Nobody is going to give hungry because food will be cheaper next year. Nobody is going to go homeless because rents will be cheaper next year. Even if doing nothing is a good strategy, humans aren't going to do nothing because our time on earth is finite and we hate saving.
Even in an inflationary environment the rational thing is not to consume, but to invest in investments where the expected return beets inflation.
From the perspective of the wealth (who account for most consumption) we have effectively been in a deflationary environment as their investment returns consistently beat inflation
A deflationary environment is the opposite, where people sit on cash instead of investing because they believe that the investments will be worth less than the cash in the future. Inflationary environments are what make investments the smart choice, if we were deflationary no one would invest money.
It's not that - deflation compounds the value of debt. Charging interest on debt can be thought of as taking a return on inflation, and makes sense, because debt is most often taken as leverage against the future value of something. The bank gets to offset inflation via my interest, and I get to realize appreciation on some asset using that leverage. With deflationary pressure, that whole equation breaks. You'd need to have negative interest to balance things out, but there would never be any incentive for a bank to loan money at a negative return when not loaning money generates a positive return.
This is the fundamental problem with deflation. Without leverage, modern economic systems as we know them fall apart and we'd revert to some kind of planned sustenance economy.
Not just from a private investor standpoint, but also for the government they need the economy to grow to have a hope of ever tackling the debt problem. Deflation would end up driving the interest rate up and would mean serious amounts of austerity. Jobs would be cut and without private investors growing the economy there would be massive amounts of unemployment.
I mean, I live in Australia and something like that could possibly be good for the economy. We have an incredibly nondiverse economy, basically the best way to make money is housing, which is out of reach for most, owning a business even more so.
Housing is unique because it’s simultaneously an investment, and a thing needed to live. The solution for Australia is to separate the investor side from the living needs side, so that people only have one house. But the rest of the economy still doesn’t want deflation
This is operating under the assumption that those investments actually drive anything at all.
I would argue that investment as we know it today has been so divested from its original meaning, we need to come up with a new word, or just call it economic gambling which feels more accurate.
You're equating investing with the stock market. The person above you is using the word as investing to mean buying supplies for a business, hiring new people, research and development, and building a new factory. They're using it like something investing in their future by eating well and going to the gym and you're thinking about it like buying lottery tickets.
Yeah, that makes sense if you don't think about it too hard. People will invest provided the expected return of investing is positive. If deflation means cash of 1.00 is worth 1.02 tomorrow. And investing means it is worth 1.04, the rational choice is to invest.
What the hell are you smoking. No one is going to face a 99% failure risk for 1% returns. High risk low reward investments don't get investors except those bad at math or addicted to gambling.
Imagine if a lotto scratch cost 5€ and you had a 1/1 million to make 6€. Do you really think you would get many takers?
Low risk low rewards? Sure all the time, bonds, steady stocks etc. High risk high rewards? Sure too, more daring investors, with a higher tolerance for risk will take these. Low risk High reward are unicorns that get swamped quickly or are scams, but to knowingly put money in high risk low reward is just stupid.
Bro, you don't know what expected return means. Please Google that and then come back. When expected return on lottery is greater than 1, hedge funds spend millions buying lottery tickets.
Please, please, please Google what "Expected Returns" mean
If expected returns are too close to 1, it stops being worth it. No company is going to spend a billion dollars to make back a billion dollars + 50 cents. You can't compare the investment against a vacuum, you have to factor in the opportunity cost. If your investment doesn't have a better return than basic government bonds, people aren't going to take it
Expected returns are also just that: an expectation. Inferred from statistical data, prior patterns, and can be wrong, so any respectable company takes into account that it's a figure that could swing either way. It's one thing for an investment to go from an expected ROI of 3x to 2x, but to go from 1.01x to 0.8x is ruinous.
Different companies, depending on risk aversion and accessible capital are going to have a different minimum acceptable RoI. But >1 does not guarantee takers like you implied.
If expected returns are too close to 1, it stops being worth it
Yeah, so I worked in Asset Management for some of the biggest global investment banks.
Have you heard of this thing called leverage? And in a deflation/low inflation environment interest rates are zero or negative which means you get paid to leverage (see Yen carry trade)
So your point is objectively false. As long as expected return is positive money will flow to it. And in a high savings environment (that deflation causes in theory). Leveraging is even easier.
