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?
Try and think of our global system as an engine that's purpose is to make fuel for itself. It needs to keep it's input above the output in order to keep powered on. As soon as the input drops below output the machine starts to slow down and can no longer sustain itself. The engine is not designed to slow down so it very quickly breaks down
Ok but after covid, prices skyrocketed compared to pre-covid levels and we got massive inflation. Wages didn't suddenly skyrocket at the same time, hiring rates didn't go through the roof, corporate profits did though. So why would prices suddenly returning to pre-covid levels require everyone to be fired and customers to disappear when the economy was working great before? Would it just be that companies would start mass layoffs to prevent a short term decline in quarter on quarter profits which would start a negative feedback loop?
Because of how corps react to lower prices. They would just lay everyone off. Deflation itself isn't the issue, it's how little protections actual working people have and how much incentive corps have to keep their stock price high. Being able to sell something for less means less profit for the corps which is a big problem for corp leadership. So the solution is to temporally increase profits by getting rid of staff.
That's because consumer spending is starting to go down and families are starting to cut back. So they have to either increase prices, which they're already doing and that's not working, so they have to cut costs, and the number one way for companies to do that is to cut employees.
Yes, the record profits are because they keep cutting the cost of labor by cutting off employees.
Sorry if my original comment didn't make sense. I'll try to explain it differently. Companies right now are raising prices. Every time a company raises prices, no matter the industry, people will stop buying it or buy less of it. But they need to keep making more profits, that's the American growth system.
So, they are continuously cutting more from the workforce, whether that is firing employees, laying them off, or replacing them with cheaper workers while letting go of all the better-paid ones. That way, the profits are steadily going up on a chart, but they are still laying off more and more people while raising prices.
Ahh ok so basically it all just comes down to corporate greed determining how much we should all suffer and be punished for even considering the idea that their stock price doesn't have to keep going up every 3 months and that they might be able to survive on 5% less profit this year compared to last year. Got it.
Keep in mind this is just the tip of the iceberg. Corporations actively lobby for these policies that ensure they get protections and bailouts while workers and citizens foot the bill and they largely get passed as a result of things like Citizen United, and that these lobbies also own and operate the media, which makes them the Kingmakers of your elected officials.
In history classes, we typically call this form of Oligopoly “Feudalism”, not Democracy.
The rich have gotten so rich they have essentially taken over the most important parts of government, and they’re using that power to funnel your tax money AND spending money directly to themselves.
Yup. Though in a very real sense it is less corporate greed and more individual greed. I don’t think any of these cunts need the unreasonable amount of wealth they have accumulated: https://www.forbes.com/billionaires/
I’d say it’s more the focus on short term results and the knee jerk reactions than boiling it down to just greed. Corporations are going to be “greedy” by default, but the current incentive structure is so focused on immediate term profitability they take actions that are with little thought to the long term health of the company or economy at large.
To me, a lot of it is upper management trying to save themselves. Their job is to make profit/stock price go up, and if that doesn’t happen, their job is on the line. So a quick way to make more money is to cut the most expendable expense which is labor, even if it’s a bad idea in the long run. These guys don’t think about the long run, by the way, it’s 5-year plans at best.
You're right, but the problem arises when even corporates are the similar engine that if their revenue drops, they cease and another takes over.
It's the playing in debt system. Everyone is borrowing money from the future to use now, and when the inflation drops, everything follows the same rate. It all started when FIAT currency was introduced, or maybe it was introduced because they already put the debt system in place and gold standard couldn't handle the amount of debt w/o breaking away from it. Who knows?
Deflation itself is the issue. Think about the psychology behind it. Why buy an appliance for $500 today when next month it may be $450? When the public anticipates that prices will keep going down it creates a death spiral where consumers withhold their spending and business make less sales and can't lower prices to attract more sales.
Sales are the lifeblood of employment. If you can't make payroll you've got to let people go which only further reduces overall spending in the broader economy. This is what the Great Depression was.
I get your concerns, but i just heard "This is a USA problem more than a Europe problem, from the workers perspective", and will sleep soundly again tonight.
Yes. Owners make money just by having money, so they aren’t incentivized to spend money. Since they don’t need to spend money to make money they decide it’s too risky spend (why put money back into my business to try to eek out a margin that I might not even realize if I can coast on whatever I have stockpiled until I’m literally out of supplies and can buy everything cheaper later on or buy the same amount of supplies that I need and have more money that’s passively making money later?). Now that I’m not producing as much I don’t need as much labor, I’m going to lay off employees. When this goes on long enough deflation accelerates and I’m even more incentivized to slow production and lay off employees. It’s a positive feedback cycle where the more deflation increases the faster it accelerates and so the more companies are incentivized to lay everyone off and coast.
Put simply. If your money might be worth more tomorrow, then maybe you will do your best to put off buying that thing you need. If money is going to be worth less tomorrow, better buy now even if not absolutely necessary.
Prices drop for only one reason: people can no longer afford to buy the products.
The underlying reason can vary (war, crop failures, rising oil prices, etc.).
When a specific group of people can no longer afford to buy products, the producer will lower prices in order to make sales.
The cost of the plant, raw materials and/or energy remains the same—or may even rise—so the only area where the producer has some control is staffing; consequently, non-essential roles are eliminated.
As a result, those people can no longer buy products either, and the cycle repeats.
That is how you end up in a negative deflationary spiral.
What socialists and unions call "corporate greed" is really just the essence of a business: making a profit.
