Low inflation might be the first step towards deflation. Many economists would argue that deflation is a worse situation for the economy because it leads to a sharp drop of consumption and therefore a huge recession follows?
1) If I can expect the price of a pair of shoes to drop if I wait, I’ll wait as long as I can before buying it. The shoe company is going to lose sales and fire workers and the government is going to miss out on taxes (both on the sale and on the now-unpaid salaries).
2) Most governments are deeply in debt. Imagine a fictional country has a debt of 1000 € and today you can buy a loaf of bread for 2 €. The “value” of the debt is 500 loaves of bread. Imagine due to deflation, the price of a loaf drops to 1 €. The value of the debt has gone up to 1000 loaves of bread.
The shoe company is going to lose sales and fire workers
A deflationary cycle will stop way upstream of the consumers.
Every company all the way up to the suppliers of the raw materials will stop turning an appreciating asset (cash) into goods that are losing value. They'll all cease production and eliminate the workers to hold as much cash as possible. Consumers are likely to get fired before they see anything get cheaper.
Try and think of our global system as an engine that's purpose is to make fuel for itself. It needs to keep it's input above the output in order to keep powered on. As soon as the input drops below output the machine starts to slow down and can no longer sustain itself. The engine is not designed to slow down so it very quickly breaks down
Ok but after covid, prices skyrocketed compared to pre-covid levels and we got massive inflation. Wages didn't suddenly skyrocket at the same time, hiring rates didn't go through the roof, corporate profits did though. So why would prices suddenly returning to pre-covid levels require everyone to be fired and customers to disappear when the economy was working great before? Would it just be that companies would start mass layoffs to prevent a short term decline in quarter on quarter profits which would start a negative feedback loop?
Because of how corps react to lower prices. They would just lay everyone off. Deflation itself isn't the issue, it's how little protections actual working people have and how much incentive corps have to keep their stock price high. Being able to sell something for less means less profit for the corps which is a big problem for corp leadership. So the solution is to temporally increase profits by getting rid of staff.
That's because consumer spending is starting to go down and families are starting to cut back. So they have to either increase prices, which they're already doing and that's not working, so they have to cut costs, and the number one way for companies to do that is to cut employees.
Ahh ok so basically it all just comes down to corporate greed determining how much we should all suffer and be punished for even considering the idea that their stock price doesn't have to keep going up every 3 months and that they might be able to survive on 5% less profit this year compared to last year. Got it.
Keep in mind this is just the tip of the iceberg. Corporations actively lobby for these policies that ensure they get protections and bailouts while workers and citizens foot the bill and they largely get passed as a result of things like Citizen United, and that these lobbies also own and operate the media, which makes them the Kingmakers of your elected officials.
In history classes, we typically call this form of Oligopoly “Feudalism”, not Democracy.
The rich have gotten so rich they have essentially taken over the most important parts of government, and they’re using that power to funnel your tax money AND spending money directly to themselves.
Yup. Though in a very real sense it is less corporate greed and more individual greed. I don’t think any of these cunts need the unreasonable amount of wealth they have accumulated: https://www.forbes.com/billionaires/
Deflation itself is the issue. Think about the psychology behind it. Why buy an appliance for $500 today when next month it may be $450? When the public anticipates that prices will keep going down it creates a death spiral where consumers withhold their spending and business make less sales and can't lower prices to attract more sales.
Sales are the lifeblood of employment. If you can't make payroll you've got to let people go which only further reduces overall spending in the broader economy. This is what the Great Depression was.
Yes. Owners make money just by having money, so they aren’t incentivized to spend money. Since they don’t need to spend money to make money they decide it’s too risky spend (why put money back into my business to try to eek out a margin that I might not even realize if I can coast on whatever I have stockpiled until I’m literally out of supplies and can buy everything cheaper later on or buy the same amount of supplies that I need and have more money that’s passively making money later?). Now that I’m not producing as much I don’t need as much labor, I’m going to lay off employees. When this goes on long enough deflation accelerates and I’m even more incentivized to slow production and lay off employees. It’s a positive feedback cycle where the more deflation increases the faster it accelerates and so the more companies are incentivized to lay everyone off and coast.
Put simply. If your money might be worth more tomorrow, then maybe you will do your best to put off buying that thing you need. If money is going to be worth less tomorrow, better buy now even if not absolutely necessary.
Prices drop for only one reason: people can no longer afford to buy the products.
The underlying reason can vary (war, crop failures, rising oil prices, etc.).
When a specific group of people can no longer afford to buy products, the producer will lower prices in order to make sales.
The cost of the plant, raw materials and/or energy remains the same—or may even rise—so the only area where the producer has some control is staffing; consequently, non-essential roles are eliminated.
As a result, those people can no longer buy products either, and the cycle repeats.
That is how you end up in a negative deflationary spiral.
What socialists and unions call "corporate greed" is really just the essence of a business: making a profit.
If a company with 20,000 employees lays off 1,000 of them, it is terrible for those 1,000 people; but if they don't lay those 1,000 off and the company goes bankrupt, it is disastrous for all 20,000 employees—including the original 1,000.
Usually, socialists and unions get angry because the profit isn't distributed among the employees.
