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A slow and steady deflation is the natural state of affairs when productivity is advancing and the social environment is relatively stable. Economists panic ab

A slow and steady deflation is the natural state of affairs when productivity is advancing and the social environment is relatively stable. Economists panic about things getting cheaper because they are compromised by the current banking system, which is based on fractionally reserved debt and requires inflation to stave off a general run on fictional assets. Consider: computers have been getting cheaper for a generation and its been one of the greatest economic boons in history. I'm aware of the standard economic criticisms of deflation, I just don't agree with them. The massive deflation shock of the Great Depression was due to the preceding leverage boom, and should not be used for a general analysis of deflation without considering that boom. Deflation is usually good. Things we want cost less of our labor. The benefits are widely distributed with no early receiver advantages as there is with inflation. This is a good thing.

hobbsh 12y ago
The problem with deflation is that we are a nation of debtors. Deflation causes debt to become more expensive, thus raising defaults and all of the ripples that follow. edit: I should clarify that I don't completely disagree, just that debt is the real problem. No one wants to endure the short term pain so we keep "kicking the can down the road" as they say.
- carsongross 12y ago
  I agree, I think we are probably too far gone at this point. There will almost certainly be a massive deflationary shock anyway, because total debt isn't expanding at anywhere near the rate necessary to keep up with the pre-2008 curve. (Last I saw, about a year ago, the gap was 30 trillion dollars between the L1 total debt and the extrapolated pre-2008 L1 curve.) Regardless, I think its important to point out that a slow and steady deflation is actually an ideal or at least a reasonable state for an economy.
  - roymurdock 12y ago
    Reasonable yes, but I don't think you can go as far as to say that it's ideal. The ideal state for an economy is one where the rate of inflation/deflation is determined by the market. This would happen if central banks were disbanded and the production/circulation of currency was left to a (regulated) private sector with a healthy number of competing companies innovating to have the best currency on the market. What we are seeing now is a natural adjustment to years of accumulating debt under an artificial, inflation-targeting central banking system. Central banks have tried their best to prevent deflation in order to support the debt-driven "fractional-reserve" system that has created an unsustainable network of debt that is no longer tied to the productivity of real assets. A system of competing private currencies would remove artificial signals manufactured by central bank monetary policy and gov. fiscal policy.
    - carsongross 12y ago
      Sure. I'm saying, ceteris paribus, advances in technology should make the things we want less expensive. That's generally (though not always) why we bother to pursue them. In real life ceteris is never paribus, of course.
    - coderzach 12y ago
      I'm curious how competing currencies would work in practice. Are businesses required to accept any currency? Can anyone create their own currency? How do you regulate private currencies?
      - kansface 12y ago
        1. No. Businesses (by federal law), aren't even required to accept dollars now. 2. Yes, but would you use Honest Achmed's Used Cars and Dollars? 3. (Private) Ratings Agencies would rate currencies and maybe each other. The market picks the winner based on trust, convenience, or whatever else it cares about. In practice, I'd expect an 80/20 rule. Two currencies would make up 80% of all transactions in a given region, with a rather large tail (gold/silver/basket of commodities backing, fixed exchange rates, etc). Multiple currencies is nearly unworkable with paper money, but quite trivial with digital paper money.
  - ArkyBeagle 12y ago
    I believe the "ideal" - at least when you assume central banking - is a perfect fit between the expansion of the money supply and the "value" it represents - IOW, a dollar/pound/ruble means the exact same thing, year by year. That would amount to population grown ( which is lagged by the age at which people go to work ) and productivity growth. I believe that describes "zero inflation" but it's sort of hard to say. It is possible that the previous evils of deflation no longer apply ( because technology) , but I'd rather not find out through experiment.
- hardcandy 12y ago
  Also the biggest tickets to middle class wealth in the last few decades have been pensions and home equity. Home equity being the ability for a young couple to borrow money at a low rate on a stable asset that appreciates at a higher rate (over a 30 year time horizon). Pensions have been removed. If housing price growth stops as well, that's a significant double blow.
  - YokoZar 12y ago