If a company with 20,000 employees lays off 1,000 of them, it is terrible for those 1,000 people; but if they don't lay those 1,000 off and the company goes bankrupt, it is disastrous for all 20,000 employees—including the original 1,000.
Usually, socialists and unions get angry because the profit isn't distributed among the employees.
But when the company is running at a loss, or needs to fund investments, research, or fine payments, do the unions or socialists ask all the employees to chip in?
That profit needs to be set aside for those very things.
What frustrates me the most is that everyone actually knows this, yet they refuse to admit it.
The attempt at maintaining mass profits results in massive layoffs which leave many jobless, and with enough panic results in mass withdrawals from banks (the beginning of the end to any financial crash) and a decline in consumation.
Combined with the governments attempts to pay off companies sudden losses in order to help keep them running as before (using tax payers money).
Then futher decline in stock prices (if they haven't already by now), deflaction, before eventually the crash.
Because businesses only understand perpetual growth and the entire system is built on the lie that there is infinite growth potential.
Businesses will lay a ton of people off in the short term to try to keep appearances of growth. If the train ever slips backwards it’s going to nuke a ton of retirement accounts, home values, etc.
You can argue that the entire system is moronic but it won’t change the reaction of businesses to potential backslide to “their most profitable year ever.” All that matters is how the investors perceive the value of the company. If that perception is tainted the entire company can cease functioning.
corporate greed. That’s it. Prices go up, so wages should go up/ jobs increase, and people can purchase the same amount if wages increase together. but they don’t. People get laid off. Profits go up.
Prices go down? People can buy more things w the same money they made right?, but they don’t. People get laid off and wages go down. Profit stays the same. It’s a win/lose situation and guess which side most of us are on?
You asked what if prices returned to pre-covid levels. The primary problem is not about the current price level. It’s about the slowing of money moving throughout the economy. Money slows, when people are incentivized not to spend it.
The S&P 500’s profit margin increased from 11.0% in 2019 to 12.9% in 2025, ~17% rise.
In a deflationary environment, corporations would see this margin decrease, while also laying off employees. They layoff employees, because it’s not profitable to keep them employed due to decreased demand and/or decreased margins.
The longer explanation is that all major public businesses rely on the price of their stock going up constantly. They need to constantly make a profit each quarter to impress the people with the big money. They bend the law, lobby in congress, and use aggressive or cutthroat business tactics to dominate markets, exploit workers, and mislead customers. All to impress the shareholders.
I’m no economist or expert in the ways of governments, but the system itself is clearly fundamentally flawed. We can’t just make simple changes or put laws into place to fix things up. No democrat or republican politician would have the brains, the desire, or the ability to change the system that dramatically. The population seems to be comfortable with the way things are as well.
In my opinion, we need some horrible shit to happen before there’s a huge change in how people think. I don’t think society will entirely collapse, or humanity will entirely die out. But it won’t be pretty. I just know that we can’t keep going on without really changing things.
Because priced aren't tied to wages as you pointed out they are tied to proofs and proof must be maximize in order to keep stock holders happy. So you are invested in lets sale Walmart all of sudden Walmart proofs drop by 25 percent you see this as business failing so you sell you stock others start a massive stock sale off driving down the shares now every manager is wondering what to do in every store. They actually have more customers now that things are cheaper but they are operating at a monthly loss that increase in some customers can make up at all if the prices of 1000 items drop 25 cents it does seem much at all its just 2500 dollars to the billion they make a year that is nothing at all. You are right by what you for get is that is for only one item sold those 1000 items sale 1000 times a day globally easly so now they are losing 2.5 m dollars a day. The get maybe 1000 new customers but they cant make up for the loss because like you said they don't have extra money so they aren't spending more they just shifted where they spend it. No company can sustain losing 10's of millions of dollars a month the first thing they do is lay off because labor cost is one of the only factor a company can control so people are always the first to go when prices drop. Look what happens every time the price oil drops to certain level 10 of k of pipeline workers are laid off you can see this pattern repeated dozens of times over the last 20 years. What maybe good for an individual isn't always good for a nation.
the us economy is not profits driven, it's growth driven. If prices are forced to drop, you can't maintain growth. If you can't maintain growth, the stock price drops, if the stock price drops, corps panic and need to reduce cost. Easiest cost to reduce is human capital in most cases. If people lose their jobs, they can't buy things. If people can't buy things, prices have to drop until they will. Go back to the start and read it again and again and again until everyone is eating dirt.
If the prices were to just drop over night to some lower level, that wouldn't be a big problem.
The problem is that deflation (and inflation) tends to stay around. I'm not an economist so I only now that historically it has been hard to break out of.
You can think of a situation where everything gets constantly cheaper for a couple of years. People start to delay buying anything, because they know it'll be cheaper in the future. This leads to fewer purchases, which leads to fewer jobs, which leads fewer purchases and so fort.
This is REAL median wages, which means that it's inflation adjusted, as you can see during COVID it did skyrocket, but also it's continued to increase, so people's earnings are going up even when adjusted for inflation.
The economy wasn’t exactly working great before. This has been a brewing for some time now…say since Reagan/Nixon/end of the gold standard quick fix that never got readdressed when that bandaid was put on because it worked out great for a select amount of the population (corporations). I have no idea when the crash will come or exactly what it will look like…but it won’t be pretty
There absolutely was wage inflation in the wake of covid.
Companies don't fire sale first when hard times hit. They reduce costs first, so by the time prices are dropping many people have no income.
