Ignore me if I’m missing the point: It’s not so much the drop in prices as the growing belief that the prices will continue to drop. People withhold money expecting a better deal and stop spending. The lack of consumer spending is the drop in fuel.
If your money will be worth more tomorrow than it is today you will only spend it today if absolutely necessary, is another way to phrase it that may help
The issue is really that it leads to a downward spiral that is hard to get out of. So if it stops being deflation and starts being inflation again then yes its no longer deflation
My point here is that: it still doesn't seem worse: people will start consuming again when prices drop, but they will stop consuming for good if their money is worth less than the air they breathe
I think the key thing that is getting lost by many is that people not spending money results in people losing jobs, no longer having any income, and no longer being able to buy the essentials. Less people buying essentials the causes the same kind of layoffs in those industries, causing less people to be about to buy essentials, into a death spiral.
Left alone it results in huge unemployment and homelessness numbers.
Just look at Japan for a real world example. They've been stuck in the deflation trap since the 90s, their economy has stagnated and their buying power relative to the rest of the world has continued to fall. The effects are so bad that they have called the time since the Lost Decades.
An economy can survive a one-off deflation shock, but becoming the status quo is catastrophic and basically guarantees the economy will collapse.
Im not gonna write a whole book to explain to you why deflation is bad, if you really care you can look a bit more into it. But it boils down to
Our system is called capitalism, it is held up by capital being invested in the economy. The capital is invested because thats how you grow the capital. If you let it sit and do nothing while there is inflation then your money is worth less tomorrow. If you let it sit and do nothing while there's deflation your money is worth more tomorrow.
So if you have capital and theres deflation you will not spend that capital and the whole machine stops. When the machine stops people die, or lose their livelihoods, or cannot afford Healthcare or a million other issues that come with an economy that doesnt have enough money circulating
Going to add a personal anecdote that helped make click for me as a layman why deflation is bad. I have a friend who is really stingy with his money. Not necessarily cause he broke but grew up with a very broke mentality where he guilty spending more than $10 going out for a meal. When he wanted to build a PC, he naturally dragged his feet for nearly 3 years while we pestered him about it but he wanted to hold out for cheaper and/or better.
You know what finally convinced him he just needs to bite the bullet? Last year, when prices were skyrocketing for PC parts and were only getting worse. So in this real life example, he was only convinced to spend money when prices rose as opposed to fall and he was willing to wait probably indefinitely for an arbitrary price to fall. Deflation causes more of a psychological issue as opposed to a logical one. Now just imagine that attitude was adopted by everyone and for all goods.
Suddenly businesses are making less sales, they eventually will be forced to lay off employees, employees no longer have jobs to be able to afford to buy goods, and then the cycle of economic collapse occurs. Inflation becomes the better alternative to deflation. On top of the fact that you have better control over inflation and little to no control with deflation
Yeah that was me too, but this is a shitty ass example because at some point your PC isn't supported, it literally isn't something you can drag out indefinetely.
The economy is also about voting with your wallet. Waiting a year or two more to upgrade your PC instead of overconsumption and buying new shit as soon as it comes out also can't be good for the consumer
People need food and shelter and stuff. The baseline is there. "But they are not buying TVs and iPhones." So what? You're not building them in America anyway.
That's the thing, though, the prices don't stagnate. When people hold onto their money expecting it to be more valuable, that's a self-fulfilling prophecy because it means there's less money in circulation which means every cent that is gets more valuable. It's a positive feedback loop.
Okay so my money is worth more. We constantly hear we shouldnt overconsume, well that sounds to me like only buying when necessary (same thing you're describing)
And deflation is great if you have a huge pile of money to live off of and don't care about general misery and decreased societal well-being.
But if you have a job, deflation very quickly leads to you losing it, as demand for goods and services shrinks, people are laid off, they can't buy stuff so demand for goods and services shrinks further, more people are laid off etc etc.
