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?
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.
Housing is unique because it’s simultaneously an investment, and a thing needed to live. The solution for Australia is to separate the investor side from the living needs side, so that people only have one house. But the rest of the economy still doesn’t want deflation
This is operating under the assumption that those investments actually drive anything at all.
I would argue that investment as we know it today has been so divested from its original meaning, we need to come up with a new word, or just call it economic gambling which feels more accurate.
Yeah, that makes sense if you don't think about it too hard. People will invest provided the expected return of investing is positive. If deflation means cash of 1.00 is worth 1.02 tomorrow. And investing means it is worth 1.04, the rational choice is to invest.
What the hell are you smoking. No one is going to face a 99% failure risk for 1% returns. High risk low reward investments don't get investors except those bad at math or addicted to gambling.
Imagine if a lotto scratch cost 5€ and you had a 1/1 million to make 6€. Do you really think you would get many takers?
Low risk low rewards? Sure all the time, bonds, steady stocks etc. High risk high rewards? Sure too, more daring investors, with a higher tolerance for risk will take these. Low risk High reward are unicorns that get swamped quickly or are scams, but to knowingly put money in high risk low reward is just stupid.
Bro, you don't know what expected return means. Please Google that and then come back. When expected return on lottery is greater than 1, hedge funds spend millions buying lottery tickets.
Please, please, please Google what "Expected Returns" mean
If expected returns are too close to 1, it stops being worth it. No company is going to spend a billion dollars to make back a billion dollars + 50 cents. You can't compare the investment against a vacuum, you have to factor in the opportunity cost. If your investment doesn't have a better return than basic government bonds, people aren't going to take it
Expected returns are also just that: an expectation. Inferred from statistical data, prior patterns, and can be wrong, so any respectable company takes into account that it's a figure that could swing either way. It's one thing for an investment to go from an expected ROI of 3x to 2x, but to go from 1.01x to 0.8x is ruinous.
Different companies, depending on risk aversion and accessible capital are going to have a different minimum acceptable RoI. But >1 does not guarantee takers like you implied.
If expected returns are too close to 1, it stops being worth it
Yeah, so I worked in Asset Management for some of the biggest global investment banks.
Have you heard of this thing called leverage? And in a deflation/low inflation environment interest rates are zero or negative which means you get paid to leverage (see Yen carry trade)
So your point is objectively false. As long as expected return is positive money will flow to it. And in a high savings environment (that deflation causes in theory). Leveraging is even easier.
If your investment doesn't have a better return than basic government bonds, people aren't going to take it
And why do you assume government bonds aren't an investment? Government uses that money to invest in infrastructure which further reduces operating costs for the entire economy by reducing energy, water and transportation costs. (See China for a modern example)
So government bonds are very much a form of investment
Inferred from statistical data, prior patterns, and can be wrong, so any respectable company takes into account that it's a figure that could swing either way
Yeah, now we are talking abiut Sharpe ratios and drawdown. But that's getting way to technical and is outside the expertise of most economists. This is more finance, but it's a solved problem. You can use options to reduce volatility (not recommended for lay people)
Expected return accounts for risk neutrally, but (for a lot of rational reasons) people are risk averse. As risk increases, expected return also must increase to be a “good investment”.
This is why, for example, stocks have a higher expected and historical return than bonds, which have a higher return than T-bills
This isn't just for investing in the stock market though. Who would buy a house if they knew that it would be losing value next year? Why would banks ever give out a mortgage if they lose the ability to sell the house and make back the loan amount? Over the length of the loan the house value goes down but the loan doesn't.
The other thing is that deflation causes more deflation. Sectors of the economy sensitive to deflation stagnate, and then the workers in that area of the economy lose their jobs and stop spending, and that affects the rest of the economy, and then those have compounding losses. Money and investments would fly to other countries where there isn't deflation instead of staying here having lesser returns, which would accelerate deflation again. It would cause a full economic collapse.
This is exactly what happened during the great depression.
Oh no housing becoming more affordable every year just like every consumer good under the sun, what a disaster!
"Housing needs to appreciate so people spend a higher percentage of their salary on shelter every year, otherwise that's bad for some reason - John Economics
Nothing will become more affordable. Your salary will go down along with prices. If you can't get salary increases to match inflation, you won't be able to stop your salary being cut because of deflation.
You're absolutely correct. That's why nobody buys cars... do you guys ever try to apply your theories on a macro level. The contradictions are everywhere and are simple to identify.
Deflationary spiral is purely theoretical and has never been observed. What we have seen is that recessions cause deflation, and as recessions increase deflationary effects increase.
That observation is the same as saying supplementary spiral. People get sick. Take vitamin supplements. As illness spreads more through population more people take supplements. And therefore concluding that the supplements are making people sick
You'll buy a car if you have to, because the old one broke or whatever. But you won't buy a car now if you know it'll be several thousand cheaper next year.
So yeah, essentials are gonna keep selling like they always have, but most non-essential purchases are going to grind to a halt. Not all of them, mind you, but majority, which is enough to topple businesses and cause massive layoffs across basically all sectors of economy.
Not all of them, mind you, but majority, which is enough to topple businesses and cause massive layoffs across basically all sectors of economy.
