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Why Falling Prices Are Actually a Really Bad Thing

30 points by orin_hanner 12y ago

kyllo 12y ago
Yep, it's called deflation and it leads to hoarding behavior and a stagnant economy. See Japan in the 1990s for a good example.
- waps 12y ago
  Here is another factor you might consider. What happens to government finances during deflation ? Well, deflation means falling prices. Prices sponsor wages. Falling prices means falling wages. The large majority of government tax income is a tax on wages, or a tax on consumption. Both of these go down. Now this wouldn't be so bad, except ... Governments loan money both to fund expenditures and to pay interest on their old loans. Inflation effectively means they can spend 2% of the total amount of their old loans "for free" (by loaning it) (they key thing to realise here is that doing so does not increase the burden on their income, it was 2% of taxes, and it still is). They get this double, since they get it both on the income side, and on the new loans. Deflation means the opposite. Tax revenues go down, interest payments go up. Unless they want to drastically cut spending, that means they have to use pretty much all of their yearly new loans just to pay back interest. The problem is also the difference between years : year 1 : 2% inflation -> government can spend 104% of it's budget year 2 : 2% deflation -> government can spend 96% of it's budget So 2% inflation necessitates a 10% cut in loan-based spending, which is about half of government spending. So a seemingly tiny amount of deflation requires a 5% spending cut by the government at minimum. But that is not all. Government taxes have always been effectively a percentage of GDP. Governments have historically been unable to raise tax income. Deflation will lead to a fall in GDP, historically of at least double the amount of the deflation, sometimes much more. So the other half of government income goes down by ~4% (very, very optimistically). Now because falling prices and wages mean that the stress on social services increases (for obvious reasons), government expenditures go up, usually again by much more than the amount of deflation you see. It leads to pretty much every part of social security going up. Unemployment, for obvious reasons. But also pensions (people will go on a pension earlier because there's no work) and even illness and disability (well we all know why). So 2% deflation effectively means the government has to cut spending by ~10%, WHILE social security expenses go up. The government controls central banks. QE, ostensibly to "cause inflation" hasn't caused inflation (rather the opposite). So in order to absorb this financial shock, the U.S. government has instead decided to finance it's operations by direct money printing, by lending from the money printer. They ran a risk by lending the way the constitution said they should lend, so they "cheated". Now we see the EU (and dozens of other governments, including China and lots of smaller ones) doing the same. This is also an extremely important factor in central bank behaviour, as they are controlled by governments, and it is the reason that we have not seen the end of QE (except maybe in America, but to be honest, I think there is a non-negligeable chance the US will lower rates instead of raising them, in 6 months).
brc 12y ago
I would believe these types of pop-economics articles a lot more if they could actually find and example of a deflationary spiral causing a long term depression. Prices for many things already do decrease regularly. Every time I purchase a new computer I'm faced with the knowledge that, in 6 months time, a better, cheaper (or at least better value) model will come out. This myth that consumers will endlessly postpone purchases in the face of falling prices ignores the fact that a lot of ourchases cannot be postponed indefinitely. And even if consumers postpone spending, it means they are saving. Which builds the investment base necessary for growth. The point is that a currency cannot deflate to an infinite value, but it can be inflated to a zero value. There has been plenty examples of the latter, but zero examples of the former. The real reason for the FUD around deflation is that it's not good for central banks. They, and their supporters are just talking their book. Fair enough, but like high or low currency values relative to other currencies, there are always winners and losers with deflation and inflation. One side is not inherently more evil than the other. What would be really great is constant value of currencies over time. That would be mildly deflationary as technology increases production efficiency, and it would ward off a lot of bad investment decisions which excarbate the boom/bust cycle.
- zzalpha 12y ago
