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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 unde

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
    - throw0101d 2y ago
      > There's no rational basis for the 2pct inflation target [1] […] Except that it seems to work. Hitting an inflation rate of exactly 0% is practically impossible: you're going to be either a little high, or a little low. So the option is: do you want "too high" or "too low" (negative)? In the last little while how we've all seen how painful high(er) inflation is for people. Lessons from periods of the 1930s (and others in the linked-to PDF) show how bad deflation is. A "little" high seems to have been a pretty good compromise.
      - lurking15 2y ago
        The 1930s show the consequences of inflation, speculation and credit expansion, and then bungled government response that dragged out economic contraction which is needed to clear out malinvestment. Any common person realizes their ability to lead a dignified life is being squeezed out by monetary expansion gone amok, with those closest to the govt spigot getting the benefits and none of the costs (cantillon effect). And it brings up a good point which no one answers satisfyingly: why shouldn't the average person just enjoy price savings produced by technology?
        throw0101d 2y ago
        > The 1930s show the consequences of inflation, speculation and credit expansion […] The 1930s were nothing special when it comes to wild swings in prices (as the article show), speculation was not new (see canal mania, railroad mania, etc) * https://en.wikipedia.org/wiki/Canal_Mania https://en.wikipedia.org/wiki/Canal_Mania * https://en.wikipedia.org/wiki/Railway_Mania https://en.wikipedia.org/wiki/Railway_Mania What is special is the post-WW2 era (where there was no deflationary bust, especially after a major war), and the decades that followed (when there was no gold standard to handcuff monetary policy, and when Keynesian economics allowed for fiscal flexibility). > And it brings up a good point which no one answers satisfyingly: why shouldn't the average person just enjoy price savings produced by technology? There's a difference between deflation through innovation, and deflation through economic turmoil (e.g., mass unemployment, collapse of aggregate demand). One of my favourite examples of 'invisible deflation' that no one notices (often while they're complaining about inflation) is a 1991 Radio Shack ad: * https://www.huffpost.com/entry/radio-shack-ad_b_4612973 https://www.huffpost.com/entry/radio-shack-ad_b_4612973 * Via: https://awealthofcommonsense.com/2021/01/inflation-truthers/ https://awealthofcommonsense.com/2021/01/inflation-truthers/
- Etheryte 2y ago
  This mixes up the reason and the cause. A deflationary spiral occurs when you have a financial crisis, e.g. due to a debt-based asset bubble, and the economy is not strong enough to stimulate growth through policy changes, e.g. interest rates are already zero etc. This then in turn leads to reduced spending to ensure liquidity, that is reduced demand, which leads to lower prices, which is deflation. Deflation is the result, not the cause. From that point onward, yes, it is possible for the situation to spiral in a feedback loop, but deflation is not why the spiral started.
Dig1t 2y ago
I have heard what OP is talking about referred to on econ podcasts like Planet Money and Freakonomics.
yyyyybb 2y ago
Why is this an odd statement to make who educated you to think it’s not?
daedrdev 2y ago
While deflation sounds good, its is definitely bad. When prices are falling, this provides an incentive to firms and consumers to delay purchases since prices are expected to be cheaper in the future. This reduces aggregate demand, which means goods get cheaper due to less demand, causing firms to have to fire people due to lower, causing greater economic decline that spirals out of control. We now know that deflation was a primary cause of the Great Depression.
- Etheryte 2y ago
  Neither one of those is true. So long as it is not extreme, a decline in the price of goods means consumers have greater purchasing power, more financial security and hence more flexibility in their spending and saving. All of these are good for the economy as an aggregate.
  - deleted 2y ago
    [deleted]
  - qwytw 2y ago
    Except your debts start increasing even while you're continuously paying them off and investment becomes much more lucrative. Deflation benefits those who have a lot of capital and can invest it into ~ zero risk instruments like government bonds the most (e.g. that's basically how the rentier/aristocratic class in the 19th Britain were able to maintain their lifestyle without doing anything productive, government bonds were yielding 4-5% while the value of their capital was going up due to near continues deflation throughout much of the century). On the other hand if you're a heavily mortgaged farmer you were basically screwed if the price food went down (that's why free-silver/loose monetary policy was so popular amongst farmers back in the 1800s in the Midwest and in much of US).
  - throw0101d 2y ago
    > So long as it is not extreme, a decline in the price of goods means consumers have greater purchasing power, more financial security and Deflation means that people's debt becomes more of a burden. I'd hazard to guess that poor people have more debt that rich, and so deflation would be worse for the poor.
KoolKat23 2y ago
Economics 101, deflation is very bad. Basically it is because it directly leads to economic contraction. Why produce something if you're not sure you're going to make the necessary money if you sell it, or wait if you can buy it for cheaper.
- Etheryte 2y ago
  This is fundamentally flawed, I'll rather refer you to a thorough article on the subject [0]: > Most of the time, deflation is unambiguously a positive trend for the economy, but it can also under certain conditions occur along with a contraction in the economy. [0] https://www.investopedia.com/articles/personal-finance/030915/why-deflation-bad-economy.asp https://www.investopedia.com/articles/personal-finance/03091...
  - KoolKat23 2y ago
    The heading even leads with "why is deflation bad for the economy". Obviously there are situations where it is good and for certain people, say a right sizing of an overheating economy/sector but on the whole, and more generally, it is bad, not something you look to as fine or alright.
    - Etheryte 2y ago
      It would be helpful if you could actually read the article. Then you'd see that the article outlines some specific situations where deflation is bad for the economy, but concludes that it is good in general. You'd even take away as much if you only read the key takeaways section, but sadly that seems to be a tall order.
      - KoolKat23 2y ago
        I've read it before my prior response and it ends off with: "A little bit of deflation is a product of, and good for, economic growth. But, in the case of an economy-wide, central bank-fueled debt bubble followed by debt deflation when the bubble bursts, rapidly falling prices can go hand-in-hand with a financial crisis and recession." This is what I'm saying.
UncleOxidant 2y ago
> It is mostly when deflation is coupled with an asset bubble Isn't it usually? Such as the housing price deflation of 2008-2011.
ThrustVectoring 2y ago
People have a strong and well-founded attachment to nominal values in the economy. You pay your rent or mortgage with a fixed quantity of dollars, so as a salaried employee certain pay cuts are intolerable, so employers balance their falling nominal revenues with layoffs instead of pay cuts. These nominal agreements are significantly less flexible than real-valued ones; people are much more able to buy fewer steak dinners when they're $20 instead of $15, and much less able to stay in their house when their paycheck is $1500 instead of $2000.

