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?
Deflation is “bad” because it leads to an economic death spiral, and there’s no way to stop it.
Prices go down
People see prices going down and hold on to money thinking it’ll be cheaper if they wait.
Less purchasing despite lower prices cuts profit margins, so producers produce less.
Sellers lower prices more in a desperate attempt to make SOME money.
Repeat.
This usually leads to layoffs to try to salvage money, big sales to get rid of inventory, then eventually there’s nothing to buy, no one making it, and everyone loses their job.
Interest rates don’t fix it, taxes don’t fix it, you just cross your fingers and hold onto your butts
So you keep buying what you need, but skip getting what you want because the prices will go down next week, and business feel the crunch because the money isn't coming. How long can you go in your old shoes or with the old iphone vs how long can businesses burn money paying salaries, but w/o income?
You're downvoted but I can see where you're coming from. Your perspective is of someone that finally sees their paycheck doing something instead of buying basics plus maybe something nice every once in a while. However, the American economy is currently held together by investments and tech moonshots. If we entered deflation, the only thing holding our paper-thin economy goes bust and everything comes down, which would have severe ramifications to everyone's income.
Basically, we can't let investments die or it all dies.
If it's only being held together by hopes and prayers is it even being held together at all for the significant portion of the country that isn't investing?
Sounds more like the status quo, which conveniently favors those currently with power and wealth, while the vast majority suffer further and further.
I'm of the mind that we're headed to an economic crash anyway unless there were a lot of big policy changes really fast. The policies in place now are letting anyone who does not have financial power right now barely stay afloat while the 'big players' continue to create imaginary gains.
We're already in a position where people are being bled dry - just slowly enough to not start rioting over night.
It's going to inevitably happen due to decades of fluffing VC cushions while squeezing everyone else just enough.
For me, there is reduction in prices because we can do better. Like Apple can make better iPhone tomorrow than today, so prices are going down. Or you needed X people to harvest some crops years ago and nowadays, one combine harvester does it all. So things are getting cheaper or better (or both).
Yes, when someone is oil lamp builder and no one is buying from him, so he must reduce prices, then it's damaging to him. And also to his employees. But increasing the costs or printing money won't save his business. Sometimes, it's better to let some businesses die.
Lowering prices makes profits less which makes investments worth less, so people with the capacity to invest do it less which creates a circular effect.
The downstream of that is that less business are started or go under, which leads to less spending overall, which exacerbates the previous problem.
If enough people lose their jobs, money only gets funneled to basic needs or nothing at all.
Could it eventually stabilize again? Sure. The gambit of it stabilizing before people are mass rioting, looting and dying is something that the people who virtually make the economy stay afloat is not a risk they want to take. So we continue to trudge that direction instead of sprinting.
The longer the economy doesn't crash, the more capital the owning class gets to leech before jumping ship.
How does this get affected by the fact that most people are already only buying what they need, and sometimes not even that, because the COL is so high it consumes their entire paycheck before they get to discretionary spending at all?
They're not. 50-63% figure is self reported, by strict definitions it's closer to 25%, which while still high - is not "most people".
Okay, you get deflation for a month or two, cool, cheaper groceries (they're not gonna be). And then month three gigantic layoffs and you're left with no income. But the groceries are getting cheaper! Too bad you've got zero money because the economy is stopping.
And I'm not talking about the recent layoffs of hundreds of people from companies that employ hundreds of thousands - I'm talking widespread bankruptcies.
Thats the thing, the investor class is all economists care about. They know you and I will buy groceries, pay bills, and buy a new car when ours breaks. They worry that money at the top will stop moving around, and even though that money isn't the real economy, it's what economists are paid to focus on.
The goal of this system is to maintain oppression of the working class. Inflation hurts us by making us work harder each year to afford less than the previous year, so its good for capitalism. If we can work less and afford more, that's bad for capitalism. When that starts happening, the wealthy freak out and start enacting measures to deliberately hurt us more so we go back to working more for less. The core issue with deflation isn't that its actually bad for anyone who actually works for a living. The problem is that its good for people who work for a living, but bad for people who steal money through investing for a share of the profit.
An economy that focuses on people who actually work for a living finds ways to drive down prices so they can afford more and enjoy more. We dont live under that kind of system, so we just get paid less and suffer more.
I don't know how this anti-intellectual slopulist drivel got any upvotes.
Economists care about the economy. It's what they study. It's an ecosystem and investors are just one part of it.
Inflation is bad for the wealthy. They now have to risk their money and can't just put it in a vault. Their wealth decreases if they don't put it to work and risk losing it.
Deflation is awesome for the wealthy. They already have a ton of money and now it's worth more. They get richer by doing nothing, and their power grows as the supply of money shrinks. A true deflationary spiral would end in some sort of feudal system with the wealthy holding more power than they do now.
At no point in the history of mankind has the average citizen had this much purchasing power and control of their financial status. It's not a perfect system, but it has lead to historical prosperity for regular people.
That's not true though. It's good for the people who have savings and can afford to hold their money. While the working class has higher spending power today, the money they spend today is devalued tomorrow.
Meanwhile, lower volume of purchasing (due to speculation on further deflation) incentivizes lower supply in an effort to fight deflation, which leads to job losses. And job losses lead to less spending, which leads to lower supply, which leads to job losses... you get the picture.
So in a very short-sighted view, deflation is good for workers because they can buy more pizza than they did before. But 6 months from now, you'll be jobless wishing you didn't essentially spend 10k bitcoins for a pizza. Meanwhile, the rich guy who just sat on his money will be worth way more, even if they did nothing.
