It's more about people holding out on buying things because they believe it will be cheaper later. Food is a bad example because people will always buy food, regardless of the cost. But why would you buy a car if it might be $2,000 cheaper in a few months? Then a few months pass and now it looks like that car might be even cheaper, will you spend now or keep holding out to see if it goes lower?
It's such a bad system when the logic follows the other path too. "I should buy a car now because it's only likely to get more expensive, while my income stagnates"
yes that's the entire point, to make money move(also known as an economy), instead of having money hoarders that just hold money for no goal and so does nothing for anyone.
Oh wait, that's what's happening right now as the flow of the economy goes into the glorified hoarders of the top 1% and the real economy is rotting from the inside out.
Tax the rich hard and make the money move again into the real economy.
Yeah, I don't disagree on most of what you're getting at. I just disagree that the inflationary pressure is the main, or should be the main driver of consumer spending (I should buy now cause it'll be more expensive later). Normal consumers are buying as they need.
Give 300 people $1, and they'll spend it in their local economy. Give 1 person $300, and they're saving. The velocity of money increases when it's returned to normal consumers.
I agree with the sentiment that aggressive inflation shouldn't be used as the sole tool of moving money around. Decades of purposeful mismanagement of the economy to favour the few as got us into this position.
taxing the higher brackets like we used to would spread out the money throughout the economy and we could go back to sensible regulations that stamp down on the excesses of the stock market, so the money can get invested into more diversified spread of the economy that would help build out the middle class again.
inflation is already a tax, so higher inflation means rich people get taxed, while average consumers with no savings basically don t, the real problem here is where the inlfation is localized, being converged to consumers good rather than technology development.
Because of this, Joe that spent 10% of its salary on food now spends 15%, while Elon instead of spending 1$ on his egg spends 2$ which doesn t matter to him.
You can see the problem is that the inflation is caused by consumer goods being scarce rather than having inflation caused by economic pressure. Or even better the economic pressure pushes the industries to invest more using more water electricity and land that was used to make food, washing machines or just space to build houses which weighs even more on the average joe as economic pressures and products being scarce sum their weight.
Inflation hits people at the bottom way harder than people at the top because the things they need to live become more expensive and they have to choose between rent and food.
Thats a whole different level to “my portfolio didn’t outperform inflation over 5 years”.
Inflation is a devaluation of currency, not a tax; there is a major difference. The rich do not have their money sitting as cash, being devalued by inflation. Quite the opposite, they usually have it in assets, which appreciate alongside inflation, and benefit from governmental spending/money printing. This is historically the case. The gains to assets are generally higher than inflation, and are used as non-taxable loan collateral, not taxable income.
Normal people are hurt by inflation due to real increasing prices and stagnating income. Savings are devalued: Any cash on hand can now purchase less. If you have 0 savings, and income increases alongside inflation, the net outcome is neutral. This is almost never the case. The devaluation of current and future purchasing power is the point.
The inflation we've seen since 2019 is not tied to normal inflationary pressures nor scarcity. It's tied to profit seeking behavior, and maximizing profits per transaction. Sure, total inventory and manufacturing capacity can drive up prices, but so can collusion and price fixing behavior (chip industries come to mind).
That's a given that inflation to input costs impact sales price and margin. These are real costs.
All I'm hearing is that the system succeeding requires buying power to decrease. Which just makes me want the system to fail cause why the fuck would I care when I'm already making nothing and can't afford shit. Let the whole thing collapse idgaf anymore.
I wish people would just say the thing out loud that matters - what is best for you is not necessarily what is best for the economy at large. Your financial success quite literally threatens others', almost by definition.
Take away the means of production and give it to the people who are actually doing the labor that creates the economy. The endless accumulation of wealth for the few, siphoned from the many with state-glorified approval, is what is ruining pretty much everything. Solidarity, not the illusion of choice, is what actually creates systems that address the entropy of the human condition.
never understood this "tax the rich" thing. Rich people can make their money disappear on paper = not rich on paper = cant tax them and/or wont pay too much tax.
Exactly what Elon does for example.
Yup, that's why many economists agree that having very low inflation (0.1-2% YOY) is better for the economy compared to no inflation. But that also only works so long as salaries increase alongside it, which in many parts of the world, they haven't.
Because at the end of the day money is for spending. Having some savings is good, but over saving is a trap for both the economy and an individual person. Imagine you live incredibly frugally your whole life, always saving. One day you die, and what did you work your whole life for? How much of life, or things you could have enjoyed, did you miss out on?
Actually it could theoretically be any number as long as it's generally accepted that that's the target- it's only 2% bc some dude in New Zealand thought that sounded good. The economy/stock market is all about managing expectations.
Well, the other advantage of inflation is that wages are sticky downwards. It's very unpopular and difficult to cut workers' wages, so if wages in a particular job are too high, inflation provides a natural release valve to gradually reduce the real wages over time. Sucks to get your real spending power reduced but it beats being laid off.
