and avoid it.

bryanlarsen 4y ago

It's not so much that deflation is bad, it's that inflation and employment are very correlated. Given the choice between 0% inflation and high unemployment or 2% inflation and low unemployment, we choose to have low unemployment along with a little bit of inflation.

thinkharderdev 4y ago

If people expect deflation then they will defer buying things because their money will buy more in the future than it will right now. This should reduce aggregate demand and also feedback on itself as falling demand should put further downward pressure on prices, causing more deflation. It sounds nice if you are only a buyer but almost everyone in the economy is both a buyer and a seller. Beyond that it's an issue for investors. Interest rates have a nominal lower bound at 0% (because you can always just hold money instead of lending it) so the minimum real interest rate becomes effectively the rate of deflation. So imagine that deflation is 4% and I have a use of capital with a real rate of return of 3%. It won't get funded because investors can achieve a higher real return (4%) by just sitting on capital instead of investing it.

Aunche 4y ago

In a healthy economy deflation isn't possible because the money supply naturally grows with the economy. This was true even when we were on the gold standard because banks will be more aggressive with lending, which effectively creates more credit money. The deflation has historically only occurred when a large quantity of credit money gets destroyed in defaults. The purpose of money is to facilitate mutually beneficial transactions. When the money supply contracts, the "price" of money goes up. People are incentivized to hoard money for the sake of hoarding money, which adds friction to mutually beneficial transactions. This causes a feedback loop, which leads to even more deflation and even less economic activity.

AnimalMuppet 4y ago

Deflation is bad because some people owe money. Lets say I buy a house for $500,000. I put $25,000 down and get a mortgage for $475,000. Then deflation hits. It's not just that my house becomes worth less in dollar terms (though it does), but also that I'm paying my mortgage with more expensive dollars. (In a real deflation, your salary can decrease.) That hurts. Some people lose their houses. The mortgage holders sell the houses for what they can get, which does two things. It drives down the price of houses. Also, it decreases the amount of dollars that are theoretically in the economy, so dollars become more valuable, and the deflation continues. Historically, this has caused enormous amounts of damage, wiping out businesses and families. Now, 1% deflation this month won't do any of that. The problem is that the deflation can gain momentum and be very difficult to stop (similar to inflation in fact, but deflation can happen faster). So the Fed prefers to stay away from deflation, preferring something like 2% inflation to give them a bit of margin to work with. And they've been nervous since 2008 because they couldn't get back up to 2% inflation.