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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

#51

Post by Retric »

Jtsummers wrote: post #17
Retric wrote: post #10

Earlier quoted context omitted.

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.

Firing and rehiring destroys morale. A perfectly stable and functional company can destroy itself by trying something like this. Employees will start to realize that no matter what they do they're getting shafted and their productivity will drop. Some will seek employment elsewhere, but those are often the ones you want to keep. You'll be stuck with mediocre and bad employees. When you try to fill in positions with n…

That greatly depends on overall economic conditions. In many places unemployment approaches 50% at which point wages become far more elastic.

PS: Talking about economics goes beyond software developers or illigal day labiors in the US. It includes peasants in the middle ages, factory workers in ‘Soviet Russia’ and even gally slaves on a Roman warship.

Re: Why Falling Prices Are Actually a Really Bad Thing

#52

Post by Chathamization »

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?

The wage issue isn’t that people are choosing unemployment over pay cuts. It’s that companies will generally opt for a hiring freeze over a pay cut. Most places aren’t going to cut the salary of every team member by $10k so they can hire a new person, they’re going to put off hiring a new person and try to make do with what they have.

Re: Why Falling Prices Are Actually a Really Bad Thing

#53

Post by facepalm »

mikeash wrote: post #50
facepalm wrote: post #36

Earlier quoted context omitted.

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.

So you need those things, an ongoing deflation is only a factor in your evaluation. It doesn't mean you'll never buy them. You will think "is it worth for me to hold out a little longer before buying" and there will be a threshold where you think "no" and you buy.

You could just as well argue that inflation leads to a spiral of death because people won't be able to afford things. Therefore they won't buy things, nobody will produce things, and there will be no things. Sounds just as logical.

Re: Why Falling Prices Are Actually a Really Bad Thing

#54

Post by pjc50 »

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?

Ordering and cashflow matters. If someone is just above being able to pay rent/mortgage+food+commuting+heating, and they get a pay cut, what happens?

Re: Why Falling Prices Are Actually a Really Bad Thing

#55

Post by icebraining »

Amezarak wrote: post #23
msandford wrote: post #19

Earlier quoted context omitted.

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 b…

While there are certainly fixed costs to being alive (like toilet paper), most people do cut back

But why, if things are getting cheaper?

Re: Why Falling Prices Are Actually a Really Bad Thing

#56

Post by fooqux »

skywhopper wrote: post #38
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…

Totally right about downward wage pressure. The worst effect of all of deflation is that it increases the value of debt. So every company and household with debt will see their debt grow in relation to their earning potential. At any level of deflation, suddenly it's a terrible idea to ever borrow any money, which means no new housing, no new factories, no new cars. Our economy relies on inflation to make it work. A…

>At any level of deflation, suddenly it's a terrible idea to ever borrow any money, which means no new housing, no new factories, no new cars.

Why is this such a horrible thing though? Obviously, less lending is bad for the banks, but I fail to see how it would be bad for the consumer if they actually saved up money and paid cash for a car. Although I do understand why lending is important for starting a business; it would be hard in many markets to save enough capital to get off the ground. I'm talking about small stuff, like housing, cars, TVs.

I have little to no economics knowledge, but it does seem to me that this pervasive, cultural thinking that we need this now is the source of many problems. I know some retailers like Ford even attempted to curb the practice of buying on credit, but ultimately caved to pressure from customers wanting to live above their means.

So, can you explain, in a way that doesn't involve trickle-down economics, how borrowing money is a net gain for consumers? (I'm genuinely not being snarky here, just curious.)

Re: Why Falling Prices Are Actually a Really Bad Thing

#57

Post by pjc50 »

debacle wrote: post #33

> When shoppers see persistent price declines, they hold out on buying things. They ask, will I get a better deal next week, next month, next year? Who does this? For 90% of my consumer goods, I don't care what they're going to cost in a month or a year. I need to replace the one I have today .

90% of your goods or 90% of the value of your goods? It's the big ticket items - TV, car, housing - that people delay.

Re: Why Falling Prices Are Actually a Really Bad Thing

#58

Post by icebraining »

skywhopper wrote: post #41
rondon2 wrote: post #28

Earlier quoted context omitted.

"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.

Except they won't keep the same quality of life, because their mortgage payments are not going to go down

Why not? They did these past few years in the EU. Are most mortgages in the US not pegged to some reference rate like Euribor?

Re: Why Falling Prices Are Actually a Really Bad Thing

#59

Post by mikeash »

facepalm wrote: post #53
mikeash wrote: post #50

Earlier quoted context omitted.

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.

So you need those things, an ongoing deflation is only a factor in your evaluation. It doesn't mean you'll never buy them. You will think "is it worth for me to hold out a little longer before buying" and there will be a threshold where you think "no" and you buy. You could just as well argue that inflation leads to a spiral of death because people won't be able to afford things. Therefore they won't buy things, nobo…

I'm sorry, I have no idea how your reply relates to my comment.

Re: Why Falling Prices Are Actually a Really Bad Thing

#60

Post by debacle »

pjc50 wrote: post #57
debacle wrote: post #33

> When shoppers see persistent price declines, they hold out on buying things. They ask, will I get a better deal next week, next month, next year? Who does this? For 90% of my consumer goods, I don't care what they're going to cost in a month or a year. I need to replace the one I have today .

90% of your goods or 90% of the value of your goods? It's the big ticket items - TV, car, housing - that people delay.

I wouldn't hold off on a car or housing - to assume that is ignorant - though with prices going down I would likely purchase a new vehicle much sooner than I otherwise would have.
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