Why do people consider deflation bad?

[LunarRay]

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.

People act based on what they think [all other things being equal]. That said, the folks with saved funds will act accordingly and those in debt will too. Given that these folks will act according to their condition and belief and deflation still occurs your argument is not well grounded.
Deflation really is a downward spiral and it continues until some force acts with sufficient psychological and economic thrust to reverse that situation. A war for instance would do more to reverse deflation than most anything else... depending on the extent of it and the ability for that war to be enabled. There is little difference, economically, between a bomb being made and dropped and a highway being made and not used.... There is however, between the psychological aspects of "Supported" war and of peace.
Remember, the national debt is subject to interest and interest payment comes from revenue and more national debt... sooner or later that demands remedy. It also tends to move folks to supporting Isolationism... or that is forced to the extent the economy of that debtor nation is not fully intertwined with the rest of the world economy....
When the entire world is in the same boat... you can get back to Adam and Eve before the economy starts up hill again, imo.

 

[Fern]

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.

You've hit on it, perhaps unintentionally.

Those hoarding cash now are the only ones who would benefit from deflation.

Most of us have a net worth consisting of hard assets such as homes, along with the debt on those assets.

As I've explained deflation makes your debt more expensive, and it also makes your hard asset less valuable.

If you think we have a housing crisis now, just consider for a moment what that would look like if we had deflation. Talk about foreclosures and people walking away from homes, geesh.

Fern

 

[Darwin333]

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?

Because most people have debt that is considered reasonable like mortgages and auto loans (throw CCs out the window for the moment) and what your home is worth in terms of actual dollars (that you borrowed before the deflation) has decreased. You can't sell it and it costs you more "value" to service the debt.

It costs you "more" to pay those loans off. OTOH, people with zero debt and a lot of cash make out extremely well because the cash purchases more.

And why wouldn't wages drop with significant deflation? If making $20K a year would purchase the same stuff as someone currently making $200K a year does do you think a burger flipper would still make $20K?

 

[dullard]

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.

Have you tried this in historical context? What happened the two previous times that monetary supply (say the M3) decreased? What happened in the years 1928-1932 and what happened in the years 2009-2010? Did the economy recover in a heart beat in those cases? Did people with money saved up do well? How did the people without a whole lot of money do?

What happened when monetary supply stagnated (didn't fall but didn't rise either)? Consider the years 1937-1940, 1959-1960, and 1989-1990. Do you see any pattern?

Finally, what would the wealthy buy if there aren't stores selling and if there aren't manufacturers making goods?

 

[LunarRay]

You've hit on it, perhaps unintentionally.

Those hoarding cash now are the only ones who would benefit from deflation.

Most of us have a net worth consisting of hard assets such as homes, along with the debt on those assets.

as I've explained deflation makes your debt more expensive, and it also make your hard asset less valuable.

If you think we have a housing crisis now, just consider for a moment what that would look like if we had deflation. Talk about foreclosures and people walking away from homes, geesh.

Fern

Imagine the kind of investment vehicles that IRA, 401k, etc. are made up of. Stocks and Bonds make up a large percentage, I'd wager.
Where do the folks go when they 'walk away' from their homes? The mess that deflation creates is total and complete.
Who holds cash? What will they use it for, food and the essentials of life? Not nearly a long term prospect there. Folks will take from the cash horder the means to survive to survive themselves... I think.

What we need doing is creating a more isolationist mentality and recreate the American Manufacturing that sustained us and let the chips fall where they may. Buy only American! This is war... an economic war that we can win or lose depending on what direction we go in... We must change the agenda of One World everything folks.
Well, imo..

 

[LunarRay]

Because most people have debt that is considered reasonable like mortgages and auto loans (throw CCs out the window for the moment) and what your home is worth in terms of actual dollars (that you borrowed before the deflation) has decreased. You can't sell it and it costs you more "value" to service the debt.

It costs you "more" to pay those loans off. OTOH, people with zero debt and a lot of cash make out extremely well because the cash purchases more.

And why wouldn't wages drop with significant deflation? If making $20K a year would purchase the same stuff as someone currently making $200K a year does do you think a burger flipper would still make $20K?

Wages depend on being employed... Deflation disincentivises investment and ergo, employment... the rate of job creation will pass zero percent and move negative until only farmers and police are employed.

 

[Darwin333]

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.

Wouldn't the exact opposite be true then as well? If prices and wages rise due to an increase in the money supply people with debt would greatly benefit and rescue the people with a whole lot of cash but very little assets?

