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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

#21

Post by Amezarak »

learnstats2 wrote: post #5

OK, 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…

> (Yet we have seen consistent inflation)

Last month, the US inflation rate was 0.8%.

For 2014 as a whole, it was 1.6%.

This is, in fact, credited in part to low consumer demand. Slack demand generally leads to job cuts, which leads to even slacker demand. That's the spiral they talk about.

> 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.

This is why economists talk about core inflation, to remove as much as possible the influence of volatile commodities such as oil. Inflation will remain very low even with oil prices go up. Since 2008, inflation has actually at times been negative (i.e., deflation.)

People who think deflation is a good thing need only look at the Great Depression, Japan, the present Eurozone, and the 2008 recession. Just because high inflation is bad doesn't mean that deflation is good.

Re: Why Falling Prices Are Actually a Really Bad Thing

#22

Post by [deleted] »

msandford wrote: post #19
zzalpha wrote: post #6

Earlier quoted context omitted.

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…

Yeah man, super true! For example if prices were to start falling I'm going to start putting off the following purchases: 1. New computer 2. New TV 3. New stereo 4. Toilet paper 5. Food 6. Gasoline 7. Rent 8. A new-to-me used pickup truck 9. Clothing 10. Several dozen other things which I can't really wait for but which I will pretend I could for the sake of making a point EDIT: Yes guys, I do realize that it's a mar…

[deleted]

Re: Why Falling Prices Are Actually a Really Bad Thing

#23

Post by Amezarak »

msandford wrote: post #19
zzalpha wrote: post #6

Earlier quoted context omitted.

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…

Yeah man, super true! For example if prices were to start falling I'm going to start putting off the following purchases: 1. New computer 2. New TV 3. New stereo 4. Toilet paper 5. Food 6. Gasoline 7. Rent 8. A new-to-me used pickup truck 9. Clothing 10. Several dozen other things which I can't really wait for but which I will pretend I could for the sake of making a point EDIT: Yes guys, I do realize that it's a mar…

Something tells me the average HN commenter living in Silicon Valley making six figures doesn't represent the average American.

While there are certainly fixed costs to being alive (like toilet paper), most people do cut back and this behavior is observed. And when it gets very bad, even those "fixed costs" start being cut - cheaper toilet paper, moving in with mom and dad, etc. Not because they want to save now to buy more TP later, but because when discretionary spending falls, people lose jobs, which further reduces discretionary spending, and more people lose jobs, wages fall (because of the surplus of labor), and eventually it all starts affecting you.

Re: Why Falling Prices Are Actually a Really Bad Thing

#24

Post by BSousa »

ttty wrote: post #16

This is just stupid IMO, but I'm not any economist. You worked X time: got 1000€ Day 1: You can buy 1000 candies at 1€ each. Day 2: Inflation, prices +100%: you can only buy 500 at 2€ each This means that you just lost 500 candies or 500€. This means that what you worked 50% for nothing! You just lost 50% of your money, just like that! So who has my money? not me of course. Let's think about deflation: Day 1: You can…

Not an economist either. But the way I see it (ignoring food and other things you can't live without)

Inflation Day 1: you can buy 1000 candies, and you suspect tomorrow you will only be able to buy 500, so you buy 1000 candies and store them/eat them. You 'inject' money into the economy, give the government tax money, etc.

Deflation: Day 1: you can buy 1000 candies, but suspect that tomorrow you can buy 2000 candies, you don't buy Day 2: you can buy 2000 candies, but suspect that tomorrow you can buy 3000, you don't buy, or buy just enough for your sweet tooth today (lets say 100) Day 3: you can buy 3000 candies, but again... etc etc

Again, this is based on needs and wants. If you have 1000 euros. If your phone breaks and you need one to work, you will buy today, no matter if we are in deflation or inflation, but if your old one still works, you may very well buy it today (in case of inflation, since it will will cost more of those 1000 euros tomorrow, or you will wait if you are in deflation since it will cost less of those 1000 euros.

