Why Falling Prices Are Actually a Really Bad Thing • Hacker News Board

Re: Why Falling Prices Are Actually a Really Bad Thing

#41

Post by skywhopper » Thu, Jan 22, 2015, 3:00 PM UTC

rondon2 wrote: post #28

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…

"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?

Except they won't keep the same quality of life, because their mortgage payments are not going to go down, even though the value of their house will. Renters won't get a break, either, because their landlords have to pay their mortgage with the rent money. Deflation equals disaster for our economy.

Re: Why Falling Prices Are Actually a Really Bad Thing

#42

Post by debacle » Thu, Jan 22, 2015, 3:00 PM UTC

dublinben wrote: post #12

jayess wrote: post #9

Earlier quoted context omitted.

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...

>But it can't continue forever... Why not? Malthusian predictions have proven to be wrong so far.

We'll really be able to find out in the next 20 years. If it can survive the retirement of the boomer generation and the stagnation of China's economy, it will prove itself as almost entirely durable.

Re: Why Falling Prices Are Actually a Really Bad Thing

#43

Post by pillowpants2 » Thu, Jan 22, 2015, 3:01 PM UTC

Aside from the theory that people are going to stop buying goods because of expectations that they will get cheaper, I thought the price of consumer products were lowering because of cheaper energy, which would decrease COGS and improve margins/prices, not affect revenue?

Re: Why Falling Prices Are Actually a Really Bad Thing

#44

Post by debacle » Thu, Jan 22, 2015, 3:01 PM UTC

supercanuck wrote: post #31

> Lower profits = less money to go around to workers Hasn't this shown to have been un-true in the last 5 years? Higher profits has not meant more money going around to workers.

I think in general it has. The cost function for labor has kind of bottomed out. Demand is so low in comparison to supply.

Re: Why Falling Prices Are Actually a Really Bad Thing

#45

Post by debacle » Thu, Jan 22, 2015, 3:04 PM UTC

Alex3917 wrote: post #20

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…

> 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. The obvious example would be bitcoin. No one ever spends their BTC, because of the fear that something that costs 1 BTC today will cost only 0.5 BTC tomorrow.

That's an issue with volatility, not deflation.

Re: Why Falling Prices Are Actually a Really Bad Thing

#46

Post by Chathamization » Thu, Jan 22, 2015, 3:05 PM UTC

math wrote: post #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).

Hmm, I’ve heard multiple people talk about jumping in during the housing bubble because they thought if they didn’t buy right then the price would keep going up. And I’d say that there’s pretty good evidence that people will buy things sooner if they think that waiting would entail a price increase (which is why sales are so effective).

So if people are expecting the price to rise, they’re more likely to make a purchase, and if they aren’t expecting the price to rise they’re less likely to. I don’t think it’s too much of a jump to think that if the price of something is going to go down next week, people are more likely to hold off on purchases.

Though I imagine a bigger issue is the need for investment. When there’s stagnation firms tend to sit on a lot of cash, because they believe that money slowly losing value (low inflation) or even gaining value (deflation) is preferable to the few and possibly risky investment opportunities they see. This causes credit and investments to dry up. This hording behavior, as well as the wage inflexibility mentioned above, ends up being a major drag on the economy. On the other hand, with a decent rate of inflation firms are going to be making sure that their money is working, because if it’s just sitting there it’s going to be losing money year after year.

Re: Why Falling Prices Are Actually a Really Bad Thing

#47

Post by lottin » Thu, Jan 22, 2015, 3:06 PM UTC

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…

You're 100% right. If prices fall faster than wages, it means that gradually people have more real income and you'd expect that their consumption would increase, not decrease. While in specific circumstances some purchases might be postponed temporarily due to falling prices, it's extremely dubious that the end result would be less consumption in the economy.

Re: Why Falling Prices Are Actually a Really Bad Thing

#48

Post by jmesserly » Thu, Jan 22, 2015, 3:07 PM UTC

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…

> This is just a big lie thrown in my face!

> please correct me if I'm wrong!!!

You're wrong. Deflation is basic economics. If you take a college macroeconomics course it will be covered.

It's hard to summarize in a way that will convince you in an internet debate. Sort of like trying to argue electromagnetism with someone that never learned about Maxwell's equations. An econ textbook would be ideal, but another place to start would be: http://en.wikipedia.org/wiki/Deflation

(By the way, no offense intended with that. It's hard for anyone to comment on a scientific subject if they didn't learn the background, even super smart folks.)

There are several things wrong with your story, but the first one that jumps out is that some prices are more sticky than others. For example, wages are likely to not go down much, instead firms tend to cut employment. There's a lot of evidence for this: http://en.wikipedia.org/wiki/Nominal_rigidity. Another big factor is the effect of debts, which are not reduced: http://en.wikipedia.org/wiki/Debt_deflation

Here's another summary on deflation, intended for a popular audience: http://krugman.blogs.nytimes.com/2010/08/02/why-is-deflation...

Re: Why Falling Prices Are Actually a Really Bad Thing

#49

Post by dragonwriter » Thu, Jan 22, 2015, 3:08 PM UTC

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…

> 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.

The US depression of the mid-1800s and the UK depression starting in the late 1920s are usually cited as examples, and the Fed's deflationary policy after the 1929 crash in the US is often cited -- even by libertarian economists -- as a contributor to the US's Great 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.

Postponing consumption isn't really the issue, reducing investment is. If holding on to cash has positive expected utility, there is less incentive to to use funds that are beyond what is desired for immediate consumption and invest them in productive assets.

Also, see the comments by other posters on debt in deflation.

Re: Why Falling Prices Are Actually a Really Bad Thing

#50

Post by mikeash » Thu, Jan 22, 2015, 3:09 PM UTC

facepalm wrote: post #36

BSousa wrote: post #24

Earlier quoted context omitted.

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…

What if you really want some candy? I think that's what the theory misses. You can only hold out for so long with certain things. If you are hungry, eventually you'll have to buy something to eat. An extreme example: I have bought a lot of computers in my life, even though I knew their value would be close to zero within two years. And maybe there are also benefits if people only buy the stuff they actually need.

What qualifies as "really need," and how much of the modern economy is involved in producing that stuff?

If people only buy the stuff they actually need, we on HN would all be out of jobs tomorrow. Computers, smartphones, nice cars, high-end food, good booze, entertaining movies, all of this goes away. I don't want to live in that world, personally.