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Why do people consider deflation bad?

A

Anarchist420

Diamond Member
I've never understood why so many people consider deflation (decrease in money supply, not prices falling because the market is in bad shape).

Can someone explain?

The only time I think deflation can be bad is if a nation is a major exporter or if someone is deeply in debt. I believe Japan has trouble with deflation because they export a lot and tend to import very little and because their deflation jumps up and down erratically from month to month, rather than steady deflation.

Otherwise, a fixed money supply and 100% reserve banking works perfectly, unless you have low self control--that is, buy everything on credit rather than save for a little while.
 
because you expect to get a certain price when you make something, you pay your bills based on that (for parts, labor, etc.), and then you get less. so next time you can't afford to make as many, you have to purchase less labor, fewer parts, etc. and while that's ok in doses here and there, a general price level fall would hit nearly everyone at the same time.
 
I'm not sure why you feel the need to call a decrease in monetary supply "deflation". Deflation normally refers to the falling prices that you say we shouldn't consider. A decline in monetary supply often leads to falling prices, so they are closely linked, but they are not the same. But, I'll talk about a monetary supply decrease since that is what you asked for.

A decrease in monetary supply means that people have less cash and/or less ability to buy goods/services. If that doesn't sound bad to you, then you probably aren't human. People like to have cash and people like to have the ability to buy things. Would you really like half of your cash to disappear? Psycologically, that isn't a good thing for you or for the economy.

Of course, you could debate that it is relative. If everyone had their cash cut in half, then you could argue that everyone is essentially the same. That sounds good on a forum, but it isn't good when you think about it. Just because your cash was cut in half doesn't mean your debt was. And therein lies the problem. With a decrease in monetary supply, people will be forever paying their debt to get out of their now much bigger hole. People thus cannot buy goods/services. Thus that leads to underutilization of factories and buisnesses. That usually leads to unemployment and declining prices. Which leads to more reductions in monetary supply, which leads to more deflation, which leads to more unemployement, etc.

Now, to fix that, you could argue that we eliminate all debts and decrease the monetary supply simultaneously. I suppose that wouldn't hurt as much (ignoring the psychological effect of seeing your bank balances slashed). But we'd still live in a society where future debt is far more costly. What if the monetary supply dropped again? I certainly wouldn't want to be holding debt in that case. So, people will avoid debt. They won't gain leverage. Small businesses can't afford to take a great idea and market it since they can't afford debt (how can they get a new factory running without debt?). A world without risk is not a world that I'd want to be in.
 
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Deflation deals with a decline in prices as said above, not the money supply. The money supply does affect prices (such as when it increases so do prices due to the rise in demand because there are more dollars chasing goods), but they are two separate things.

Falling prices are good, correct? Not necessarily. Deflation has the tendency to feed off itself. Let's say there is a period of economic distress (like the present!) and consumer confidence is extremely low. They will spend less and save more, decreasing overall demand for goods. This decrease in demand causes a subsequent decrease in price levels, deflation. As prices fall this causes consumers to spend even less, demand goes down even more, and deflation becomes even stronger.

The effect is a very destabilizing force to the markets which can make any kind of economic recovery that much harder. Because it does in fact feed off itself, once it sets in deflation can be hell to get rid of.
 
UglyCasanova said:
As prices fall this causes consumers to spend even less,
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Why? As prices fall, people usually spend more, don't they? If something cost less this year than it did last year, what is making me less likely to buy it? Or are you referring to the falling of wages in conjunction with falling prices?
 
PeshakJang said:
Why? As prices fall, people usually spend more, don't they? If something cost less this year than it did last year, what is making me less likely to buy it? Or are you referring to the falling of wages in conjunction with falling prices?
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When prices are falling, people stop buying. Why buy a $20k car today when it'll be $18k next month? Why buy that $18k car next month when it'll be $17k in October? Why buy in October when it'll be cheaper in December? Same goes for inexpensive items.

Sales only work when they are short-term. People buy at the sale price since they know the price will go back up. That isn't true in deflation (which usually lasts for years). People will wait years to buy since they want the best price. Since people wait to buy, businesses wait to hire (or worse, fire/cut wages). Once businesses hurt their employees, suddenly it switches from a situation where people won't buy into a situation where people can't buy. And the deflation just gets worse.
 
USA has assloads of debt. Metric shit tons even. The government and the citizens. Deflation makes the debt effectively larger.

So, the USA is like this guy who just dug himself a 50 foot deep hole and is stuck in it. The hole represents debt. He goes "Oh shit, I'm in a pickle now." And then the sides of the hole collapse on him and that would be deflation.
 
dullard said:
When prices are falling, people stop buying. Why buy a $20k car today when it'll be $18k next month? Why buy that $18k car next month when it'll be $17k in October? Why buy in October when it'll be cheaper in December? Same goes for inexpensive items.
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But you pay more for having it longer.
 