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
  - throw0101d 2y ago
    > There's no rational basis for the 2pct inflation target [1] […] Except that it seems to work. Hitting an inflation rate of exactly 0% is practically impossible: you're going to be either a little high, or a little low. So the option is: do you want "too high" or "too low" (negative)? In the last little while how we've all seen how painful high(er) inflation is for people. Lessons from periods of the 1930s (and others in the linked-to PDF) show how bad deflation is. A "little" high seems to have been a pretty good compromise.
    - lurking15 2y ago
      The 1930s show the consequences of inflation, speculation and credit expansion, and then bungled government response that dragged out economic contraction which is needed to clear out malinvestment. Any common person realizes their ability to lead a dignified life is being squeezed out by monetary expansion gone amok, with those closest to the govt spigot getting the benefits and none of the costs (cantillon effect). And it brings up a good point which no one answers satisfyingly: why shouldn't the average person just enjoy price savings produced by technology?
      - throw0101d 2y ago
        > The 1930s show the consequences of inflation, speculation and credit expansion […] The 1930s were nothing special when it comes to wild swings in prices (as the article show), speculation was not new (see canal mania, railroad mania, etc) * https://en.wikipedia.org/wiki/Canal_Mania https://en.wikipedia.org/wiki/Canal_Mania * https://en.wikipedia.org/wiki/Railway_Mania https://en.wikipedia.org/wiki/Railway_Mania What is special is the post-WW2 era (where there was no deflationary bust, especially after a major war), and the decades that followed (when there was no gold standard to handcuff monetary policy, and when Keynesian economics allowed for fiscal flexibility). > And it brings up a good point which no one answers satisfyingly: why shouldn't the average person just enjoy price savings produced by technology? There's a difference between deflation through innovation, and deflation through economic turmoil (e.g., mass unemployment, collapse of aggregate demand). One of my favourite examples of 'invisible deflation' that no one notices (often while they're complaining about inflation) is a 1991 Radio Shack ad: * https://www.huffpost.com/entry/radio-shack-ad_b_4612973 https://www.huffpost.com/entry/radio-shack-ad_b_4612973 * Via: https://awealthofcommonsense.com/2021/01/inflation-truthers/ https://awealthofcommonsense.com/2021/01/inflation-truthers/
Etheryte 2y ago
This mixes up the reason and the cause. A deflationary spiral occurs when you have a financial crisis, e.g. due to a debt-based asset bubble, and the economy is not strong enough to stimulate growth through policy changes, e.g. interest rates are already zero etc. This then in turn leads to reduced spending to ensure liquidity, that is reduced demand, which leads to lower prices, which is deflation. Deflation is the result, not the cause. From that point onward, yes, it is possible for the situation to spiral in a feedback loop, but deflation is not why the spiral started.