Stability should be the goal, no inflation and no deflation. I have heard interesting arguments on how to make that possible, basically the monetary system would be "mechanical" and the amount of money AND credit in the system would be mechanically tied to population and GDP. Even if it was possible (I am no expert in the field but it sounded reasonably plausible) our government (and the people that own them) would never relinquish control over the monetary system.

 

[Fern]

Imagine the kind of investment vehicles that IRA, 401k, etc. are made up of. Stocks and Bonds make up a large percentage, I'd wager.

Bonds would be looking pretty sweet. Unless they were corporate and defaulted. I'd wager most have a recall provision though, and they would be executed immediately.

Stocks I think would be a wash. They drop in value to match purchasing power etc.

Where do the folks go when they 'walk away' from their homes? The mess that deflation creates is total and complete.

Yeah, that would be a helluva mess. Banks, while holding loans (and thus look to come out ahead) have much of them backed by hard assets (e.g., homes and auto etc) and would get hammered.

I don't know where people would go. When you're evicted you're evicted. I guess most of us would end with crappy credit and eventual buy each others' homes on the foreclosure market for a very low purchase price.

Fern

 

[Fern]

Wouldn't the exact opposite be true then as well? If prices and wages rise due to an increase in the money supply people with debt would greatly benefit.....
-snip-

Exactly.

Your hard asset would appreciate in value while debt would fall.

Cash holders, bond holders (principal loss) and bankers hate inflation.

Fern

 

[Darwin333]

Wages depend on being employed... Deflation disincentivises investment and ergo, employment... the rate of job creation will pass zero percent and move negative until only farmers and police are employed.

Depends on which side you are on. As a business owner who has a lot of cash I would happily gobble up assets that have significantly reduced in price and grow my business. Of course that assumes we aren't in some sort of death spiral (in either direction) and I can reasonably forecast that the economy will correct and I will have a customer base. In a perfect scenario the "value" of a company would reduce at the same rate as deflation so my 401K and stocks would still be "worth" the same in terms of purchasing power. If I had a ton of cash on hand I could actually buy much more of a company with that cash (make a better investment because I am getting more value now than the value I have saved in cash) than I could before the deflation.

The debt, which we have a metric fuckton of, would crush us though. Massive defaults, bank failures due to the defaults and reduced value of the collateral compared to the value of the money lent (not that I would shed a tear for the banksters), and I would assume the .gov would have an equally hard time servicing its debt.

 

[piasabird]

When you pay for a piece of property, you lose money. Duh!

The Moral for this story is a House is not an investment. It is a money pit.

This is one of the lessons on Donald Trump's training tapes.

 

[Engineer]

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

I don't owe anyone so I welcome our new deflationary overlords! :sneaky:

When you pay for a piece of property, you lose money. Duh!

The Moral for this story is a House is not an investment. It is a money pit.

This is one of the lessons on Donald Trump's training tapes.

I agree 1000000%. I truly believe it was HGTV and shows like "Flip This House" that got us into this fucking economic mess to begin with, lol!:awe:

 

[Zebo]

Simple you got a $2000 Mortgage and boss says I'm only going to pay you $500 mo. now due to deflation. Good luck with that. You got a new $250,000 combine from bank and wheat goes through floor. etc.

People who own or have cash no problem. But most don't our whole economy is highly leveraged and depends on inflation.

 

[Cogman]

There are several reasons deflations is bad.
1. All debts are effectively increased.
2. There is a higher incentive to save money then there is to spend it, that hurts all business.
3. The amount of exports will effectively decrease as the value of the dollar increases. Foreign countries don't like to buy expensive stuff.
4. The market doesn't always react as fast as the dollar value changes. In other words. the value of the dollar may increase, but the cost of many goods may remain the same (especially foreign goods.) That essentially causes you to get less for more.

 

[Zebo]

Imagine the kind of investment vehicles that IRA, 401k, etc. are made up of. Stocks and Bonds make up a large percentage, I'd wager.
Where do the folks go when they 'walk away' from their homes? The mess that deflation creates is total and complete.
Who holds cash? What will they use it for, food and the essentials of life? Not nearly a long term prospect there. Folks will take from the cash horder the means to survive to survive themselves... I think.

What we need doing is creating a more isolationist mentality and recreate the American Manufacturing that sustained us and let the chips fall where they may. Buy only American! This is war... an economic war that we can win or lose depending on what direction we go in... We must change the agenda of One World everything folks.
Well, imo..

A lot of stocks and bonds are a derivative of debt and it being paid. Stock crash too would come.

 

[CycloWizard]

Simple you got a $2000 Mortgage and boss says I'm only going to pay you $500 mo. now due to deflation. Good luck with that. You got a new $250,000 combine from bank and wheat goes through floor. etc.