    Housing and rental costs have been a substantial drain on what would otherwise be the new middle class. For the most part they don't (yet) own homes, lower prices can only help them. Consider how much doesn't get invested by the poor and middle class into education, paying down debts, or retirement savings accounts. It feels rather absurd to suggest that they would somehow benefit from continually raising the price of something they need to buy.
    - collyw 12y ago
      Exactly. Its great for those who own, paid for those who don't yet.
- graedus 12y ago
  Precisely. I understand it like this: if the United States has some $18tn of debt and it has to pay this back in dollars that are more valuable than they were when the debt was issued, that debt load quickly becomes unserviceable. However, if they successfully inflate away some significant percentage of the value of the USD, the nominal debt remains the same but it becomes lighter in real terms. Pippa Malmgren - correctly, I think - describes this inflating away the value of the currency (and by extension, all outstanding debts) as just another form of default, and one that has been used many times in history. It's just more stealthy than saying "we can't pay, so we won't pay" or something similar[0]. [0] https://www.youtube.com/watch?v=KBU59sY2erA https://www.youtube.com/watch?v=KBU59sY2erA
  - ArkyBeagle 12y ago
    But government debt is DESIGNED to be inflated away. The U.S ran a then-terrifying $2B deficit during WWII. The whole point of government debt is that GDP rises eclipse it over time. I am rather shocked that anyone can't tell the difference between the effects of mild inflation on debt and default. Debt is not a blood oath - it's just a tool. We're better off if we can use this tool and use it properly. With deflation, that's harder.
  - prostoalex 12y ago
    Inflation is not a secret, they're shooting for an average of annual 2% rate http://www.federalreserve.gov/faqs/economy_14400.htm http://www.federalreserve.gov/faqs/economy_14400.htm The markets, however, figure that out, and price that in. Which is why countries with weak currencies don't have an option to borrow in their native currencies.
- prostoalex 12y ago
  Higher number of defaults just leads to risk re-evaluation and debt repricing, it doesn't change anything structurally.
rhino369 12y ago
You seem to be conflating the cost of some goods going down with deflation. Wages would fall with the deflating currency. Goods would not cost less of your labor. They would cost the same. The benefits are distributed only to those who already have money. Those who are in debt are harmed. Not to mention, those standard economic criticisms that you don't agree with. Even the working rich with a respectable bank account are harmed in a deflationary spiral.
- msandford 12y ago
  Deflation != deflationary spiral The deflation has to be severe enough to cause people to substantially change their behavior. Suggesting that deflation always leads to a deflationary spiral (which you implicitly did) doesn't hold. Remember, wages are sticky so people aren't necessarily going to be making less money, just that stuff will be cheaper. As things get cheaper, it's possible that sales volumes will go up (econ 101). That could then offset any reduction is gross profit, if there is any. There may well not be, because the reduction in the output price might simply be from the reduction in the material input price. Massive deflationary shocks cause a lot of problems. But how do you get deflationary shocks? By trying desperately to pretend deflation isn't happening for many years, and then eventually the market stops believing you (you being the central banker) and prices adjust to a more realistic level. Perhaps the folks who are trying like mad to prevent a mild deflation are in fact the cause of the deflationary spiral that's a problem. Perhaps in their absence we'd just have mild deflation that doesn't cause the whole world to blow up all at once.
- brc 12y ago
  Wages are already falling in real terms in many cases. There is a certain part of human psychology that locks onto numbers (I was paid x, therefore I should continue to be paid x) which perhaps explains the aversion to deflation. I think part of the problem is that endless credit growth is what constitutes economic growth, instead of increasing productivity as it should be. So by preening and saying we cannot accept lower prices, we ignore the obvious long term benefits of stable and falling prices. There are winners and losers in deflation, just as there are winners and losers in inflation. It's better to take a neutral view of the distribution of benefits because someone wins or loses either way, and it helps to think more clearly when you realise everyone has a bias based on which camp they are in. What should matter for the sake of the debate is whether everyone would be better off overall.
dimitar 12y ago
Computers have decreased their prices in real terms, not nominally. An Apple II was originally priced at $1300. Do computers now cost $13? They would if you had deflation or if they had been cheaper in nominal terms. Computers haven't become cheaper in terms of their price-tag, but more affordable thanks to your increased nominal income (inflation!) and because they have become cheaper relative to other other goods whose prices have increased more. Of course computers do a lot more today than 30 years ago, but I'm sure that more suitable examples can be found (digital watches anyone?). And think of the debt the computer manufacturers could pay more easily thanks to all that inflation!