  Congratulations for confusing micro and macroeconomics. What happens to the price of a single good over the lifetime of that good is not a useful lesson in what happens as a result of broad, economy-wide deflation. Frankly, the issue with purchase postponement isn't the biggest problem (although it's certainly a concern, as is hoarding). In my mind the biggest problem is wages being inelastic downward. As all prices deflate, income for employers goes down (or thought of another way, the value of money goes up which makes each employee more expensive). That forces two options: fire employees, or cut salaries. The latter is very difficult. So instead you see the former. So you get broad based increases in unemployment. That leads to reduced consumer spending, which forces prices down even further, and so on. As for real life examples, perhaps the Great Depression qualifies? http://www.economist.com/economics-a-to-z/d#node-21529653 http://www.economist.com/economics-a-to-z/d#node-21529653 If you're looking for a more contemporary example, Japan experienced its own deflationary spiral: http://www.forbes.com/sites/jamesgruber/2014/04/27/japan-deflation-to-end/ http://www.forbes.com/sites/jamesgruber/2014/04/27/japan-def...
math 12y ago
"When shoppers see persistent price declines, they hold out on buying things." and yet I keep buying computers... I don't think I agree with this statement (unless there is massive deflation).
- EricBlair 12y ago
  Of course not, but that's the fallacy they like to use to convince people that deflation is a bad thing. It's only a problem for those in debt. They want to inflate away those debts and this goes contrary to that. There's a reason why a Coke no longer costs a nickel and these guys will tell you it's a good thing when it costs a $1000. Never mind that you will essentially be earning the same wages when that comes about. You saw that just a few years ago in CA when oil was close to $150 and people were quitting their jobs because of the cost of the commute. Bloomberg, like the Economist and FT represent the status quo. They print whatever propaganda they're instructed to by the state. When you hear about the CIA and MI6 having agents working for news organziation, these guys are at the top of the list. Ooooooh 'conspiracy'... that has been documented a thousand times over many decades. This game has been played out many times before over the past century and then some. It's a tiresome old debate.
- Chathamization 12y ago
  Hmm, I’ve heard multiple people talk about jumping in during the housing bubble because they thought if they didn’t buy right then the price would keep going up. And I’d say that there’s pretty good evidence that people will buy things sooner if they think that waiting would entail a price increase (which is why sales are so effective). So if people are expecting the price to rise, they’re more likely to make a purchase, and if they aren’t expecting the price to rise they’re less likely to. I don’t think it’s too much of a jump to think that if the price of something is going to go down next week, people are more likely to hold off on purchases. Though I imagine a bigger issue is the need for investment. When there’s stagnation firms tend to sit on a lot of cash, because they believe that money slowly losing value (low inflation) or even gaining value (deflation) is preferable to the few and possibly risky investment opportunities they see. This causes credit and investments to dry up. This hording behavior, as well as the wage inflexibility mentioned above, ends up being a major drag on the economy. On the other hand, with a decent rate of inflation firms are going to be making sure that their money is working, because if it’s just sitting there it’s going to be losing money year after year.
learnstats2 12y ago
OK, this article explains deflationary spiral. This depends on the assumption that people hold out on buying non-urgent goods in the belief that prices will continue to fall - leading prices to fall further. But in the current economic climate, almost nobody is buying non-urgent goods anyway. (Yet we have seen consistent inflation) The current 'deflation' is primarily led by a sharp downtick in oil prices that won't be repeated - there's no immediate suggestion that prices will continue to fall. With years of consistent inflation above wage increases compounding to give high prices, any deflation is just as likely to be seen by consumers as a relief from high prices - a good opportunity for people to spend the money they've been holding onto.
- Amezarak 12y ago
  > (Yet we have seen consistent inflation) Last month, the US inflation rate was 0.8%. For 2014 as a whole, it was 1.6%. This is, in fact, credited in part to low consumer demand. Slack demand generally leads to job cuts, which leads to even slacker demand. That's the spiral they talk about. > The current 'deflation' is primarily led by a sharp downtick in oil prices that won't be repeated - there's no immediate suggestion that prices will continue to fall. This is why economists talk about core inflation, to remove as much as possible the influence of volatile commodities such as oil. Inflation will remain very low even with oil prices go up. Since 2008, inflation has actually at times been negative (i.e., deflation.) People who think deflation is a good thing need only look at the Great Depression, Japan, the present Eurozone, and the 2008 recession. Just because high inflation is bad doesn't mean that deflation is good.
