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?
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
It all makes sense to me , except why are people so sure its going to be cheaper next week. How would people instantly know it isn't a temporary situation. Im actually trying to learn something, not argue.
Under the thesis of modern liberal capitalism, inflation is supposed to be targeted at 2% to encourage investment while preventing harm to the population.
Deflation is the worst possible case scenario. Cash becoming worth more is good for people who have cash, but the vast majority do not. The increase in value of cash also means an increase to all debts. Based on the structure of most nation’s spending, it would be mean the collapse of most governments.
Inflation encourages people to borrow money, as skills/education/hiring people/buying stock are things that increase in value. With inflation, debt becomes cheaper over time as well.
If just holding money becomes more profitable, there is no spending, which means no employment or investment.
Those that are wealthy also move money from companies/employing people to buy up hard resources instead.
The true evil is the economics stall, when people does not spend their money, and does not fuel the economy.
Maybe, the problem is ...money? That's a resource with no intrinsic value.
So, let's use MWh as a currency? Surely, power also can get cheaper and cheaper.
This will trigger immediate response: conversion these MWh into cheaper fresh water, more aliminium and rare earths.
No stall, a production increase instead!
Assume even the true deflation in energy production, leading to "free" MWhs.
Power plants are shutting down their production, causing shortage in power supply, rebalancing the MWh prices.
In the details, Devil is not in the Deflation, the Stall in.
Why would an average person assume it would go on indefinitely? Aren't there more people who are priced out of buying commodities than people who can afford them currently. Why wouldnt the next step down in wealth pick up the slack of the people who are currently able to afford them (the savers during deflation). I know im wrong, I just want somebody to explain why I'm wrong.
A bit of deflation hits and people say “look at that, shit is getting cheaper, I should wait to buy that thing I don’t really need.”
Those delays (waiting for it to be cheaper) means the producers of those things have a glut of inventory.
That means they curtail production.
That means people don’t work.
Now less people have money to spend, so the costs of things need to be lower or nobody could afford it.
Of course if you have a job/income/wealth you see that and say - why buy today if it’ll be cheaper tomorrow?
If you save money during deflation, your money is worth more tomorrow and things are cheaper. You don’t even need to earn interest or any return. You can put a stack of greenbacks under your mattress and you have more wealth tomorrow.
If you save money during inflation, your money is worth less tomorrow and things are more expensive. You need to earn interest or get some return on your otherwise idle capital to not lose money. So you invest or buy shit.
"A bit of deflation hits and people say “look at that, shit is getting cheaper, I should wait to buy that thing I don’t really need.”" No, not necessarily. People have time preference, they're not necessarily going wait for an amount of time they need to in order for the price of a product to reach its maximum cheapness.
"Those delays (waiting for it to be cheaper) means the producers of those things have a glut of inventory." This assumes that everyone in the economy on mass, whilst in a state of deflation, is just biding there time for products to reach there maximum cheapness, which is an absurd assumption. Time preference prevents this.
Yes if everyone stopped buying things on mass then producers would stop producing because no ones is buying, but this scenario however is completely unrealistic and fantastical. There is no such thing as an economy in which no consumes anything ever.
"Of course if you have a job/income/wealth you see that and say - why buy today if it’ll be cheaper tomorrow?" Again with this faulty assumption. Real human beings do not infinitely delay consumption on the basis that they know a product will become continuously cheaper overtime.
"If you save money during deflation, your money is worth more tomorrow and things are cheaper. You don’t even need to earn interest or any return. You can put a stack of greenbacks under your mattress and you have more wealth tomorrow." Yes, this is correct and is why deflation is good as it incentivizes people to save and accumulate wealth, it rewards good behavior.
"If you save money during inflation, your money is worth less tomorrow and things are more expensive. You need to earn interest or get some return on your otherwise idle capital to not lose money. So you invest or buy shit." Also correct and is why inflation is bad, because it destroys your savings overtime and thus disincentivizes saving and wealth accumulation.