Heavily assumption based. We don't knoe why prices are falling. You are assuming a reception. Assuming productivity simply increased so that the cost to make a car dropped by 20%
We can have people buying more cars, cars selling for less, overall expenditure on cars being down and yet corporate profits still increasing due to reduction in expenditure.
China has grown in near deflationary environments. Japans economy has remained stable in deflationary environments while QoL improved.
Median QoL in the US has gone down despite slight inflationary environment. When we observe the biggest economies in the world, the observable facts do not support the deflation = recession hypothesis
Car loans and mortgages carry vastly different risk profiles and repayment plans to account for the fact that brand new cars are a depreciating asset and houses aren't to the same extent, not to mention the 5-10x difference in principle amount.
And to be clear, it's brand new cars that are considered depreciating assets. Used cars tend to hold value much better.
A mortgage company won't approve a loan on an asset where they don't expect that the asset can cover the principle, because 15-30 years is a long time to assume that a person will stay committed to a single home. PMI exists for this exact reason, in case a person's equity isn't high enough to cover for a gap between the sale of the asset and the remaining principle.
Most car insurance also includes gap coverage for the same reason. Car loans don't typically have to factor resale value because they rarely exceed 8 years or so. Cars get totaled more often than they get sold before the loan is paid off.
In a deflationary environment, unemployment drives market changes. An unemployed person can't afford their mortgage, so they sell, but everybody needs to sell at the same time, so prices fall, which causes mortgage holders to panic because their assets are valued for less, which causes mortgage terms to become much more conservative (no more 30 year loans), which further causes house prices to fall (because less people can afford the new mortgage terms) until a new equilibrium is reached, or mortgage companies are forced to declare bankruptcy (aka market failure).
Deflationary spiral hasn't happened because most nations have a Federal Reserve equivalent that bails out an industry before total collapse. This is what happened in '08.
Didn't bother reading tbe whole thing. I've lost interest in this debate. We're going in circles. Homes are deprecating according to tax law. Only land appreciates. Therefore mortgages on apartments should be near impossible as land value in high density housing is a fraction of the overall spend.
Your theory runs counter to observable facts. Read the other comments. I'm debunking the same claims over and over again. Nothing new is being stated.
Observe the economies of US, China, Japan, Germany from 1990 to 2025. Look at these economies during periods of deflation. Evidence runs counter to theory.
I wonder why my property tax assessment keep going up then... it's almost like home prices don't depreciate every year, even if you can write off asset depreciation as a tax incentive (because maintenance costs usually can't be deferred and the write off is the assumed amortized rate).
Real estate shouldn't exist by your logic, but it clearly does.
If you're not going to read the whole comment, then don't respond. You just look foolish.
Read your whole comment. It's as dumb as I thought. The entire crux of your argument is deflation causes GDP decline. That is an unobserved phenomena. Yes, if you make up random facts, you can justify whatever.
Your commentary on real estate implies that there is no real estate in Japan. And yet people are not all homeless there...
Your points run counter to observable facts. There is no point in this discussion. I'm arguing what we can observe. You are making up observations to support your theory. Your argument is essentially "falling solar panel prices will kill the renewable energy market."
People see cars as assets that they purchase for the purpose of transporting themselves to their destinations, not as financial instruments that they invest in to get future return like they often do with housing.
But keep going with your smug dipshittery, my guy. Why simply look up what economists think when you can just assume they’ve never asked even rudimentary questions about the most basic theories?
You are repeating the economists claim about deflation without acknowledging how they came to that conclusion and the limitations they admit in that.
For the purpose of maximising GDP growth, deflation is non-ideal. For the purpose of maximising median living standards, there is a lot of evidence that deflation is good provided it is not caused by a recession
Don't bother arguing with these people. They are wrong about everything. Japan lived with deflation for years, as did the Eurozone sporadically. They didn't predict the GFC, they said that QE straight after would be highly inflationary, they said that there would only be "transient" inflation after COVID. Did you know that their models treat banks as ordinary companies, and that they only just concluded in the last ten years or so that banks create money? Did you know that they don't have a definition of money? It's just a cavalcade of nonsense on stilts that is little better than astrology.
But deflation or inflation don’t really influence people’s desire for goods, just whether or not they’re in a position to be able to afford those goods.
yes, right now holding assets (stocks included) is better then holding cash. Debt is cheap. And there is zero incentive to save money or be frugel.
The wealth divide everyone is upset about exists between those with assets and those without. Everyone is leveraged up to their eyeballs and have no money. Prices of everything is not inline with actual society.
We needed deflation a decade+ ago it would have been short lived preventing these issues. I dont even know if we can survive it now, we arnt going to survive the current plan either, so go for it!
why on earth would you hold money instead of buy stocks? or a phone? or anything not a dollar? the dollar will be worth less tomorrow and the day after.
No, inflationary environments don’t make investments a smart choice, they make them the only choice, because if you hold cash you lose your purchasing power over time. That’s a bug not a feature, but it’s been prettied up to sound like one for decades.
As the guy above you said, consumption is unwise under deflation because if you hold the cash you gain more value, but it’s ALSO unwise under inflation because while holding the cash erodes your purchasing power, you’d be better off putting that cash to work in an investment rather than holding it.