Of course, if you need rice to not starve, it doesn't matter! And for average folks, deflation tends to be good since most of expenses are from needs and not wants but this causes issues to business and (possibly) to the economy as well.

If you want a smaller example, I've personally waited for weeks and months to import some goods due to the falling EUR->USD rate, saving me between 5-6% of the cost, so I don't see why others won't do the same if they expect the costs to be less in the future.

Re: Why Falling Prices Are Actually a Really Bad Thing

#26

Post by maxerickson »

msandford wrote: post #19
zzalpha wrote: post #6

Earlier quoted context omitted.

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…

Yeah man, super true! For example if prices were to start falling I'm going to start putting off the following purchases: 1. New computer 2. New TV 3. New stereo 4. Toilet paper 5. Food 6. Gasoline 7. Rent 8. A new-to-me used pickup truck 9. Clothing 10. Several dozen other things which I can't really wait for but which I will pretend I could for the sake of making a point EDIT: Yes guys, I do realize that it's a mar…

It's a marginal effect. The point isn't that you as an individual are going to put off buying all those things, the point is that buyers in aggregate will put off buying those things (or perhaps, immediately shift to a new, lower price that they are willing to pay for them).

Re: Why Falling Prices Are Actually a Really Bad Thing

#27

Post by bsaunder »

Maybe it's me (I'm sure it is - I'm no ecomomist), but a basic income seems like a perfect counter to deflation:

1. It seems like it should increase consumption as everyone would simply have more money to spend. Even if things are cheaper (and seem to be getting cheaper), you now have a new stream of income that, for some people, will burn holes in pockets and beg to be spent.

2. It would allow some employees in the labor market to "opt-out" (as the basic income supplants the "need" for a minimal wage job) and decrease the surplus labor pool. This would seem to require wage growth as employers now need to make the job proposition more compelling. Maybe they would even treat their employees better. Bonus.

3. "printing money" to pay for (or maybe just a portion of) the basic income seems like it should be a nice inflationary counter to the natural deflationary pressures.

I'm sure there are other pros and some cons of this approach, but those seem like good starting points.

Re: Why Falling Prices Are Actually a Really Bad Thing

#28

Post by rondon2 »

zzalpha wrote: post #6
brc wrote: post #3

I 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…

"So you get broad based increases in unemployment." I know it sucks to go from making 70k to making 60k but in a world where prices are going lower someone will still be able to have a similar quality of live at 60k. What kind of economic "Theory" would assume that people would rather starve to death than take a salary cut at another job?

Re: Why Falling Prices Are Actually a Really Bad Thing

#29

Post by collyw »

ttty wrote: post #16

This is just stupid IMO, but I'm not any economist. You worked X time: got 1000€ Day 1: You can buy 1000 candies at 1€ each. Day 2: Inflation, prices +100%: you can only buy 500 at 2€ each This means that you just lost 500 candies or 500€. This means that what you worked 50% for nothing! You just lost 50% of your money, just like that! So who has my money? not me of course. Let's think about deflation: Day 1: You can…

Deflation is only bad if you are in debt (it effectively increases what you owe rather than reduce it).

The governments of most western nations are in debt, hence their fear of deflation.

Re: Why Falling Prices Are Actually a Really Bad Thing

#30

Post by [deleted] »

msandford wrote: post #19
zzalpha wrote: post #6

Earlier quoted context omitted.

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…

Yeah man, super true! For example if prices were to start falling I'm going to start putting off the following purchases: 1. New computer 2. New TV 3. New stereo 4. Toilet paper 5. Food 6. Gasoline 7. Rent 8. A new-to-me used pickup truck 9. Clothing 10. Several dozen other things which I can't really wait for but which I will pretend I could for the sake of making a point EDIT: Yes guys, I do realize that it's a mar…

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