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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

#61

Post by jmesserly »

bsaunder wrote: post #27

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…

I'm not an economist either, but applying textbook theory from school, it could help. A lot depends on the size, and making sure it isn't too big to discourage employment. http://en.wikipedia.org/wiki/Basic_income would be a demand side stimulus, with money going to the folks most likely to spend by taxing the folks most likely to save (you wouldn't want to do it by "printing money"). That particular effect would point in the direction of increased GDP (assuming we start from a deflationary trap with inadequate demand and large private debt overhang). However the risk would be too much employment lost, which points in the direction of decreased GDP.

A safer way to do the same thing would be to just spend government money on things like building infrastructure. In current conditions, that translates into increased GDP without the reduced employment risk. Similarly reduced taxes on lower incomes would be less risky but work through the same means.

(This isn't addressing whether basic income would be morally good or bad. Just the macro effects.)

Re: Why Falling Prices Are Actually a Really Bad Thing

#62

Post by Jtsummers »

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…

Inflation is good for borrowers, employers and sellers. Deflation is good for lenders, employees and buyers.

Borrowing - Inflation: I borrow $1000.00 today at 3% with an inflation rate of 2% (per year). At the end of this year I pay the loan back in full at $1030.00. I have spent a larger nominal value, however the real value of the loan is now $1030.00 * 0.98 = $1009.40. Meaning my effective interest rate was around 1%.

Borrowing - Deflation: Let's take the same numbers, but now it's 2% deflation. I pay back the loan, $1030.00 nominal value. The real value is $1030.00 * 1.02 = $1050.60. My effective interest rate is around 5%.

Salary - Inflation: I am paid $100,000 this year for my work, inflation rate of 2%. Without a pay raise my nominal salary remains the same next year, but my real salary becomes $98,000. This is a pro for employers, I am a cheaper employee. It's a con for me, my time is worth less.

Salary - Deflation: I am paid $100,000 this year for my work, deflation rate of 2%. Without a pay raise my nominal salary remains the same next year, but my real salary becomes $102,000. This is the reverse. I cost my employer more, but without changing nominal salaries my time has become more valuable.

Purchasing - Inflation: You want a widget worth $1000.00 today and face 2% inflation. If you purchase it at the start of the year, ignoring depreciation on the widget, it's worth $1020.00 at the end of the year. So if you resell it at that point you've made 2% (nominal), though the real value is the same.

Purchasing - Deflation: Using the same widget, price and 2% deflation. If you purchase it at the start of the year for $1000.00, and sell at the end for $980.00 you end with the same real value, but you've lost 2% of the nominal value. Barring a need to purchase an item within a particular time, it makes sense for purchasers to delay purchasing as long as possible. On the other hand, vendors want to sell as early as possible because the nominal value of their goods are decreasing (and this ignores other costs of holding inventory).

Re: Why Falling Prices Are Actually a Really Bad Thing

#63

Post by pjc50 »

People are having trouble getting this. Consider:

- if you expect to get a 1% pay increase every year, is it reasonable to take out a mortgage at 3% and pay $X/mo for 25 years? Yes, and at the end of the term it will be a smaller fraction of your expenditure. And if your house goes up in value by 1% you're benefiting there as well.

- if you expect to get a 1% pay cut every year, is it reasonable to take out a mortgage at 1% and pay $X/mo for 25 years? No, that's going to be a disaster as it gradually squeezes you, unless you carefully refi regularly. And if the house goes down in value by 1% a year, that's even worse. Construction industry collapses as a result.

Re: Why Falling Prices Are Actually a Really Bad Thing

#64

Post by pjc50 »

fooqux wrote: post #56
skywhopper wrote: post #38

Earlier quoted context omitted.

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…

Not "trickle down" but circularity: if you borrow money you get to bring forward consumption and the workers making your goods get paid earlier as well. Enabling them and the factory to pay off their loans. Ford uniquely went in the other direction of trying to push money round the economy by raising wages; that would be great but isn't happening at the moment.

Getting credit solves cashflow problems. If you're spending $10/week at the laundry, buying a $250 washing machine pays for itself very quickly. Except you can't save $250 because you keep needing to do laundry.

Re: Why Falling Prices Are Actually a Really Bad Thing

#65

Post by [deleted] »

icebraining wrote: post #55
Amezarak wrote: post #23

Earlier quoted context omitted.

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?

[deleted]

Re: Why Falling Prices Are Actually a Really Bad Thing

#66

Post by Retric »

icebraining wrote: post #55
Amezarak wrote: post #23

Earlier quoted context omitted.

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?

It's not cheaper right now, it will be cheaper tomorrow.

EX: http://buyersguide.macrumors.com/ note the 'don't buy' recommendations.

Re: Why Falling Prices Are Actually a Really Bad Thing

#67

Post by Amezarak »

jbooth wrote: post #35
Amezarak wrote: post #21

Earlier quoted context omitted.

> (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 sugge…

In addition, this incredibly low inflation happened in an environment with rock bottom interest rates and the fed basically printing money because you can't cut interest rates below 0. Those moves were supposed to create hyper-inflation and be the reason for You to Buy Gold Now. Actually they barely kept us out of deflation.

I can only assume there is something that for most people just feels absolutely, intuitively true about more money = inflation = bad.

Since 2008, the Fed has increased the money supply by a factor of 5, inflation has been rock-bottom or nonexistent, real interest rates on Treasuries are negative, but hyperinflation is even now just around the corner. No matter how often the prediction is wrong, new ones are made and the failure of the appearance of hyperinflation on schedule is ignored or handwaved away with vague declarations about how the government is conspiring to hide inflation, or the Fed is using some kind of temporary monetary/balance-sheet magic trick, or as soon as the economy starts up again we're all doomed.

What I have never understood is why computer-technical types so often participate in this kind of thinking when we're usually pretty good on other sciences. To be sure, economics is a field with more cranks than usual - paid cranks, even-, but there are working, well-tested mainstream models that churn out accurate prediction after prediction and are largely ignored in favor of whatever the WSJ or Ron Paul says.

Re: Why Falling Prices Are Actually a Really Bad Thing

#68

Post by facepalm »

mikeash wrote: post #59
facepalm wrote: post #53

Earlier quoted context omitted.

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.

Well "really need" is in the eye of the beholder. Except for staying alive. Do you honestly believe because of Deflation people would only buy the barest minimum of things to keep them alive?

And when would you buy a sleeping bag. Maybe it is Minus 5 degrees outside but you can survive that. After all, tomorrow the sleeping back will be 1$ less tomorrow, and after all you'll only die if it's minus 10 degrees?

Re: Why Falling Prices Are Actually a Really Bad Thing

#69

Post by asgard1024 »

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…

> 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.

True. But why then the article is titled "Why Falling Prices Are Actually a Really Bad Thing" and not "Why Deflation Is Actually a Really Bad Thing"?

I can imagine economy where you don't have deflation, prices of all products fall, and the economy is actually growing, because people produce and buy completely new products they could not afford before.

Re: Why Falling Prices Are Actually a Really Bad Thing

#70

Post by icebraining »

Retric wrote: post #66
icebraining wrote: post #55

Earlier quoted context omitted.

While there are certainly fixed costs to being alive (like toilet paper), most people do cut back But why, if things are getting cheaper?

It's not cheaper right now, it will be cheaper tomorrow. EX: http://buyersguide.macrumors.com/ note the 'don't buy' recommendations.

Yes, but Amezarak said it was "not because they want to save now to buy more TP later", which is what you're describing.
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