Excessive inflation is bad because it leads to people not being able to build up savings, not being able to afford goods and services, etc, but it eventually self corrects (unless the government keeps printing money) as people stop being able to afford goods and services, and that causes negative pressure on prices.
Deflation is a positive feedback loop. People can't afford shit so jobs disappear so people can't afford shit so jobs disappear etc etc.
They can if they have savings. If you live paycheck to paycheck and you lose your job, you don't get to enjoy the cheaper goods. You can't afford them anyways.
Lots of rich families these days in the states became rich when their great-grandparents who already had accumulated wealth bought cheap assets during the depression. But the common people selling their house for cheap because they just can't get a job and need some money to buy food got ruined.
Breaking out of that deflationary spiral took stuff like the New Deal and World War 2: massive government spending to provide jobs so that people finally had money to buy goods again, so more jobs are created, so that demand for goods increased etc.
Because they lost their job and no longer have a stream of income coming in. Sure, they can afford a lot of groceries with their last paycheck, but once that paycheck and savings are gone, there is nothing to use to buy. If people aren’t buying, more people lose their jobs/business, and more can’t afford to buy anything even if it is cheap. It’s a cycle that leads everyone to have no money to pay for goods, even if items are cheap. Sure, a pack of diapers is now 50 cents, but you won’t even have 10 cents.
Also, 60% of the US population are living paycheck to paycheck. Even missing one paycheck would lead to millions losing their homes. Their mortgages don't drop in price, even if the price of milk does.
In simple terms, because deflation also impacts wages.
If a company is paying you $50,000, but realize that if they wait 6 months they can hire someone for only $40,000 they're going to fire you and hire someone cheaper.
So yes, the money in your bank account is going to go further, but you should also expect for your paycheck to get smaller over time.
I think the problem that a lot of people miss when trying to figure this out is that they only look at the consumer side and ignore the producer side. Because it's the producer side where things get fucky.
For example imagine you're a farmer in an normal economy. If you spend $50,000 planting wheat in your field, you can sell that wheat for $60,000 in 3 months time. That's a nice profit so you do it.
But in a deflationary economy, it might look like you still have to pay $50,000 to plant the wheat, but the wheat's price is going to go down to $40,000 in those 3 months, so now planting wheat is a really bad idea and the farmer won't do it.
This also means that the money that the farmer was going to spend paying farmhands, just doesn't get spent anymore, so the people who were doing farm work are out of a job.
Basically, deflation encourages producers to move their money out of funding real economic activity, (such as paying farm hands to plant a field) and instead move their assets into liquid cash, which is bad.
Why do economists assume the average joe thinks like that rather than them just seeing a price drop and thinking "Oh, more snacks for my payday, lets treat myself"?
I get that the financially aware themselves operate in that manner, but that bubble isn't as representative of the economy as it is of the stock market
Interest is generated by the money being invested, because it is lucrative to do that. Deflation means it is no longer lucrative to invest it and instead you would get "interest" by holding it
Your reasoning is that people won't spend money if it's worth more tomorrow than it is today. That is ALWAYS the case. This thread is talking about the effects of deflation on consumption. Consumption is not the same as investment. Consumption is spending for immediate short term satisfaction. Investment is long term. They are two different things. Deflation will not stop consumption. It stops investment and that has an effect on consumption, but it's not because the average person is withholding spending
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?
The comment you just replied to was explaining that interest is gained because you let people invest your money instead of just putting it in your mattress. Please pay attention
Considering that the majority of people are living paycheck to paycheck, do we REALLY think enough people are going to hold on to their money that it would cause issues?
I still need to buy groceries. If they're cheaper next week, awesome, but I still have to feed the family. I still have to pay for my bills. It feels like this would only affect people with disposable income which may affect luxury items which are already overpriced because of companies trying to achieve infinite growth.
