7 ms·

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 wha

by 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.
- deleted 12y ago
  [deleted]
- Amezarak 12y ago
  Something tells me the average HN commenter living in Silicon Valley making six figures doesn't represent the average American. While there are certainly fixed costs to being alive (like toilet paper), most people do cut back and this behavior is observed. And when it gets very bad, even those "fixed costs" start being cut - cheaper toilet paper, moving in with mom and dad, etc. Not because they want to save now to buy more TP later, but because when discretionary spending falls, people lose jobs, which further reduces discretionary spending, and more people lose jobs, wages fall (because of the surplus of labor), and eventually it all starts affecting you.
  - icebraining 12y ago
    While there are certainly fixed costs to being alive (like toilet paper), most people do cut back But why, if things are getting cheaper?
rondon2 12y ago
"So you get broad based increases in unemployment." I know it sucks to go from making 70k to making 60k but in a world where prices are going lower someone will still be able to have a similar quality of live at 60k. What kind of economic "Theory" would assume that people would rather starve to death than take a salary cut at another job?
- skywhopper 12y ago
  Except they won't keep the same quality of life, because their mortgage payments are not going to go down, even though the value of their house will. Renters won't get a break, either, because their landlords have to pay their mortgage with the rent money. Deflation equals disaster for our economy.
  - icebraining 12y ago
    Except they won't keep the same quality of life, because their mortgage payments are not going to go down Why not? They did these past few years in the EU. Are most mortgages in the US not pegged to some reference rate like Euribor?
    - Jtsummers 12y ago
      Can you point out what they did in the EU with this? GP is referring to the idea that, under deflation, your debt grows in real value while retaining its nominal value, but the nominal value of your income will be decreasing. If I take out a $100k mortgage and can put 10% of my salary to it each year, say I make $100k as well for easy math. I'll pay it off in 10 years if my nominal salary remains the same. (I'm ignoring the interest on the loan, it changes the timeline but not the fundamentals.) If we have inflation, my salary will likely go up over time so each year I'll be spending the same nominal ($10k) amount, but its a smaller percentage of my income and a lower real amount. If we have deflation, my salary will likely go down over time (assuming its consistent it'd likely be negotiated into employment contracts, like cost of living adjustments are now for inflation). So each year I have to pay the same nominal amount ($10k), but its an increasing real amount and a larger percentage of my income each year.
skywhopper 12y ago
Totally right about downward wage pressure. The worst effect of all of deflation is that it increases the value of debt. So every company and household with debt will see their debt grow in relation to their earning potential. At any level of deflation, suddenly it's a terrible idea to ever borrow any money, which means no new housing, no new factories, no new cars. Our economy relies on inflation to make it work. A lot of the persistent sluggishness of the current economy is due to the remarkably low inflation, meaning that all the debt people built up prior to the crisis in 2008 is still hanging around and will be for years to come. People are stuck under student loans and underwater mortgages, and unable to invest in their own future. With stagnant wages, digging out from under the debt will take a long time, and until that happens, the economy will continue to trudge along.
- TheCraiggers 12y ago
  >At any level of deflation, suddenly it's a terrible idea to ever borrow any money, which means no new housing, no new factories, no new cars. Why is this such a horrible thing though? Obviously, less lending is bad for the banks, but I fail to see how it would be bad for the consumer if they actually saved up money and paid cash for a car. Although I do understand why lending is important for starting a business; it would be hard in many markets to save enough capital to get off the ground. I'm talking about small stuff, like housing, cars, TVs. I have little to no economics knowledge, but it does seem to me that this pervasive, cultural thinking that we need this now is the source of many problems. I know some retailers like Ford even attempted to curb the practice of buying on credit, but ultimately caved to pressure from customers wanting to live above their means. So, can you explain, in a way that doesn't involve trickle-down economics, how borrowing money is a net gain for consumers? (I'm genuinely not being snarky here, just curious.)
  - pjc50 12y ago
    Not "trickle down" but circularity: if you borrow money you get to bring forward consumption and the workers making your goods get paid earlier as well. Enabling them and the factory to pay off their loans. Ford uniquely went in the other direction of trying to push money round the economy by raising wages; that would be great but isn't happening at the moment. Getting credit solves cashflow problems. If you're spending $10/week at the laundry, buying a $250 washing machine pays for itself very quickly. Except you can't save $250 because you keep needing to do laundry.
asgard1024 12y ago
> 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. True. But why then the article is titled "Why Falling Prices Are Actually a Really Bad Thing" and not "Why Deflation Is Actually a Really Bad Thing"? I can imagine economy where you don't have deflation, prices of all products fall, and the economy is actually growing, because people produce and buy completely new products they could not afford before.
freeasindave 12y ago
You're assuming macro-economics is concrete, peer reviewed science. Lot's of people disagree. The great depression lasted way longer than it should have because of the anti-deflationary measures put into place, like slaughtering millions of livestock to prop up commodity prices while starving, out of work people looked on in horror. If prices had been allowed to fall, wage rates could have come down to a price where hiring made sense. Read Rothbard's "America's Great Depression" for a good overview of the case against macro-economics and deflationary interventionism.
- brc 12y ago
  Well, yes. But those who insist that deflation is terrible are hardly going to agree that the depression was made worse by all the ham fisted attempts to fix it.
  - dragonwriter 12y ago
    > But those who insist that deflation is terrible are hardly going to agree that the depression was made worse by all the ham fisted attempts to fix it. Pretty much everyone, everywhere on the political spectrum, irrespective of what they think about deflation, agrees that the depression was made worse by "all the ham fisted attempts to fix it". There's some disagreement about which of the particular policy responses fall into the category of "ham fisted attempts", sure, but the Fed's initial deflationary policy is one of the most widely accepted (I mean, its a point on which Keynesians and Hayek agree.)
brc 12y ago
Hoarding is Keynesian fantasy, and can only exist if people stuff gold or cash in their mattress. Paying down debt or saving is a healthy base for a a economy to grow from. Japan suffered a deflationary event, but has not had a deflationary spiral. The problems for japan have been exacerbated by following the madness of Keynesian policy prescription, to the point where they have increased their debt to 2x GDP over two decades, redirecting their resources towards building bridges to nowhere, instead of allowing entrepreneurs and innovators to allocate capital. All while they have their demographic death spiral in place. Plenty of other Asian countries have suffered large setbacks, particularly during the Asian financial crisis, but by avoiding the same path that Japan slavishly followed, have rebounded with strong growth ever since. What is necessary is a short sharp correction, which will include bad debts and higher unemployment. This will be bad. This is still better than two decades of a zombie economy where an entire generation don't experience a growing economy and the benefits that entails.
dang 12y ago
> Congratulations for confusing micro and macroeconomics. This comment would be much better without this acerbic swipe. Please don't do that on Hacker News.