But when the company is running at a loss, or needs to fund investments, research, or fine payments, do the unions or socialists ask all the employees to chip in?
That profit needs to be set aside for those very things.
What frustrates me the most is that everyone actually knows this, yet they refuse to admit it.
The attempt at maintaining mass profits results in massive layoffs which leave many jobless, and with enough panic results in mass withdrawals from banks (the beginning of the end to any financial crash) and a decline in consumation.
Combined with the governments attempts to pay off companies sudden losses in order to help keep them running as before (using tax payers money).
Then futher decline in stock prices (if they haven't already by now), deflaction, before eventually the crash.
At a macro scale, the biggest benefit of some inflation is that it also devalues debt while it devalues currency. In a deflationary spiral, the real value with debt compounds with deflation in addition to interest, so the velocity of money grinds to a halt. No investment means no jobs, bread lines, and a complete collapse of the consumer economy, resulting in a corresponding collapse of the government's tax base. This is literally the entire basis of Keynesian economics - that the government must engage in deficit spending to combat deflationary pressures during recessions, because there is basically no other option.
The prices only go down when people don't have enough money to buy things.
isn't that where we are now? I mean kids aren't moving out of their parents house. And everyone has either multiple roommates or multiple jobs. Tech is laying off, and no one is hiring.
Deflation will happen when boomers start to retire enmasse and pur imaginary stock prices dont have the liquidity behind them for people retiring... only magically for more circular investment between the same 6 companies.
I doubt it'll be a sudden change though. At least not until it hits a breaking point and the public gets wise and tries to get what they can from it.
Oh it'll SEEM sudden, but there will have been thousands of economists ringing alarm bells well in advance while the politicians pull the curtain closed and say everything is fine, right up until the whole thing crashes. And then it'll be a "Who could have seen this coming? It's not our fault!"
Too many people have not studied how bad the depression was. There’s a reason granny kept a ham in her deep freezer from 10 years before you were born.
Except the prices keep going up anyway and that seems to be just as big of a problem. Basically it just sounds like the entire system as it is is meant to fuck us no matter what. Either the great machine can continue to pumping out more bullshit and we can keep buying it with the ever-increasing prices that they want to put on them or we can't afford it and then we all end up without jobs and in a death spiral. Perhaps the problem is the machine.
One of the hurdles of affordability in housing is that no matter what you do it will hurt someone.
A lot of people who own their homes have them leveraged at their current value. If we make housing more affordable that means the value of their house goes down while their debt stays the same.
I personally (as a person who own their home) think we need to be making housing more affordable, but as a country we’re really bad about explaining and preparing for the negative impacts of positive progress and housing is just one example out of thousands when deflation hits the economy.
One thing is people need to think. Buying a house that is historical like $320K for $670K, a house thats doubled in value in 6 years. Its not smart. Like I get housing is needed but at the same time you need to have sense as a buyer. On no planet is that house a good investment. Youre umderwater the day you buy.
I just see houses in my parents development going or being asked for ludicrous prices. I know people that bleed money buying overpriced houses before the 08 crash. It'll happen again. People are so leveraged and likely have loans out for like 50 years.
I think the problem is buying a house as if it were an investment in general. I bought mine in 2022. No one can tell me whether the housing market will go up or down in the next 10,15 or 30 years.
So the decision on how much to spend is based on how much I like the place and what I can afford. I don’t take HELOCs or use my house as collateral on anything. And when I asked the bank to pre-approve me for $300k so I was ready to buy at $250k and they told me they could get me more I declined because I knew $250k is what I could afford no matter what the bank told me.
It’s my house, not my investment. I have a 401k for investing and I just don’t touch that shit. If my home value drops $100k in the next ten years my mortgage stays the same, unless I refinance for a lower rate and I can live with that.
It's harder to buy a house now, than during the Great Depression. Rent is through the roof. College is obscenely expensive. Wages have stagnated for decades.
The check engine light is on, and the temp gauge is in the red. Something has to give.
Seriously.. All that gives, is corporations and rich people trying to put the blame on everyone else. The money printing only works for so long without actually addressing any problems for the people
The week or so ebt wasn’t funded. My local Walmart had food items clearanced for under $1. Filled up my cart for $90, hadn’t done that in years. Multiple reasons why. AI orders everything for those stores now days, so trucks were coming to deliver more food. EBT is a massive subsidy for Walmart to fuel their greed. People need it to not starve. Corp knows that so they charge extra, I suspect. Like with student loans and tuition increases. We like to solve problems by creating new problems in this country🤣
It’s both at the same time really because it’s a feedback loop. Something causes deflation to start, suddenly it’s cheaper to buy something tomorrow instead of today (infinitely until deflation ends), people wait to buy things, demand for goods dries up rapidly, businesses fire people because there’s much less demand, unemployed people don’t buy as much, demand lowers further causing more deflation because supply is still backed up, etc etc. in a deepening spiral. We got out of it in the Great Depression with a combo of the WPA, New Deal, and WW2 spending.
It’s good for you only until the lowering prices causes your employer to fire you to cut costs or because they don’t need you to perform your job because demand has dropped. Deflation spirals include lots of people losing their jobs because businesses lose demand because goods will be cheaper if you wait to buy them.
