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I've always heard that deflation is awful and must be avoided. Following WWI, this marks a period of "13 Year Deflation" from ~1918 - 1931, but this includes a

by abeppu 2y ago

I've always heard that deflation is awful and must be avoided. Following WWI, this marks a period of "13 Year Deflation" from ~1918 - 1931, but this includes a period marked "prosperity" from 1922-1929, though commodity prices then dive as the depression deepens. But what conditions made deflation and growth possible together in the 1920s?

logicchains 2y ago
>I've always heard that deflation is awful and must be avoided. Because most modern economists are state-funded and the state benefits handsomely from the ability to print money. If you look back before economics got institutionalised you'll see a consensus that inflation is far worse than depression; plenty of states have been destroyed by debasement of the money supply (as far back as the Roman Empire artificially devaluing its currency leading up to its collapse), but there hasn't been a single one destroyed by the value of its people's money increasing. Because deflation can only be transitionary; people need food and housing and other necessities, so there's a limit to how much they can reduce spending, and once that limit is reached the economy has just shifted to a new equilibrium, one with less spending and more savings than before. Inflation on the other hand (when it's caused by printing money/defacing the currency) has the power to destroy 100% of the populace's wealth, as we saw in Weimar Germany and Zimbabwe.
creshal 2y ago
> But what conditions made deflation and growth possible together in the 1920s? a) It was a correction to the very unusual war years, which saw unprecedented levels of government investments, price controls, and money printing b) It also led to a lot of money getting invested in dubious overseas markets, which directly led to the Great Depression
tim333 2y ago
Deflation is just prices going down. There is a difference between the good years with prices going down but people have loads of money to spend and the bad ones of prices going down because everyone's broke.
godzillabrennus 2y ago
Irrational exuberance in stock performance.
- eagerpace 2y ago
  Irrational exuberance in crypto performance.
- throw0101d 2y ago
  > Irrational exuberance in stock performance. And canals: * https://en.wikipedia.org/wiki/Canal_Mania https://en.wikipedia.org/wiki/Canal_Mania And railroads: * https://en.wikipedia.org/wiki/Railway_Mania https://en.wikipedia.org/wiki/Railway_Mania And a whole bunch of other things: * https://en.wikipedia.org/wiki/Technological_Revolutions_and_Financial_Capital https://en.wikipedia.org/wiki/Technological_Revolutions_and_... Getting overly excited about things seems to just be a thin humans tend to do.
deleted 2y ago
[deleted]
chrisco255 2y ago
It wasn't just the 1920s. Take a look at the 1810s-1820s and the 1870s.
Etheryte 2y ago
This is an odd statement to make, in most contexts deflation is good for the economy. It is mostly when deflation is coupled with an asset bubble and large underlying debt that it's an issue and leads to a financial crisis. Why do you think deflation is bad?
- dgfitz 2y ago
  I think it is called a deflationary spiral. When your money becomes more valuable if you don't spend it, people spend less, which depressed prices further, so people spend even less, which even further depresses prices. https://web.mit.edu/krugman/www/spiral.html https://web.mit.edu/krugman/www/spiral.html
  - galdosdi 2y ago
    Yes, but this is easy to avoid. It's only happened when the governmental authorities foolishly believed they should respond to deflation with austerity, which is now obvious to us that this is backwards. See https://en.m.wikipedia.org/wiki/Bernanke_doctrine https://en.m.wikipedia.org/wiki/Bernanke_doctrine That said, the fact that austerity has been tried recently suggests the perverse impulse to respond to deflation with belt tightening instead of expanding credit is still with us. But all we have to do is just print money to match the deflation. The 1990s through 2019 are a great example, there was constant economic deflation because of new technology and the fed just printed credit like crazy to match said deflation and keep the inflation at 2pct. The pie was getting bigger, so eroding the value of each slice to make it a smaller portion of the pie kept slice sizes stable while not making anyone lose pie. They had an easy time with that. Now that the pandemic caused real eocnomic inflation due to supply shocks, dealing with excess inflation is a lot harder. The only way to keep pie slice size stable is to take away pie from someone and nobody wants be the loser, so capital and labor are in a game of chicken to see who blinks first and has to eat more of the inflation.
    - lurking15 2y ago
      > the fed just printed credit like crazy to match said deflation and keep the inflation at 2pct There's no rational basis for the 2pct inflation target [1], it's entirely baseless, in some sense it's now a matter of conservatism, mere tradition from a random fad decision in the 90s. And the point is that monetary expansion directs the energy of the economy and effectively steals savings, forcing the economic energy of people into consumerism and CEOs pockets. [1]: https://archive.ph/5abTC https://archive.ph/5abTC
csomar 2y ago