- carsongross 12y ago
  (lol) The price of an apple 2 computer, with no monitor, was $1300. You can get a 21 inch imac for $1100 today. 18% nominal deflation! Apple must be absolutely broke! Look, I know. I went to the same "inflation is necessary" schools you did, and listened to Cal Econ professors patiently explain to me how without it we'd all be rooting around in the dirt, eating grubs. At some point I just stopped believing that.
  - hga 12y ago
    That's with only 4KiB of DRAM; per Wikipedia, $2,638 for 48KiB (and it was indeed very expensive back then). And using tape cassette for storage like other computers of that era. Add quite a bit for 1 or 2 floppies, and I found a reference to a 10 MiB (true MiB! :-) Covrus hard disk that went for $5,350 in apparently 1980.
  - brc 12y ago
    I stopped believing when nobody could provide me with an economy that collapsed due to deflationary spiral, but dead economies from inflationary spirals happen several times per century, right up until the current day. There is, however, evidence of periods in the Roman Empire where price stability lasted for spans of several emperors (the ones that didn't debase the currency). But when emperors decided to debase the currency, those long periods of price stability were destroyed in the blink of an eye. Many economists tie themselves in knots trying to explain how inflation has complex causes, but it is 'always and everywhere a monetary phenomonen'
skilesare 12y ago
Deflation of some things (like common inputs to creative endeavours) will increase our general ability to create little monopolies where we have much better pricing power. For example, every time we cut the price of a 3D printer in half we bootstrap thousands of new creative into a position where they can have much stronger pricing power by doing something very, very, different.
snowwrestler 12y ago
Things do not cost less in real terms under long-term deflation, because your nominal wages and assets will fall at the same rate as the prices of the goods you buy. Inflation vs. deflation matters because of the incentives they provide for asset balances, not because consumer goods are more or less expensive. Inflation incentivizes storing value in investments, which makes capital available for innovation. Deflation incentivizes storing value in currency, which does not. Which is better for long-term economic growth? edit: grammar
jbooth 12y ago
Natural state of affairs? The G7 between them have been deflationary exactly twice in the last 100 or so years that we've been keeping good records on this. That's twice, for less than a decade each, in 700 country-years of economic experience. That includes time on the gold standard, time on fiat currency, pre-euro, post-euro, WWI, WWII and the cold war. Early industrial to post industrial, pre-computing and high frequency trading. Only a couple times through all those crazy situations was deflation a thing. So an extremely rare and divergent situation is the 'natural' state of affairs? Are we talking in the eating nuts and berries sense of natural here, or what?
- toomuchtodo 12y ago
  Japan has been in a deflationary state for the last ~20 years, yet they have what I think we could all consider a high quality of life.
  - jbooth 12y ago
    Well, they've also got horrible growth and debt problems, but I was trying to point to probability of the scenario -- Japan is indeed one of the two cases I was thinking of but thanks for correcting me from a decade to ~~20 years (1995 will always be 10 years ago). So out of 700 country-years across the G7, we've got Japan deflationary for 20 with a mediocre-to-lousy economy, and the US deflationary for maybe 5 if we round up, during the great depression. From those datapoints, I'm supposed to conclude that deflationary at 25/700 is the 'natural' state of things, rather than exceptional, and additionally that it's a good place to be?
    - toomuchtodo 12y ago
      > From those datapoints, I'm supposed to conclude that deflationary at 25/700 is the 'natural' state of things, rather than exceptional, and additionally that it's a good place to be? I'm not sure what you're supposed to conclude. It appears, from my rough estimation, that as economies develop (as Japan's did, as the rest of the first world is currently) they'll reach an economic equilibrium which appears to be deflationary in nature. If you continue to become more and more productive, and there are only so many consumers and so much to consume in they physical world, prices should go down.
harryh 12y ago
Falling prices due to productivity increases isn't deflation.
jaredklewis 12y ago
I think whether or not deflation is "good" depends on how you feel about wealth distribution. Inflation is a tax. Politicians don't like raising taxes, because it's unpopular. The government still needs money though, so they inflate the currency which redistributes the money from the citizens to the government. Government redistributes the wealth back to citizens through services which usually provide more to the less wealthy members of society. I think wealth distribution is a good thing and I'm not opposed to it being done in this manner.
deleted 12y ago
[deleted]