Deflation = hold cash and gain value, hold assets and lose value
Inflation = hold assets and gain value, hold cash and lose value
It’s two sides of the same coin. An economy which minimizes both sides is the ideal situation because both your cash and assets retain value and don’t incentivize or disincentivize one over the other.
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.
How do you pay for anything if you don't have a job bud?
That's a cute way to call yourself proletariat. Wealthy people pay for things using the returns of their investments. If that were not possible, retirement as a concept would not exist.
Also deflation doesn't mean that. As long as the expected return of investment is > 1, the rational move is to still invest in a deflationary environment because the goal is to MAXIMISE returns. Otherwise everyone would just invest in bonds and call it a day under inflationary conditions
Nominal returns are highly dependent on inflation.
If inflation is 100% per year, I can do nearly anything to get a nominal return greater than 0%. 0% is the nominal return I am looking to beat, as that is what I get sitting on cash.
If inflation is -50% per year, I can do almost nothing to get a nominal return greater than 0%. So I don't do anything.
If I am paying an employee $50k a year, at the end of the year the real value of that wage is $100k. I don't think they're worth that. So I fire them, or reduce their pay.
A deflationary economy does not leave you alone. Prices don't drop while your income and employment remain untouched.
The biggest recent examples of deflation are the Great Recession in the US and the lost decades for Japan. It is not good.
Thats a counter example to your points. QoL improved for Japenese people during the lost decade due to inflation. Wages remained stagnant while prices fell, goods become cheaper.
Which shows that all else being equal, deflation has positive effects. Deflation can exist outside of a recession. Recessions are often proceeded by high levels of inflation.
90% of arguments against deflation are arguments against recessions with it assimed that deflation and recessions are the same.
What has been observed: recessions cause deflation
What has never been observed: deflation causes recessions
Perhaps the reason deflation follow recessions is because deflations are positive and so nations allow it when they are desperate to protect people during massive negative events such as recessions.
Perhaps the deflation is like supplements. People tend to consume more when they are sick. Doesn't mean they cause people to become sick
The economic theory you love to point to also claims that a low 2% unemployment is actually dangerously low.
Nonetheless we see rising unemployment in developed economies globally. What is your evidence that what we saw in Japan was specifically a result of deflation?
We also see a MASSIVE Labour force participation rate in Japan over that same period as more women entered the labour force. Job growth was strong. Labour participation simply outstripped it
I'm sorry, are you claiming that you're part of the bourgeoisie here? You're part of the proletariat if you work for a living and can't live off of investments, like the vast majority of Americans.
Trying to fit retirees into this framework is frankly insane, because they typically cannot work for a living because of their age. Their investments, if they have them (many don't), are typically drawn down using any gains to increase their savings window. Don't confuse the white collar retirement plan for the average American's savings plan. They overlap a little, but most Americans are living paycheck to paycheck and can't save even if they wanted to.
You're part of the proletariat if you work for a living and can't live off of investments, like the vast majority of Americans
We are saying the same thing
but most Americans are living paycheck to paycheck and can't save even if they wanted to.
Yeah, most Americans are proletariat. The people living paycheck to paycheck do not care if prices are going to be down next year. They need to purchase the consumer staples every single month. Elasticity of demand goes both ways
No, in a recessionary period there are massive layoffs. Renewable energy market is larger than ever despite deflationary effects on solar panels and batteries.
Nope, never observed. We've only seen the inverse. Recessions causing deflation. We have many example of deflation in non recessionary environments. EG the EU
Lol so if we end up in a recession and then deflation happens, are you gonna switch to crying about how it's not bad for a different reason and the proletariat magically still have their paychecks?
The Bottom Line
Deflation is the sustained decline in the price level of goods and services associated with a contraction in the supply of money and credit. The money supply is influenced by central banks. When the supply of money falls without a corresponding decrease in economic output, the prices of all goods tend to fall. Deflation can cause high unemployment, recession, or depression.
Straight from Investopedia. Show your sources if you're so confident.
You’re being dense. In a deflationary environment consumers have no incentive to spend money outside of their immediate needs because their money is worth more the longer they wait. Why would you pay for a car, better house, vacation, tv, or anything that is not an immediate need today if you knew that it would be worth less tomorrow. In an economy where no one is incentivized to spend money, there wont be a demand for products or workers and thus there will be no jobs. In such an environment only those with wealth will be able to hold out, everyone else will slowly suffer.
Lets take it to the extreme the market become hyper optimised on consumer necessities.
Food is dirt cheap, rent is dirty cheap, transport is dirty cheap, health care ia dirt cheap.
Because these see the undustries were competition will concentrated. This and limited time offer events that will cater to the wealthy cost of living goes down. Extreme wealthy goes down, citizens are happier than before (except the top 0.01% but they paying pennies in taxes thanks to loop holes so we're not interested
The assumption that you don't have a job is the issue. We have seen deflation that is not accompanied with a recession multiple times. Japan is probably the best example.