All that to say that some salaries not tracking inflation is a feature, not a bug. But you're right that if median wages fall behind inflation, that's bad news for everyone's standard of living.
You want that Porsche? Get it now rather than wait as it will be more expensive next year. Don’t feel like paying $1MM for the Porsche, that’s where free market comes in and says go get a Miata.
Then the cycle repeats until company XYZ is willed into existence because the Miata got too expensive, or wages have caught up.
Instead of a car, think of a house. If you buy a house now, you want the value of the house to increase or stay the same. You don't want the value of your house to lose 50% of its value after 10 years.
Not really. My example was just about inflationary driven spending, and how it's not really the driving factor of consumer behavior.
It's possible that the difference in rate of inflation and compensation leads to a decrease in purchasing power, without decreased economic activity (on paper). Maybe less people are spending, but those that are, are spending more (the niche driven spending we're currently seeing where prices are inflated and specific consumers are paying those prices, offsetting the lack of spending from others).
You mentioned “while my income stagnates.” That’s the decreased economic activity which is the crucial difference in inflation vs stagflation. Inflation isn’t necessarily a bad thing provided wages are rising at a comparable rate.
People do this exact thing with iPhones ("I can wait one more generation before upgrading") and Apple is doing just fine.
There is no real reason to fear deflation. It is feared by the owning class because it would enable the working class to build generational wealth, rather than slaving away their entire lives for nothing.
Is it going to apply to a culture that FUCKING LOVES SPENDING? Something by like 80% of Coachella apparently went into debt to go, meanwhile, Japan doesn’t, unanimously accept credit cards still.
But inflation doesn't lead to me buying a house now because it would be more expensive later. Inflation led to me not buying a house because it got to expensive to buy one with my wage, which didn't get a proportional rise. It also didn't lead to me buying more stuff in general because of fomo.
On the contrary, if deflation would lead to my money being worth more and I would be able to buy a house, I wouldn't wait to buy one.
There are massive cultural differences at play between Japan and the US though. There is a major austerity movement built into much of Japanese culture that the US just does not have.
I feel like economists underestimate how poorly people manage their money. Most folks don't wait for prices to come down, they make purchases whether they have the money or not.
I don't believe that theory holds up. Spending is more of a psychology thing rather than economy. People would definitely buy more with deflation, no sane person would think that not buying something is better because it would be cheaper later. People would buy more because things are cheaper and they need those things, simple as that. Inflation is good in theory but it make people spend less because things are getting expensive. People don't buy things or pend be cause they have to keep the depreciating money to be able to afford basic things while they increase in price. I never saw inflation being good at ney point. Theory only works in some specific perfectionist scenarios. After I see what deflation does in real life than I'll decide if it's bad or not.
"no sane person would think that not buying something is better because it would be cheaper later."
But you already see this all the time with people holding out for sales. If people have a reasonable expectation that something will be cheaper, the impulse is to wait for it to be cheaper. And nobody is saying "inflation is good", it's that a small amount of inflation is expected in a healthy economy.
But they’re not talking about some imaginary theory, they’re talking about something that has explicitly happened in real life. The original commenter in this thread even gave an example, which you could verify with [two seconds of googling](https://en.wikipedia.org/wiki/Lost_Decades)
When you zoom into a single grocery store item, it’s great. When you zoom out to a mortgage, you’re borrowing $400k from the bank and promising to pay them back with dollars that are more valuable than the dollars you’re spending today. Plus interest. While the value of your property drops year after year.
It’s also toxic to farmers who have to borrow to buy for the same year’s harvest. Again, the dollars they pay to pay off the loan will be worth more than the dollars they borrowed at the beginning of the year, and again, plus interest. The commodity they’re selling is also going to be worth less by the end of the year than at the beginning. Look into the Cross of Gold speech by William Jennings Bryan, it explores the same theme. Back in the day, the dollar was based on gold. As new gold was discovered, the value of the dollar would drop as more money/gold entered the system. In the absence of new gold finds, there would be deflation. Bankers loved it. Farmers did not. They preferred silver, which we were mining quite a lot of back then.
They're functionally the same thing, but it's all relative to what you're comparing the money to. Eggs in America are the same as eggs in Canada, but they cost different amounts based on how much the respective dollar can buy. If you know the American dollar is crashing, it might be worth hoarding money while it's worth less because people are more willing to let it go, then it will be worth more once the dollar recovers and becomes worth more. During that whole thing, the Canadian dollar remained steady and continued to grow in value. Canadians were not incentivized to hold their money, so more eggs were sold in Canada because people wanted to buy asap since their dollars would be worth less the longer they wait to spend them. Americans bought less eggs because they were holding out for the dollar to start increasing in value so they don't miss out on potential gains/even cheaper eggs. Continuous, steady inflation incentivizes spending, while deflation incentivizes holding.