hobbsh 12y ago

The problem with deflation is that we are a nation of debtors. Deflation causes debt to become more expensive, thus raising defaults and all of the ripples that follow. edit: I should clarify that I don't completely disagree, just that debt is the real problem. No one wants to endure the short term pain so we keep "kicking the can down the road" as they say.

carsongross 12y ago
I agree, I think we are probably too far gone at this point. There will almost certainly be a massive deflationary shock anyway, because total debt isn't expanding at anywhere near the rate necessary to keep up with the pre-2008 curve. (Last I saw, about a year ago, the gap was 30 trillion dollars between the L1 total debt and the extrapolated pre-2008 L1 curve.) Regardless, I think its important to point out that a slow and steady deflation is actually an ideal or at least a reasonable state for an economy.
- roymurdock 12y ago
  Reasonable yes, but I don't think you can go as far as to say that it's ideal. The ideal state for an economy is one where the rate of inflation/deflation is determined by the market. This would happen if central banks were disbanded and the production/circulation of currency was left to a (regulated) private sector with a healthy number of competing companies innovating to have the best currency on the market. What we are seeing now is a natural adjustment to years of accumulating debt under an artificial, inflation-targeting central banking system. Central banks have tried their best to prevent deflation in order to support the debt-driven "fractional-reserve" system that has created an unsustainable network of debt that is no longer tied to the productivity of real assets. A system of competing private currencies would remove artificial signals manufactured by central bank monetary policy and gov. fiscal policy.
  - carsongross 12y ago
    Sure. I'm saying, ceteris paribus, advances in technology should make the things we want less expensive. That's generally (though not always) why we bother to pursue them. In real life ceteris is never paribus, of course.
  - coderzach 12y ago
    I'm curious how competing currencies would work in practice. Are businesses required to accept any currency? Can anyone create their own currency? How do you regulate private currencies?
    - kansface 12y ago
      1. No. Businesses (by federal law), aren't even required to accept dollars now. 2. Yes, but would you use Honest Achmed's Used Cars and Dollars? 3. (Private) Ratings Agencies would rate currencies and maybe each other. The market picks the winner based on trust, convenience, or whatever else it cares about. In practice, I'd expect an 80/20 rule. Two currencies would make up 80% of all transactions in a given region, with a rather large tail (gold/silver/basket of commodities backing, fixed exchange rates, etc). Multiple currencies is nearly unworkable with paper money, but quite trivial with digital paper money.
- ArkyBeagle 12y ago
  I believe the "ideal" - at least when you assume central banking - is a perfect fit between the expansion of the money supply and the "value" it represents - IOW, a dollar/pound/ruble means the exact same thing, year by year. That would amount to population grown ( which is lagged by the age at which people go to work ) and productivity growth. I believe that describes "zero inflation" but it's sort of hard to say. It is possible that the previous evils of deflation no longer apply ( because technology) , but I'd rather not find out through experiment.
hardcandy 12y ago
Also the biggest tickets to middle class wealth in the last few decades have been pensions and home equity. Home equity being the ability for a young couple to borrow money at a low rate on a stable asset that appreciates at a higher rate (over a 30 year time horizon). Pensions have been removed. If housing price growth stops as well, that's a significant double blow.
- YokoZar 12y ago
  Housing and rental costs have been a substantial drain on what would otherwise be the new middle class. For the most part they don't (yet) own homes, lower prices can only help them. Consider how much doesn't get invested by the poor and middle class into education, paying down debts, or retirement savings accounts. It feels rather absurd to suggest that they would somehow benefit from continually raising the price of something they need to buy.
  - collyw 12y ago
    Exactly. Its great for those who own, paid for those who don't yet.
graedus 12y ago
Precisely. I understand it like this: if the United States has some $18tn of debt and it has to pay this back in dollars that are more valuable than they were when the debt was issued, that debt load quickly becomes unserviceable. However, if they successfully inflate away some significant percentage of the value of the USD, the nominal debt remains the same but it becomes lighter in real terms. Pippa Malmgren - correctly, I think - describes this inflating away the value of the currency (and by extension, all outstanding debts) as just another form of default, and one that has been used many times in history. It's just more stealthy than saying "we can't pay, so we won't pay" or something similar[0]. [0] https://www.youtube.com/watch?v=KBU59sY2erA https://www.youtube.com/watch?v=KBU59sY2erA
- ArkyBeagle 12y ago
  But government debt is DESIGNED to be inflated away. The U.S ran a then-terrifying $2B deficit during WWII. The whole point of government debt is that GDP rises eclipse it over time. I am rather shocked that anyone can't tell the difference between the effects of mild inflation on debt and default. Debt is not a blood oath - it's just a tool. We're better off if we can use this tool and use it properly. With deflation, that's harder.
- prostoalex 12y ago
  Inflation is not a secret, they're shooting for an average of annual 2% rate http://www.federalreserve.gov/faqs/economy_14400.htm http://www.federalreserve.gov/faqs/economy_14400.htm The markets, however, figure that out, and price that in. Which is why countries with weak currencies don't have an option to borrow in their native currencies.
prostoalex 12y ago
Higher number of defaults just leads to risk re-evaluation and debt repricing, it doesn't change anything structurally.