We have evidence that recessions are followed by deflation. We don't have evidence of the inverse. It is intellectually lazy to conclude that deflations causes recessions. That same logic could be used to argue that medical tests increases rate of infection, or that homelessness results in high property prices
Is Japan an example of an economy that’s not in a consistent recession? Because I’d have to disagree with that. Their economy has been quite bad with significantly worse GDP growth than most other developed countries.
What evidence is there that recessions are always followed by deflation? There hasn’t been deflation in the USA since 1960.
There hasn’t been deflation in the USA since 1960.
That's just false. We saw deflation in 2007/2008 before the money printers were turned out. And some quarters since dipped into deflation as well.
Also low GDP growth ≠ negative GDP growth
And more importantly the GPD growth the US has seen following it's money printing to avoid recession has resulted in falling median living standard, hence the K shaped recovery. No evidence that this has been better for the average American than deflation.
Japan on the other hand despite low GDP growth has seen improved QoL because deflation means their stagnant wages affords them more amenities, ESPECIALLY amongst consumer staples.
US consumer staples go up in price, consumer descritionary goes down. That's a far worse trade off, especially when compared to median wages
why did you say that “we have effectively been in a deflationary environment as … investment returns consistently beat inflation”? do you understand why thats an oxymoron? if you have to invest your money in order to beat inflation, then by definition you are not in deflation. deflation is when you can realize gains without investing your money.
(lol this sub shows a warning when you type “oxymoron”)
Effectively been in a deflationary environment does not mean there has been 0 period of inflation. My bad for trying to introduce nuance. I forget how simplistic you guys are. No wonder you cling to your simply economic models and bury your heads rather than acknowledge any economy that did go through long periods of inflation without experiencing the same outcomes your models predict
Actually the above is exactly look what happens The great depression was cause by deflation and many many went hungry
Yeah, the problem there was the depression, not the deflation. Look at Japan. They had how many years of deflation without a depression or falling living standards
Look at Japan. They had how many years of deflation without a depression or falling living standards
Ah, yes. The so called "Lost Decades" during which Japan went from being the undisputed #2 economy of the world, with a GDP only 2x smaller than that of the US, to now being the #4 economy with a GDP 8x smaller. With growing wealth inequality, despite a barely growing economy.
I'm under the belief that the western capitalist world could do good with a brief deflationary period if one were actually achievable (without a crash), but pointing to Japan as an example of "deflation" done right is asinine.
Investing in you put your money to move something. Maybe it end up hiring someone.
Even your money in bank accounts are invested by the bank. You basically borrow them your money.
In Deflation your money literally doing nothing. And when everyone stop using money. The demand for money going up. Which raise its value. Which introduce a slow spiral downward.
food will be a business. but all the other stuff quickly falls. and companies will no longer innovate or take any risks because investing 10k now on repairs when that 10k is worth WAY more next year would be financial suicide.
Businesses won't invest money if the output price falls next year. And existing debts get harder to finance the worse deflation gets, which creates more deflation as debt financing costs grow
Yup, that's why falling solar panel prices has reduced the size of the renewable energy market. Stop with your rhetorics and think for 30 seconds if there is an observable market or economy we can point to that debunks your thesis. Because I'm quoting real world events. You are quoting your theory. I may as well debate with a creationist
Okay, so now you are saying that what is important is WHY are prices falling. Almost like my ENTIRE argument and point in decoupling recession caused deflation from other forms of deflation. Thank you for agreeing with me. Deflation isn't the issue. Recessions are the issue. Good night
You're mixing up a change in the partial equilibrium with the general and forgetting some basic economics. Falls in the price of specific goods, like solar panels, don't cause deflation, which is a fall in general level of prices.
To see this, remember your econ 201. Your budget constraint doesn't change with a fall in prices, you just consume more of any good -- you move to a different point on your utility. Overall, gains in productivity don't lower inflation, they raise consumption and velocity (in fact, they raise the money stock)
Deflation is the opposite. This reduces your budget constraint and reduces the money stock. The money multiplier goes in reverse in deflation, which is a cause of and reflection of a fall in demand and investment.
Cool, more theory. Explain this then. Deflation in EU, China and Japan at the same time we see economic growth.
Overall, gains in productivity don't lower inflation, they raise consumption
Productivity has outpaced wages for like 6 decades now. They only raise consumption amongst the wealthiest. Most consumption growth in lower and middle income households has been fuelled by easier access to debt and financing options
This reduces your budget constraint and reduces the money stock
You are treating deflation and recessions as the same thing. Productivity can 100% lead to deflation (e.g. EU, Japan, China). It's a policy choice as to whether to allow that or not. The US specifically prefers to keep inflation. EU as well, but they're not as good as getting their ultra wealthy to consume more.
I understand the theory. Cheaper prices in X, leads to more consumption in Y. That works for goods people were going to buy anyways, i.e. inelastic demand goods. Solar panels do not fall in that category. If solar panels are expensive, we simply just don't purchase them.
But you reveal something interesting. Which products are increasing/decreasing in price matters.
Look at the basket of goods that make up CPI. Are those goods elastic or inelastic. Housing costs is up. Energy costs are up. Food costs are up. Electronic prices are down. Transport cost are up. Healthcare is up. Childcare is up. Entertainment is down.