> I've always heard that deflation is awful and must be avoided. That doesn't mean anything. People talk about god/gods all the time, it doesn't mean they are real or exist. Inflation/Deflation are meaningless without linking them to the system in question. Growth also, in my opinion, has little to do with inflation/deflation and more about the positive inflow of energy into the economy.
- AnimalMuppet 2y ago
  We had a system. We saw deflationary collapses in that system. We've seen them. They're real, and they are very destructive. So we mostly kept the same system, but tried to tweak them to make deflation 1) much rarer and 2) less destructive.
  - ThunderSizzle 2y ago
    What system collapsed due to deflation?
    - AnimalMuppet 2y ago
      I didn't say the system collapsed. I said we saw deflationary collapses within the system. Look at the Panic of 1893, the Panic of 1907, and the Great Depression. If that's not enough, there are several others.
galdosdi 2y ago
Fed chair bernanke famously said "the us government has a technology called a printing press" to explain why deflation was in no way to be feared, bc unlike inflation it can be fought easily and without serious drawbacks. Deflation is good, it means cheaper prices. A deflationary spiral due to insufficient money supply despite robust economic fundamentals can be really bad in theory sure, but it can't happen unless the monetary authorities are totally negligent and incompetent, as happened in the great depression. All you have to do is print more money and problem solved. We don't expect it to happen again because we learned from it. See https://en.m.wikipedia.org/wiki/Bernanke_doctrine https://en.m.wikipedia.org/wiki/Bernanke_doctrine
- throw0101d 2y ago
  > […] but it can't happen unless the monetary authorities are totally negligent and incompetent, as happened in the great depression. Or if you do not have monetary policy flexibility, like when you're on the Gold Standard, as happened in the Great Depression (until FDR went off of it). See Bernanke and James (1990): > However, Temin (1989) argues that, once these destabiliz- ing policy measures had been taken, little could be done to avert deflation and depression, given the commitment of central banks to maintenance of the gold standard. Once the deflationary process had begun, central banks engaged in competitive deflation and a scramble for gold, hoping by raising cover ratios to protect their currencies against speculative attack. Attempts by any individ- ual central bank to reflate were met by immediate gold outflows, which forced the central bank to raise its discount rate and deflate once again. According to Temin, even the United States, with its large gold reserves, faced this con- straint. Thus Temin disagrees with the suggestion of Friedman and Schwartz (1963) that the Federal Reserve's failure to protect the U.S. money supply was due to misunderstanding of the problem or a lack of leadership; instead, he claims, given the commitment to the gold standard (and, presumably, the ab- sence of effective central bank cooperation), the Fed had little choice but to let the banks fail and the money supply fall. * https://www.nber.org/system/files/chapters/c11482/c11482.pdf https://www.nber.org/system/files/chapters/c11482/c11482.pdf For a fuller treatment, see Eichengreen: > This book offers a reassessment of the international monetary problems that led to the global economic crisis of the 1930s. It explores the connections between the gold standard--the framework regulating international monetary affairs until 1931--and the Great Depression that broke out in 1929. Eichengreen shows how economic policies, in conjunction with the imbalances created by World War I, gave rise to the global crisis of the 1930s. He demonstrates that the gold standard fundamentally constrained the economic policies that were pursued and that it was largely responsible for creating the unstable economic environment on which those policies acted. The book also provides a valuable perspective on the economic policies of the post-World War II period and their consequences. * https://www.goodreads.com/en/book/show/775143 https://www.goodreads.com/en/book/show/775143 Following the rules of the gold standard is what caused the initial "negligent and incompetent" action. Of course later (1937) on they raised rates too soon (and the government dialled back deficit spending), which caused an economic slowdown. It was not until the giant stimulus packaged often referred to as "World War Two" that the economy picked up again.
akamaka 2y ago
> But what conditions made deflation and growth possible together in the 1920s? They didn’t go together, the chart shows two severe episodes of deflation, one of which was the Great Depression, and the other was this: https://en.m.wikipedia.org/wiki/Depression_of_1920%E2%80%931921 https://en.m.wikipedia.org/wiki/Depression_of_1920%E2%80%931... It’s not clear why the chart lumps them into one period.
francisofascii 2y ago
I think deflation independent of anything else is neither good or bad. Deflation gets a bad rap because it tends to correlate with market crashes and contractionary periods. If you are a senior on fixed income, or have a ton of cash, it is better than high inflation.
- UncleOxidant 2y ago
  And if you're at home buying age housing deflation would be a gift. Unfortunately for buyers it's not something we'll likely see again for a while.