And yes, it becomes a negative feedback loop aggravated not just by job and income losses, but also by the fact that once people expect job losses even people who havent lost their job yet will try to spend less, and when prices are expected to drop, everyone tries to delay buying things in hope the price will drop before they have to buy.
People aren't currently keeping their jobs or customers due to inflation though, no one can afford to run their businesses when raw materials, fuel, and taxes are so high.
That is why there is a whole other problem area on the opposite side when inflation is too high. Typically, in modern economics a healthy inflation is around 2%.
Long term common deflation is bad because why invest today if tomorrow it is cheaper. But in many things like with energy cheaper is better for common economy.
I thought it is about expectations. If the consumer expects prices to fall, they put off their purchase, knowing they can get it cheaper if they wait, the real issue is consumptions come to a grinding halt.
At a macro scale, the biggest benefit of some inflation is that it also devalues debt while it devalues currency. In a deflationary spiral, the real value with debt compounds with deflation in addition to interest, so the velocity of money grinds to a halt. No investment means no jobs, bread lines, and a complete collapse of the consumer economy, resulting in a corresponding collapse of the government's tax base. This is literally the entire basis of Keynesian economics - that the government must engage in deficit spending to combat deflationary pressures during recessions, because there is basically no other option.
The prices only go down when people don't have enough money to buy things.
isn't that where we are now? I mean kids aren't moving out of their parents house. And everyone has either multiple roommates or multiple jobs. Tech is laying off, and no one is hiring.
There's a penalty for hanging on to money. Banks would essentially be fined for not loaning money out, so the net result is insanely low-to-zero interest for borrowers.
The problem is, of course, if the downturn is that bad, you have to weigh having money in reserve that takes a penalty versus loaning it out and losing it all.
"You're thinking of this place all wrong. As if I had the money back in a safe. The money's not here. Well your money's in Joe's house. That's right next to yours and in the Kennedy house and Mrs Melan's house and... and a hundred others."
No, WEEEE wouldn't see negative interest rates, billionaires who need to constantly move commas around a spread sheet would. WEEEEEEEEEEE would still be getting fucked over.
Which, incidentally, would also materially bandaid the US debt crisis for a few years without changing spending policies. The US would refinance a bunch of expensive / high interest treasuries with near 0% rates and let the money printer keep going.
It's funny because I think the regimes goal was to drive UP inflation to reduce the cost of servicing the existing debt and THEN collapse the economy to lower rates. The might have failed at part 1, but perhaps were successful with part 2.
Deflation will happen when boomers start to retire enmasse and pur imaginary stock prices dont have the liquidity behind them for people retiring... only magically for more circular investment between the same 6 companies.
I doubt it'll be a sudden change though. At least not until it hits a breaking point and the public gets wise and tries to get what they can from it.
Oh it'll SEEM sudden, but there will have been thousands of economists ringing alarm bells well in advance while the politicians pull the curtain closed and say everything is fine, right up until the whole thing crashes. And then it'll be a "Who could have seen this coming? It's not our fault!"
Sometimes people need some number to understand what happens when deflation happens. There’s 2% deflation and that seems close to zero or healthy inflation. Doing some google fu I found out that profit margins on wheat farms are in the 1-4% profit margin. At -2% inflation all the farms in the 1% profit margin can now double their profits by not farming. As someone without the means to grow my own wheat this is a problem for me.
Too many people have not studied how bad the depression was. There’s a reason granny kept a ham in her deep freezer from 10 years before you were born.
I don't know if I'd say I'm doomsday prepper level about it but I've got enough non-perishable food to last a couple years in the event that the cost of food either becomes prohibitively expensive or just isn't there to buy. In this fantasy scenario though the water needs to still be running because I have at best a couple months of water.
Except the prices keep going up anyway and that seems to be just as big of a problem. Basically it just sounds like the entire system as it is is meant to fuck us no matter what. Either the great machine can continue to pumping out more bullshit and we can keep buying it with the ever-increasing prices that they want to put on them or we can't afford it and then we all end up without jobs and in a death spiral. Perhaps the problem is the machine.
Don’t forget these people kept telling us that paying people would cause inflation. Except that cost of living and corporate profits have outstripped worker income for decades.
Now people can’t afford to buy shit and we are being blamed for deflation as well. Basically any non capitalist will be blamed for he state of the economy no matter what.
One of the hurdles of affordability in housing is that no matter what you do it will hurt someone.
A lot of people who own their homes have them leveraged at their current value. If we make housing more affordable that means the value of their house goes down while their debt stays the same.
I personally (as a person who own their home) think we need to be making housing more affordable, but as a country we’re really bad about explaining and preparing for the negative impacts of positive progress and housing is just one example out of thousands when deflation hits the economy.
One thing is people need to think. Buying a house that is historical like $320K for $670K, a house thats doubled in value in 6 years. Its not smart. Like I get housing is needed but at the same time you need to have sense as a buyer. On no planet is that house a good investment. Youre umderwater the day you buy.
I just see houses in my parents development going or being asked for ludicrous prices. I know people that bleed money buying overpriced houses before the 08 crash. It'll happen again. People are so leveraged and likely have loans out for like 50 years.
I think the problem is buying a house as if it were an investment in general. I bought mine in 2022. No one can tell me whether the housing market will go up or down in the next 10,15 or 30 years.
So the decision on how much to spend is based on how much I like the place and what I can afford. I don’t take HELOCs or use my house as collateral on anything. And when I asked the bank to pre-approve me for $300k so I was ready to buy at $250k and they told me they could get me more I declined because I knew $250k is what I could afford no matter what the bank told me.