  - jbooth 12y ago
    In addition, this incredibly low inflation happened in an environment with rock bottom interest rates and the fed basically printing money because you can't cut interest rates below 0. Those moves were supposed to create hyper-inflation and be the reason for You to Buy Gold Now. Actually they barely kept us out of deflation.
    - Amezarak 12y ago
totalrobe 12y ago
It's definitely a bad thing for all the big banks holding oil that just got f#$@@d
CapitalistCartr 12y ago
If I knew the price of everything I buy would be 1%-2% lower next quarter, it wouldn't affect my spending behavior at all. I have, in fact, known gasoline was dropping by a lot more than that for the past two quarters, and I've not put off even casual consumption. Marginal deflation isn't enough to change my spending habits, and my mortgage and utilities are pretty fixed.
- waps 12y ago
  True. But here's what it would affect. If you are a huge company, or a government, with an extremely large negative net worth (ie. you loaned loads of money). Deflation will cause : 1) your income to go down by more than the deflation amount 2) your loans don't go down So deflation will kill large companies very quickly, and put governments in a really difficult position.
ttty 12y ago
This is just stupid IMO, but I'm not any economist. You worked X time: got 1000€ Day 1: You can buy 1000 candies at 1€ each. Day 2: Inflation, prices +100%: you can only buy 500 at 2€ each This means that you just lost 500 candies or 500€. This means that what you worked 50% for nothing! You just lost 50% of your money, just like that! So who has my money? not me of course. Let's think about deflation: Day 1: You can buy 1000 candies at 1€ each. Day 2: Deflation, prices -50%: you can buy 2000 at 0.5€ each Now if you would only buy 1000 candies you would still have 500€ to spend on other stuff. You might save it or buy other stuff. Let's think about none of them: Day 1: You can buy 1000 candies at 1€ each. Day 2: You can buy 1000 candies at 1€ each. Today is the same as yesterday, I've worked X hours I buy Y candies, everyday. Why should it change? I know many factors change the price but why? Well, if you can see inflation is good for the banks. They inject more money in order to make your money less valuable. So in other words you lose money (your hard earned money) while they are just printing easy money! So who is the dumb one? We can do nothing. Again why deflation is bad? I would buy to eat even if inflated or deflated, maybe less and more, depending by inflation or deflation. I might even buy higher quality meals. If I need a new phone do you wait until the prices fall to 100€? No some people still buy them at 1000€. Some not, but is not inflation that will make that change. For example the same people that don't wait a few months for the price of Iphone to fall from 1000€ to 300€ will not wait for deflation to decrease the price from 1000€ to 800€. He just want the Iphone and it will buy it. This is just a big lie thrown in my face! please correct me if I'm wrong!!!
- BSousa 12y ago
  Not an economist either. But the way I see it (ignoring food and other things you can't live without) Inflation Day 1: you can buy 1000 candies, and you suspect tomorrow you will only be able to buy 500, so you buy 1000 candies and store them/eat them. You 'inject' money into the economy, give the government tax money, etc. Deflation: Day 1: you can buy 1000 candies, but suspect that tomorrow you can buy 2000 candies, you don't buy Day 2: you can buy 2000 candies, but suspect that tomorrow you can buy 3000, you don't buy, or buy just enough for your sweet tooth today (lets say 100) Day 3: you can buy 3000 candies, but again... etc etc Again, this is based on needs and wants. If you have 1000 euros. If your phone breaks and you need one to work, you will buy today, no matter if we are in deflation or inflation, but if your old one still works, you may very well buy it today (in case of inflation, since it will will cost more of those 1000 euros tomorrow, or you will wait if you are in deflation since it will cost less of those 1000 euros. Of course, if you need rice to not starve, it doesn't matter! And for average folks, deflation tends to be good since most of expenses are from needs and not wants but this causes issues to business and (possibly) to the economy as well. If you want a smaller example, I've personally waited for weeks and months to import some goods due to the falling EUR->USD rate, saving me between 5-6% of the cost, so I don't see why others won't do the same if they expect the costs to be less in the future.
jkot 12y ago
IT industry had falling prices for last 60 years.
- arethuza 12y ago
  Most organizations and individuals are probably spending more than they ever had have on "IT" related purchases.