by zzalpha 12y ago

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.

deleted 12y ago
[deleted]
Amezarak 12y ago
Something tells me the average HN commenter living in Silicon Valley making six figures doesn't represent the average American. While there are certainly fixed costs to being alive (like toilet paper), most people do cut back and this behavior is observed. And when it gets very bad, even those "fixed costs" start being cut - cheaper toilet paper, moving in with mom and dad, etc. Not because they want to save now to buy more TP later, but because when discretionary spending falls, people lose jobs, which further reduces discretionary spending, and more people lose jobs, wages fall (because of the surplus of labor), and eventually it all starts affecting you.
- icebraining 12y ago
  While there are certainly fixed costs to being alive (like toilet paper), most people do cut back But why, if things are getting cheaper?

rondon2 12y ago

"So you get broad based increases in unemployment." I know it sucks to go from making 70k to making 60k but in a world where prices are going lower someone will still be able to have a similar quality of live at 60k. What kind of economic "Theory" would assume that people would rather starve to death than take a salary cut at another job?

skywhopper 12y ago
Except they won't keep the same quality of life, because their mortgage payments are not going to go down, even though the value of their house will. Renters won't get a break, either, because their landlords have to pay their mortgage with the rent money. Deflation equals disaster for our economy.
- icebraining 12y ago
  Except they won't keep the same quality of life, because their mortgage payments are not going to go down Why not? They did these past few years in the EU. Are most mortgages in the US not pegged to some reference rate like Euribor?
  - Jtsummers 12y ago
    Can you point out what they did in the EU with this? GP is referring to the idea that, under deflation, your debt grows in real value while retaining its nominal value, but the nominal value of your income will be decreasing. If I take out a $100k mortgage and can put 10% of my salary to it each year, say I make $100k as well for easy math. I'll pay it off in 10 years if my nominal salary remains the same. (I'm ignoring the interest on the loan, it changes the timeline but not the fundamentals.) If we have inflation, my salary will likely go up over time so each year I'll be spending the same nominal ($10k) amount, but its a smaller percentage of my income and a lower real amount. If we have deflation, my salary will likely go down over time (assuming its consistent it'd likely be negotiated into employment contracts, like cost of living adjustments are now for inflation). So each year I have to pay the same nominal amount ($10k), but its an increasing real amount and a larger percentage of my income each year.

