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If the value of the dollar buys less stuff, that is only good for the economy if the economy benefits from this. While that may be a "well-duh" statement it is

by drakaal 13y ago

If the value of the dollar buys less stuff, that is only good for the economy if the economy benefits from this. While that may be a "well-duh" statement it is counter intuitive in cases where it also means that it means that "Stuff" becomes more expensive than "Labor". Often inflation means more people do things because it becomes cheaper to do things that are labor intense than it is to do things that are material intense. Inflation can be driven by an increase in the cost of labor too however. If we raise the minimum wage then "Labor" will cost more and "stuff" may also cost more an inflation will not be a good thing. But because so many people can't afford this affordable health care there is a push to up the minimum wage. Doing so will raise the cost of labor at the bottom of the wage pool, which will mean someone who was making 25% more than minimum wage will be barely making minimum wage, and likely won't get a wage increase for several years, so for those people they will live closer to the poverty line. For things which are more "stuff" than "labor" the price will go up because people earn more and they will raise to match inflation which will mean more profit margin, as a result the companies that do more "stuff" with less "labor" will get richer. Inflation by its definition means $1 buys less than it did previously. This is almost never a good thing over anything but the shortest of terms. Stagnation is good. Deflation is better.

thaumasiotes 13y ago
Well, deflation sounds like it would be good for anyone with a positive net worth, but the empirics are awful.
- netpenthe 13y ago
  a small amount of inflation (2-3%) is generally seen as good and the target of reserve banks around the world... you think they have this target because inflation is BAD? inflation encourages investment (better invest to beat inflation) deflation is bad unless you already have a lot of money. it discourages investment (why invest? i can just sit here and the value of my money goes up) you can call inflation bad, but it is still better than the alternatives.
  - nerfhammer 13y ago
    not just any kind of money -- cash. It's good if you have a lot of liquid assets laying around, neutral or bad for every other type of asset.
  - thaumasiotes 13y ago
    How is this a response to me? I just pointed out that deflation generally goes along with terrible circumstances. > deflation is bad unless you already have a lot of money. Deflation is bad even when you do already have a lot of money, for the reasons you describe. This is a good place for the argument "a rising tide lifts all boats".
- drakaal 13y ago
  Deflation is actually bad for people with positive net worth, it helps most the people who live pay check to paycheck because their money goes farther. People with lots of networth are usually hurt by deflation which is the reason it is seen as bad. Deflation means houses and capital assets are worth less than they were before, so people with a positive net worth are "hurt". Now if you are totally liquid, then deflation only helps if you want to spend that money. If you entirely bound in something that is not liquid and you need to liquidate it, then you get less dollars, but those dollars go farther. Basically Deflation narrows the gap between the rich and the poor, Inflation increases it.
  - jafaku 13y ago
    > Deflation means houses and capital assets are worth less than they were before, so people with a positive net worth are "hurt". That's wrong, houses can be bought with less money because the purchasing power of money increased, not because houses are losing value. In a deflationary economy, the owner of a house could be richer if instead he holds money. By holding the house instead of money he has the same wealth (assuming the value of the house didn't change for other reasons).
    - drakaal 13y ago
      You countered your own argument. If your house stays at $100k but there is 5% deflation. You made 5%. If your house is worth $100k but falls to $95k because of deflation, your networth has dropped, and your buying power has stayed the same. In the first scenario you can do a happy dance, in the second scenario, if the house is 100% paid off you aren't out anything. If you have paid off 75% of the house you are behind, because the unpaid off portion of the home dropped in value, but the debt stayed the same. This is why they try to keep inflation at 2-3% it means that debt decreased at that rate because your buying power for that financed amount has decreased effectively lowering the amount of debt. Imagine you buy a house and pay only the interest. If inflation is at 7% and the interest is 3% you are ahead each year. I your interested is 3% and there is 3% deflation you are behind each year.
      - deleted 13y ago

by drakaal 13y ago

thaumasiotes 13y ago

Well, deflation sounds like it would be good for anyone with a positive net worth, but the empirics are awful.

netpenthe 13y ago
a small amount of inflation (2-3%) is generally seen as good and the target of reserve banks around the world... you think they have this target because inflation is BAD? inflation encourages investment (better invest to beat inflation) deflation is bad unless you already have a lot of money. it discourages investment (why invest? i can just sit here and the value of my money goes up) you can call inflation bad, but it is still better than the alternatives.
- nerfhammer 13y ago
  not just any kind of money -- cash. It's good if you have a lot of liquid assets laying around, neutral or bad for every other type of asset.
- thaumasiotes 13y ago
  How is this a response to me? I just pointed out that deflation generally goes along with terrible circumstances. > deflation is bad unless you already have a lot of money. Deflation is bad even when you do already have a lot of money, for the reasons you describe. This is a good place for the argument "a rising tide lifts all boats".
drakaal 13y ago
Deflation is actually bad for people with positive net worth, it helps most the people who live pay check to paycheck because their money goes farther. People with lots of networth are usually hurt by deflation which is the reason it is seen as bad. Deflation means houses and capital assets are worth less than they were before, so people with a positive net worth are "hurt". Now if you are totally liquid, then deflation only helps if you want to spend that money. If you entirely bound in something that is not liquid and you need to liquidate it, then you get less dollars, but those dollars go farther. Basically Deflation narrows the gap between the rich and the poor, Inflation increases it.
- jafaku 13y ago
  > Deflation means houses and capital assets are worth less than they were before, so people with a positive net worth are "hurt". That's wrong, houses can be bought with less money because the purchasing power of money increased, not because houses are losing value. In a deflationary economy, the owner of a house could be richer if instead he holds money. By holding the house instead of money he has the same wealth (assuming the value of the house didn't change for other reasons).
  - drakaal 13y ago
    You countered your own argument. If your house stays at $100k but there is 5% deflation. You made 5%. If your house is worth $100k but falls to $95k because of deflation, your networth has dropped, and your buying power has stayed the same. In the first scenario you can do a happy dance, in the second scenario, if the house is 100% paid off you aren't out anything. If you have paid off 75% of the house you are behind, because the unpaid off portion of the home dropped in value, but the debt stayed the same. This is why they try to keep inflation at 2-3% it means that debt decreased at that rate because your buying power for that financed amount has decreased effectively lowering the amount of debt. Imagine you buy a house and pay only the interest. If inflation is at 7% and the interest is 3% you are ahead each year. I your interested is 3% and there is 3% deflation you are behind each year.
    - deleted 13y ago