bsaunder 12y ago
Maybe it's me (I'm sure it is - I'm no ecomomist), but a basic income seems like a perfect counter to deflation: 1. It seems like it should increase consumption as everyone would simply have more money to spend. Even if things are cheaper (and seem to be getting cheaper), you now have a new stream of income that, for some people, will burn holes in pockets and beg to be spent. 2. It would allow some employees in the labor market to "opt-out" (as the basic income supplants the "need" for a minimal wage job) and decrease the surplus labor pool. This would seem to require wage growth as employers now need to make the job proposition more compelling. Maybe they would even treat their employees better. Bonus. 3. "printing money" to pay for (or maybe just a portion of) the basic income seems like it should be a nice inflationary counter to the natural deflationary pressures. I'm sure there are other pros and some cons of this approach, but those seem like good starting points.
- jmesserly 12y ago
  I'm not an economist either, but applying textbook theory from school, it could help. A lot depends on the size, and making sure it isn't too big to discourage employment. http://en.wikipedia.org/wiki/Basic_income http://en.wikipedia.org/wiki/Basic_income would be a demand side stimulus, with money going to the folks most likely to spend by taxing the folks most likely to save (you wouldn't want to do it by "printing money"). That particular effect would point in the direction of increased GDP (assuming we start from a deflationary trap with inadequate demand and large private debt overhang). However the risk would be too much employment lost, which points in the direction of decreased GDP. A safer way to do the same thing would be to just spend government money on things like building infrastructure. In current conditions, that translates into increased GDP without the reduced employment risk. Similarly reduced taxes on lower incomes would be less risky but work through the same means. (This isn't addressing whether basic income would be morally good or bad. Just the macro effects.)
supercanuck 12y ago
> Lower profits = less money to go around to workers Hasn't this shown to have been un-true in the last 5 years? Higher profits has not meant more money going around to workers.
- debacle 12y ago
  I think in general it has. The cost function for labor has kind of bottomed out. Demand is so low in comparison to supply.
- dragonwriter 12y ago
  > Hasn't this shown to have been un-true in the last 5 years? Strictly speaking, no. > Higher profits has not meant more money going around to workers. That doesn't mean that lower profits don't reduce the maximum that can be distributed to workers, however. (The fact that the actual amount distributed hasn't historically increased when the maximum has is a different issue.)
debacle 12y ago
> When shoppers see persistent price declines, they hold out on buying things. They ask, will I get a better deal next week, next month, next year? Who does this? For 90% of my consumer goods, I don't care what they're going to cost in a month or a year. I need to replace the one I have today.
- pjc50 12y ago
  90% of your goods or 90% of the value of your goods? It's the big ticket items - TV, car, housing - that people delay.
  - debacle 12y ago
    I wouldn't hold off on a car or housing - to assume that is ignorant - though with prices going down I would likely purchase a new vehicle much sooner than I otherwise would have.
  - freeasindave 12y ago
    No it's not. Millions of PC's are sold each quarter, even though they cost as much as a TV and they get cheaper all the time. When you need it, you need it. You might wait a couple of months, but at the end of the day you have to pull the trigger based on need. It's called marginal utility. When you determine that the usefulness of a good (to you) outweighs the usefulness of the cash that good would displace, you buy it.
facepalm 12y ago
...in theory.
pillowpants2 12y ago
Aside from the theory that people are going to stop buying goods because of expectations that they will get cheaper, I thought the price of consumer products were lowering because of cheaper energy, which would decrease COGS and improve margins/prices, not affect revenue?
pjc50 12y ago
People are having trouble getting this. Consider: - if you expect to get a 1% pay increase every year, is it reasonable to take out a mortgage at 3% and pay $X/mo for 25 years? Yes, and at the end of the term it will be a smaller fraction of your expenditure. And if your house goes up in value by 1% you're benefiting there as well. - if you expect to get a 1% pay cut every year, is it reasonable to take out a mortgage at 1% and pay $X/mo for 25 years? No, that's going to be a disaster as it gradually squeezes you, unless you carefully refi regularly. And if the house goes down in value by 1% a year, that's even worse. Construction industry collapses as a result.
deleted 12y ago
[deleted]