It’s my house, not my investment. I have a 401k for investing and I just don’t touch that shit. If my home value drops $100k in the next ten years my mortgage stays the same, unless I refinance for a lower rate and I can live with that.
People still have money because debt. Debt is the highest it's ever been across the board, and the interest rates on that debt is also the highest it's ever been. But people don't care, they keep getting more debt.
It's not just that most people don't have money and stop buying things. People who do have money slow or stop economic activity because their inert savings will be worth more over time. The incentive to take on risk with investments or growth dissipates. The economy seizes like a brick.
As awful a treadmill as inflation can be, it at least encourages money to move.
It's harder to buy a house now, than during the Great Depression. Rent is through the roof. College is obscenely expensive. Wages have stagnated for decades.
The check engine light is on, and the temp gauge is in the red. Something has to give.
Seriously.. All that gives, is corporations and rich people trying to put the blame on everyone else. The money printing only works for so long without actually addressing any problems for the people
The week or so ebt wasn’t funded. My local Walmart had food items clearanced for under $1. Filled up my cart for $90, hadn’t done that in years. Multiple reasons why. AI orders everything for those stores now days, so trucks were coming to deliver more food. EBT is a massive subsidy for Walmart to fuel their greed. People need it to not starve. Corp knows that so they charge extra, I suspect. Like with student loans and tuition increases. We like to solve problems by creating new problems in this country🤣
I’m aware. Those where we have to move product NOW prices. Nearest Walmart has the highest markup in this area, if I drove 30min prob not as dramatic. Middle class majority white, theft has almost put nearest WM out of business. Still might. Bored white women steal as a hobby here. It’s unsustainable. I filled that cart with junk food, fresh produce, baking mixes, and frozen food. Was not the healthiest cart. I buy meat from a meat locker. Of course I would never steal from WM. Secret shopper is my shadow.
My understanding was that people don't spend money as the thing might be cheaper the next week. It would get all the unnecessary crap out of shops and people would just buy essentials. I think that would be good for everyone.
Prices go down for tech products (relatively speaking) since years.
Look at prices for TVs for example.
Still people buy TVs and don’t wait until forever because prices go down.
Inflation however is one of the main drivers of the „forever growth spiral“, where the buying power of workers continuously declines whole asset inflation leads to more and more wealth concentration.
Billionaires are one symptom of a system that systematically concentrates wealth.
It’s both at the same time really because it’s a feedback loop. Something causes deflation to start, suddenly it’s cheaper to buy something tomorrow instead of today (infinitely until deflation ends), people wait to buy things, demand for goods dries up rapidly, businesses fire people because there’s much less demand, unemployed people don’t buy as much, demand lowers further causing more deflation because supply is still backed up, etc etc. in a deepening spiral. We got out of it in the Great Depression with a combo of the WPA, New Deal, and WW2 spending.
It’s good for you only until the lowering prices causes your employer to fire you to cut costs or because they don’t need you to perform your job because demand has dropped. Deflation spirals include lots of people losing their jobs because businesses lose demand because goods will be cheaper if you wait to buy them.
I'm no economist and really don't know much, but it seems like much of our inflation is artificial anyway. Prices seem bloated not because people can afford to spend more, but because they are forced to. Corporations are making record profits while wages have barely increased. At some point, I think that trend will fail and things will balance out. Maybe that's what you're seeing as deflation. People will stop spending money on unnecessary things that cost more and the rest of the economy will follow. It's just a latent process because prices can increase at any time, but it takes time for people to realize they're not willing to spend that anymore or find other options. Like I said, I'm not an economist and not here to argue, so I'd like to know why someone thinks that's wrong.
The vibes and fact that our inflationary environment is bad for consumers in different ways doesn't really change that deflation tends towards self reinforcement. The economy is based on a certain level of continuous self feeding growth and more of that growth has been captured by companies in the form of record profits but it's not related to the fact that a true contraction causing deflation is also bad.
It's not just the prices going down, it's the expectation they will keep going down.
Think of it like this: You want to buy a car but no need to buy it today because you expect that tomorrow it will be cheaper. Tomorrow you put off buying it again becuse you expect it will be cheaper the following day and so on and so on, so you never actually buy the car. Everyone is following the same expectation so no one buys a car or a phone or anything else.
Everyone's daily consumption of even groceries becomes the minimum because there's no need to buy that fancy bar of chocolate today because you expect it will be cheaper tommorrow.
So Demand sharply decreases and production (Supply) and profit margins with it. Lower Supply means downsizing industry so fewer jobs/consumer wealth which further decreases any Demand that was left.
Negative inflation causes a feedback loop that can spiral really fast and crash an economy due to lack of "economic momentum" like the engine metaphor from IrksomFlotsom.
Wages track prices both directions, but the inverse isn't stable. If prices go up and wages lag, company is extra profitable. If prices go down and wages lag, the company goes bankrupt. Negative profits doesn't mean less production, it collapses to 0 production.
Because what we've experienced recently wasn't actually inflation by the definition that matters. Real inflation is our currency losing value. The "inflation" that happened with covid was all the corporations working together to raise prices across the board on everything but labor. It was just flat out theft. Going in the other direction would actually benefit real people.
But we still havent hit the price points we were at before covid jacked all the prices up. They never came back down (and wages didnt go up) so it wouldn't technically be deflation until it past that point would it.