If your investment doesn't have a better return than basic government bonds, people aren't going to take it
And why do you assume government bonds aren't an investment? Government uses that money to invest in infrastructure which further reduces operating costs for the entire economy by reducing energy, water and transportation costs. (See China for a modern example)
So government bonds are very much a form of investment
Inferred from statistical data, prior patterns, and can be wrong, so any respectable company takes into account that it's a figure that could swing either way
Yeah, now we are talking abiut Sharpe ratios and drawdown. But that's getting way to technical and is outside the expertise of most economists. This is more finance, but it's a solved problem. You can use options to reduce volatility (not recommended for lay people)
Expected return accounts for risk neutrally, but (for a lot of rational reasons) people are risk averse. As risk increases, expected return also must increase to be a “good investment”.
This is why, for example, stocks have a higher expected and historical return than bonds, which have a higher return than T-bills
This isn't just for investing in the stock market though. Who would buy a house if they knew that it would be losing value next year? Why would banks ever give out a mortgage if they lose the ability to sell the house and make back the loan amount? Over the length of the loan the house value goes down but the loan doesn't.
The other thing is that deflation causes more deflation. Sectors of the economy sensitive to deflation stagnate, and then the workers in that area of the economy lose their jobs and stop spending, and that affects the rest of the economy, and then those have compounding losses. Money and investments would fly to other countries where there isn't deflation instead of staying here having lesser returns, which would accelerate deflation again. It would cause a full economic collapse.
This is exactly what happened during the great depression.
Oh no housing becoming more affordable every year just like every consumer good under the sun, what a disaster!
"Housing needs to appreciate so people spend a higher percentage of their salary on shelter every year, otherwise that's bad for some reason - John Economics
Nothing will become more affordable. Your salary will go down along with prices. If you can't get salary increases to match inflation, you won't be able to stop your salary being cut because of deflation.
My savings will go further and give me more housing though. Unlike the current situation where savings are immediately eroded by more inflation and where owning a house generates more in price appreciation that the median person's salary, year after year.
Also the threat of salary cuts is cute when salaries have already plummeted in real terms in the last five years. And unemployment has already skyrocketed.
Armchair economists describing the horrors of deflation always manage to accidentally describe the current situation under excess inflation.
There's nothing that says moderate deflation for a while would be a bad thing. Switzerland and Germany had this for almost the entirety of the 2010s and it wasn't an issue.
The problem is a permanent deflation doom loop. But that is just as likely of a problem as runaway inflation, which has historically been more prevalent and achieves the same disastrous effects just much faster.
This focus on scary deflation is just a dogmatic knee jerk reaction based on ridiculous straw men scenarios.
You're absolutely correct. That's why nobody buys cars... do you guys ever try to apply your theories on a macro level. The contradictions are everywhere and are simple to identify.
Deflationary spiral is purely theoretical and has never been observed. What we have seen is that recessions cause deflation, and as recessions increase deflationary effects increase.
That observation is the same as saying supplementary spiral. People get sick. Take vitamin supplements. As illness spreads more through population more people take supplements. And therefore concluding that the supplements are making people sick
You'll buy a car if you have to, because the old one broke or whatever. But you won't buy a car now if you know it'll be several thousand cheaper next year.
So yeah, essentials are gonna keep selling like they always have, but most non-essential purchases are going to grind to a halt. Not all of them, mind you, but majority, which is enough to topple businesses and cause massive layoffs across basically all sectors of economy.
Not all of them, mind you, but majority, which is enough to topple businesses and cause massive layoffs across basically all sectors of economy.
Heavily assumption based. We don't knoe why prices are falling. You are assuming a reception. Assuming productivity simply increased so that the cost to make a car dropped by 20%
We can have people buying more cars, cars selling for less, overall expenditure on cars being down and yet corporate profits still increasing due to reduction in expenditure.
China has grown in near deflationary environments. Japans economy has remained stable in deflationary environments while QoL improved.
Median QoL in the US has gone down despite slight inflationary environment. When we observe the biggest economies in the world, the observable facts do not support the deflation = recession hypothesis
Car loans and mortgages carry vastly different risk profiles and repayment plans to account for the fact that brand new cars are a depreciating asset and houses aren't to the same extent, not to mention the 5-10x difference in principle amount.
And to be clear, it's brand new cars that are considered depreciating assets. Used cars tend to hold value much better.
A mortgage company won't approve a loan on an asset where they don't expect that the asset can cover the principle, because 15-30 years is a long time to assume that a person will stay committed to a single home. PMI exists for this exact reason, in case a person's equity isn't high enough to cover for a gap between the sale of the asset and the remaining principle.
