7 ms·

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

by 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...
- Retric 12y ago
  Salary is somewhat elastic if nothing else fire and rehighering works. The real issue is debt is not elastic. So it becomes an unbound risk durring deflation.
  - zzalpha 12y ago
    Yup, also a great point. In the small, anyone holding a mortgage during a deflationary spiral is steadily squeezed. In the large you'll see businesses and government penalized for taking out loans to invest in capex, market expansion, etc, and existing loans become steadily more and more expensive.
  - Jtsummers 12y ago
    Firing and rehiring destroys morale. A perfectly stable and functional company can destroy itself by trying something like this. Employees will start to realize that no matter what they do they're getting shafted and their productivity will drop. Some will seek employment elsewhere, but those are often the ones you want to keep. You'll be stuck with mediocre and bad employees. When you try to fill in positions with new employees, they see a dysfunctional shop and start looking for the exit.
    - Retric 12y ago
      That greatly depends on overall economic conditions. In many places unemployment approaches 50% at which point wages become far more elastic. PS: Talking about economics goes beyond software developers or illigal day labiors in the US. It includes peasants in the middle ages, factory workers in ‘Soviet Russia’ and even gally slaves on a Roman warship.
- msandford 12y ago
  Yeah man, super true! For example if prices were to start falling I'm going to start putting off the following purchases: 1. New computer 2. New TV 3. New stereo 4. Toilet paper 5. Food 6. Gasoline 7. Rent 8. A new-to-me used pickup truck 9. Clothing 10. Several dozen other things which I can't really wait for but which I will pretend I could for the sake of making a point EDIT: Yes guys, I do realize that it's a marginal effect and that people aren't going to STOP buying TP. The point I'm trying to make, though, is that the "deflationary spiral" told as a story isn't entirely accurate either. People don't STOP buying things, they simply reduce their consumption ever-so-slightly and if EVERYONE does that, it cuts growth. My point, though, is that there are a whole bunch of things which aren't really elastic or which already have falling prices but don't cause general malaise. Yes TV purchases do get put off for the next best model, but eventually people do buy TVs and the industry has models that work even given this reality. In my personal opinion it's not that deflation itself is bad it's that it takes a long time for the deflation to work through the economy and for expectations to readjust. And given the maniacally long maturity of mortgages it takes half a lifetime to reset expectations and it's simply unrealistic.
jayess 12y ago
The other reason for so much FUD is that the modern economy is entirely based on debt -- personal, corporate, and (especially) government. Therefore central banks needs to keep the bubble growing perpetually so that the debt can be serviced. But it can't continue forever...
- dublinben 12y ago
  >But it can't continue forever... Why not? Malthusian predictions have proven to be wrong so far.
  - jayess 12y ago
    Past performance does not guarantee future results :)
    - jbooth 12y ago
      Neither do bald assertions with a smiley face. We've been supposed to see hyper-inflation Any Day Now since like 2009. I'm sure it's just around the corner.
  - elwin 12y ago
    Historically, debt neither increases forever nor collapses catastrophically. Individual sectors collapse, and new ones develop. In the early modern period, governments would simply refuse to repay their debts. Nowadays we have things like stock market crashes and mortgage crises.
  - debacle 12y ago
    We'll really be able to find out in the next 20 years. If it can survive the retirement of the boomer generation and the stagnation of China's economy, it will prove itself as almost entirely durable.
    - dublinben 12y ago
      I think the true test of this system comes sometime in the next century when human population peaks. Expansionist policies assume growth (growing population) and don't handle shrinking or stable populations well.
marcosdumay 12y ago
The usual example of a deflation spiral is the 29's crisis. Altough it's not helped by the fact that most developed countries got into a crisis by about the same time, with several kinds of monetary policies, from US deflation to Germany iperinflation, with everything in the middle. The only point of the article that makes any sense is #5. The author does even ignore the keynesian theory of sticky salaries pricing people out of the labor market (however true it is). It's an almost thought-free article.
- brc 12y ago
  I don't agree that a reduction in growth (recession or depression) is a deflationary spiral. Yes, there was deflation, but it didn't go into an uncontrolled tailspin. The problem was the old canard of irrational exuberance and excessive bad debt. Which must be cleared by letting bad choices come home and businesses go broke so that resources can be reallocated. The measures to 'fight' it, like confiscating and refining the price of gold, and other measures, most likely prolonged it.
Alex3917 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. The obvious example would be bitcoin. No one ever spends their BTC, because of the fear that something that costs 1 BTC today will cost only 0.5 BTC tomorrow.
- debacle 12y ago
  That's an issue with volatility, not deflation.
- marssaxman 12y ago
  I don't care whether bitcoin goes up or down tomorrow; I only care whether it goes up or down between the time I buy the bitcoin and the time I send it to someone. That is: bitcoin is a medium of exchange, not a store of value.
dragonwriter 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. The US depression of the mid-1800s and the UK depression starting in the late 1920s are usually cited as examples, and the Fed's deflationary policy after the 1929 crash in the US is often cited -- even by libertarian economists -- as a contributor to the US's Great 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. Postponing consumption isn't really the issue, reducing investment is. If holding on to cash has positive expected utility, there is less incentive to to use funds that are beyond what is desired for immediate consumption and invest them in productive assets. Also, see the comments by other posters on debt in deflation.
- jscott2 12y ago
  I agree on this: debt in deflation is rough. Maybe the lesson is that people/governments should stay out of debt, not that deflation is the boogeyman. That'd certainly be more anti-fragile.
  - dragonwriter 12y ago
    Again, while debt is an issue, the bigger issue is the disincentive for investment.

by brc 12y ago

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...