Everything we need is up. Everything that is optional is down. AI tokens are subsidised while electricity costs go up. This is the nature of inflation in the US
Deflation in EU, China and Japan at the same time we see economic growth.
China inflation rate over the last 20 years has been ~2%. EU and Japan similar.
Japan is actually the textbook example of what to do when facing persistent deflationary pressures. The BoJ had interest rates at 0% by 1999, started QE in 01, had negative rates in 2016 along with yield curve control for like 7 years. IE -- they dramatically expanded the monetary base.
Productivity has outpaced wages for like 6 decades now. They only raise consumption amongst the wealthiest. Most consumption growth in lower and middle income households has been fuelled by easier access to debt and financing options
That is not true. Median personal and household real wage growth has been positive this entire time, with some of the strongest most recent gains in the lowest wage brackets. Part of the story of the "shrinking" middle class has been people moving up into upper middle class.
Those EPI grapths that compare productivity to wages are just being lazy about their selection of incomes and deflators. its been beat to death
Part of how you can see this is in home prices --> the dramatic rise in home prices is driven by wage gains that are captured land rents. Its literally a right shift in demand caused by additional buying power, and its one reason why inelastic housing supply is so damaging economically.
Productivity can 100% lead to deflation
No, because to get additional productivity you need expansion of money supply to finance investment. Investment is literally the source of the additional $ that creates inflation.
Lets imagine you wanted to create deflation now. Would you raise or lower interest rates?
Cheaper prices in X, leads to more consumption in Y. That works for goods people were going to buy anyways, i.e. inelastic demand goods. Solar panels do not fall in that category. If solar panels are expensive, we simply just don't purchase them.
Inelastic demand means you buy the same quantity at any price. If good X is inelastically demanded, and its price falls, then you necessarily consume more good Y - like solar panels. Unless you take your savings and just bury them in the ground never to be seen again. Nobody does that -- even left in the bank, they fuel the money multiplier.
This is why falls in prices don't result in low inflation -- > you spend your budget. You don't maintain a consistent standard of living fixed to a cetain year, such as 1961, and then just not spend the excess gains. No, you just spend that difference and up your standard of living. To give an example of this -- when my grandparents died, they had something like 10k in the bank to leave to me and my brother: or, in other words, out of the entire lifetime of earnings, they spent all of it except 10k. That is over 99.9%. You and I will be the same, as are the vast vast majority of people.
--- yes, absolutely we need to liberalize more housing development broadly. Immigration can help with that production. Immigration can help with the cost of child care. Immigration is also important to agriculture ( -- the bracero immigration experiment directly tested whether immigration restrictions raised wages here...they didn't), etc.
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.
These are inelastic necessities.
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.
Not exactly true, also you're only thinking on the individual level.
Even in an inflationary environment the rational thing is not to consume, but to invest in investments where the expected return beets inflation.
And in a deflationary environment, this flips. In deflation the value of held cash goes up, and usually investments fall. So companies invest even less, and that leads to a negative feedback loop.
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
Tell me you don't understand the basic concept of inflation, without telling me you don't understand the concept of inflation. Inflation is an effect on the value of MONEY. The wealthy invest their money specifically because of inflation, because their investments will beat inflation. Because a dollar today is worth more than a dollar tomorrow. So they don't hold the dollar they invest it. They no longer have a dollar, they have a share. In a deflationary cycle that share becomes worth less tomorrow and the dollar becomes worth more, so they stop investing.
This discussion is boring. I give facts. You give theory. I give facts. You give theory. Last fact.
Renewable energy market is bigger today despite deflationary effects on solar panels and batteries. Give me facts. I will not entertain more theory.
In deflation the value of held cash goes up, and usually investments fall.
You are conflating deflation with a recession. Invesmtents only fall under recession. Not deflation. Otherwise the EU economy would have been in a recession since 2008, and Japan would have been in a recession for ~4 decades now.
Governments hate deflation because it forces fiscal discipline. But there is a reason why every healthy economic recovery from a recession (measured by median income and purchasing power relative to inelastic necessities) is proceeded by deflation.
And every K shape economic recovery is proceeded by massive money printing trying to force end a recession through money printing that benefits the wealthiest and harms the majority
You think people won't put off buying a new car/TV/refrigerator/etc for a year if they think it will be cheaper then? That kind of broad-based pull back in spending stalls economies and leads to layoffs.
No, deflation isn't always bad. But it often portends a larger economic problem and can be a cause or symptom that deepens a recession.
So why doesn't everyone simply invest every extra dollar since returns on a high yields savings account surpasses inflation. And according to government data electronics depreciate in price each year. So they should just be delaying that TV purchase indefinitely. And yet they don't. Theory diverge heavily from what we observe in actuality. It's why economists tend to make very poor traders
You don't think people put off buying homes when prices are falling? Or cars? Not to mention you're acting like every single person will operate the same way. That's absurd. But it literally only takes percentages of people putting off purchases for revenues to fall below expectations, causing reductions in staffing, and so on. You're treating people like perfectly rational robots.
No, quite the opposite. That's why we reduce interest rates. By reducing the monthly cost to purchase a home more people buy homes. The only reason people avoid buying homes in environments that proces are falling is that proces are falling due to a recession and so people simply cannot afford a home.