I'm no economist and really don't know much, but it seems like much of our inflation is artificial anyway. Prices seem bloated not because people can afford to spend more, but because they are forced to. Corporations are making record profits while wages have barely increased. At some point, I think that trend will fail and things will balance out. Maybe that's what you're seeing as deflation. People will stop spending money on unnecessary things that cost more and the rest of the economy will follow. It's just a latent process because prices can increase at any time, but it takes time for people to realize they're not willing to spend that anymore or find other options. Like I said, I'm not an economist and not here to argue, so I'd like to know why someone thinks that's wrong.
The vibes and fact that our inflationary environment is bad for consumers in different ways doesn't really change that deflation tends towards self reinforcement. The economy is based on a certain level of continuous self feeding growth and more of that growth has been captured by companies in the form of record profits but it's not related to the fact that a true contraction causing deflation is also bad.
It's not just the prices going down, it's the expectation they will keep going down.
Think of it like this: You want to buy a car but no need to buy it today because you expect that tomorrow it will be cheaper. Tomorrow you put off buying it again becuse you expect it will be cheaper the following day and so on and so on, so you never actually buy the car. Everyone is following the same expectation so no one buys a car or a phone or anything else.
Everyone's daily consumption of even groceries becomes the minimum because there's no need to buy that fancy bar of chocolate today because you expect it will be cheaper tommorrow.
So Demand sharply decreases and production (Supply) and profit margins with it. Lower Supply means downsizing industry so fewer jobs/consumer wealth which further decreases any Demand that was left.
Negative inflation causes a feedback loop that can spiral really fast and crash an economy due to lack of "economic momentum" like the engine metaphor from IrksomFlotsom.
Wages track prices both directions, but the inverse isn't stable. If prices go up and wages lag, company is extra profitable. If prices go down and wages lag, the company goes bankrupt. Negative profits doesn't mean less production, it collapses to 0 production.
Because what we've experienced recently wasn't actually inflation by the definition that matters. Real inflation is our currency losing value. The "inflation" that happened with covid was all the corporations working together to raise prices across the board on everything but labor. It was just flat out theft. Going in the other direction would actually benefit real people.
Prices going down due to technology or whatever is good (eg TVs are cheaper than they used to be) but prices going down because people are choosing not to engage in the economy by not buying products or paying for services due to the fact that they will be cheaper in the future is bad.
The simplest way I can put it is when prices go down, people notice and they wait to buy things as they wait for them to go down more. This is what causes economic output to plummet
As far as I understand it, deflation indicates that prices are going down, which is a good thing to me individually.
Median voter moment.
The price of a thing going down is fine. The price of everything going down means that anyone who makes things is now better-off if they stop making things and just hold on to their money. When all production stops at once you'll have a very bad time.
Man, if only capitalism hadn't already fucking collapsed on itself, so people would stop repeating some bullshit line they heard, because they think it makes them sound insightful.
Seriously, the stretch from WW1 to the Great Depression showcased the fact that capitalism is a system fundamentally incapable of sustaining itself through a crisis. Pulling yourself by your bootstraps sounds wonderful until there are no boots going around to begin with.
You'd think that after the government having to come to the rescue again and again, maybe people would realize that a system where 12 people are worth more than half the Earth's population combined might have some issues needing addressing. Especially given the fact that the "golden age" of said system happened exactly when social welfare and strong worker's rights were a priority.
But no, it's the best out of all alternatives imaginable, so let's just keep pursuing the fairy tale it's supposed to be instead of working with the reality of what it is.
the stretch from WW1 to the Great Depression showcased the fact that capitalism is a system fundamentally incapable of sustaining itself through a crisis
No need to task a random redditor with devising a new economic paradigm, turns out one or two discerning experts spotted the trouble with the whole "the economy can grow forever!" concept. They spotted it pretty early, in fact. Adam Smith literally wrote about this problem.
I was unfamiliar with it, so I took a look on Wikipedia (hardly the most reliable or in-depth source, but it’s a fine beginning for most things) and I’m certainly no expert, but there is a glaring flaw in the base concept (just like capitalism/supply & demand break down with a very simple thought experiment, ie - the monopoly). In a stable state economy, it hinges on a “constant population size” which might seem ok on paper, but it’s something that goes against human nature. I’m unaware of any successful state-mandated population control, but I have heard of the One Child Policy and that wasn’t pretty.
EDIT: Some pointed out that population is trending towards a “constant size”, and it’s a fair point. And it’s true that in some developed nations, population rates can & have fallen below replacement levels.
My point stands that it’s no trivial thing to maintain a “constant population size”.
My comment wasn’t meant as a sweeping condemnation of “steady state economy” any more than monopolies are a sweeping condemnation of capitalism. Just because it’s a flaw, it doesn’t mean there is no solution.
Also your assumption to fully understand human nature and that stable population size goes against it is just bonkers. I feel like you're just looking back historically and saying that's the way it's always supposed to be now and forever and ignoring the reasons why we had so many more children in the past. Like your brain is trying to think, but it's just stopping halfway through on every thought and regurgitating things like "One Child Policy = bad" "Wikipedia = unreliable" with no attempt to understand the mechanisms behind why.