30 points by orin_hanner 12y ago

kyllo 12y ago

Yep, it's called deflation and it leads to hoarding behavior and a stagnant economy. See Japan in the 1990s for a good example.

waps 12y ago
Here is another factor you might consider. What happens to government finances during deflation ? Well, deflation means falling prices. Prices sponsor wages. Falling prices means falling wages. The large majority of government tax income is a tax on wages, or a tax on consumption. Both of these go down. Now this wouldn't be so bad, except ... Governments loan money both to fund expenditures and to pay interest on their old loans. Inflation effectively means they can spend 2% of the total amount of their old loans "for free" (by loaning it) (they key thing to realise here is that doing so does not increase the burden on their income, it was 2% of taxes, and it still is). They get this double, since they get it both on the income side, and on the new loans. Deflation means the opposite. Tax revenues go down, interest payments go up. Unless they want to drastically cut spending, that means they have to use pretty much all of their yearly new loans just to pay back interest. The problem is also the difference between years : year 1 : 2% inflation -> government can spend 104% of it's budget year 2 : 2% deflation -> government can spend 96% of it's budget So 2% inflation necessitates a 10% cut in loan-based spending, which is about half of government spending. So a seemingly tiny amount of deflation requires a 5% spending cut by the government at minimum. But that is not all. Government taxes have always been effectively a percentage of GDP. Governments have historically been unable to raise tax income. Deflation will lead to a fall in GDP, historically of at least double the amount of the deflation, sometimes much more. So the other half of government income goes down by ~4% (very, very optimistically). Now because falling prices and wages mean that the stress on social services increases (for obvious reasons), government expenditures go up, usually again by much more than the amount of deflation you see. It leads to pretty much every part of social security going up. Unemployment, for obvious reasons. But also pensions (people will go on a pension earlier because there's no work) and even illness and disability (well we all know why). So 2% deflation effectively means the government has to cut spending by ~10%, WHILE social security expenses go up. The government controls central banks. QE, ostensibly to "cause inflation" hasn't caused inflation (rather the opposite). So in order to absorb this financial shock, the U.S. government has instead decided to finance it's operations by direct money printing, by lending from the money printer. They ran a risk by lending the way the constitution said they should lend, so they "cheated". Now we see the EU (and dozens of other governments, including China and lots of smaller ones) doing the same. This is also an extremely important factor in central bank behaviour, as they are controlled by governments, and it is the reason that we have not seen the end of QE (except maybe in America, but to be honest, I think there is a non-negligeable chance the US will lower rates instead of raising them, in 6 months).

brc 12y ago

I would believe these types of pop-economics articles a lot more if they could actually find and example of a deflationary spiral causing a long term depression. Prices for many things already do decrease regularly. Every time I purchase a new computer I'm faced with the knowledge that, in 6 months time, a better, cheaper (or at least better value) model will come out. This myth that consumers will endlessly postpone purchases in the face of falling prices ignores the fact that a lot of ourchases cannot be postponed indefinitely. And even if consumers postpone spending, it means they are saving. Which builds the investment base necessary for growth. The point is that a currency cannot deflate to an infinite value, but it can be inflated to a zero value. There has been plenty examples of the latter, but zero examples of the former. The real reason for the FUD around deflation is that it's not good for central banks. They, and their supporters are just talking their book. Fair enough, but like high or low currency values relative to other currencies, there are always winners and losers with deflation and inflation. One side is not inherently more evil than the other. What would be really great is constant value of currencies over time. That would be mildly deflationary as technology increases production efficiency, and it would ward off a lot of bad investment decisions which excarbate the boom/bust cycle.

