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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
by 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 agoYou 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[deleted]
- pjc50 13y agoOther way round; if you have negative net worth, and wage deflation (i.e. your salary is reducing), then your debts stay at the same nominal value but get harder and harder to pay. If you have a $100k job and $100k house with $100k mortgage, then 10% deflation means you have a $90k job and $90k house but $100k mortgage, which is now underwater and harder to pay off.