Most car insurance also includes gap coverage for the same reason. Car loans don't typically have to factor resale value because they rarely exceed 8 years or so. Cars get totaled more often than they get sold before the loan is paid off.
In a deflationary environment, unemployment drives market changes. An unemployed person can't afford their mortgage, so they sell, but everybody needs to sell at the same time, so prices fall, which causes mortgage holders to panic because their assets are valued for less, which causes mortgage terms to become much more conservative (no more 30 year loans), which further causes house prices to fall (because less people can afford the new mortgage terms) until a new equilibrium is reached, or mortgage companies are forced to declare bankruptcy (aka market failure).
Deflationary spiral hasn't happened because most nations have a Federal Reserve equivalent that bails out an industry before total collapse. This is what happened in '08.
Didn't bother reading tbe whole thing. I've lost interest in this debate. We're going in circles. Homes are deprecating according to tax law. Only land appreciates. Therefore mortgages on apartments should be near impossible as land value in high density housing is a fraction of the overall spend.
Your theory runs counter to observable facts. Read the other comments. I'm debunking the same claims over and over again. Nothing new is being stated.
Observe the economies of US, China, Japan, Germany from 1990 to 2025. Look at these economies during periods of deflation. Evidence runs counter to theory.
I wonder why my property tax assessment keep going up then... it's almost like home prices don't depreciate every year, even if you can write off asset depreciation as a tax incentive (because maintenance costs usually can't be deferred and the write off is the assumed amortized rate).
Real estate shouldn't exist by your logic, but it clearly does.
If you're not going to read the whole comment, then don't respond. You just look foolish.
Read your whole comment. It's as dumb as I thought. The entire crux of your argument is deflation causes GDP decline. That is an unobserved phenomena. Yes, if you make up random facts, you can justify whatever.
Your commentary on real estate implies that there is no real estate in Japan. And yet people are not all homeless there...
Your points run counter to observable facts. There is no point in this discussion. I'm arguing what we can observe. You are making up observations to support your theory. Your argument is essentially "falling solar panel prices will kill the renewable energy market."
People see cars as assets that they purchase for the purpose of transporting themselves to their destinations, not as financial instruments that they invest in to get future return like they often do with housing.
But keep going with your smug dipshittery, my guy. Why simply look up what economists think when you can just assume they’ve never asked even rudimentary questions about the most basic theories?
You are repeating the economists claim about deflation without acknowledging how they came to that conclusion and the limitations they admit in that.
For the purpose of maximising GDP growth, deflation is non-ideal. For the purpose of maximising median living standards, there is a lot of evidence that deflation is good provided it is not caused by a recession
Don't bother arguing with these people. They are wrong about everything. Japan lived with deflation for years, as did the Eurozone sporadically. They didn't predict the GFC, they said that QE straight after would be highly inflationary, they said that there would only be "transient" inflation after COVID. Did you know that their models treat banks as ordinary companies, and that they only just concluded in the last ten years or so that banks create money? Did you know that they don't have a definition of money? It's just a cavalcade of nonsense on stilts that is little better than astrology.
But deflation or inflation don’t really influence people’s desire for goods, just whether or not they’re in a position to be able to afford those goods.
yes, right now holding assets (stocks included) is better then holding cash. Debt is cheap. And there is zero incentive to save money or be frugel.
The wealth divide everyone is upset about exists between those with assets and those without. Everyone is leveraged up to their eyeballs and have no money. Prices of everything is not inline with actual society.
We needed deflation a decade+ ago it would have been short lived preventing these issues. I dont even know if we can survive it now, we arnt going to survive the current plan either, so go for it!
why on earth would you hold money instead of buy stocks? or a phone? or anything not a dollar? the dollar will be worth less tomorrow and the day after.
No, inflationary environments don’t make investments a smart choice, they make them the only choice, because if you hold cash you lose your purchasing power over time. That’s a bug not a feature, but it’s been prettied up to sound like one for decades.
As the guy above you said, consumption is unwise under deflation because if you hold the cash you gain more value, but it’s ALSO unwise under inflation because while holding the cash erodes your purchasing power, you’d be better off putting that cash to work in an investment rather than holding it.
Deflation = hold cash and gain value, hold assets and lose value
Inflation = hold assets and gain value, hold cash and lose value
It’s two sides of the same coin. An economy which minimizes both sides is the ideal situation because both your cash and assets retain value and don’t incentivize or disincentivize one over the other.
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u/thevoidthatjerksback 8h ago
I doubt that anyone could explain this in a way where I would accept deflation as worse