It isn’t no one consumes anything. It’s less people consume many things. You’re still going to buy shit you need. You aren’t going to buy shit you don’t (unless you’re a fool).
Debt also becomes more expensive. So if you have a fixed rate mortgage, the real cost of servicing the debt goes up, not down. At the same time, income/pay go down. That’s not good.
Inflation isn’t great for saving at an individual level, but excess saving doesn’t lead to a thriving economy in the broader sense either, much is why economists want some inflation.
Inflation keeps you from stashing a pile of greenbacks under your mattress.
It’s very similar to the arguments for land value tax; the current property tax system means that it can be economically beneficial to hoard land and not put it to use. That’s good for the landowner, but not so good for society at large.
But if people are saving money, the banks will have more cheap credit, and opening businesses, investing, or building becomes even cheaper, no? Therefore, people will have more jobs and build more.
I suppose it's the venture capitalist waiting to buy a company that stops a new team from getting a job to do the M&A work, which affects multiple families. You apply this across the economy and you get bad economic results.
Methinks placing this kind of power in the hands of rich fucks isn't the best idea.
in theory, in an equilibrium state, sure. But right now companies are making record profits while people are struggling to avoid basics. If prices dropped by 10% (that'd be massive, and yes, likely a sign of something worse, but just for argument's sake) then people would be able to afford more and companies would still be making close to record profits. they can lay people off to recoup those even higher profits, but it isn't a necessity like people are claiming in a deflationary situation. And it'd make things worse. companies start laying people off, less consumption, more deflation, lower prices, etc. it would be in the companies best interest to not do that. though quarterly profits over anything even remotely long term issue would still be at play.
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.
Yeah and the company that hired you is getting less money for their products and decide to cut jobs so they can rehire at a low price point, purchasing power means jack shit when they lay you off.
Yes, so why would you spend any money today when your money will be worth more tomorrow? You won’t. You won’t spend, you won’t invest, you’ll do nothing, because doing nothing is the easiest way to increase your purchasing power.
What happens to the economy if nobody spends any money? I’ll give you a hint: 1929
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
Actually; supply and demand is an economic reality. As it becomes less profitable to hire people at a certain wage, firms will lower those wages to retain profitability.
If you want to work on the assumption that firms are going to behave contrary to how they have in every other case (including periods of deflation) you can, but let’s be clear. Your assumption is also just that, and moreover- it’s a mountain, uncited and difficult to support. My assumption is, meanwhile, backed up by decades (if not centuries) of empirical evidence and a very simple assumption to support (Firms will act as they do, responding to supply and demand)
Going after assumptions is a bad argument for you dude. You have way more than I do.
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
They're saying a pay raise is not assumed, and that without a pay raise, in real terms they get a pay cut because inflation reduces the buying power of their salary.
They're then assuming that the same employer who refuses to give a pay raise in an inflationary environment, wouldn't claw back some of their salary, to claim that steady nominal pay would essentially give them a pay raise.
You will get a literal paycut when deflation happens. Because falling costs include costs of labor. Stuff will cost less, but you will also earn less, so you won't get any benefit out of it.
In that sense, deflation is only "benefitial" to those rich enough to live off their wealth
You also don't get much benefit with inflation because either your paycheck rises with inflation, or it stagnates. But deflation has other consequences that are much much worse.
You don't get a pay cut with inflation. You get a buying power cut with inflation, your pay stays the same, and you probably get a yearly pay increase, that come from increased profits, that are also up due to inflation.
With deflation, your company is probably seeing less revenue, because that's what deflation means - the price they're charging is going down. Less revenue. If your salary stays the same, your buying power increases, but your company can't afford to keep paying you what they were, because of less revenue (deflation, lower prices).
So, either they reduce your pay and your buying power doesn't increase, or they fire you and your buying power goes to zero.
4.4k
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?