by abeppu 2y ago

logicchains 2y ago

>I've always heard that deflation is awful and must be avoided. Because most modern economists are state-funded and the state benefits handsomely from the ability to print money. If you look back before economics got institutionalised you'll see a consensus that inflation is far worse than depression; plenty of states have been destroyed by debasement of the money supply (as far back as the Roman Empire artificially devaluing its currency leading up to its collapse), but there hasn't been a single one destroyed by the value of its people's money increasing. Because deflation can only be transitionary; people need food and housing and other necessities, so there's a limit to how much they can reduce spending, and once that limit is reached the economy has just shifted to a new equilibrium, one with less spending and more savings than before. Inflation on the other hand (when it's caused by printing money/defacing the currency) has the power to destroy 100% of the populace's wealth, as we saw in Weimar Germany and Zimbabwe.

creshal 2y ago

> But what conditions made deflation and growth possible together in the 1920s? a) It was a correction to the very unusual war years, which saw unprecedented levels of government investments, price controls, and money printing b) It also led to a lot of money getting invested in dubious overseas markets, which directly led to the Great Depression

tim333 2y ago

Deflation is just prices going down. There is a difference between the good years with prices going down but people have loads of money to spend and the bad ones of prices going down because everyone's broke.

godzillabrennus 2y ago

Irrational exuberance in stock performance.

eagerpace 2y ago
Irrational exuberance in crypto performance.
throw0101d 2y ago
> Irrational exuberance in stock performance. And canals: * https://en.wikipedia.org/wiki/Canal_Mania https://en.wikipedia.org/wiki/Canal_Mania And railroads: * https://en.wikipedia.org/wiki/Railway_Mania https://en.wikipedia.org/wiki/Railway_Mania And a whole bunch of other things: * https://en.wikipedia.org/wiki/Technological_Revolutions_and_Financial_Capital https://en.wikipedia.org/wiki/Technological_Revolutions_and_... Getting overly excited about things seems to just be a thin humans tend to do.

deleted 2y ago

[deleted]

chrisco255 2y ago

It wasn't just the 1920s. Take a look at the 1810s-1820s and the 1870s.

Etheryte 2y ago

This is an odd statement to make, in most contexts deflation is good for the economy. It is mostly when deflation is coupled with an asset bubble and large underlying debt that it's an issue and leads to a financial crisis. Why do you think deflation is bad?

dgfitz 2y ago
I think it is called a deflationary spiral. When your money becomes more valuable if you don't spend it, people spend less, which depressed prices further, so people spend even less, which even further depresses prices. https://web.mit.edu/krugman/www/spiral.html https://web.mit.edu/krugman/www/spiral.html
- galdosdi 2y ago
  Yes, but this is easy to avoid. It's only happened when the governmental authorities foolishly believed they should respond to deflation with austerity, which is now obvious to us that this is backwards. See https://en.m.wikipedia.org/wiki/Bernanke_doctrine https://en.m.wikipedia.org/wiki/Bernanke_doctrine That said, the fact that austerity has been tried recently suggests the perverse impulse to respond to deflation with belt tightening instead of expanding credit is still with us. But all we have to do is just print money to match the deflation. The 1990s through 2019 are a great example, there was constant economic deflation because of new technology and the fed just printed credit like crazy to match said deflation and keep the inflation at 2pct. The pie was getting bigger, so eroding the value of each slice to make it a smaller portion of the pie kept slice sizes stable while not making anyone lose pie. They had an easy time with that. Now that the pandemic caused real eocnomic inflation due to supply shocks, dealing with excess inflation is a lot harder. The only way to keep pie slice size stable is to take away pie from someone and nobody wants be the loser, so capital and labor are in a game of chicken to see who blinks first and has to eat more of the inflation.
  - lurking15 2y ago
    > the fed just printed credit like crazy to match said deflation and keep the inflation at 2pct There's no rational basis for the 2pct inflation target [1], it's entirely baseless, in some sense it's now a matter of conservatism, mere tradition from a random fad decision in the 90s. And the point is that monetary expansion directs the energy of the economy and effectively steals savings, forcing the economic energy of people into consumerism and CEOs pockets. [1]: https://archive.ph/5abTC https://archive.ph/5abTC

csomar 2y ago

> I've always heard that deflation is awful and must be avoided. That doesn't mean anything. People talk about god/gods all the time, it doesn't mean they are real or exist. Inflation/Deflation are meaningless without linking them to the system in question. Growth also, in my opinion, has little to do with inflation/deflation and more about the positive inflow of energy into the economy.

