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You've missed the point. From the article: "When prices fall, people put off buying things. And when people put off buying things, companies put off investing.

You've missed the point. From the article: "When prices fall, people put off buying things. And when people put off buying things, companies put off investing. And then the economy slumps—and keeps slumping. " I will make a more specific claim: the author is arguing that when the price of things in a given currency fall, people delay purchasing. This can be re-stated that as the ratio of money to goods declines, so too will the purchase of goods. The ratio of money to a specific good declining can happen in one of two ways. Either 1) the currency as a whole appreciates in value relative to everything in the economy (usually called "deflation") or 2) the good becomes cheaper to extract, manufacture, grow or otherwise produce which then allows business to price it less expensively In either case 1 or 2 the ratio of money to a good has decreased. We normally would say it has "gotten cheaper" Computers are a good which has gotten cheaper in real terms and nominal terms and especially in absolute terms. A desktop computer used to cost $2000 or more for anything decent (adjusted for inflation perhaps $5000 or more), today a quite respectable laptop can be purchased for $800 which has hundreds if not thousands of times the capability of the $2000 machine from 20 years ago. The world as it exists today does have a computer industry, in fact it's huge. Compared to 1993 it's at least 10x larger, and surely quite a bit more: http://en.wikipedia.org/wiki/File:Personal_computers_(million)_ITU.png http://en.wikipedia.org/wiki/File:Personal_computers_(millio... So according to the author's "when things get cheaper people stop buying" argument the computer industry should have been shrinking over the last 20 years, not growing. But we can clearly see from the world that exists today that the computer industry has grown over the last 20 years. How should I reconcile the author's argument with the reality I see around me? I feel I have no choice but to conclude that the notion that "falling prices causes people to reduce their purchases" might not be a universal truth, or perhaps it contains only a little truth inside it.

maxerickson 13y ago
I'm just saying I don't think you can expect the same behavioral responses to 1 and 2. In the case of 1, I minimize all of my purchases during periods where I perceive higher levels of appreciation. In the case of 2, I only buy what I need of that good (which is approximately what I do anyway). So it isn't a particularly interesting comparison to make.
- msandford 13y ago
  Sure, but for most people even in case 1 you still have to have food, clothing, shelter, etc. Those needs don't disappear just because you want to speculate. Now you might be able to speculate quite effectively buying when prices are low and living off of your stores when prices are high. But everyone can't do that by definition, so we're saved from case 1 totally throwing a monkey-wrench into the works.
matwood 13y ago
Deflation is defined as a general decline in prices, with emphasis on the word "general." At any given time, especially in a low-inflation economy like that of our recent experience, prices of some goods and services will be falling. Price declines in a specific sector may occur because productivity is rising and costs are falling more quickly in that sector than elsewhere or because the demand for the output of that sector is weak relative to the demand for other goods and services. Sector-specific price declines, uncomfortable as they may be for producers in that sector, are generally not a problem for the economy as a whole and do not constitute deflation. Deflation per se occurs only when price declines are so widespread that broad-based indexes of prices, such as the consumer price index, register ongoing declines. From the Bernanke article I originally linked.

maxerickson 13y ago

I'm just saying I don't think you can expect the same behavioral responses to 1 and 2. In the case of 1, I minimize all of my purchases during periods where I perceive higher levels of appreciation. In the case of 2, I only buy what I need of that good (which is approximately what I do anyway). So it isn't a particularly interesting comparison to make.

msandford 13y ago
Sure, but for most people even in case 1 you still have to have food, clothing, shelter, etc. Those needs don't disappear just because you want to speculate. Now you might be able to speculate quite effectively buying when prices are low and living off of your stores when prices are high. But everyone can't do that by definition, so we're saved from case 1 totally throwing a monkey-wrench into the works.

matwood 13y ago

Deflation is defined as a general decline in prices, with emphasis on the word "general." At any given time, especially in a low-inflation economy like that of our recent experience, prices of some goods and services will be falling. Price declines in a specific sector may occur because productivity is rising and costs are falling more quickly in that sector than elsewhere or because the demand for the output of that sector is weak relative to the demand for other goods and services. Sector-specific price declines, uncomfortable as they may be for producers in that sector, are generally not a problem for the economy as a whole and do not constitute deflation. Deflation per se occurs only when price declines are so widespread that broad-based indexes of prices, such as the consumer price index, register ongoing declines. From the Bernanke article I originally linked.