All else being equal, a decrease in housing prices increases volumes of sales. Right now lrices are extremely high and yet home sales are at an all time low. After the 2008 crash, home sales volumes quickly rebounded
Is not a "people will eat or not" or "the wealthy save on houses or stocks anyways", the problem is what happens to logistics.
Shops buy from distributors/suppliers, under high inflation the supplierd have low insentive to sell when the same product will sell for more in a week, and under deflation the shops have low incentive to buy since they'll be able to buy more if they wait up. At the same time deflation can swing back to hyperinflation by the shops having cash but no products, driving prices up again, then if offer doesn't flow back in fast enough, either by the suppliers not having enough or not wanting to sell (see above), you can end up with a positive feedback system that keeps driving prices up. The timescale of this may also change the aftermath, since the low sells period on deflation, if long enough, may cause production capacity to be lowered.
Thinking economics on a micro scale of "Steve next door will buy bread and pay rent anyways" or "Elon Musk won't care because already doesn't use actual cash" hides the actual players that keep a country running. Is not that people will go hungry as a choice, they won't have who to buy from.
Basically it means doing nothing is a good strategy.
If deflation is around ~2% then surely someone will find an investment opportunity that beats this. Its also not like everyone suddenly stops consuming because their money becomes more worth in the future. Humans want stuff now
The thing is, like inflation, it's a cycle that feeds into itself. Small deflation doesn't cut off all investment, but it does stifle investment at the margins, which can lead to more deflation. If they economy digs itself too deep this can create gigantic problems, and eventually there is basically zero investment because nothing beats deflation. The same happens with inflation (but backwards, and with different bad consequences), but with a central bank we can increase interest rates a slam the brakes on inflation. Rates can always go up.
Deflation is a harder problem, because interest rates can really only go to zero. If you hit zero and it's still happening it can get out of hand. A few places have tried negative interest rates, but public reaction is SUPER NEGATIVE. Imagine the bank telling you that the interest on the high yield savings account was negative. Meaning, you lost money this month for having it in the bank, all while being part of the 10% of the workforce unemployed competing for very few jobs.
Meaning, you lost money this month for having it in the bank,
This is happening right now already. I get basicially nothing in my saving account while my moneys worth shrinks 3% every year. This doesnt even include the very real possibility that inflation could be higher then is getting told (which is supported if you look at how the calculate it).
I hear you, but it's not the same as everyone seeing -$56.35,or whatever, on their bank statement. That could cause a bank run and throw the entire basis of our monetary system out the window.
I'm not saying this inflation isn't a real problem for people, it's just not in the same ballpark and real, out of control, deflation.
Okay I have to ask a couple questions comprehension wise.
First: So everyone would loose each month money from their account because of what exactly? The bank service fee? I already pay that
Second: If people would loose money having it inside a savings account then that should naturally bring people to use and invest their money now which is a counterforce to deflation. So a natural break to a deflation spiral, right?
And some more, but those are the most pressing ones.
No, the interest they pay on your balance, that would be negative.
Yes, this is exactly why they do it. The problem is it could also cause people to remove all their money from the banks and tank the monetary system. They can be unemployed with no hope of a job. (Not like now, where it's just pretty hard to get a job. Like, NO JOBS FOR ANYONE) Those hopeless people start acting lawlessly in large groups and the fabric of society breaks down.
Why would a private bank have negative interest rates? Its not like we want the goverment to mandate negative interest rates. No, deflation already happens naturally if you dont increase the supply of money in comparison to the increase of production each year.
For example we have 5 money and 10 Bananas on year X. And then 5 money and 20 Bananas on year Y. Are we on the same term here or is there a misunderstanding?
Real world doesn't work with bananas and money, real world works with bananas, money, and debt.
Bank has 5 money. Farmer has 10 banana. I have no money, but I can secure a line of credit from the bank.
I ask bank for 5 money for 10 banana. Bank gives me a loan for 5 money with 10 banana collateral, but I have to pay interest on the loan because of the time value of money. I don't get the money for free, I have to pay for it. Let's assume it's 20%, so it would be exactly 1 money.
I get 10 banana. Farmer gets 5 money. Bank gets nothing for now, but eventually they will have 6 money. I turn bananas into smoothies, which are more valuable that raw banana, and sell them to pay off my loan and keep a profit. Everybody wins.
Next year, deflation happens. 5 money can buy 20 banana now. Bank is fucked if I default on my loan now. If I defaulted, they would take back the collateral, but now 10 bananas doesn't get you 5 money. It only gets 2.5 money.
If I pay back my loan, Bank gets their money back, but they're sure as hell not giving out loans backed by banana collateral now, because it's too volatile. Bank is smart, and can recognize that collateral needs to maintain its value or appreciate over time in order to be safe. Bank does this for every asset class, which is why real banks have strict limitations on what can all be considered collateral.