Prices going down due to technology or whatever is good (eg TVs are cheaper than they used to be) but prices going down because people are choosing not to engage in the economy by not buying products or paying for services due to the fact that they will be cheaper in the future is bad.
Prices going down because supply catches up to demand is not neccessarily the same as deflation, as no sane producer or merchant would overproduce goods beyond demand in a way that would crash the entire market. Delfation that applies simultaneously to all prices would be caused bys something like massive reduction in monetary supply or unfathomable increase in productivity. Like if somebody would invent a star trek type replicator that can instantly create anything, even other replicators.
The simplest way I can put it is when prices go down, people notice and they wait to buy things as they wait for them to go down more. This is what causes economic output to plummet
As far as I understand it, deflation indicates that prices are going down, which is a good thing to me individually.
Median voter moment.
The price of a thing going down is fine. The price of everything going down means that anyone who makes things is now better-off if they stop making things and just hold on to their money. When all production stops at once you'll have a very bad time.
There is a significant incentive to save rather than spend which compounds deflationary pressure which compounds the incentive not to spend. And then everyone goes home.
This is what I can think of when it comes to deflation. If prices go down that means companies aren’t making as much, so in order to try to keep their profits one of the first things they’ll look to do are layoffs. And now you’ll have even more people who can’t afford these cheaper prices and once again these corporations aren’t making as much money as they want so they’ll do another round of layoffs and the cycle continues.
If you want to buy something and every week the price gets cheaper are you going to buy it now or next week? For some things you will buy now because the price is worth it, but others things you will wait. If enough people start waiting on enough things then the system starts breaking down. Lots of things are done with the expectations of future demand, stores need to order inventory, factories need to manufacture those products, those factories in turn order raw materials and components.... It's a system that is not designed to slow down or stop because once it does it is very difficult to start again. If a factory shuts down, you can't just start it back up again later.
You're asking if Deflation is a cause or symptom, but then you're completely ignoring that it can be a cause.
Deflation reflects that prices are going down. But deflation itself causes huge changes in market sentiment, mostly people stopping spending (hence less money circulating). This causes HUGE effects.
You can't look at one metric of an economy and say that's good or not. Question is, is it a smooth-running engine, or is it fucking chaos?
Sure, but your money, your employers money, and the money of your customers is also suffering deflation. Money slows down, no one gets the value they desire.
Deflation means there is less money around which translates to less demand which leads to increased unemployement and bankrupt business. High inflation is bad but it can usually be fixed by monetary means (increased interests, stopping printing money and so on), deflation is a negative loop which is very hard to break even if the government starts printing money and giving away money for free. Deflation is usually stopped by heavy state spending which translates to more debt.
Food and fuel will surely cost less but it's because no one can afford it and there is too much of it on the market
I agree - inflation and deflation are terms too broad to take action on unless you go sector by sector or have specific examples. I think the fears over deflation are too overblown. Probably intentionally emphasized by people who have assets that do well in an inflationary environment.
The prices going down is a result of less consumption from the population having less disposable income to spend which is a result of a death spiral of layoffs and freezes in hiring. Its not a good thing. Inflation can be controlled somewhat or at least slowed down. Deflation is a self perpetuating disaster with no brakes on collapse.
To you individually it might be. But guess what happens when prices keep going down. The companies make less money. And at some point that will mean they lower wages or mass fire people. And the only reason there would ever be for companies to lower prices that much, is that something else has gone SEVERLY wrong.
The problem with deflation is that people stop spending money (outside of essentials). Why buy a TV for 1200 when it will be 1000 next week.
Sounds great in theory if you're a consumer but when people stop non essential spending, recessions start. People get laid off, less money is spent, more people get laid off, and around and around.
There's a reason recession recovery packages almost always involve direct payments to the working and middle classes. Get people on the bottom rungs spending money again and it (theoretically) should result in hiring more workers, which gets more people spending money, etc.
Prices going down, as an abstract thing in a vacuum, does seem like a good thing.
However, deflation is both a cause and a symptom, which means it’s a self-reenforcing cycle. So economic activity slows, which causes deflation, which causes the economy to slow, which causes more deflation.
Or think about it in terms of supply and demand. Prices drop when supply increases or demand drops. In a deflationary cycle, you’ll see prices drop because demand drops, which causes the businesses selling the product to make less money and employ fewer people. That then causes people to be out of work and get paid less, meaning they can’t afford to buy things, and demand drops further.
In economic terms high deflation is bad because it rewards sitting on resources and punishes having to spend, specially if everything follows suit. We can see this a bit easier with a couple math problems. Let’s say we are in an extreme deflation period and for 5 days every thing will decrease by a dollar. There is a luxury good that costs 30 dollars and needed good that costs 10. Your paycheck is set as 10x the needed good cost each week. So before the deflation you could afford your week plus 1 luxury. Now before your pay is cut you actually get a nice week, it only cost 45 to get the needed this week, and you could actually get 2 luxury. But the next week is bad, you are now down to only 15 to spare after the necessary purchases, so you can only afford a luxury every 2 weeks compared to before. In comparison, the person that has a 1,000 assured pay is able to buy there stuff for much cheaper. The key bit is for 99% of people you are more likely in the former camp.
Prices go down. Salaries go down. That can be a toss-up
The value of your house goes down. Your mortgage stays the same. Interest rates might have dropped, but you cannot refinance it because the debt exceeds the value of the house.
Unemployment goes up, unemployment benefits go down. Your student loans stay the same.