People who own or have cash no problem. But most don't our whole economy is highly leveraged and depends on inflation.

Those of us who have government jobs are sitting pretty...on the couch at home...receiving raises and bonuses every year regardless of what happens in the real world. It's absolutely twisted, but it's just about the only safe investment out there right now because everyone in every party wants more government.

 

[Zebo]

Those of us who have government jobs are sitting pretty...on the couch at home...receiving raises and bonuses every year regardless of what happens in the real world. It's absolutely twisted, but it's just about the only safe investment out there right now because everyone in every party wants more government.

I don't blame y'all gettin while gettin good.

Unsustainable.

http://www.zerohedge.com/forum/government-bubble-spells-trouble

 

[LegendKiller]

Deflation is a cyclical event that triggers multiple rounds of deflation. For lack of a better starting point, let's start at the consumer level.

1. Joe Six Pack has less money to spend since credit is less available (money supply shrinks, although this is a derivative effect, since you're focused on monetary deflation we'll start there).

2. Since J6P has less money to spend he cuts back on buying goods.

3. Lesser goods equates to lesser demand for production.

4. Lesser demand for production equates to fewer jobs needed.

5. Fewer jobs needed results in less money to spend.

6. Since an employer knows that prices are going down he won't invest in capital improvement, new employees, or anything else.

7. Fewer jobs since businesses won't expand or even replace old equipment until the equipment is dead, no need to invest if it's going to be cheaper.

8. Since you don't know if you're going to have a job, since the boss isn't investing in PPE (plant property and equipment) and employees, you cut back spending.

9. Since you know that prices are going down, you buy less stuff, why buy now if it's going to be cheaper tomorrow?

10. You lose your job.

11. Less demand for goods.

12. Economic uncertainty kicks in, the stock market goes down since the stock market is nothing but an expectation of how much future earnings are worth today. Market crashes.

13. Retireees spend less money since their investments are worth less.

14. Lenders say "fuck it", asset values are declining, businesses look less profitable, why lend when it's much riskier?

15. Price elasticity kicks in, demand for goods collapses as everybody in the entire economy refuses to pay "market" prices since they know things will be cheaper.

16. More jobs lost.

17. Less people to spend money.

18. Less money willing to be lent.

19. More businesses go under since they can't adjust prices quick enough to meet the fickle "market" price.

20. Mass defaults in debt.

21. Money lost from defaults.

22. Fuck it, might as well go be a pig farmer. Free bacon, right?


Do you get it yet Anarchist? You may hate credit, but credit isn't evil. Deflation is a bad thing, it adds uncertainty and a self-defeating cycle. This is why mild inflation is far more preferable. While deflation rewards savers, there won't be any savers left if nobody is buying anything since the economy will effectively grind to a halt.

 

[rchiu]

You guys are missing the point here. Inflation or deflation isn't good or bad by itself. They are just the symptom of what's going on, what's good or bad is the cause of inflation of deflation.

Inflation could be cause by many things, good job market and increased salary pushing the money supply up. Or government keep borrowing and spending to keep and demand up. Or some external event that make goods scarce and push the supply down.

Same thing with deflation, half of people become unemployed and unable to buy anything. Something happens and caused oil, milk, whatever to become cheap.

So the point is not if inflation or deflation good or bad, but what's going on behind that's good or bad.

 

[Cogman]

You guys are missing the point here. Inflation or deflation isn't good or bad by itself. They are just the symptom of what's going on, what's good or bad is the cause of inflation of deflation.

Inflation could be cause by many things, good job market and increased salary pushing the money supply up. Or government keep borrowing and spending to keep and demand up. Or some external event that make goods scarce and push the supply down.

Same thing with deflation, half of people become unemployed and unable to buy anything. Something happens and caused oil, milk, whatever to become cheap.

So the point is not if inflation or deflation good or bad, but what's going on behind that's good or bad.

high inflation and deflation are bad in and of themselves for the reasons that have already been posted here. The reasons for for high inflation/deflation just adds to why they should be avoided.

 

[JS80]

You guys are missing the point here. Inflation or deflation isn't good or bad by itself. They are just the symptom of what's going on, what's good or bad is the cause of inflation of deflation.

Inflation could be cause by many things, good job market and increased salary pushing the money supply up. Or government keep borrowing and spending to keep and demand up. Or some external event that make goods scarce and push the supply down.

Same thing with deflation, half of people become unemployed and unable to buy anything. Something happens and caused oil, milk, whatever to become cheap.

So the point is not if inflation or deflation good or bad, but what's going on behind that's good or bad.

You beat me to it. In real life deflation/inflation is a reflection of what is going on in the economy.