As others have said, food prices (like energy) are volatile and can be affected by idiosyncratic factors like supply chain issues, weather events, cattle/crop diseases etc. Also, as others said, these are necessities. This is why economists also track inflation via Core CPI, which is the consumer price index excluding food and energy.
Why economists are concerned is that fundamentally deflation is a lagging indicator of demand destruction. This, in combination with 50 years of worsening income inequality, means that the economy is indicating a paradigm shift in the broader US consumer psychology: people are less willing to pay for things at current prices, so companies are lowering prices until they see people are willing to buy again.
This is why economists say some inflation is a good thing. Again, the problems we see now in the US are due partly because inflation has outpaced income growth for decades.
"Oh wow, I can buy 2 packs of eggs now when $10 got me 1 pack last week... I shouldn't buy eggs this week, next week I might be able to buy 3 packs for $10."
Then put that thinking to more impactful investments long-term
Economic study is basically psychology of the masses, the first thing you learn is that the biggest factor is public trust/beliefs in the market. Market doesn't operates on logic, it operates on vibes and feels.
Also remember, the Economie with a big E is not the same as personnal finances, it doesn't work the same at all
So to make it clearer, it's not that things will cost less thats the problem for small items like food. You will likely buy eggs regardless because food are essential items. We will always buy eggs regardless of the price. It's the larger items like houses, cars, tvs, etc. The big, expensive purchase that aren't necessarily required right away are put on hold, i.e. the non-essentials. This creates a downward spiral because companies start cutting costs more to clear inventory and make sales, thus reinforcing the waiting till it hits the bottom price before buying. And since they aren't making sales and generating revenue as high, they start down sizing employees to make up the loss. This means more people who now can't afford these items and have to wait on more essential products until they can hopefully find work.
Debts also don't shrink because of inflation. Your student loan payments, car payments, and/or house payments don't change. You'll still have to pay those in a period when people are losing jobs. Well now you're spending the money you saved on the non essential items on your debts while you're now job hunting in an economy where you have more and more people joining that hunt more often while companies are also freezing hiring or cutting wages to minimum to save costs, which means even if you have a job, you're making less and can't afford the reduced costs.
Now, this is for full economic decline. If individual sectors (for example smarthphones and computers) experience deflation because technological innovation or increasing efficiency, that can be good because incomes and productivity rise with it and the sector will experience a boom. For example when cars became easier and cheaper to make so more families could afford them, thus making the car market over all better.
I hope this helps explain better what you were asking.
Maybe it’s that businesses start laying off employees because the income stream is built on prices going up. So that 2 for $10 eggs are a great price but now you don’t have a job. So you sell your house to a big corporation and then they rent it back to you. But now everyone is selling their house and more people need to rent. So the corporation sees this and raises your rent price. Now you are paying in rent what your mortgage was. This makes you mad so you say no way! So you decide to live in a tent. And now look up Hooverville. Cause that’s all part of the Great Recession.
You can buy 2 for 10 dollars because "money can buy more"
After deflation you can't buy eggs.
Because the farmer realized feeding and housing chickens was going to cost now much more than it would return later. So they sold off EVERYTHING, paid off their loans, and decided they'll buy it all back at a discount when / if the deflation stops.
It’s “You can buy 2 for 10 dollars because ‘money can buy more’” but still no one is buying because 20% of the country doesn’t have a job and another 20% are fearful they will lose their job so they spend enough to just survive.
They are the same, but I feel that how I said it is the better way to explain the issue with deflation, since it focuses on the future, which is the root of the problem.
Food is a necessity so it won’t be affected as much as other purchases. So let’s use cars.
If the avg car price is $50k, and this month the avg price drops to $45k, we may see some people buy. The issue is when everyone thinks the price will drop more. Why buy a car for $45k when you think it will drop to $40k, or even $35k?
That spiral is great for buyers, but life destroying for workers (the same people who get laid off. And it wouldn’t just be cars.
Usually the fed will lower interest rates to combat deflation. The ideology here is that if the cost of borrowing is lower, people will
Borrow and spend more.
But what if inflation rates hit zero? Can people just take loans with no interest? And what happens when even zero interest isn’t enough to correct the deflation spiral? Negative interest would mean that the government would pay you to take a loan, which presents its own slew of wacky issues.
The person you’re replying to put it poorly, but I think I see what they’re trying to say.
An egg costs X-amount of actual materials and labor to produce (maybe a certain number of pounds of feed, a certain amount of land, and a given number of labor hours). That X-amount doesn’t really change (the “cost”).
Separately, a dollar is worth Y-amount of that cost. If you think the value of Y is increasing (deflation), why spend it now instead of wait until Y can buy even more X?