This is a very rudimentary example I'm about to give and is based on my very limited and underdeveloped understanding of economics, so anyone that knows more feel absolutely free to correct me.
Imagine you have a 2020 Toyota Corolla. It's treated you well, but it's time for an upgrade due to mileage, maintenance, what have you. A brand new 2027 Corolla, base model is about 23k, and your current Corolla has a trade in value of about 12k. One day, deflation hits, now the 2027 Corolla is worth 22k, but accordingly your trade in is now 11k. Ok, that Corolla is cheaper, but the trade in is also less valuable so why don't we wait a little bit, that new car price will go down and it will become even more affordable, right?
Next price drop hits, and it drops a little more this time and the car is worth 21k, accordingly your trade in goes down to 10k. Ok, your trade in has gone down but the prices are still dropping so maybe I'll wait a little longer, get a better deal. Next drop the new car is 19k, and your trade in is now worth 9k.
Your trade in car is now closer to the new price of the new car, your trade in is getting stronger, so why not wait a little longer? Next drop the new car is 17k, and now your trade in is worth 8k. Your trade in now has less than a 10k difference between cars, if you can stretch it out just a little longer, your trade in will be better leverage, so let's wait just a little bit longer. Next drop new car is 15k, and your trade in is now 7k. Your car is almost half of what the new car is, this is fantastic, right?
Well, imagine all of the people who have that same exact thought around the country, and all of the lost revenue for Toyota as a result. A new Corolla has gone from 23k to 15k and people still aren't buying them, they keep waiting for the next price drop to get the most out of their current situation. Factories will likely have to close, as Toyota is just unable to turn a profit. This will be spread across multiple industries and eventually will lead to low prices for things but a desire to save as much as possible in all aspects you can afford to.
This is not indicative of any real world numbers, all the numbers I used were extremely simplified for the sake of the example and lack so much nuance and should NOT be taken as hard numbers for anything. But this is the worry when it comes to deflation to my understanding, there's a psychological aspect that overtakes logic in a lot of aspects regarding spending that lead to a downward spiral.
E: Editing to add since I forgot to actually add this comment in the example, the initial trade in was over half of the new car, but the difference between 23k and 12k looks bigger than 15k and 7k, this is part of the psychologocal reasoning for holding the trade in. That's why I talk about logic vs psychology in the last paragraph, I just forgot to actually add it in the actual comment lol
Sounds great when you are thinking about consumer prices, not great when we are talking asset prices. Like when the housing bubble burst. Deflationary spirals mean that all assets(which are leveraged for other assets based off of their book value) also drop.
Then factor in that if consumers wait until the next day to buy something because they expect prices to fall, then consumer spending also plummets paired with a decline in the velocity of money. Taxes are often paid based on a transaction basis, so tax revenue drops relative to both the drop in prices and the velocity of spending.
Cheaper consumer prices in this case are a temporary relief as the suppliers of said consumer goods are driven out of business.
I'm taking some liberties here not being an economist, but:
Economic growth generally leads to higher incomes, leading to higher demand and therefore inflation. It applies some pressure to invest as well as purchase - e.g., if I don't buy this house/car it's only going to get more expensive the longer I wait.
Deflation causes people to delay purchases (because prices are dropping!), both individuals and businesses to reduce investments (because prices are dropping!), which leads to less available jobs at lower wages.
Deflation is fantastic for an individual who has a ton of cash and doesn't need to work - they can buy up the houses and businesses that people can no longer afford to keep.
If prices are going down, might people wait longer to buy something?
If many do that, might that lower the amount companies can charge for those things?
That reduction of prices is (if widespread) more deflation, making people hold onto their money more tightly. That's a deflationary spiral.
At some point, the market prices drop to/below production prices, and those firms will have to shut down, their employees will be out of work, and those products will not be available.
While the unavailability is the system recovering, it's a terribly destructive mechanism, and setting up new firms/factories/etc. will be rather more expensive than if the firms had survived, so as a consumer you'll find that availability of goods collapses and then correcting that situation requires significantly higher-than-original prices.
Massive disruption, little real cost reduction for you, and a good chance that you lose your job.
Prices going down might seem nice at first, but then you might think to yourself wait if it's going down I can just wait until it's even lower price! Problem is, everyone starts to do this to a degree and it becomes a feedback loop that causes all businesses to lose money, which causes them to lay people off, which causes people to spend even less... which again causes more deflation.
It’s more than that. As prices fall everywhere, wages fall. This doesn’t mean much if you’re just thinking about variable costs like groceries or gas. It might actually feel good to see those prices fall. But rent, mortgages, car payments, all carry long term fixed costs. And if your paycheck gets cut, the bank isn’t going to magically change what you owe. These expenses will just end up taking a larger percentage of your income
Widespread deflation means everything is getting sold for less, not just your groceries. It includes whatever your company is selling, and will result in many companies going bankrupt, not being able to support payroll, etc.
2 big issues : nominal wage rigidity, and real debt burden.
Nominal wage rigidity means most people won’t accept a pay cut in dollar terms. If money is worth more (I.e. in a deflationary period) your labor is now more expensive. If you aren’t increasing productivity to offset, you’ll get fired. No job is a bad outcome.
Real debt burden : today you owe $100.,000. Under inflation, the real amount you have to pay back shrinks through time. Under deflation, it grows. This leads to more defaults, which leads to capital stress for debt issuers, which leads to either bank runs and / or bailouts. See the Panic of 1907, depression, and all the mess that came out of the 08 GFC.