Population sizes tend to stabilize. If you look at many developed nations, they're actually struggling with the opposite - people aren't having enough children to support aging older generations.
No "might" about it: it's already underway. Almost all countries with well-developed economies either have shrinking populations (anti-immigration policies) or populations increasing only through the addition of immigrants.
If the economy is constant then, for example, a 2% productivity increase means you need to decrease total labor hours by roughly 2%. Total wealth is basically zero-sum, so for anyone to become rich someone else must become poor (or several people become slightly poorer).
This does not sound compatible with the way the world is now, at least not for countries like American.
It's a bit more nuanced even in that system - it's zero sum for resource extraction & our ecological impact, but not for knowledge/service/non-extractive forms of economic development & participation. But sure, as far as monetary supply goes you're right. I should've read your comment more carefully - although "money" is arguably not the only thing that constitutes wealth.
Anyway I'm not really a fan of debating any kind of economic theories as it's not like I subscribe to this idea, really, but it's clear that if we want to continue to exist on this planet then SOMETHING has to change. We cannot predicate our economic system on the idea of infinite growth while living on a planet with finite resources.
Truthfully, I think we're going to run this planet into the ground as people only begrudgingly and out of overwhelming necessity accept any encroachment on capitalism. I think the necessary adjustments to our current system will be forced upon us by the planet through large-scale disasters and destabilization, but by the point that people accept the need to change it'll be too late for the changes to actually fix the issues we've created.
Pretty sure president Jefferson called the up n coming debt based economy neo slavery and reluctantly agreed to put into effect. It really is a shame production is not focused on permanent viability instead of this plastic rat hell we have conjured up.
And worse that so many people will ardently defend it just...because?
Like, look around - even if you're well-off and comfortable, which honestly, my wife and I are, surely you can see that this is not sustainable nor working well in many ways.
People get so wrapped up in defending today's EXACT flavor capitalism because of the technological innovations that they think it's solely responsible for giving us that they truly freak out at the suggestion that we can improve our economic system and...make life better for everyone? Stave off our impending ecological doom?
Simply because they don't like even the whiff of the idea that they might have to contribute, that people who they think are "lesser" might become more economically equal to them, or because they literally can't stop believing that "any threat to capitalism" == "slippery slope to totalitarianism".
Yeah the ideology seems to be a relic of the 50s barely clinging to life in the form of nationalism. A lot of things in life don’t make sense to me but this one takes the cake.
It quite literally works for 1-5% of people and that number is shrinking with the worst seemingly on the horizon.
The real shame being how adequate technology has become, there’s no reason to continue this nonsense unless you’re winning already.
We're currently on the brink of population stagnation and decline globally as access to medical care and wage/resource inequality cause young people to make a decision.
So the global system is based on the concept of a perpetual motion machine? Why is that a laughable thing in physics but a totally reasonable premise in economics?
Probably helps that economics is mostly imaginary, I guess. I'm not saying that it isn't related to certain realities, but people are far from simple enough and predictable enough even in large groups to make it make much sense. That is both good and bad.
Arguably, they didn't exain that very well. All the mechanisms here have a reasonable explanation and it's not just made up.
Let me give it a try:
The problem with deflation is that it creates a strong incentive for businesses to infinitely accrue cash reserves on the expectation that large purchases like new machinery or maintenance and the likes are going to be cheaper in the near future. This means that consumption is declining, which means that productive businesses shut down, which means people working in those businesses are fired and in turn have less money to purchase goods and services from other businesses which means that even more factories/businesses shut down and now you're in an infinite downward spiral with no available monetary policy instrument to stop it. That's why minor inflation is seen as a necessity.
For the "infinite growth" argument, that builds on a bit of a misunderstanding: If I sell you a service and you sell it back to me, we have created GDP growth and we can do that indefinitely and keep creating GDP from essentially nothing... That part of the economy truly is just made up but it's just a way of comparing economies so it's effectively meaningless anyway.
If your money gets worth less over time, you have an incentive to spend it. If it's going to be worth more in the future than it is now, you have a strong incentive to not spend it, and lots of people follow that incentive, and spending (especially investing) craters.
But companies could stop this if they weren’t so greedy. People are struggling to buy the essentials and pay their bills so if they make food cheaper but keep other things the same wouldn’t that help. If people find them selfs with extra money at the end of the month they tent to spend it on things they don’t need.
My educated but amateur (BA in econ, so I understand more than average, but nowhere near professionals) thought is that the biggest reason deflation would be a catastrophe is that our government (US) doesn't have the political will to address the economy with fiscal policy. They've been relying on monetary policy (the fed) for decades. I suspect wealth inequality is so bad that you could theoretically shift the pain on to the 1%. It would be extremely complicated for sure, but I think its possible.
Ignore me if I’m missing the point: It’s not so much the drop in prices as the growing belief that the prices will continue to drop. People withhold money expecting a better deal and stop spending. The lack of consumer spending is the drop in fuel.
If your money will be worth more tomorrow than it is today you will only spend it today if absolutely necessary, is another way to phrase it that may help
Considering that the majority of people are living paycheck to paycheck, do we REALLY think enough people are going to hold on to their money that it would cause issues?