zzalpha 12y ago
Congratulations for confusing micro and macroeconomics. What happens to the price of a single good over the lifetime of that good is not a useful lesson in what happens as a result of broad, economy-wide deflation. Frankly, the issue with purchase postponement isn't the biggest problem (although it's certainly a concern, as is hoarding). In my mind the biggest problem is wages being inelastic downward. As all prices deflate, income for employers goes down (or thought of another way, the value of money goes up which makes each employee more expensive). That forces two options: fire employees, or cut salaries. The latter is very difficult. So instead you see the former. So you get broad based increases in unemployment. That leads to reduced consumer spending, which forces prices down even further, and so on. As for real life examples, perhaps the Great Depression qualifies? http://www.economist.com/economics-a-to-z/d#node-21529653 http://www.economist.com/economics-a-to-z/d#node-21529653 If you're looking for a more contemporary example, Japan experienced its own deflationary spiral: http://www.forbes.com/sites/jamesgruber/2014/04/27/japan-deflation-to-end/ http://www.forbes.com/sites/jamesgruber/2014/04/27/japan-def...

math 12y ago

"When shoppers see persistent price declines, they hold out on buying things." and yet I keep buying computers... I don't think I agree with this statement (unless there is massive deflation).

EricBlair 12y ago
Of course not, but that's the fallacy they like to use to convince people that deflation is a bad thing. It's only a problem for those in debt. They want to inflate away those debts and this goes contrary to that. There's a reason why a Coke no longer costs a nickel and these guys will tell you it's a good thing when it costs a $1000. Never mind that you will essentially be earning the same wages when that comes about. You saw that just a few years ago in CA when oil was close to $150 and people were quitting their jobs because of the cost of the commute. Bloomberg, like the Economist and FT represent the status quo. They print whatever propaganda they're instructed to by the state. When you hear about the CIA and MI6 having agents working for news organziation, these guys are at the top of the list. Ooooooh 'conspiracy'... that has been documented a thousand times over many decades. This game has been played out many times before over the past century and then some. It's a tiresome old debate.
Chathamization 12y ago
Hmm, I’ve heard multiple people talk about jumping in during the housing bubble because they thought if they didn’t buy right then the price would keep going up. And I’d say that there’s pretty good evidence that people will buy things sooner if they think that waiting would entail a price increase (which is why sales are so effective). So if people are expecting the price to rise, they’re more likely to make a purchase, and if they aren’t expecting the price to rise they’re less likely to. I don’t think it’s too much of a jump to think that if the price of something is going to go down next week, people are more likely to hold off on purchases. Though I imagine a bigger issue is the need for investment. When there’s stagnation firms tend to sit on a lot of cash, because they believe that money slowly losing value (low inflation) or even gaining value (deflation) is preferable to the few and possibly risky investment opportunities they see. This causes credit and investments to dry up. This hording behavior, as well as the wage inflexibility mentioned above, ends up being a major drag on the economy. On the other hand, with a decent rate of inflation firms are going to be making sure that their money is working, because if it’s just sitting there it’s going to be losing money year after year.

learnstats2 12y ago

OK, this article explains deflationary spiral. This depends on the assumption that people hold out on buying non-urgent goods in the belief that prices will continue to fall - leading prices to fall further. But in the current economic climate, almost nobody is buying non-urgent goods anyway. (Yet we have seen consistent inflation) The current 'deflation' is primarily led by a sharp downtick in oil prices that won't be repeated - there's no immediate suggestion that prices will continue to fall. With years of consistent inflation above wage increases compounding to give high prices, any deflation is just as likely to be seen by consumers as a relief from high prices - a good opportunity for people to spend the money they've been holding onto.

Amezarak 12y ago
> (Yet we have seen consistent inflation) Last month, the US inflation rate was 0.8%. For 2014 as a whole, it was 1.6%. This is, in fact, credited in part to low consumer demand. Slack demand generally leads to job cuts, which leads to even slacker demand. That's the spiral they talk about. > The current 'deflation' is primarily led by a sharp downtick in oil prices that won't be repeated - there's no immediate suggestion that prices will continue to fall. This is why economists talk about core inflation, to remove as much as possible the influence of volatile commodities such as oil. Inflation will remain very low even with oil prices go up. Since 2008, inflation has actually at times been negative (i.e., deflation.) People who think deflation is a good thing need only look at the Great Depression, Japan, the present Eurozone, and the 2008 recession. Just because high inflation is bad doesn't mean that deflation is good.
- jbooth 12y ago
  In addition, this incredibly low inflation happened in an environment with rock bottom interest rates and the fed basically printing money because you can't cut interest rates below 0. Those moves were supposed to create hyper-inflation and be the reason for You to Buy Gold Now. Actually they barely kept us out of deflation.
  - Amezarak 12y ago

totalrobe 12y ago

It's definitely a bad thing for all the big banks holding oil that just got f#$@@d

