Why Falling Prices Are Actually a Really Bad Thing
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Why Falling Prices Are Actually a Really Bad Thing
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Re: Why Falling Prices Are Actually a Really Bad Thing
#2Yep, it's called deflation and it leads to hoarding behavior and a stagnant economy. See Japan in the 1990s for a good example.
Re: Why Falling Prices Are Actually a Really Bad Thing
#3I would believe these types of pop-economics articles a lot more if they could actually find and example of a deflationary spiral causing a long term depression.
Prices for many things already do decrease regularly. Every time I purchase a new computer I'm faced with the knowledge that, in 6 months time, a better, cheaper (or at least better value) model will come out. This myth that consumers will endlessly postpone purchases in the face of falling prices ignores the fact that a lot of ourchases cannot be postponed indefinitely.
And even if consumers postpone spending, it means they are saving. Which builds the investment base necessary for growth.
The point is that a currency cannot deflate to an infinite value, but it can be inflated to a zero value. There has been plenty examples of the latter, but zero examples of the former.
The real reason for the FUD around deflation is that it's not good for central banks. They, and their supporters are just talking their book. Fair enough, but like high or low currency values relative to other currencies, there are always winners and losers with deflation and inflation. One side is not inherently more evil than the other.
What would be really great is constant value of currencies over time. That would be mildly deflationary as technology increases production efficiency, and it would ward off a lot of bad investment decisions which excarbate the boom/bust cycle.
Re: Why Falling Prices Are Actually a Really Bad Thing
#4"When shoppers see persistent price declines, they hold out on buying things." and yet I keep buying computers... I don't think I agree with this statement (unless there is massive deflation).
Re: Why Falling Prices Are Actually a Really Bad Thing
#5OK, this article explains deflationary spiral.
This depends on the assumption that people hold out on buying non-urgent goods in the belief that prices will continue to fall - leading prices to fall further. But in the current economic climate, almost nobody is buying non-urgent goods anyway. (Yet we have seen consistent inflation)
The current 'deflation' is primarily led by a sharp downtick in oil prices that won't be repeated - there's no immediate suggestion that prices will continue to fall.
With years of consistent inflation above wage increases compounding to give high prices, any deflation is just as likely to be seen by consumers as a relief from high prices - a good opportunity for people to spend the money they've been holding onto.
Re: Why Falling Prices Are Actually a Really Bad Thing
#6I would believe these types of pop-economics articles a lot more if they could actually find and example of a deflationary spiral causing a long term depression. Prices for many things already do decrease regularly. Every time I purchase a new computer I'm faced with the knowledge that, in 6 months time, a better, cheaper (or at least better value) model will come out. This myth that consumers will endlessly postpone…
Congratulations for confusing micro and macroeconomics.
What happens to the price of a single good over the lifetime of that good is not a useful lesson in what happens as a result of broad, economy-wide deflation.
Frankly, the issue with purchase postponement isn't the biggest problem (although it's certainly a concern, as is hoarding). In my mind the biggest problem is wages being inelastic downward. As all prices deflate, income for employers goes down (or thought of another way, the value of money goes up which makes each employee more expensive). That forces two options: fire employees, or cut salaries. The latter is very difficult. So instead you see the former.
So you get broad based increases in unemployment. That leads to reduced consumer spending, which forces prices down even further, and so on.
As for real life examples, perhaps the Great Depression qualifies?
http://www.economist.com/economics-a-to-z/d#node-21529653
If you're looking for a more contemporary example, Japan experienced its own deflationary spiral:
http://www.forbes.com/sites/jamesgruber/2014/04/27/japan-def...
Re: Why Falling Prices Are Actually a Really Bad Thing
#7It's definitely a bad thing for all the big banks holding oil that just got f#$@@d
Re: Why Falling Prices Are Actually a Really Bad Thing
#8If I knew the price of everything I buy would be 1%-2% lower next quarter, it wouldn't affect my spending behavior at all. I have, in fact, known gasoline was dropping by a lot more than that for the past two quarters, and I've not put off even casual consumption. Marginal deflation isn't enough to change my spending habits, and my mortgage and utilities are pretty fixed.
Re: Why Falling Prices Are Actually a Really Bad Thing
#9I would believe these types of pop-economics articles a lot more if they could actually find and example of a deflationary spiral causing a long term depression. Prices for many things already do decrease regularly. Every time I purchase a new computer I'm faced with the knowledge that, in 6 months time, a better, cheaper (or at least better value) model will come out. This myth that consumers will endlessly postpone…
The other reason for so much FUD is that the modern economy is entirely based on debt -- personal, corporate, and (especially) government. Therefore central banks needs to keep the bubble growing perpetually so that the debt can be serviced. But it can't continue forever...
Re: Why Falling Prices Are Actually a Really Bad Thing
#10I would believe these types of pop-economics articles a lot more if they could actually find and example of a deflationary spiral causing a long term depression. Prices for many things already do decrease regularly. Every time I purchase a new computer I'm faced with the knowledge that, in 6 months time, a better, cheaper (or at least better value) model will come out. This myth that consumers will endlessly postpone…
Congratulations for confusing micro and macroeconomics. What happens to the price of a single good over the lifetime of that good is not a useful lesson in what happens as a result of broad, economy-wide deflation. Frankly, the issue with purchase postponement isn't the biggest problem (although it's certainly a concern, as is hoarding). In my mind the biggest problem is wages being inelastic downward. As all prices…
Salary is somewhat elastic if nothing else fire and rehighering works. The real issue is debt is not elastic. So it becomes an unbound risk durring deflation.