In inflation, it’s the opposite: invest Y money NOW, because it gets the most X you’re ever going to get moving forward. Inflation incentivizes investment.
Wouldn't that mean that the long term effects after deflation are better for quality of life though? Cost of living goes down, which results in people being able to live more comfortably on the same wages. Sure, the economy isn't growing but it doesn't sound that bad to me
Yes and no. On the one hand, putting off buying things as a consumer is good for personal wealth, but it also means the economy stagnates. Why would a company invest in making their products better if no one is buying the current models and they aren’t making money? Heck, why are they paying 100 workers when they only need 50 to make their demands? Then people get laid off because no one is spending. This can then lead to a rush of people buying the things they put off because they no longer have income, reversing things and causing inflation again, but now there are 50 people from that company without jobs who are getting pummeled by the increased prices. It dan, in theory, cause a cycle of this that leads to a lot of people being left holding the bag
If people were willing and able to defer consumption to when things got cheaper, nobody would have bought any electronics for the last 70 years and nobody would ever have high interest consumer debt
It's a myth that deflation causes material drops in consumer spending. The inverse is what's true: drops in consumer spending cause deflation, as producers are forced to lower prices to move inventory that people stopped buying
There are literally zero example of deflation causing drops in consumer spending. Invariably the increase in real income caused by lower price level has a stronger effect on increasing consumption than any temporal substitution effect that might cause people to delay consumption in anticipation of lower prices. Also, you can compensate for the temporal substitution effect by lowering interest rates
What you have are examples of falling incomes causing drops in consumer spending
Consumption dropped because incomes dropped, not because consumer prices dropped. Income dropped because of, inter alia, collapses in agriculture, collapses in trade largely attributable to smoot-hawley tariffs, and collapses in the money supply caused by 10,000 bank failures (itself compounded by falling incomes - especially falling income:asset ratios which compounded the losses of farm loan defaults and margin call defaults (caused by stock market crash) and inaction of the Fed, failing to inject liquidity when it was needed).
Deflation didn't cause those things. Deflation was caused by those things
None of that applied to the rich people in the depression, who were hoarding money and gold. FDR literally issued an executive order confiscating the private gold reserves in the country as a measure to reintroduce liquidity into the economy.
Yes and? Rich people didn't consume less because they were waiting for things to get cheaper. To the extent they consumed less, it was because their own incomes were down
Yes, FDR confiscated the gold in 1933 as part of measures to increase the money supply, which was part of other measures that helped end the banking crisis. Prior to that though, the Fed was fucking dog by, among other things, increasing rates
Usually a drop in disposable or discretionary income. Sometimes an increase in the real interest rate
Another cause could be perceived economic instability, so people try to save more
Another cause could be markets behaving comparatively less efficiently, causing people to engage in less market labour and more domestic labour (i.e. instead of working more at a job and spending money on prepared meals, they spend less on groceries and cook for themselves; or instead of working more at a job and spending money on daycare, they look after the kids at home).
What I don't get about that explanation is that the same happens with investments. If you stop spending and invest your money on a low risk asset, you can buy more with it in the future. Yet people spend money, because then need some stuff and want some other stuff
If you could buy a car for $10,000 today but if you waited a month you could buy it for $9,000. Would you buy it today?
Based on the 2008 recession and the 5 or so years following no one had the jobs, capital, risk appetite to really buy like that even if they wanted to. Historically America and Americans have been piss poor at saving for a rainy day.
Deflation would be absolutely devastating for the US.
This is essentially already true when the stock market pumps out consistent +15% returns every year across 3 decades, so I don't see what the massive difference is. Why use your money for things when you can buy any index you want and beat inflation several times?
>Isn't it better to save that money for the future, when it's probably gonna be able to buy more?
But hasn't that always been the case? YOu could buy stocks and they'd grow faster than inflation, therefore why but $100 shows now when you can invest it and but the same shows next year for $103 with $5 left over (assuming 8% stock growth and 3% inflation)?
I don't know how we can tell people to save for retirement and sing the praises of compound interest at the same time we say deflation would cause people to delay spending.
all these theories assume that every person is a financial strategist, most normal people don't track prices like crazy, most people will see that they can finally buy the thing they always wanted but couldn't afford without considering if it might be worth more next month.
If people were actually that smart with their money, then 80% of industries wouldn't exist, because their products is useless junk at the end of the day
That's great for purchases that aren't needed right now, and for people who have their basic needs met and extra money to spend or save as they prefer. That's who this "low inflation is bad" wisdom favors.
How about people who are living paycheck-to-paycheck and spending everything as soon as it comes in? People who actually benefit from low inflation because they can buy almost as much today as they did two weeks ago?
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u/Poland-lithuania1 7h ago
It isn't things cost less, it's money can buy more. Isn't it better to save that money for the future, when it's probably gonna be able to buy more?