Retric 12y ago
Salary is somewhat elastic if nothing else fire and rehighering works. The real issue is debt is not elastic. So it becomes an unbound risk durring deflation.
- zzalpha 12y ago
  Yup, also a great point. In the small, anyone holding a mortgage during a deflationary spiral is steadily squeezed. In the large you'll see businesses and government penalized for taking out loans to invest in capex, market expansion, etc, and existing loans become steadily more and more expensive.
- Jtsummers 12y ago
  Firing and rehiring destroys morale. A perfectly stable and functional company can destroy itself by trying something like this. Employees will start to realize that no matter what they do they're getting shafted and their productivity will drop. Some will seek employment elsewhere, but those are often the ones you want to keep. You'll be stuck with mediocre and bad employees. When you try to fill in positions with new employees, they see a dysfunctional shop and start looking for the exit.
  - Retric 12y ago
    That greatly depends on overall economic conditions. In many places unemployment approaches 50% at which point wages become far more elastic. PS: Talking about economics goes beyond software developers or illigal day labiors in the US. It includes peasants in the middle ages, factory workers in ‘Soviet Russia’ and even gally slaves on a Roman warship.
msandford 12y ago
Yeah man, super true! For example if prices were to start falling I'm going to start putting off the following purchases: 1. New computer 2. New TV 3. New stereo 4. Toilet paper 5. Food 6. Gasoline 7. Rent 8. A new-to-me used pickup truck 9. Clothing 10. Several dozen other things which I can't really wait for but which I will pretend I could for the sake of making a point EDIT: Yes guys, I do realize that it's a marginal effect and that people aren't going to STOP buying TP. The point I'm trying to make, though, is that the "deflationary spiral" told as a story isn't entirely accurate either. People don't STOP buying things, they simply reduce their consumption ever-so-slightly and if EVERYONE does that, it cuts growth. My point, though, is that there are a whole bunch of things which aren't really elastic or which already have falling prices but don't cause general malaise. Yes TV purchases do get put off for the next best model, but eventually people do buy TVs and the industry has models that work even given this reality. In my personal opinion it's not that deflation itself is bad it's that it takes a long time for the deflation to work through the economy and for expectations to readjust. And given the maniacally long maturity of mortgages it takes half a lifetime to reset expectations and it's simply unrealistic.

jayess 12y ago

The other reason for so much FUD is that the modern economy is entirely based on debt -- personal, corporate, and (especially) government. Therefore central banks needs to keep the bubble growing perpetually so that the debt can be serviced. But it can't continue forever...

dublinben 12y ago
>But it can't continue forever... Why not? Malthusian predictions have proven to be wrong so far.
- jayess 12y ago
  Past performance does not guarantee future results :)
  - jbooth 12y ago
    Neither do bald assertions with a smiley face. We've been supposed to see hyper-inflation Any Day Now since like 2009. I'm sure it's just around the corner.
- elwin 12y ago
  Historically, debt neither increases forever nor collapses catastrophically. Individual sectors collapse, and new ones develop. In the early modern period, governments would simply refuse to repay their debts. Nowadays we have things like stock market crashes and mortgage crises.
- debacle 12y ago
  We'll really be able to find out in the next 20 years. If it can survive the retirement of the boomer generation and the stagnation of China's economy, it will prove itself as almost entirely durable.
  - dublinben 12y ago
    I think the true test of this system comes sometime in the next century when human population peaks. Expansionist policies assume growth (growing population) and don't handle shrinking or stable populations well.

marcosdumay 12y ago

The usual example of a deflation spiral is the 29's crisis. Altough it's not helped by the fact that most developed countries got into a crisis by about the same time, with several kinds of monetary policies, from US deflation to Germany iperinflation, with everything in the middle. The only point of the article that makes any sense is #5. The author does even ignore the keynesian theory of sticky salaries pricing people out of the labor market (however true it is). It's an almost thought-free article.

brc 12y ago
I don't agree that a reduction in growth (recession or depression) is a deflationary spiral. Yes, there was deflation, but it didn't go into an uncontrolled tailspin. The problem was the old canard of irrational exuberance and excessive bad debt. Which must be cleared by letting bad choices come home and businesses go broke so that resources can be reallocated. The measures to 'fight' it, like confiscating and refining the price of gold, and other measures, most likely prolonged it.

Alex3917 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. The obvious example would be bitcoin. No one ever spends their BTC, because of the fear that something that costs 1 BTC today will cost only 0.5 BTC tomorrow.

debacle 12y ago
That's an issue with volatility, not deflation.
marssaxman 12y ago
I don't care whether bitcoin goes up or down tomorrow; I only care whether it goes up or down between the time I buy the bitcoin and the time I send it to someone. That is: bitcoin is a medium of exchange, not a store of value.

dragonwriter 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. The US depression of the mid-1800s and the UK depression starting in the late 1920s are usually cited as examples, and the Fed's deflationary policy after the 1929 crash in the US is often cited -- even by libertarian economists -- as a contributor to the US's Great 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. Postponing consumption isn't really the issue, reducing investment is. If holding on to cash has positive expected utility, there is less incentive to to use funds that are beyond what is desired for immediate consumption and invest them in productive assets. Also, see the comments by other posters on debt in deflation.

jscott2 12y ago
I agree on this: debt in deflation is rough. Maybe the lesson is that people/governments should stay out of debt, not that deflation is the boogeyman. That'd certainly be more anti-fragile.
- dragonwriter 12y ago
  Again, while debt is an issue, the bigger issue is the disincentive for investment.