Only good if your assets are in actual, physical currency in your possession, you’re unemployed / retired, and owe no debts. And you can keep the mob with pitchforks at bay.
In a deflationary environment you likely lose your job since as wages are going down they will fire you to hire somewhere cheaper, only to fire that person and hire someone even cheaper as wages continue to drop.
Your student loans, car payment, and other debt become a much bigger burden since they’re in current non-deflated dollars. So you will spend much more on debt service
Many goods and products would become unavailable as the cost they would sell for is less than what the maker paid for the inputs so the producer makes the decision to save money by shutting down.
Maybe you’re a magical unicorn that wouldn’t be effected by this but it would be very bad for the 99.99999% of everyone else
Now, imagine every financial decision in the economy has to be rethought from first principles. All our experience and what the average person learned is obsolete. All the elderly people have to figure this out month 1 or starve.
All the contracts for commodities and stuff being delivered to stores are now unprofitable because they were created with the assumption of 0 or positive inflation.
Maybe deflation in itself would be fine if everyone properly adjusted to it immediately. But they won't, so it will be chaos.
Prices aren't going down because it costs less, it costs the same to producers, you just start thinking that maybe it will go further down, and along with you rest of the people also start thinking the same, even your company, which in turn might lay you off because it's costing too much to keep you there. So prices are falling but you still wouldn't be able to afford it because you don't have enough money. Prices going down in itself isn't bad, it's just that sustained deflation would cause everyone to cut back on spending which will in turn generate lower income for people which would go on and on. You get my point? It's symptom and cause both simultaneously.
I think the idea is that if prices are going down due to deflation, then consumers may hold off on their purchases, assuming that the price may continue to drop. If consumer spending drops, that fuels the decline in the economy, continuing the deflation trajectory.
When prices are going down that means businesses will lay off workers because of less profi simultaneously people will be less productive in finding income sources. As a result unemployment would rise. That’s why economists argue that natural inflation (low inflation around 2%-5%) is better for boosting the economy.
When you look at it from your own perspective, deflation looks good, but look at when you account for everybody.
Imagine you go the store, and your favorite chips are currently $10 (go with it, i don't care if it's not an accurate price). You decide "that's too much" and walk away.
Now 50,000 other people just walked into a store and decided that those chips were "too much" and walked away.
Now the business needs to reduce the price. Say to $9
You go back to the store, see the price drop, maybe pick up a bag, maybe not. To the business, this probably worked, and sales have gone up.
However what about the 50,000 other people? Say 40,000 of them still consider $9 to be too much. To the business, that's not enough, so they drop prices again. This time to $8.
Now you go back into the store, see the price dropped again, and think to yourself" $7 is how much I'd pay, I don't need it right now, so let me see if the price keeps dropping"
and now imagine all of those other 50,000 people come to the same conclusion
The price drops to 7 soon after, you think to yourself "okay I'll get one, but I want to see if it keeps dropping"
and now all of those other 50,000 people come to the same conclusion.
Now the price is $6, then $5, then $4 until people start breaking and buying it.
To a single product, such as our chips, this will have no affect on the economy. In fact, it probably will never go this far on a single-product deflation, since the people are still making money.
However, when the entire economy does this? Everything starts dropping in price. So everyone is waiting "I'll get a new car next year, the prices keep dropping" "Let's wait til next month to get a new fridge." Expand that out for an entire economy, and it starts affecting things like produce, soon they'll become hard to get.
Pair this with the fact that your current bank account value will have their real value increase during deflationary periods, meaning you're more likely to save money, and not spend anything. This is why deflation is considered a bad thing, and a small amount of inflation be a good thing. It's a negative feedback loop where the only stable state is gettin deeper into deflation.
If you wanna look at Great Depression's specific causes, I'd read up on "debt-deflation theory." In super super short, the economy was being moved by debt, and when the time came to pay that debt, the banks failed causing already falling prices to fall even harder.
One other thing to note is that when prices fall, wages do not fall as easily. It's much harder to get an employee to agree from going from 100,000 a year to 90,000 a year, than it is from just firing them, and rehiring an employee at 80,000 a year. And I don't exactly blame the businesses for this either, I wouldn't want a 10k pay cut either, and probably would refuse at first.
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OPINION ALERT:
That being said, I actually disagree with the blanket "all deflation is bad" statement common by economists. I believe a small amount of deflation, or controlled ~0% inflation can be a good thing, at least in the short-term. Japan has had basically no inflation since the 80s iirc, and they seem to be doing just fine, still a first world nation, didn't collapse, high QoL (does anything else really matter other than QoL? philosophical question with no wrong answer), sure the population is declining but I doubt that's because of their inflation numbers. Sure, the country isn't a perfect shining "country" on the horizon, but I think at the very least they prove that deflation isn't a death sentence for an economy.
Prices go down but so does revenue for the companies and the economy slows which makes it harder to stay in business, partially because they are simply earning less due to lower prices but also because deflation incentivizes me holding off buying things today because I know it will be cheaper next year.
They can try lowering prices more to increase business but that is not possible forever so the other alternative is to cut expenses like the workforce. Less people with jobs means less spending, less spending means less revenue, less revenue means more layoffs and so on...... Things can spiral quickly once it gets going.
The central banks can try to boost the economy by lowering interest rates, effectively trying to cause inflation, but they can only do that if they have room to lower them properly, 0% is the lowest it can realistically go and if that is not enough to boost things back in order then there is nothing anyone can do and everything will collapse rather quickly.