All of this happens 100 years ago. Bank understand deflation bad, because loans are backed by assets that devalue relative to the dollar during deflationary periods. Bank always freaks out whenever it even smells like deflation, because they own so much debt that they will get fucked if it ever does actually happen. When banks get spooked, they increase interest rates and stop giving out as many loans. Less loans means less money eventually coming back to the back in interest payments. Savings account interest is paid out of money coming back to the bank from loan interest payments. Interest accrual plummets, and could possibly go negative to cover operational costs of the bank. People pull out of bank. Bank not doing so well.
Now, I can't secure a line of credit to buy banana in the first place, because bank can't afford to hold depreciating bananas. Farmer doesn't get paid for banana harvest, and gets fucked. Bank doesn't get to eventually get back 6 money, but at least they don't lose money by holding banana. I don't make money, because I relied on buying bananas on credit to turn then into something profitable for me, which I would have used to pay back loan plus interest. I get fucked.
This looks more like a problem of banks giving out bad loans, which definitely happens. And banks that are greedy and give out to many loans without actual collateral behind them should go bancrupt, so the "good" and sustainable banks are the ones left which is a win in my book.
If the bank in your scenario diversivies their creditors then one guy going default wont make the bank go bancrupt. If instead of you buying the 10 bananas it was 10 people buying 1 banana each then one person going default is just part of business.
The other thing is if for some reason the whole Banana industry goes bancrupt and this industry was a critical pillar of the country (lets say exports), then that means the Bank all of a sudden has no more supply of income from interest but a shit ton of bananas.
The Banana industry had to be not profitable to be able to default, right? So that means that maybe the industry got to big and produced way more bananas then the market needed. Now that the industry is bancrupt, banana production stops. This makes the price of bananas go up over time again until we reach profitability.
So even in this worst case scenario that wouldnt mean that the bank ends up with half of what it started with. The market would just sort out an unstustainable industry and the banks would learn to maybe not give out bad loans. The other outcome would be that the public through artificial money creation would pay to keep Banana industry producing more Bananas then anyone needs. And even in this scenario at some point the whol thing would crumble down like a house of cards, but with even worse effects for everyone.
Hobbits disagree with you on that. Also banks pay interest on savings accounts. Arguably the richest already are on the do nothing train. Deflation would just allow for everyone to benefit from that
i dont thinkg you understand too much about this stuff
fantasy stories are a terrible source of economic policy
the amount of interest bank pay on savings is controlled by the feds to moderate inflation/deflation the reason banks are paying interest on savings now is becuase we were trying to curb high inflation. when we come to deflation banks will be told to stop paying interest on savings (or even charge to keep savings if it gets absolutely crazy) to get people to stop hoarding money
the rich behave in extremely immoral ways but this we are talking about economic activity. the problem is not that they are not performing economic activity, the problem is that they are doing it selfishly rather than for societies benefit. but they are making and selling things and hiring people.
deflation would mean business activity would slow down due to low investment. that means you'll have fewer places to buy the things you need. thats bad
No. Deflation means thing that costs 20 today will cost 19 tomorrow. Why buy something today, when you can buy it for 1 less tomorrow? Why buy tomorrow when you can buy the day after tomorrow. And so on and so forth. Under deflation, the entire consumer side of the market collapses, no one buys anything anymore. Producers cannot produce more because it will cause loss, and they aren't gaining capital. No buying/selling, liquidity drops, economy's dead. Recession.
sure. The seller sells you spaghtti for a dollar of profit today, breaks even tomorrow, and loses a dollar the next day. A week later, the seller closes shops because it is impossible to stay afloat. Recession.
Most things that are bought aren't bought because they will be worth more tomorrow. They are bought because they are wanted or needed. They will still be wanted and needed. I will gladly buy my board game knowing I could have bought it cheaper tomorrow. Because I want to play my board game. I don't want to wait an infinite amount of time not playing it just so it can be cheaper.
Also deflation is not an infinite exponential. It can never be. It would be impossible to buy an infinite number of things with 1 dollar. What you buy will always have value and cost. That can't be erased. Deflation just removes imagined cost. It forces it down to where it is only what it actually cost to make and what value it actually has
Truly more things will actually be bought because there will be more capabilities for people to buy things. Because they will be able to buy more things with the same money. And if you know anything about people you will know that they love buying things
You are an irrational actor then. Rational actors will buy things cheap. Which means, they will not buy today which can be bought tomorrow cheaper. Producers are forced to drive their costs lower and lower, and turn in and cut losses as fast as they can. Then, production will stop because it is nigh guaranteed to incur loss. No one buys, no one sells. Any market wants its liquidity to be high. Deflation essentially freezes everything.
People aren't rational actors. The term rational actors is completely made up by people who don't know anything. People are inherently irrational actors. We have countless evidence for this. There is zero evidence that the average person is really going to care enough to wait. Especially because the actual rate of deflation would be too small to care about. You're treating the concept of .1% deflation as 500% deflation compounded daily. The majority of things that we buy will still be bought. At worst it gives people a second hesitation on things that they never would benefit buying in the first place
I truly enjoy the many opinion in this thread of “I will just act differently than every other person has acted in this exact scenario for all of human history” response lol. This is real “Those who do not remember the past are condemned to repeat it”material.
Yes, people will buy some things regardless of price, but people also wait to buy things until they're on sale. Deflation is a sale that gets better every day. You might want to play the board game today, but if you wait until tomorrow, you get rewarded with the same game at a cheaper price. How important is the board game that you wouldn't wait to pay less for it?