I still need to buy groceries. If they're cheaper next week, awesome, but I still have to feed the family. I still have to pay for my bills. It feels like this would only affect people with disposable income which may affect luxury items which are already overpriced because of companies trying to achieve infinite growth.
I'm shocked we haven't already entered into a recession with the skyrocketing prices tbh. What would essentially be a deflation to self-correcting the insanity of the past 6+ years would be welcome in my book.
Hell, I might actually have MORE disposable income in a deflation event.
The current economy is propped up by massive spending from the upper class, not the day to day spending that low income people are forced to keep spending regardless of how the economy is, because there's only so much you can cut when you're already paycheck to paycheck.
Not sure where you live but generally people notice prices going up a lot easier than average salaries going up.
For example in the US in jan 2025 the average salary had higher purchasing power (you could buy more of the same stuff) than before covid but people were up in arms about inflation and high cost of living.
Basically what I am trying to say is that tbe average person is very unlikely to accurately asses the current economic situation even for themselves they act almost purely based on what the media tells them and vibes.
Considering that the majority of people are living paycheck to paycheck, do we REALLY think enough people are going to hold on to their money that it would cause issues?
Yes,
Something like 40% of the stock market is held by retirement accounts. In a deflationary economy contributing to a retirement account doesn't make sense since you can just buy the stock later at a cheaper price. So you'd see tens of trillions of dollars be pulled out of American companies because holding cash is more appealing than investing in the economy. So you'll see businesses shut down.
And then the problem becomes, you still need to buy groceries, but there's no store to buy them at because you now gain wealth faster by holding onto pictures of dead presidents, then you do by selling produce.
Yes, because people will hold off to the last possible moment. And even with paycheck to paycheck living it will still punish any extraneous spending, like want to buy a bag of chips? it will be cheaper next week, so people hold off, for eternity and everything grind to a halt. People will buy the absolute minimum to survive. The great depression was a deflationary crisis.
Agreed, and even if people are paycheck to paycheck, that doesn’t necessarily mean hand to mouth, so realistically virtually everyone (excepting the homeless and some others) can delay even a few percentage points of spending for a week or more.
Because it results in less people making products due to them no longer being profitable. This leads to less jobs. Which leads to less money for people to spend. Prices drop as no one can afford the old price. Less people make the product due to it not being profitable and so the loop continues.
That is the thought at least. The desire for profit drives creation which is the fuel for the economy.
Nobody is going to give hungry because food will be cheaper next year. Nobody is going to go homeless because rents will be cheaper next year. Even if doing nothing is a good strategy, humans aren't going to do nothing because our time on earth is finite and we hate saving.
Even in an inflationary environment the rational thing is not to consume, but to invest in investments where the expected return beets inflation.
From the perspective of the wealth (who account for most consumption) we have effectively been in a deflationary environment as their investment returns consistently beat inflation
A deflationary environment is the opposite, where people sit on cash instead of investing because they believe that the investments will be worth less than the cash in the future. Inflationary environments are what make investments the smart choice, if we were deflationary no one would invest money.
It's not that - deflation compounds the value of debt. Charging interest on debt can be thought of as taking a return on inflation, and makes sense, because debt is most often taken as leverage against the future value of something. The bank gets to offset inflation via my interest, and I get to realize appreciation on some asset using that leverage. With deflationary pressure, that whole equation breaks. You'd need to have negative interest to balance things out, but there would never be any incentive for a bank to loan money at a negative return when not loaning money generates a positive return.
This is the fundamental problem with deflation. Without leverage, modern economic systems as we know them fall apart and we'd revert to some kind of planned sustenance economy.
I mean, I live in Australia and something like that could possibly be good for the economy. We have an incredibly nondiverse economy, basically the best way to make money is housing, which is out of reach for most, owning a business even more so.
How do you pay for anything if you don't have a job bud?
Deflation means all capital interests veer towards saving over spending, including corporate interests that would typically be spending money to make money by hiring people to do work.
A poor person needs to spend the bulk of their money to survive. They can’t spend less on food, shelter, ect. Because they are likely at the cheapest option already. If they were able to save that money they would be able to buy more tomorrow. But they can’t. So they spend money that ends up being worth more tomorrow than yesterday.
A rich person can see deflation and hold back on their spending. Most of their spending is not necessity but discretionary. They can spend less and grow their money by doing nothing with it. They don’t need that second yacht and can wait I’ll tomorrow when the price drops.
They way it was explained to me is that a little bit of inflation is a good thing. Theoretically workers should get raises Based on the inflation rate one of the reasons things are so bad right now is that that isn’t happening but I digress. If your money is worth more then people will be layed off
Why buy x thing at $10 when you can wait till next year and get it at $9.50? But applied to companies so the effect is fucking huge and people hoard wealth even more than they do right now instead of spending it which is basically a requirement for the economy to function properly.
you got the numbers wrong. At 5% productivity increase, you'd need 10% deflation to justify that pay cut. At 5% deflation, there's no pay cut at all. And at 5% inflation, the pay cut is hidden, because the productivity increase is funneled away from you.