AnimalMuppet 2y ago
We had a system. We saw deflationary collapses in that system. We've seen them. They're real, and they are very destructive. So we mostly kept the same system, but tried to tweak them to make deflation 1) much rarer and 2) less destructive.
- ThunderSizzle 2y ago
  What system collapsed due to deflation?
  - AnimalMuppet 2y ago
    I didn't say the system collapsed. I said we saw deflationary collapses within the system. Look at the Panic of 1893, the Panic of 1907, and the Great Depression. If that's not enough, there are several others.

galdosdi 2y ago

Fed chair bernanke famously said "the us government has a technology called a printing press" to explain why deflation was in no way to be feared, bc unlike inflation it can be fought easily and without serious drawbacks. Deflation is good, it means cheaper prices. A deflationary spiral due to insufficient money supply despite robust economic fundamentals can be really bad in theory sure, but it can't happen unless the monetary authorities are totally negligent and incompetent, as happened in the great depression. All you have to do is print more money and problem solved. We don't expect it to happen again because we learned from it. See https://en.m.wikipedia.org/wiki/Bernanke_doctrine https://en.m.wikipedia.org/wiki/Bernanke_doctrine

throw0101d 2y ago
> […] but it can't happen unless the monetary authorities are totally negligent and incompetent, as happened in the great depression. Or if you do not have monetary policy flexibility, like when you're on the Gold Standard, as happened in the Great Depression (until FDR went off of it). See Bernanke and James (1990): > However, Temin (1989) argues that, once these destabiliz- ing policy measures had been taken, little could be done to avert deflation and depression, given the commitment of central banks to maintenance of the gold standard. Once the deflationary process had begun, central banks engaged in competitive deflation and a scramble for gold, hoping by raising cover ratios to protect their currencies against speculative attack. Attempts by any individ- ual central bank to reflate were met by immediate gold outflows, which forced the central bank to raise its discount rate and deflate once again. According to Temin, even the United States, with its large gold reserves, faced this con- straint. Thus Temin disagrees with the suggestion of Friedman and Schwartz (1963) that the Federal Reserve's failure to protect the U.S. money supply was due to misunderstanding of the problem or a lack of leadership; instead, he claims, given the commitment to the gold standard (and, presumably, the ab- sence of effective central bank cooperation), the Fed had little choice but to let the banks fail and the money supply fall. * https://www.nber.org/system/files/chapters/c11482/c11482.pdf https://www.nber.org/system/files/chapters/c11482/c11482.pdf For a fuller treatment, see Eichengreen: > This book offers a reassessment of the international monetary problems that led to the global economic crisis of the 1930s. It explores the connections between the gold standard--the framework regulating international monetary affairs until 1931--and the Great Depression that broke out in 1929. Eichengreen shows how economic policies, in conjunction with the imbalances created by World War I, gave rise to the global crisis of the 1930s. He demonstrates that the gold standard fundamentally constrained the economic policies that were pursued and that it was largely responsible for creating the unstable economic environment on which those policies acted. The book also provides a valuable perspective on the economic policies of the post-World War II period and their consequences. * https://www.goodreads.com/en/book/show/775143 https://www.goodreads.com/en/book/show/775143 Following the rules of the gold standard is what caused the initial "negligent and incompetent" action. Of course later (1937) on they raised rates too soon (and the government dialled back deficit spending), which caused an economic slowdown. It was not until the giant stimulus packaged often referred to as "World War Two" that the economy picked up again.

akamaka 2y ago

> But what conditions made deflation and growth possible together in the 1920s? They didn’t go together, the chart shows two severe episodes of deflation, one of which was the Great Depression, and the other was this: https://en.m.wikipedia.org/wiki/Depression_of_1920%E2%80%931921 https://en.m.wikipedia.org/wiki/Depression_of_1920%E2%80%931... It’s not clear why the chart lumps them into one period.

francisofascii 2y ago

I think deflation independent of anything else is neither good or bad. Deflation gets a bad rap because it tends to correlate with market crashes and contractionary periods. If you are a senior on fixed income, or have a ton of cash, it is better than high inflation.

UncleOxidant 2y ago
And if you're at home buying age housing deflation would be a gift. Unfortunately for buyers it's not something we'll likely see again for a while.