I'm shocked we haven't already entered into a recession with the skyrocketing prices tbh. What would essentially be a deflation to self-correcting the insanity of the past 6+ years would be welcome in my book.
Hell, I might actually have MORE disposable income in a deflation event.
The current economy is propped up by massive spending from the upper class, not the day to day spending that low income people are forced to keep spending regardless of how the economy is, because there's only so much you can cut when you're already paycheck to paycheck.
This assumes the paycheck to paycheck people will still have a job. Even if the wealthier people cut back their spending, that will reduce profits and force companies to cut jobs. Deflation puts downward pressure on wages either through layoffs or hiring people at lower rates, further reducing spending, further cutting jobs and eventually those lower earners will also get their wages reduced. Massive unemployment is absolutely a bad thing, yes.
How do the wealthy out more money into the economy that everyone else? The stock markets and index funds.
The non wealthy buy more food, clothes, and consumer electronics than the wealthy, by sheer numbers of each class alone. The non wealthy vastly outnumber the wealthy. Aside from things like private jets, yachts, and disgustingly large houses, how do they contribute more to the economy? 1000 poor people need more basic essentials that 1 wealthy person, because it’s a ratio of 1000:1.
So how do the wealthy fuel the economy, when their essential spending is less? It isn’t luxury spending. It’s the stock market; that’s why big business and the wealthy got rid of pensions and tied retirement to the stock market. The stock market, and therefore retirements accounts, is now held hostage to the whims of the wealthy.
Deflation will hit the wealthy first and hardest, and they’ll pull their money from the stock markets, and that will tank the retirabiliy of the proles.
Oh yeah absolutely, I agree with you on that. But hitting the wealthy the hardest might mean a reduction from say 100 billion to 5 billion, while hitting the poor would mean losing your 15 dollar an hour job and getting evicted because you can't make rent. Deflation might hurt the rich "worse" in that it takes a bigger total amount of money, but it would materially harm the poor a lot more. The rich will weather a downturn, rely on government bailouts, and re-invest once it's over, it might be hard but they'll survive. A lower income earner might literally kill themselves because they've fallen behind on payments now that deflation has undercut their wages and their debts are a higher percent of that income. I realized you're not the same guy I initially responded to, I don't think I materially disagree with you but I definitely disagree with the guy saying deflation would benefit poor people
Not sure where you live but generally people notice prices going up a lot easier than average salaries going up.
For example in the US in jan 2025 the average salary had higher purchasing power (you could buy more of the same stuff) than before covid but people were up in arms about inflation and high cost of living.
Basically what I am trying to say is that tbe average person is very unlikely to accurately asses the current economic situation even for themselves they act almost purely based on what the media tells them and vibes.
Considering that the majority of people are living paycheck to paycheck, do we REALLY think enough people are going to hold on to their money that it would cause issues?
Yes,
Something like 40% of the stock market is held by retirement accounts. In a deflationary economy contributing to a retirement account doesn't make sense since you can just buy the stock later at a cheaper price. So you'd see tens of trillions of dollars be pulled out of American companies because holding cash is more appealing than investing in the economy. So you'll see businesses shut down.
And then the problem becomes, you still need to buy groceries, but there's no store to buy them at because you now gain wealth faster by holding onto pictures of dead presidents, then you do by selling produce.
Yes, because people will hold off to the last possible moment. And even with paycheck to paycheck living it will still punish any extraneous spending, like want to buy a bag of chips? it will be cheaper next week, so people hold off, for eternity and everything grind to a halt. People will buy the absolute minimum to survive. The great depression was a deflationary crisis.
Agreed, and even if people are paycheck to paycheck, that doesn’t necessarily mean hand to mouth, so realistically virtually everyone (excepting the homeless and some others) can delay even a few percentage points of spending for a week or more.
Shit, I’d be able to stop buying the absolute cheapest food I can get and buy some good quality cuts of meat and fresh veggies instead of the cheap frozen. I could probably upgrade my 8 year old laptop.