CapitalistCartr 12y ago

If I knew the price of everything I buy would be 1%-2% lower next quarter, it wouldn't affect my spending behavior at all. I have, in fact, known gasoline was dropping by a lot more than that for the past two quarters, and I've not put off even casual consumption. Marginal deflation isn't enough to change my spending habits, and my mortgage and utilities are pretty fixed.

waps 12y ago
True. But here's what it would affect. If you are a huge company, or a government, with an extremely large negative net worth (ie. you loaned loads of money). Deflation will cause : 1) your income to go down by more than the deflation amount 2) your loans don't go down So deflation will kill large companies very quickly, and put governments in a really difficult position.

ttty 12y ago

This is just stupid IMO, but I'm not any economist. You worked X time: got 1000€ Day 1: You can buy 1000 candies at 1€ each. Day 2: Inflation, prices +100%: you can only buy 500 at 2€ each This means that you just lost 500 candies or 500€. This means that what you worked 50% for nothing! You just lost 50% of your money, just like that! So who has my money? not me of course. Let's think about deflation: Day 1: You can buy 1000 candies at 1€ each. Day 2: Deflation, prices -50%: you can buy 2000 at 0.5€ each Now if you would only buy 1000 candies you would still have 500€ to spend on other stuff. You might save it or buy other stuff. Let's think about none of them: Day 1: You can buy 1000 candies at 1€ each. Day 2: You can buy 1000 candies at 1€ each. Today is the same as yesterday, I've worked X hours I buy Y candies, everyday. Why should it change? I know many factors change the price but why? Well, if you can see inflation is good for the banks. They inject more money in order to make your money less valuable. So in other words you lose money (your hard earned money) while they are just printing easy money! So who is the dumb one? We can do nothing. Again why deflation is bad? I would buy to eat even if inflated or deflated, maybe less and more, depending by inflation or deflation. I might even buy higher quality meals. If I need a new phone do you wait until the prices fall to 100€? No some people still buy them at 1000€. Some not, but is not inflation that will make that change. For example the same people that don't wait a few months for the price of Iphone to fall from 1000€ to 300€ will not wait for deflation to decrease the price from 1000€ to 800€. He just want the Iphone and it will buy it. This is just a big lie thrown in my face! please correct me if I'm wrong!!!

BSousa 12y ago
Not an economist either. But the way I see it (ignoring food and other things you can't live without) Inflation Day 1: you can buy 1000 candies, and you suspect tomorrow you will only be able to buy 500, so you buy 1000 candies and store them/eat them. You 'inject' money into the economy, give the government tax money, etc. Deflation: Day 1: you can buy 1000 candies, but suspect that tomorrow you can buy 2000 candies, you don't buy Day 2: you can buy 2000 candies, but suspect that tomorrow you can buy 3000, you don't buy, or buy just enough for your sweet tooth today (lets say 100) Day 3: you can buy 3000 candies, but again... etc etc Again, this is based on needs and wants. If you have 1000 euros. If your phone breaks and you need one to work, you will buy today, no matter if we are in deflation or inflation, but if your old one still works, you may very well buy it today (in case of inflation, since it will will cost more of those 1000 euros tomorrow, or you will wait if you are in deflation since it will cost less of those 1000 euros. Of course, if you need rice to not starve, it doesn't matter! And for average folks, deflation tends to be good since most of expenses are from needs and not wants but this causes issues to business and (possibly) to the economy as well. If you want a smaller example, I've personally waited for weeks and months to import some goods due to the falling EUR->USD rate, saving me between 5-6% of the cost, so I don't see why others won't do the same if they expect the costs to be less in the future.

jkot 12y ago

IT industry had falling prices for last 60 years.

arethuza 12y ago
Most organizations and individuals are probably spending more than they ever had have on "IT" related purchases.