An economy that focuses on people who actually work for a living finds ways to drive down prices so they can afford more and enjoy more. We dont live under that kind of system, so we just get paid less and suffer more.
Shallow and factually incorrect nonsense. Effectively every single consumer good has become cheaper, more accessible, and more advanced over time. Unless you're arguing that the average person today consumes less and has less than at any point in our history?
First of all all don't have to stop spending all together. As long as there's incentives to delay purchases even a little longer that effects the economy.
Second of all that's a global effect not just on you. If everyone is delaying their purchases sellers would need to lower their prices more to sell their items. And the more they lower their prices the more you're incentivized to delay your purchases. It's a positive feedback loop. It creates a runways effect.
Inflation on the other hand is the opposite. If you increase your prices people will buy less. You'll need to lower your prices to sell your product.
If you don't do anything inflation will take care of itself eventually and prices will level when supply and demand finds an equilibrium. If you don't do anything deflation will keep getting worse and worse indefinitely.
The us dollar has lost nearly a third of its value in the last decade alone. Prices keep going up, wages have stagnated. Where is this level out you're speaking of?
But it's not that I am buying food because it will be more expensive.
And all appliances are generally getting cheaper. Who would buy mentioned Nokia 3310 for $160 today? How come people have mobile phones even if they can wait for better price in a year?
Do people spend less on phones or more compared to yesterday? You're comparing the wrong things? Can I wait a year to buy the newest iPhone cheaper? Can I wait a year to buy the newest car for cheaper?
Would you buy one week worth of food right now if you know food is getting cheaper tomorrow or would you only buy what you need? Would you book your vacation with today's prices if you knew it'll be cheaper if book it later? Would you buy your plane tickets beforehand?
Would you buy new clothes now or wait until you actually need them? Sure if you can wait a year and buy clothes left from last year they'll be cheaper. That could be a nice way to be frugal.But in deflationary scenario even the newest most in fashion clothes would be cheaper.
Besides it's pointless to argue. This is not some theoretical idea. This is what happens jn deflationary economies wheater you intuitively think you yourself behave that way.
If people were keep buying things there won't be an inflation in the first place. There won't be any incentive to lower your prices if you're already selling your product. The point is once economy has a whole starts needing to lower their prices sell their product you'll need to keep lowering and lowering it unless that death sprial is interrupted somehow.
The problem here is less that regular people stop consuming and more that companies stop producing. If a company expects that it can do better by hoarding cash than by making and selling products, they will lay off staff and stop producing. Then the people who were previously just happy to have cheaper groceries suddenly have no money to buy groceries with at all.
I'm going to take my job as an example. My company employs 20k people world wide. We design, manufacture, and sell products you've never heard about. In some ways, they're "luxury" goods, because some of the segments we sell into don't legally require these products. They do however make the jobs faster, easier, and safer for the employees and producers making their products. One example of this, the product I specialize in, is used heavily in architecture, engineering, and construction. Some jobs require it, many jobs don't. Even on jobs its not required for, its a big nice to have.
But what if we enter a deflationary cycle? What if you're the budgeting group in charge of the purse strings and your group was about to buy one of these specialized devices that ranges from 40k-50k? Whats better for you and your employees? A) Pay 50k for a product you know will be 40k next year or B) wait until next year. And then C) wait until the year after that because it'll likely be even cheaper and you can make due with your current model. Repeat across the entire economy and most likely my company, and quite literally millions of other companies ranging from mom and pop specialized producers to multi-national corporations would watch their revenue and customer base drop by 20-30% in the first year. That kind of drop will be catastrophic and lead to layoffs that make Covid and 2008 look relaxing.
I would lose my job. Hell, my entire division of ~500, from engineers to sales to service to logistics would evaporate as the parent company consolidates to focusing on only products necessary for critical infrastructure (IE things that can't be pushed off a year). The same story would repeat around the country.
Now tell me; can I take advantage of lower prices when I'm unemployed? Will an employer want to pay me what I'm worth as an engineer if they know the longer they wait to hire me the less leverage I have and the more money I save?
Hiring someone is an investment according to the economy. Buying equipment is an investment. Buying materials, and the choices that come from that between different options that all meet spec, is an investment. Every single thing that happens in the economy is an investment. People would still buy their absolute needs, but the wants are what keep people employed. The wants are what pay for research and development into technologies that most people don't really think about but that make our lives easier and safer by margins.
What I'm trying to explain here that reduction in price is not bad generally. It is bad for you when you do it because no one is buying your product for 50k, so you must offer it for 40k.
If the cost to manufacture your product drops from 45k to 30k because of some new idea, then dropping the price may be ok. You may go to 40k and hire more people to manufacture more of it and outsell your competitors. This may be good.
What happens is that you buy the bare minimum as opposed to what you would usually buy.
See my other comment when it comes to gas prices. Instead of filling up right now you will delay until you absolutely need it. Even then you might not fill up because it can get cheaper later.
Or buying a house: if prices are falling you would wait. If prices are soaring, you buy as soon as you can
People will definitely buy more than usual if the price drop down because they could finally buy it.
If grocery prices go down, people won't suddenly stop doing grocery. They will go at it even more than before because now they can buy what they wanted to buy but couldn't afford
There is an initial surge when this happens, and your right that falling prices see a boost, but what follows is that labor is cut to increase profit margins and spending decreases. Suddenly work is hard to find and you need to stretch every dollar and prices are going down. So you cut things down to the essentials, but work is still hard to find because no one is hiring when profit margins are uncertain
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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?