The people living paycheck to paycheck are still by and large buying things from month to month or to improve their life. Even if their spending stayed exactly the same, the issue comes about when feedback loops happen at companies.
Company A decides to cut back on spending. That means Company A isn’t spending money on meetings, catering, and hotels at Hotel A. It isn’t spending money on capex to upgrade its facilities at Manufacturer A. Manufacturer A and Hotel A both lay people off because they don’t have money coming through.
Maybe this was justified by Conpany A, maybe not; but companies will hold onto cash if they are fearful. That’s how spending is fuel.
It's actually a little more than that. The primary problem with deflation isn't that consumers won't spend. It's that it's no longer profitable/feasible to supply to consumers, so there's literally nothing to spend money on.
People will buy food when they're hungry. People will buy shit when they're bored. The problem is on the supply side because it's no longer economically feasible to continue to produce, distribute, or sell the supply.
So not only is there not shit on the shelves/fuel in the pump, but there's no one to stock the shelves or deliver the fuel anymore either.
This is what all the bailouts in 2008 prevented - had the government not intervened and subsidized the banks, it would have been no longer profitable for the banks to exist/operate, thus all that capital would have just fizzled in a puff of smoke.
Basically, if the cost of gas doesn't come down fucking FAST we're going to see the same thing with groceries, retail, gasoline, and basically anything that gets to you by a truck or train.
It's such a dumb and simplified take, I can't even believe people fall for shit like this.
Yeah, I'm going to wait until next week so I can buy food that I need to eat today, or maybe I'll wait next month to buy new clothes so I can save 2 dollars. Nevermind paying bills and other things that have a fixed day to be paid.
For 90% of the consumer market a small level of deflation would have a negligible impact. Sure, if someone's looking to buy a car or a house, they can afford to wait some and save a lot, but those are products that have benefited from inflation for several decades and could benefit society as a whole with a severe price reduction.
The thing you're missing is that deflations impact happens primarily on the producer side.
Imagine you're a farmer, You can spend $50,000 to plant a field and in 6 months time you can sell the crops grown on that field for $60,000. That's a good investment so you do it.
But if the crops would only sell for $40,000 after 6 months, then it's better for the farmer if the field sits empty for those 6 months until prices stabilize. And that's bad because that $50,000 was going to fund the wages who were going to plant the field, but now it's just sitting in the farmers bank account.
Basically, an inflation economy encourages people to use their surplus money to fund real economic activity like planting a field. But a deflationary economy encourages people to defund real economic activity to gain more surplus money.
1) food is necessity, so it’s not a good example to use, though people’s choices in food habits do change.
2)you are analyzing from an individual perspective. You have to view it from a collective. Do you agree that more people will buy a phone at $500 vs a phone priced at 1000$? Do you know there are websites entirely dedicated to tracking the ‘right’ time to buy something? While you may not change your spending habits. Someone else does, and collectively, you can see the impacts in real time.
The examples are always hard to digest because they are so simplified for folks to understand. But people spend years and college and write papers on this very measurable phenomenon.
Because it results in less people making products due to them no longer being profitable. This leads to less jobs. Which leads to less money for people to spend. Prices drop as no one can afford the old price. Less people make the product due to it not being profitable and so the loop continues.
That is the thought at least. The desire for profit drives creation which is the fuel for the economy.
Imagine a company doesn't just fail to make as much as they wanted but are actively losing money. First thing they'll do is lay people off. We've now got a bunch of people who will try to save what they have left, rather than spend it. So other companies follow our first one and we get even more people trying to not spend money and the cycle continues in a negative spiral until, at some point, no one even trusts money to have any value anymore. And that's when either we revert to a barter economy or wait for a different, strong economy to drop on by to give a hand.
The flow of money is how the economy works; money that doesn't change hands is pointless.
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u/Aldrik90 8h ago
How is a drop in prices equivalent to a lack of fuel?