rhino369 12y ago

You seem to be conflating the cost of some goods going down with deflation. Wages would fall with the deflating currency. Goods would not cost less of your labor. They would cost the same. The benefits are distributed only to those who already have money. Those who are in debt are harmed. Not to mention, those standard economic criticisms that you don't agree with. Even the working rich with a respectable bank account are harmed in a deflationary spiral.

msandford 12y ago
Deflation != deflationary spiral The deflation has to be severe enough to cause people to substantially change their behavior. Suggesting that deflation always leads to a deflationary spiral (which you implicitly did) doesn't hold. Remember, wages are sticky so people aren't necessarily going to be making less money, just that stuff will be cheaper. As things get cheaper, it's possible that sales volumes will go up (econ 101). That could then offset any reduction is gross profit, if there is any. There may well not be, because the reduction in the output price might simply be from the reduction in the material input price. Massive deflationary shocks cause a lot of problems. But how do you get deflationary shocks? By trying desperately to pretend deflation isn't happening for many years, and then eventually the market stops believing you (you being the central banker) and prices adjust to a more realistic level. Perhaps the folks who are trying like mad to prevent a mild deflation are in fact the cause of the deflationary spiral that's a problem. Perhaps in their absence we'd just have mild deflation that doesn't cause the whole world to blow up all at once.
brc 12y ago
Wages are already falling in real terms in many cases. There is a certain part of human psychology that locks onto numbers (I was paid x, therefore I should continue to be paid x) which perhaps explains the aversion to deflation. I think part of the problem is that endless credit growth is what constitutes economic growth, instead of increasing productivity as it should be. So by preening and saying we cannot accept lower prices, we ignore the obvious long term benefits of stable and falling prices. There are winners and losers in deflation, just as there are winners and losers in inflation. It's better to take a neutral view of the distribution of benefits because someone wins or loses either way, and it helps to think more clearly when you realise everyone has a bias based on which camp they are in. What should matter for the sake of the debate is whether everyone would be better off overall.

dimitar 12y ago

Computers have decreased their prices in real terms, not nominally. An Apple II was originally priced at $1300. Do computers now cost $13? They would if you had deflation or if they had been cheaper in nominal terms. Computers haven't become cheaper in terms of their price-tag, but more affordable thanks to your increased nominal income (inflation!) and because they have become cheaper relative to other other goods whose prices have increased more. Of course computers do a lot more today than 30 years ago, but I'm sure that more suitable examples can be found (digital watches anyone?). And think of the debt the computer manufacturers could pay more easily thanks to all that inflation!