skywhopper 12y ago

Totally right about downward wage pressure. The worst effect of all of deflation is that it increases the value of debt. So every company and household with debt will see their debt grow in relation to their earning potential. At any level of deflation, suddenly it's a terrible idea to ever borrow any money, which means no new housing, no new factories, no new cars. Our economy relies on inflation to make it work. A lot of the persistent sluggishness of the current economy is due to the remarkably low inflation, meaning that all the debt people built up prior to the crisis in 2008 is still hanging around and will be for years to come. People are stuck under student loans and underwater mortgages, and unable to invest in their own future. With stagnant wages, digging out from under the debt will take a long time, and until that happens, the economy will continue to trudge along.

TheCraiggers 12y ago
>At any level of deflation, suddenly it's a terrible idea to ever borrow any money, which means no new housing, no new factories, no new cars. Why is this such a horrible thing though? Obviously, less lending is bad for the banks, but I fail to see how it would be bad for the consumer if they actually saved up money and paid cash for a car. Although I do understand why lending is important for starting a business; it would be hard in many markets to save enough capital to get off the ground. I'm talking about small stuff, like housing, cars, TVs. I have little to no economics knowledge, but it does seem to me that this pervasive, cultural thinking that we need this now is the source of many problems. I know some retailers like Ford even attempted to curb the practice of buying on credit, but ultimately caved to pressure from customers wanting to live above their means. So, can you explain, in a way that doesn't involve trickle-down economics, how borrowing money is a net gain for consumers? (I'm genuinely not being snarky here, just curious.)
- pjc50 12y ago
  Not "trickle down" but circularity: if you borrow money you get to bring forward consumption and the workers making your goods get paid earlier as well. Enabling them and the factory to pay off their loans. Ford uniquely went in the other direction of trying to push money round the economy by raising wages; that would be great but isn't happening at the moment. Getting credit solves cashflow problems. If you're spending $10/week at the laundry, buying a $250 washing machine pays for itself very quickly. Except you can't save $250 because you keep needing to do laundry.

asgard1024 12y ago

> 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. True. But why then the article is titled "Why Falling Prices Are Actually a Really Bad Thing" and not "Why Deflation Is Actually a Really Bad Thing"? I can imagine economy where you don't have deflation, prices of all products fall, and the economy is actually growing, because people produce and buy completely new products they could not afford before.

freeasindave 12y ago

You're assuming macro-economics is concrete, peer reviewed science. Lot's of people disagree. The great depression lasted way longer than it should have because of the anti-deflationary measures put into place, like slaughtering millions of livestock to prop up commodity prices while starving, out of work people looked on in horror. If prices had been allowed to fall, wage rates could have come down to a price where hiring made sense. Read Rothbard's "America's Great Depression" for a good overview of the case against macro-economics and deflationary interventionism.

brc 12y ago
Well, yes. But those who insist that deflation is terrible are hardly going to agree that the depression was made worse by all the ham fisted attempts to fix it.
- dragonwriter 12y ago
  > But those who insist that deflation is terrible are hardly going to agree that the depression was made worse by all the ham fisted attempts to fix it. Pretty much everyone, everywhere on the political spectrum, irrespective of what they think about deflation, agrees that the depression was made worse by "all the ham fisted attempts to fix it". There's some disagreement about which of the particular policy responses fall into the category of "ham fisted attempts", sure, but the Fed's initial deflationary policy is one of the most widely accepted (I mean, its a point on which Keynesians and Hayek agree.)

brc 12y ago

Hoarding is Keynesian fantasy, and can only exist if people stuff gold or cash in their mattress. Paying down debt or saving is a healthy base for a a economy to grow from. Japan suffered a deflationary event, but has not had a deflationary spiral. The problems for japan have been exacerbated by following the madness of Keynesian policy prescription, to the point where they have increased their debt to 2x GDP over two decades, redirecting their resources towards building bridges to nowhere, instead of allowing entrepreneurs and innovators to allocate capital. All while they have their demographic death spiral in place. Plenty of other Asian countries have suffered large setbacks, particularly during the Asian financial crisis, but by avoiding the same path that Japan slavishly followed, have rebounded with strong growth ever since. What is necessary is a short sharp correction, which will include bad debts and higher unemployment. This will be bad. This is still better than two decades of a zombie economy where an entire generation don't experience a growing economy and the benefits that entails.

dang 12y ago

> Congratulations for confusing micro and macroeconomics. This comment would be much better without this acerbic swipe. Please don't do that on Hacker News.