bsaunder 12y ago

Maybe it's me (I'm sure it is - I'm no ecomomist), but a basic income seems like a perfect counter to deflation: 1. It seems like it should increase consumption as everyone would simply have more money to spend. Even if things are cheaper (and seem to be getting cheaper), you now have a new stream of income that, for some people, will burn holes in pockets and beg to be spent. 2. It would allow some employees in the labor market to "opt-out" (as the basic income supplants the "need" for a minimal wage job) and decrease the surplus labor pool. This would seem to require wage growth as employers now need to make the job proposition more compelling. Maybe they would even treat their employees better. Bonus. 3. "printing money" to pay for (or maybe just a portion of) the basic income seems like it should be a nice inflationary counter to the natural deflationary pressures. I'm sure there are other pros and some cons of this approach, but those seem like good starting points.

jmesserly 12y ago
I'm not an economist either, but applying textbook theory from school, it could help. A lot depends on the size, and making sure it isn't too big to discourage employment. http://en.wikipedia.org/wiki/Basic_income http://en.wikipedia.org/wiki/Basic_income would be a demand side stimulus, with money going to the folks most likely to spend by taxing the folks most likely to save (you wouldn't want to do it by "printing money"). That particular effect would point in the direction of increased GDP (assuming we start from a deflationary trap with inadequate demand and large private debt overhang). However the risk would be too much employment lost, which points in the direction of decreased GDP. A safer way to do the same thing would be to just spend government money on things like building infrastructure. In current conditions, that translates into increased GDP without the reduced employment risk. Similarly reduced taxes on lower incomes would be less risky but work through the same means. (This isn't addressing whether basic income would be morally good or bad. Just the macro effects.)

supercanuck 12y ago

> Lower profits = less money to go around to workers Hasn't this shown to have been un-true in the last 5 years? Higher profits has not meant more money going around to workers.

debacle 12y ago
I think in general it has. The cost function for labor has kind of bottomed out. Demand is so low in comparison to supply.
dragonwriter 12y ago
> Hasn't this shown to have been un-true in the last 5 years? Strictly speaking, no. > Higher profits has not meant more money going around to workers. That doesn't mean that lower profits don't reduce the maximum that can be distributed to workers, however. (The fact that the actual amount distributed hasn't historically increased when the maximum has is a different issue.)

debacle 12y ago

> When shoppers see persistent price declines, they hold out on buying things. They ask, will I get a better deal next week, next month, next year? Who does this? For 90% of my consumer goods, I don't care what they're going to cost in a month or a year. I need to replace the one I have today.

pjc50 12y ago
90% of your goods or 90% of the value of your goods? It's the big ticket items - TV, car, housing - that people delay.
- debacle 12y ago
  I wouldn't hold off on a car or housing - to assume that is ignorant - though with prices going down I would likely purchase a new vehicle much sooner than I otherwise would have.
- freeasindave 12y ago
  No it's not. Millions of PC's are sold each quarter, even though they cost as much as a TV and they get cheaper all the time. When you need it, you need it. You might wait a couple of months, but at the end of the day you have to pull the trigger based on need. It's called marginal utility. When you determine that the usefulness of a good (to you) outweighs the usefulness of the cash that good would displace, you buy it.

facepalm 12y ago

...in theory.

pillowpants2 12y ago

Aside from the theory that people are going to stop buying goods because of expectations that they will get cheaper, I thought the price of consumer products were lowering because of cheaper energy, which would decrease COGS and improve margins/prices, not affect revenue?

pjc50 12y ago

People are having trouble getting this. Consider: - if you expect to get a 1% pay increase every year, is it reasonable to take out a mortgage at 3% and pay $X/mo for 25 years? Yes, and at the end of the term it will be a smaller fraction of your expenditure. And if your house goes up in value by 1% you're benefiting there as well. - if you expect to get a 1% pay cut every year, is it reasonable to take out a mortgage at 1% and pay $X/mo for 25 years? No, that's going to be a disaster as it gradually squeezes you, unless you carefully refi regularly. And if the house goes down in value by 1% a year, that's even worse. Construction industry collapses as a result.

deleted 12y ago

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