Legit please do correct me if i'm wrong, but if price of product x goes from 5 to 10, my 1000 salary would mean i can now only buy 100 of x instead of 200, but if x went from 5 to 2, it means that, while my salary is still the same, my purchase power is now higher, because now i can buy 500 of x instead of 200
The problem isn’t really any one person’s salary. It’s the nationwide effect of everyone getting paid less. Deflation is probably great for a handful of people at first, but job growth halts (and for most industries probably shrinks dramatically) because now all these companies are losing profits while their employees are making the same amount.
Global trade becomes more difficult for us because we have fewer dollars in circulation. Debt (federal and personal) doesn’t decrease so anyone with a loan is now paying the bank a higher % of their income. A lot of people will eventually receive pay cuts to balance things out, who will then likely reduce their spending, which then leads to less consumer products being bought, which AGAIN leads to lower salaries or layoffs.
The issue is really that deflation is a longer death spiral whereas inflation is a lot more abrupt. That inflation is a punch in the gut, but typically we all reset to the new normal. Deflation can be a lot harder hitting and it really dries up our economy. So, even when deflation finally winds down, there’s still a long recovery and a lot of non-essential goods and services have likely been abandoned or shut down. That could take decades to recover.
If deflation caused people to have more buying power, then they’d have more money to spend, driving up demand on products, which would in turn cause inflation.
Exactly. Your purchasing power will be higher tomorrow. Even higher the day after tomorrow. Higher again after. You will not buy today because you can always buy more tomorrow. There is no demand. Which is why deflation is bad.
Assuming you aren’t part of the layoffs and wave of underemployment that follows. The same way firms increase prices to keep them consistent with inflation? They do the same thing in reverse for deflation and wages
In a deflationary economy, your cost of living update would mean you literally get a pay cut every year. Like your job at your yearly review cuts your salary to account for deflation.
More likely yeah. But I have seen stuff like the employer giving a choice between firing you and you accepting lower wages. Though that was not even in deflation but like 10% inflation. But the company was failing and at the edge of bankruptcy so somewhat understandable
The Great Depression was caused by a deflationary spiral. Inflation encourages spending, while deflation discourages it, and spending is what props up the entire economy. You need money constantly circulating, and deflation makes that grind to a halt because it's individually more financially sensible to delay as many purchases as possible during deflation.
All of your investments get wiped out and the economy crashes. Market crashes are strongly linked to deflation and it is likely the market you see falling out when you see signs of deflation on the horizon.
People do not lower prices for fun. They do it because the economy has tanked.
Everyone else is trying way too hard to explain something that is rather simple.
The economy is a flow of goods and services. Regardless of economic status, when this flow is happening you a better off. There’s way for the flow to be skewed, not as helpful, etc but you are generally speaking - better off. The flow lets you sell whatever product or service you are performing, and but whatever you need or want.
Inflation cuts into your ability to use the intermediary (money) overtime. Depending on your economic status this can mean essentially a pay cut if you don’t get raises to counter this effect, or a cut to savings, or very little as most of your wealth comes from assets that are resilient to inflation.
Deflation on the other hand discourages the entire process from occurring. Considering buying something? Don’t do that. It’s a bad idea. You can get it tomorrow for cheaper. This grinds things to a halt and governments have to take drastic measures to fight it.
Of course, if people aren’t buying things, the counter is you’re now not selling. Jobs will be lost to save costs, which means less people with money in their pockets to buy the things that they shouldn’t be buying if they can manage anyway.
It’s a vicious cycle, and one that’s hard to grasp because it doesn’t really happen in the same way inflation does, partially because governments are so adverse to it.
Additionally, not all deflation is bad - and most people have experience with the good kind of inflation - technological, manufacturing, and business efficiencies over time. Comparing the price of a tv over time is one kind of deflation, and it’s awesome. But it’s not coming from the monetary, system level deflation that’s so concerning.
All this to say that if the original meme is about deflation that’s fucking stupid. It’s a huge leap to be taking just to try to be negative.
Deflation mostly happens when people stop trusting in the dollar and trade in other commodities. This makes the dollar essentially worthless.
By design economies need relatively low but stable inflation to maintain itself. This means the trust in the currency is growing and being utilized. If no one uses the currency then your economic system collapses because you cant collect taxes off of traded goods.
Inflation is mostly self-correcting in the absence of an additional severe disaster, as prices rise eventually people will stop buying luxuries until prices stabilize. Deflation has no such corrective loop, it's actually the opposite. As prices fall the value of a dollar now is much less than the value of a dollar tomorrow, which means people hold onto it, which means businesses have to lower prices, which means deflation accelerates, and theoretically could go until people are buying nothing but the absolute necessities. In our modern world with technology it takes far less people to provide the necessities than there are people so millions of people would be jobless.
You seem to think you know more about economics than people with PhDs in the field (most of whom will tell you that deflation is bad for the economy). Honestly, that's genuinely the peak of hubris and the most "reddit-brained" take I've ever seen.
I'd at least like to inform you that we had a heavily deflationary economy during the Great Depression; If you think deflation is a good situation to be in, think again.