carsongross 12y ago
(lol) The price of an apple 2 computer, with no monitor, was $1300. You can get a 21 inch imac for $1100 today. 18% nominal deflation! Apple must be absolutely broke! Look, I know. I went to the same "inflation is necessary" schools you did, and listened to Cal Econ professors patiently explain to me how without it we'd all be rooting around in the dirt, eating grubs. At some point I just stopped believing that.
- hga 12y ago
  That's with only 4KiB of DRAM; per Wikipedia, $2,638 for 48KiB (and it was indeed very expensive back then). And using tape cassette for storage like other computers of that era. Add quite a bit for 1 or 2 floppies, and I found a reference to a 10 MiB (true MiB! :-) Covrus hard disk that went for $5,350 in apparently 1980.
- brc 12y ago
  I stopped believing when nobody could provide me with an economy that collapsed due to deflationary spiral, but dead economies from inflationary spirals happen several times per century, right up until the current day. There is, however, evidence of periods in the Roman Empire where price stability lasted for spans of several emperors (the ones that didn't debase the currency). But when emperors decided to debase the currency, those long periods of price stability were destroyed in the blink of an eye. Many economists tie themselves in knots trying to explain how inflation has complex causes, but it is 'always and everywhere a monetary phenomonen'

skilesare 12y ago

Deflation of some things (like common inputs to creative endeavours) will increase our general ability to create little monopolies where we have much better pricing power. For example, every time we cut the price of a 3D printer in half we bootstrap thousands of new creative into a position where they can have much stronger pricing power by doing something very, very, different.

snowwrestler 12y ago

Things do not cost less in real terms under long-term deflation, because your nominal wages and assets will fall at the same rate as the prices of the goods you buy. Inflation vs. deflation matters because of the incentives they provide for asset balances, not because consumer goods are more or less expensive. Inflation incentivizes storing value in investments, which makes capital available for innovation. Deflation incentivizes storing value in currency, which does not. Which is better for long-term economic growth? edit: grammar

jbooth 12y ago

Natural state of affairs? The G7 between them have been deflationary exactly twice in the last 100 or so years that we've been keeping good records on this. That's twice, for less than a decade each, in 700 country-years of economic experience. That includes time on the gold standard, time on fiat currency, pre-euro, post-euro, WWI, WWII and the cold war. Early industrial to post industrial, pre-computing and high frequency trading. Only a couple times through all those crazy situations was deflation a thing. So an extremely rare and divergent situation is the 'natural' state of affairs? Are we talking in the eating nuts and berries sense of natural here, or what?

toomuchtodo 12y ago
Japan has been in a deflationary state for the last ~20 years, yet they have what I think we could all consider a high quality of life.
- jbooth 12y ago
  Well, they've also got horrible growth and debt problems, but I was trying to point to probability of the scenario -- Japan is indeed one of the two cases I was thinking of but thanks for correcting me from a decade to ~~20 years (1995 will always be 10 years ago). So out of 700 country-years across the G7, we've got Japan deflationary for 20 with a mediocre-to-lousy economy, and the US deflationary for maybe 5 if we round up, during the great depression. From those datapoints, I'm supposed to conclude that deflationary at 25/700 is the 'natural' state of things, rather than exceptional, and additionally that it's a good place to be?
  - toomuchtodo 12y ago
    > From those datapoints, I'm supposed to conclude that deflationary at 25/700 is the 'natural' state of things, rather than exceptional, and additionally that it's a good place to be? I'm not sure what you're supposed to conclude. It appears, from my rough estimation, that as economies develop (as Japan's did, as the rest of the first world is currently) they'll reach an economic equilibrium which appears to be deflationary in nature. If you continue to become more and more productive, and there are only so many consumers and so much to consume in they physical world, prices should go down.

harryh 12y ago

Falling prices due to productivity increases isn't deflation.

jaredklewis 12y ago

I think whether or not deflation is "good" depends on how you feel about wealth distribution. Inflation is a tax. Politicians don't like raising taxes, because it's unpopular. The government still needs money though, so they inflate the currency which redistributes the money from the citizens to the government. Government redistributes the wealth back to citizens through services which usually provide more to the less wealthy members of society. I think wealth distribution is a good thing and I'm not opposed to it being done in this manner.

deleted 12y ago

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