Prices go down if everything is on high supply and demand is really low. It’s usually a sign that no one can afford shit, which is bad. Stores go bankrupt, jobs are lost, even less people can afford stuff. It’s a downward spiral. The mechanics of how to make things more available to more people are really complicated and the people in charge don’t actually want that so prices consistently going down, tough it looks like a positive thing, is in fact a bad symptom.
Imagine if prices went down week after week. Would you keep your current habits or would you stop buying like “let’s see how low these prices go”?
A deflation spiral is everyone waiting to see how low prices get. Putting off everything from car repairs to healthcare, with the worst case of nobody buying anything and everyone losing their jobs.
It’s good for you as a consumer. So good, in fact that the smart play is to hold off on that big purchase if you possibly can. Cause it’ll be cheaper in six months. Save your money now. Stop spending.
Now multiply this by every consumer in the economy. What happens?
Prices are going to go down because nobody can afford to buy the things, largely because the economy has broken and the jobs which paid them no longer exist.
The cause/symptom argument depends on the underlying cause.
The Depression in the U.S. in broad terms was a collapse of the money supply, raising the value of money in circulation, lowering prices. High unemployment lowered consumer demand, forcing lowering of prices to attract buyers. Debtors tried to sell off property to raise cash for their debts, flooded the market, and further lowered prices as a result.
Contrast that with examples where deflation didn't lead to demand or production decline, as happened during the American Antebellum, mid to late Victorian Britain, and America from 1870-1890, where technological/productivity advancements lowered prices but increased output and consumption.
Every financial transaction is two way street. Sure, lower prices might be hood for ypu as a buyer but it's bad for the seller. And in modern economy nobody is just a buyer or a seller. Most people earn a wage from companies that sell stuff. When sellers start losing money, then they can't pay wages to people, so they can't buy stuff, so even more sellers can't pay their wages and so on. Deflation, same as high inflation and other price shocks, can easily lead to a downward spiral.
Prices deflate because demand and the amount of money consumers are willing to spend goes down. Producers lower the price of goods to be able to keep selling as demand falls. Not good since the producers profits drop which means layoffs which then exacerbates the problem of less demand
It could also be used to justify slashing wages/benefits or removing ‘expensive’ worker protections though. My state has a law where our minimum wages are directly correlated to inflation. IDK if they WOULD decrease it in response to such a pressure but it is legally feasible.
It is, individually, but when prices keep going down people start saving more, waiting for lower prices. This removes demand which pushes prices down even more... Which makes people wait more, ... Which reduces prices even more...
Prices going down means money the already have becomes stronger every day so why buy now if my money gets better? So nobody buys anything the production of anything except essentials dies so more an more person's lose their job and are jobless
Deflation is self feeding. It's a symptom of insufficient demand that arises when businesses are in such distress, they are forced to lower prices, but since consumers are not spending and conpetitors are reducing prices too, sales still struggle forcing further price reductions. They usually resort to reducing as much of their labor costs as possible first though.
In other words, by the time prices are dropping, a lot of people have already lost their job and nearly no one is hiring.
If you individually don't rely on a job or income from investments for income, then you might enjoy decreased prices but most of us rely on income from working or investments and would be worse off with no income regardless how cheap prices are.
It's both, that's the problem with deflation. Deflation means that holding money is more valuable than spending it, which means people hold money, which means the economy gets worse.
On top of that you can get really weird issues with loans.
Deflation can be a symptom that turns into its own cause creating a vicious cycle.
Deflation is good for you until the company you work for goes bust because everyone cuts their discretionary spending and then you lose your job and no one is hiring so now you can’t afford your rent/mortgage and you loose your house.
Right, numerically and individually deflation seems like a good thing. "I get to spend less on stuff, right?" But the problem is that it's not sustainable. "The market," (consumers, investors etc.) tends to freak out when stuff starts being worth less. Sure a dollar can get you more during deflationary periods but now that gold you bought with a dollar is only worth 70 cents. Or the car. Or whatever item.
For example. Let's say you put 50k into a farm/agriculture business. Deflation is occurring across your national market. The next year if you tried to sell your farm it only nets 40k, max, because everything is worth less now, so no one is willing to pay more. And that's only if you can secure a buyer. Own a home? Deflation bad for home owner. Generally, people that own things like for that value to appreciate (go up) not depreciate (go down).
So now you're REALLY trying to get rid of your farm to get some of your money back, but look, everyone in "the market" already had the same idea and there are hundreds of farms for sale just like yours and no one is buying because everything anyone could sell to get the money isn't worth as much as it used to be. Then people start panic selling, because they feel like they need to at least get SOME money out of whatever it is. The panic selling increases the supply, but the demand doesn't change. This makes stuff worth even less.
So yes. In the short term, for a consumer, deflation is good. But long term deflation makes everyone's stuff worth less. That means we all have less. Get it?
This is honestly why Bitcoin always perplexed me: you guys deliberately made a deflationary system? Won't that practically guarantee your system ends with a "Great Depression?"
Yep, I’m not going to go and buy a new phone / fridge / car even if I have a job if everyone I know is getting laid off. I’m going to save my savings just in case I’m next.
Good. Fuck 'em. I've always been poor. I'm maybe the 2nd level of blocks on the pyramid, not exactly the ground floor.
Mr. Capstone can find out what it's like down here in the dirt with the fucking rest of us. I don't have far to fall. If it takes being a little more poor for a while so that some rich asshole has to hurt, I'm fine with it.
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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?