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>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

>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.
dragonwriter 12y ago
> Obviously, less lending is bad for the banks, but I fail to see how it would be bad for the consumer Its not generally bad for consumers qua consumers (though there are ways that it can be, because it prevents large purchases that save in the long term), but its bad for the same people that are consumers as laborers because less borrowing by business and less investment in business (both effects of deflation) mean less paid work available, and less utility produced regardless of the distribution. > So, can you explain, in a way that doesn't involve trickle-down economics, how borrowing money is a net gain for consumers? It enables you to do things like buy a car to go to work at a job that pays well before you have amassed sufficient retained income from that job to pay for the car. Without the ability to borrow money, you may not be able to take (or, if you take it, keep) the job because you can't get to it.
skywhopper 12y ago
The other responses are good as well. Key thing is that you're right that credit gets used for lots of wasteful things in our traditional consumer economy. Buying a television on credit is not a wise financial decision. However, purchases that improve efficiency or allow new kinds of labor can be good uses of credit. If you can make $1000 more per month at a job that's inaccessible to you via transit, but you don't have $10,000 to buy a car, it would be worth it to get a loan with a $300/month payment, and say another $300/month worth of car-related expenses to net out $400/month income that can be used for saving up for that TV or what-have-you. In terms of items that retain their value, like houses, apartment buildings, factories... no one would be wise to invest in those items in a deflationary environment because if you're interested in growing your net worth, you'd be better off keeping your money in the bank.

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.

dragonwriter 12y ago

> Obviously, less lending is bad for the banks, but I fail to see how it would be bad for the consumer Its not generally bad for consumers qua consumers (though there are ways that it can be, because it prevents large purchases that save in the long term), but its bad for the same people that are consumers as laborers because less borrowing by business and less investment in business (both effects of deflation) mean less paid work available, and less utility produced regardless of the distribution. > So, can you explain, in a way that doesn't involve trickle-down economics, how borrowing money is a net gain for consumers? It enables you to do things like buy a car to go to work at a job that pays well before you have amassed sufficient retained income from that job to pay for the car. Without the ability to borrow money, you may not be able to take (or, if you take it, keep) the job because you can't get to it.

skywhopper 12y ago

The other responses are good as well. Key thing is that you're right that credit gets used for lots of wasteful things in our traditional consumer economy. Buying a television on credit is not a wise financial decision. However, purchases that improve efficiency or allow new kinds of labor can be good uses of credit. If you can make $1000 more per month at a job that's inaccessible to you via transit, but you don't have $10,000 to buy a car, it would be worth it to get a loan with a $300/month payment, and say another $300/month worth of car-related expenses to net out $400/month income that can be used for saving up for that TV or what-have-you. In terms of items that retain their value, like houses, apartment buildings, factories... no one would be wise to invest in those items in a deflationary environment because if you're interested in growing your net worth, you'd be better off keeping your money in the bank.