It means that if you’re a shoemaker and make 100 shoes and it cost you $20 to make each one, well now they’re only worth $15, so either you keep them sitting on your shelf hoping that they’ll increase in value, or you bite the bullet and lose $500, meaning that you can’t afford to buy everything you need for everyday life, so now the farmer that spent money harvesting tomatoes won’t sell them because people like you aren’t buying them, so he does the same thing, and then he can’t buy things, now other people can’t sell, and it keeps going until everybody is losing money. If you’re one of five accountants in your company, you lose your job because your company is forced to downsize and they can get by with four. If you’re a cashier working through college, you get laid off and now you have to drop out. If you just graduated, nobody is hiring.
The only people who benefit in this is people who have passive income that doesn’t depend on the country’s economic stability, for example retirees.
You want a small level of inflation bc it incentives people to spend money and circulate money into the economy and feed growth.
Deflation is a death spiral.
When consumers know that prices are going to be cheaper if they wait then they wont buy.
When consumers aren't buying goods then stores wont buy more inventory and start to lay off workers if sales get bad enough.
When stores aren't buying more inventory then factories decrease output and layoff workers since they dont need them.
When stores aren't buying goods and factories aren't shipping goods then transportation companies also layoff workers due to smaller workload.
With all of these layoffs then instead of people not buying goods to wait for cheaper prices they now arent buying them bc they're out of work. Hence the death spiral.
If your money gets more valuable over time, all of a sudden its an investment to get as much money as possible.
So instead of people investing in businesses which make jobs.
People hoard money and avoid spending it.
Because people dont want to spend money, non essential businesses close down (or they have to resort to exporting or selling at super high prices to the rich).
A lot of smaller not very profitable businesses close down too because its more profitable to do nothing with their money and instead sell their assests to the rich or wealthy.
As a result of businesses closing down, tons of people lose their jobs.
Banks raise the cost of loans to make up for lost profits from giving money away.
So just from the above, everyone is hoarding money, there are very few jobs, the only affordable things are essentials, there are no local small businesses, you are slowly losing your savings over time (unless your rich or have a job), and any children born into this future will be broke and depending on generational wealth to not end up drowned in debt, or either need to be the top 0.01% in order for the wealthy to offer them a job.
If at any point an unexpected emergency forces you to weaken your savings you can go from surviving on your savings to losing money over time.
Thankfully government jobs and money printing prevent anything like this from happening (and also cause inflation).
ELI5: One of the biggest driving forces in our economy is that your money will be worth less next year than it is today. It’s built on the idea that money will constantly be flowing and exchanging hands. This encourages you to invest instead of hoard, buy that car/house now instead of hoping it will be cheaper in the future, and so on.
If deflation happens, all of a sudden people and corporations are incentivized to keep their money instead of investing it. This sounds great, but in reality this sharp decrease in economic activity leads to things like the Great Depression due to lack of demand.
It isn't, for the individual, if we don't take into account the surrounding reality. Thing is, in devaluation, goods don't usually drop in price simultaneously. This means that stuff like rent or imports may see huge real proce increases. Also, it incentivizes saving money over spending it or investing it. This means that companies make less sales, and in turn need fewer employees(or can afford fewer, at any rate), and investing more is riskier. It usually hits small companies hardest, as well. And anyone with debt will be hit even harder, so if you have a mortgage or student loans, you might screwed.
It's also that deflation doesn't just happen. The driving factors that usually cause deflation is the economy tanking, which is typically very bad even if the deflation can seem good.
Dollars become more valuable over time vs less. People then hoard their dollars and stop buying, companies can no longer sell and start hoarding dollars, mass lay offs and pay cuts happen
Lets say you want a new car. It costs 50k right now, but you're confident it will be cheaper a year from now. You don't need a new car right now so you wait for the better deal. A year later its 49.5k, but you still think it will go down, and you don't absolutely need the new car right now so you wait. A year later its now 49k. This will likely continue year after year until you absolutely need the new car.
Now imagine this happening with pretty much every product in an economy,
People purchasing less means companies produce less. Which means they need fewer workers so people lose jobs and wages stagnate or decline.
Its a big cycle that's really hard to get out of. Japan went through about two decades of deflation recently and it was pretty tough on their economy.
Rich people stop spending money. Entirely. It is more profitable to sit on a stack of cash than it is to actually own anything. While temporary, it completely inverts our debt-bubble economy and would immediately cause an economic disaster of unknown but presumably drastic proportions.
It’s not a society destroyer, but it’s probably more of a pain to deal with than slow but steady inflation.
one important thing is debt. Deflation is the bane of debts, so all the start ups company with huge debts and no revenue would die or struggle massively, that including many companies that are developing life changing techs/meds. This would also caution investor to invest in said companies.
It's the difference between having a job and struggling (inflation) and not having a job and struggling (deflation) I guess. Think 2023-2026 v 2020 during the outbreak of covid.
My country experienced a period of 8 months of deflation that lead to one of the worst economic crisis we ever had.
There are many things that break with deflation.
If you have $100 you have to choose if you put it in the bank or invest it. Normally, the bank pays less than an investment, so many people choose to invest. During a deflation period, you don't even have to choose, even saving your money back at home means your money will be worth more next month while investing it is even more dangerous since during deflation period people don't buy stuff and am investment may end up in just losing your money. If money is not invested, no new business are created (while many are being closed), that only leads to more unemployment.
In general, the only people who actually enjoy these periods are the ones who already have lots of money and the ones that can actually keep their jobs (which the longer the period is, the less people who can actually keep their jobs).