PingSpike said:
So, the USA is like this guy who just dug himself a 50 foot deep hole and is stuck in it. The hole represents debt. He goes "Oh shit, I'm in a pickle now." And then the sides of the hole collapse on him and that would be deflation.
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Hmm. So as I see it, that man's best bet is to keep digging. That's probably the only way he'll get out.

And hey, by the time the walls collapse, he'll be dead anyway and somebody else will be in the hole. Who cares.
 
Deflation generally does benefit some. Fixed earners and Creditors, for instance.
Since Inflation is the reduction in the real value of money, Deflation is the opposite.
The issue from an Economic point of view is often centered on the reduction in the aggregate demand for goods and services. This leads to the reduction of investment and obviously the elimination of jobs and that downward economic spiral. Consider that in an inflationary era folks buy now to avoid the price of tomorrow's product offering and often do so with the creation of debt. It is in this creation of debt and the associated feeling of prosperity that an otherwise stagnant economy grows.
In today's economy if they reduce (if they could) the supply of money to deal with the decrease in demand they'd more than likely increase the effect of deflation and we'd have 40% unemployed and a FED that prays for the consumer to increase its debt and buy, buy, buy... maybe even American made products.
 
Why do people consider deflation bad?
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I would consider it bad because I have a home mortgage and an auto loan. The payments are fixed. So, in a deflationary time I could expect to earn less, yet those payments would remain the same - not a good deal for me by any means. It effectively makes my payments more expensive.

Inflation is the opposite. As long as I can expect my earnings (in $'s) to increase, inflation is my friend. Here again, my loan payments are fixed and inflation makes them effectively less expensive.

Fern
 
Fern said:
I would consider it bad because I have a home mortgage and an auto loan. The payments are fixed. So, in a deflationary time I could expect to earn less, yet those payments would remain the same - not a good deal for me by any means. It effectively makes my payments more expensive.

Inflation is the opposite. As long as I can expect my earnings (in $'s) to increase, inflation is my friend. Here again, my loan payments are fixed and inflation makes them effectively less expensive.

Fern
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also let's not forget that loans are priced with the expectation of mild inflation. so while inflation is your 'friend,' you're already paying for it with slightly higher interest rates than if inflation were expected to be lower or 0.
 
you already posted in the other thread anarchist, but I'll repeat myself and hope that you have the capacity for learning and retention.

Horded money increase in value, this stifles the incentive to invest which further restricts cash flow compounding the deflationary trend. A true deflationary cycle is the worst possible economic cycle, the economy dies.

In an inflationary spiral people want to spend/invest money as quickly as possible because it loses value, this gives the economy a life of sorts.
 
Deflation discourages spending, hiring, and investing (because products you want to purchase, the wages of those your want to hire, and the securities you want to put your money in will all be cheaper/less-valuable tomorrow) and encourages saving (because dollars earning interest - or even stuck in a mattress - will be worth more tomorrow), which effectively brings the economy to a screeching halt.
 
UglyCasanova said:
Deflation deals with a decline in prices as said above, not the money supply. The money supply does affect prices (such as when it increases so do prices due to the rise in demand because there are more dollars chasing goods), but they are two separate things.

Falling prices are good, correct? Not necessarily. Deflation has the tendency to feed off itself. Let's say there is a period of economic distress (like the present!) and consumer confidence is extremely low. They will spend less and save more, decreasing overall demand for goods. This decrease in demand causes a subsequent decrease in price levels, deflation. As prices fall this causes consumers to spend even less, demand goes down even more, and deflation becomes even stronger.

The effect is a very destabilizing force to the markets which can make any kind of economic recovery that much harder. Because it does in fact feed off itself, once it sets in deflation can be hell to get rid of.
Click to expand...

Let us also not underscore the effect on job creation/retention that long term deflation has on the economy.

Nevermind it was already mentioned.
 
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Well, thanks for kind replies, guys. I tend to disagree though. People don't need to be buying everything on credit. Even though deflation encourages saving, you still have to spend money to live.

I think the economy would recover in a heart beat if prices and wages fell due to a decrease in the money supply. People with money saved up could basically spend just a fraction more of their money, and they'd have the people without a whole lot of money rescued.
 
Anarchist420 said:
Well, thanks for kind replies, guys. I tend to disagree though. People don't need to be buying everything on credit. Even though deflation encourages saving, you still have to spend money to live.

I think the economy would recover in a heart beat if prices and wages fell due to a decrease in the money supply. People with money saved up could basically spend just a fraction more of their money, and they'd have the people without a whole lot of money rescued.
Click to expand...


Jesus wept.
 
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