That's the issue, deflation doesn't cause recessions. Deflation causes depressions. People stop buying products so the economy literally freezes. Basically think about sales. You know that there's a sale next week where everything will be half off. You as a rational consumer are only going to buy the bare minimum to ensure you can last until next week. Now with a sale there's a defined end date, so you'll buy a lot of products next week, but with deflation every week will have a lower price than this week. Meaning as a rational consumer you will always be buying the bare minimum to get to the next week. If everyone is buying only the bare minimum businesses stop making money. Without money businesses can't pay workers and layoffs begin. Then the death spiral kicks in, with higher unemployment the money supply continues to shrink, this makes deflation worse, people start to not buy because they don't have a job and can't afford to spend more money, companies continue to lose more and more money and layoff more people. Until you get the Great Depression. The economy basically has a heart attack.
The only solution is to spend a bunch of money to force the economy to restart. Give people a bunch of money so they start buying again, which causes businesses to start making money again, which increases employment, which eventually gets the economy restarted.
I think you're conflating different definitions of "rational." Economics models trends. Throwing away your money on sports betting isn't "rational" if you want to put a value judgment on it, but millions of people do it, and you can be damn sure it can be modeled economically.
If everyone is buying only the bare minimum businesses stop making money.
The money you don't spend doesn't evaporate, it is simply being redirected to somewhere else. Even if someone decides to let it pile up in a cash savings account(the money is, exactly as you have described it -- frozen). You can't lower prices indefinitely(if you can you probably weren't selling at a competitive price to begin with). Once (people realize that) the price lowering has stopped, people will then start buying, perhaps using their saved up money. Isn't the sudden unfreezing of cash exactly the "restart" that you have described as being necessary to fix the economy?
So first, money does evaporate. Deflation is literally the shrinking of the money supply. You might not be directly losing money by not spending it, but the economy is, which eventually results in money running out. To go back to basic economics, an orange might be worth 5 dollars to you but 6 to me. If I but that orange for 6 dollars then you are a dollar richer while I have not lost anything. If I can't make that purchase then the economy has lost a dollar despite neither of us directly losing anything.
Second prices can't go lower than some amount long term, but no one knows what that amount is. The actual price of something is complicated but can be simplified as supply and demand for this. People stop wanting something and supply is constant prices fall. If the price people are willing to pay goes below the cost to make then supply shrinks until the price is high enough to match the price to make. Decreasing supply is a fancy way of saying closing factories and companies. Deflation means this happens across the entire economy at once, meaning massive layoffs in all industries. People stop getting paid which means the money they have is all they will have, which further decreases demand which means supply needs to further decrease to match it. Which means more layoffs and more people unable to spend money.
Third while there's some basic amount you can't sell below and still make a profit, prices can go below that for temporary periods of time if the cost of keeping the goods outweigh the cost of selling them. If the goods are perishable then you have to sell them within a time limit or you lose all your money, so the price can rapidly drop to near zero, but even nonperishable goods still cost money to store, that's why you see unsold produce being destroyed, destroying it literally costs less than keeping it and potentially selling it when prices recover. And to go back to the first example, that is removing money from the economy. If an orange is worth 5 dollars to you and 4 dollars to me, and you are forced to sell the orange to me, you end up a dollar poorer than before and so does the economy.
It’s almost like the metrics of classical economics aren’t accurate levers for IRL prosperity (giant surprise). We’ll find all sorts of fascinating math to avoid the fact of finite resources that are poorly distributed. A tree has the correct number of leaves typa sitch.. the “economy” is going to get crazier and crazier. Just wait until the scarce good is fresh water and not a new car.
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u/1041411 6h ago
That's the issue, deflation doesn't cause recessions. Deflation causes depressions. People stop buying products so the economy literally freezes. Basically think about sales. You know that there's a sale next week where everything will be half off. You as a rational consumer are only going to buy the bare minimum to ensure you can last until next week. Now with a sale there's a defined end date, so you'll buy a lot of products next week, but with deflation every week will have a lower price than this week. Meaning as a rational consumer you will always be buying the bare minimum to get to the next week. If everyone is buying only the bare minimum businesses stop making money. Without money businesses can't pay workers and layoffs begin. Then the death spiral kicks in, with higher unemployment the money supply continues to shrink, this makes deflation worse, people start to not buy because they don't have a job and can't afford to spend more money, companies continue to lose more and more money and layoff more people. Until you get the Great Depression. The economy basically has a heart attack. The only solution is to spend a bunch of money to force the economy to restart. Give people a bunch of money so they start buying again, which causes businesses to start making money again, which increases employment, which eventually gets the economy restarted.