Inflation is good as long as salaries grow along. If salaries don't grow, we are fucked.
You like having a job that gives you food shelter right? In a recession if a business doesn't make money it closes fucking over it's workers. The trump administration isn't going to help you when you're down they're going to buy every cheap house possible.
Japan has had deflation problems, so there is a ton of info out there as to how devastating it is for economies and its participants. Unless you’re on a pension (fixed income) and don’t work, it’s much much worse than low inflation
Investors want to keep growing the value of their money, not just the pure numerical amount.
If there's inflation, the value of money goes down. So investors need to invest their money into things that grow in value: Companies, materials, production, ...
If there's deflation, the value of money goes up. So investors don't need to invest at all. They can just keep their money.
Inflation means that companies get a ton of investor money, which they can use to hire people, decreasing unemployment, increasing productivity. More people have work, salaries go up because companies are fighting for good employees, tax revenue goes up.
Deflation means that investors pull their money from companies, which they now lack to invest in employees, decreasing productivity. More unemployed people are available, thus salaries go down because companies have more than enough good people to choose from. Tax revenue goes down.
The company you work for has to lower prices. As a consequence, it is no longer profitable. So they either fire you or lower your wages. You have less money because you were either fired or your wage got cut. So you buy less stuff that leads to further deflation, more job loss and wage decline.
It isn't bad per se, it is bad in our economic system.
Our economy and money are highly debt based and the way that the government controls the economy is mostly through debt (interest rates).
When we have inflation the value of a dollar tomorrow is worth less than the value of a dollar today. That means that if I owe you 100 dollars today at 0% interest that means I owe you less value in 1 year than I owe you today. This is why we have high interest rates... the lender needs to make profit and account for inflation.
If we have deflation the value of a dollar is worth more tomorrow than it is today. This means if you owe 100 today at 0% interest in 1 year you owe MORE value than you owe today because the value of 100 dollars has increased.
This means that all existing debts become untenable and it becomes impossible for the government to force low interest rates to boost borrowing because interest rates may NATURALLY be 0.
The economic model we exist within collapses.
Can we have a different economic model? Probably. But everyone with a mortgage is going to be bankrupt to get there.
There is another part where inflation and deflation are symptoms of the money supply expanding and contracting and that the deflation itself might not be bad but a symptom of a contraction of the money supply which is a symptom of a contraction of the economy.
Money grows in value = it’s better to hold onto money than spend it now = people stop spending money = businesses force to drop prices just to get people to buy, and rinse repeat. Economic activity decreases, less money gets exchanged, people do less with their money besides the necessities, industries and markets die.
It can halt the economy and lead to a spiral that's very difficult to stop, and the reason is easy to see. If you expect your money to be worth more next month, you're not spending it.
Under a capitalist economic structure it is worse because this busted system is contingent on infinite growth (reality be damned if it says infinite growth is not possible or sustainable).
Example: a factory buys components and builds something. It may take some time until the components arrive at the factory and the final product is shipped to be sold. In this moment the price may be lower than anticipated, it may not cover the original cost or you may get higher profits if you keep money in a deposit and get the interest. To avoid loss the owner will stop production and lay off people.
Deflation sounds good, we all love lower prices but on long term will lead to unemployment.
In a deflationary economy things that are not assets are cheaper every day, so if you have to buy for example food it will be cheaper tomorrow, so you are wasting money by buying things that are not assets(homes/land), and it crates the economy because people start holding onto money because anythign they wished to buy will be cheaper tomorrow, and then the day after and so on. They will spend absolute bare minimum to survive in hope of reaching a "price floor", which never comes, and economy literally grinds to a halt.
This is why crypto can never be a currency for the masses, due to its deflationary nature(esp in cases like bitcoin) it punishes spending.
If you think your money is going to be able to buy more stuff next year, you're more likely to just not spend it, since you can buy more stuff next year. Repeated on a large scale, for a long time, and now you have an economy where people fundamentally don't spend money. Your economy stagnates, and companies don't form as often, and companies don't grow. As a result, you don't have as many jobs in your country, and the jobs you do have start the dwindle. People are spending less, but they also don't get raises, and unemployment rises. Quality of life goes down as your citizens gradually lose salary vs. cost of living.
This is the story of Japan. Japan has dealt with steady deflation over decades, and it's a large part of what has caused them to go from being the a world economic superpower in the 1980s to a declining country similar disposable income levels to Lithuania and lower than Poland.
If you'd rather have the living standards of a place like Latvia than the US, then you might prefer deflation.
Think you are Elon like with tragilion dollars. If there is deflation, why the heck would you spend it? You would just sit on it and get richer, you don't even need to try to evade taxes and 0 risk what so ever. But if there is inflation, you need to invest your money into something. And by investing, you create jobs, produce stuff, etc.
So basically it pushes people to move money around. And moving money around is, basically, the defenition of the economy.
Anyway, if it doesn't help, deflation would be even better for Elon. So it is worse.
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u/StuartMcNight 8h ago
Low inflation might be the first step towards deflation. Many economists would argue that deflation is a worse situation for the economy because it leads to a sharp drop of consumption and therefore a huge recession follows?