Then there's the lower limit. The lower limit isn't the cost of production. Firstly, producers aren't going to break even. Even if we include the costs that exist outside of the actual production, going home without more money in the pocket is a bad thing, even if that money is worth more tomorrow. Instead, they'll lower production and production costs (which includes labor). Secondly, the stores where you buy the goods can't pay rent without profitting from the goods, and they certainly can't pay rent from no income. If you don't sell necessities, your income will drop. Eventually, selling below cost is more valuable than not selling at or above cost. But if you're not making above cost, you're not buying inventory. As a seller, you would have to cut your expenses, including workers.
Now we've cut labor in production and at the store. Fewer people are employed because prices have dropped, so fewer people are buying anything that isn't necessary. Prices continue to go down because demand goes down. Demand continues to go down because people are losing their jobs.
And then there's necessities. They're not immune. When people can't afford to buy anything because they don't have an income, they're getting the cheapest necessities when they can and using them less. Now your farmers aren't making money. In a sane world, farmers would replant as much of their production as they can. We don't live in a sane world. If a farmer doesn't make enough money, they can't buy more seed. Food production will tank as well.
Basically, the best case scenario in deflation is that nobody or almost nobody is willing to wait for a bigger discount, which slows down deflation and leads to inflation. In the real world, people hold off longer and deflation speeds up. Low or even negative interest rates might stop it as more money ends up in consumer pockets to drive consumption, but a prolonged state of deflation isn't sustainable.
Well, for people it's because they need them now and they don't care, maybe with stuff like homes they can wait some time (but even then they are paying for renting in the meantime, so it is still not worth it to wait). And business needs stuff and services to operate, they can't just stop working and wait.
And business needs stuff and services to operate, they can't just stop working and wait.
Exactly. But they only need to operate if they're making money. If no one is buying, you don't continue to produce your product. You close shop. Then you lose your job. And no one is hiring, because every business is failing.
If you have money saved, yeah, you benefit. However if you live from wages, you are fucked. For one, the products and the work loses value compared to the money, thus the wages drop literally, you need to work more for the same amount of money. Today your work is 1000€ worth, tomorrow only 950€. Also since saving money is better, since tomorrow it will be more valuable, less investments and consumption is done, ergo money is missing for the companies to pay. In fact It is also more reasonable to deinvest during deflation, stocks, houses, machines, factories, whatever, loses value whereas the money itself gains value.
The banks pay interest on money in a savings accounts because that money is being lended to someone else, who then pays interest repaying the loan. The money is absolutely not sitting there “doing nothing.” This is the foundation of capitalism: I provide you with capital to deploy it creating value, and you reward me for providing that capital by paying me back more than I lent. It incentivizes deploying capital to create value.
A deflationary spiral destroys this engine, because now even if I do nothing, I win. Deployment of capital for some investment doesn’t just have to compete with other possibly ways of deploying the capital, it has to compete with doing nothing. And as less capital is deployed and the engine slows further down, the harder and harder it becomes to see a return on deployment of capital over the return of doing nothing.
Put differently: the only way deflation happens at economic scale is exactly because people have stoped spending. I only lower my prices for good because there is no demand at a higher price. If there was demand, I wouldn’t need to lower my prices to convince people to spend their money.
I understand capitalism. I do not like capitalism. Deflation destroys capitalism. I'm fine with this. You have not explained why or how it would destroy economy. It just destroys the ability for the rich to dictate and control the world through capital
Banks are doing something. During severe deflation banks won't pay interest generally and will start charging you fees to have a savings account cause their cost of providing a service is now more than what they can make doing something with your money.
No if everyone expected the value of their money to go up then they simply put off making purchases, and when people put off making purchases jobs get cut, stores and factories shut down, debt becomes MORE expensive, and it turns into a death spiral for an economy.
The rich and very rich don't park most of their wealth in bank accounts and keep it liquid, the bulk of it is invested.
Wait until you realise what banks do with your money... that will be a shocker, because invested money needs to be productive, otherwise how can it give you interest?
I never got that argument. Even as a business owner, although small. I currently buy a lot of stuff from Japan, then renovate, fix, etc. to sell. And because of weak yen, each month my money is worth more there.
My reaction is never "well then, let's wait with buying for a year so I can buy stuff 10% cheaper", I have to fuel my business now. It's "awesome, stuff got even cheaper, maybe it will get even cheaper next month, my business will get even higher profit margins".
The impact on consumer and small business spending is being overstated in this thread because like you say, consumers and small businesses actually need the things they buy, at least when it comes to day-to-day expenses.
It has more of an impact on big investments, like buying a house or starting a new business.
Doing nothing being better than doing something
means businesses start going... Out of business. Then you are unemployed, and the money you were saving because it will be worth more tomorrow, well, now you have to expend it all in food and rent, so goodbye savings.
Fast forward some months and everyone's is unemployed, without money, and most businesses closed, so there's no one to reactivate the economy and hire people. Congratulations, now we are in the great depression 2. The problem with deflation is that it becomes a loop, same thing with hiper inflation.
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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?