Dig1t 2y ago

I have heard what OP is talking about referred to on econ podcasts like Planet Money and Freakonomics.

yyyyybb 2y ago

Why is this an odd statement to make who educated you to think it’s not?

daedrdev 2y ago

While deflation sounds good, its is definitely bad. When prices are falling, this provides an incentive to firms and consumers to delay purchases since prices are expected to be cheaper in the future. This reduces aggregate demand, which means goods get cheaper due to less demand, causing firms to have to fire people due to lower, causing greater economic decline that spirals out of control. We now know that deflation was a primary cause of the Great Depression.

Etheryte 2y ago
Neither one of those is true. So long as it is not extreme, a decline in the price of goods means consumers have greater purchasing power, more financial security and hence more flexibility in their spending and saving. All of these are good for the economy as an aggregate.
- deleted 2y ago
  [deleted]
- qwytw 2y ago
  Except your debts start increasing even while you're continuously paying them off and investment becomes much more lucrative. Deflation benefits those who have a lot of capital and can invest it into ~ zero risk instruments like government bonds the most (e.g. that's basically how the rentier/aristocratic class in the 19th Britain were able to maintain their lifestyle without doing anything productive, government bonds were yielding 4-5% while the value of their capital was going up due to near continues deflation throughout much of the century). On the other hand if you're a heavily mortgaged farmer you were basically screwed if the price food went down (that's why free-silver/loose monetary policy was so popular amongst farmers back in the 1800s in the Midwest and in much of US).
- throw0101d 2y ago
  > So long as it is not extreme, a decline in the price of goods means consumers have greater purchasing power, more financial security and Deflation means that people's debt becomes more of a burden. I'd hazard to guess that poor people have more debt that rich, and so deflation would be worse for the poor.

KoolKat23 2y ago

Economics 101, deflation is very bad. Basically it is because it directly leads to economic contraction. Why produce something if you're not sure you're going to make the necessary money if you sell it, or wait if you can buy it for cheaper.

Etheryte 2y ago
This is fundamentally flawed, I'll rather refer you to a thorough article on the subject [0]: > Most of the time, deflation is unambiguously a positive trend for the economy, but it can also under certain conditions occur along with a contraction in the economy. [0] https://www.investopedia.com/articles/personal-finance/030915/why-deflation-bad-economy.asp https://www.investopedia.com/articles/personal-finance/03091...
- KoolKat23 2y ago
  The heading even leads with "why is deflation bad for the economy". Obviously there are situations where it is good and for certain people, say a right sizing of an overheating economy/sector but on the whole, and more generally, it is bad, not something you look to as fine or alright.
  - Etheryte 2y ago
    It would be helpful if you could actually read the article. Then you'd see that the article outlines some specific situations where deflation is bad for the economy, but concludes that it is good in general. You'd even take away as much if you only read the key takeaways section, but sadly that seems to be a tall order.
    - KoolKat23 2y ago
      I've read it before my prior response and it ends off with: "A little bit of deflation is a product of, and good for, economic growth. But, in the case of an economy-wide, central bank-fueled debt bubble followed by debt deflation when the bubble bursts, rapidly falling prices can go hand-in-hand with a financial crisis and recession." This is what I'm saying.

UncleOxidant 2y ago

> It is mostly when deflation is coupled with an asset bubble Isn't it usually? Such as the housing price deflation of 2008-2011.

ThrustVectoring 2y ago

People have a strong and well-founded attachment to nominal values in the economy. You pay your rent or mortgage with a fixed quantity of dollars, so as a salaried employee certain pay cuts are intolerable, so employers balance their falling nominal revenues with layoffs instead of pay cuts. These nominal agreements are significantly less flexible than real-valued ones; people are much more able to buy fewer steak dinners when they're $20 instead of $15, and much less able to stay in their house when their paycheck is $1500 instead of $2000.