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

Re: Why Falling Prices Are Actually a Really Bad Thing

#71

Post by Amezarak » Thu, Jan 22, 2015, 3:49 PM UTC

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?

Because by the time people are looking at cutting TP costs, it's because their household income is down probably substantially, or they're afraid it will be in the near future.

Re: Why Falling Prices Are Actually a Really Bad Thing

#72

Post by Jtsummers » Thu, Jan 22, 2015, 3:49 PM UTC

icebraining wrote: post #58

skywhopper wrote: post #41

Earlier quoted context omitted.

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?

Can you point out what they did in the EU with this?

GP is referring to the idea that, under deflation, your debt grows in real value while retaining its nominal value, but the nominal value of your income will be decreasing.

If I take out a $100k mortgage and can put 10% of my salary to it each year, say I make $100k as well for easy math. I'll pay it off in 10 years if my nominal salary remains the same. (I'm ignoring the interest on the loan, it changes the timeline but not the fundamentals.)

If we have inflation, my salary will likely go up over time so each year I'll be spending the same nominal ($10k) amount, but its a smaller percentage of my income and a lower real amount.

If we have deflation, my salary will likely go down over time (assuming its consistent it'd likely be negotiated into employment contracts, like cost of living adjustments are now for inflation). So each year I have to pay the same nominal amount ($10k), but its an increasing real amount and a larger percentage of my income each year.

Re: Why Falling Prices Are Actually a Really Bad Thing

#73

Post by icebraining » Thu, Jan 22, 2015, 3:50 PM UTC

Amezarak wrote: post #71

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?

Because by the time people are looking at cutting TP costs, it's because their household income is down probably substantially, or they're afraid it will be in the near future.

But why would their income be down (in real terms) in the first place?

Re: Why Falling Prices Are Actually a Really Bad Thing

#74

Post by jscott2 » Thu, Jan 22, 2015, 3:51 PM UTC

dragonwriter wrote: post #49

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…

I agree on this: debt in deflation is rough. Maybe the lesson is that people/governments should stay out of debt, not that deflation is the boogeyman. That'd certainly be more anti-fragile.

Re: Why Falling Prices Are Actually a Really Bad Thing

#75

Post by mikeash » Thu, Jan 22, 2015, 3:53 PM UTC

facepalm wrote: post #68

mikeash wrote: post #59

Earlier quoted context omitted.

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?

I'm not talking about deflation. I'm just addressing your idea that "maybe there are also benefits if people only buy the stuff they actually need." I don't think that this would be a good thing at all. I make no comment about what might cause this to happen, only that it's not a desirable outcome.

Re: Why Falling Prices Are Actually a Really Bad Thing

#76

Post by msandford » Thu, Jan 22, 2015, 3:55 PM UTC

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…

I'm not the average HN commenter then because I don't live in Silicon Valley nor do I make six figures.

Does that mean my rebuttal carries more weight then?

Re: Why Falling Prices Are Actually a Really Bad Thing

#77

Post by maxerickson » Thu, Jan 22, 2015, 3:56 PM UTC

icebraining wrote: post #58

skywhopper wrote: post #41

Earlier quoted context omitted.

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?

The majority of US mortgages are fixed rate:

http://www.newyorkfed.org/research/current_issues/ci16-8.pdf

This is largely an intentional policy outcome, Freddie Mac and Fannie Mae were both intended to make mortgages cheaper (I think an interesting thing is that this doesn't necessarily make buying a house cheaper). It's increased since the recent crisis, part of the US response was to make money even cheaper (which favors locking in the rate).

Re: Why Falling Prices Are Actually a Really Bad Thing

#78

Post by dragonwriter » Thu, Jan 22, 2015, 4:03 PM UTC

jscott2 wrote: post #74

dragonwriter wrote: post #49

Earlier quoted context omitted.

> 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…

I agree on this: debt in deflation is rough. Maybe the lesson is that people/governments should stay out of debt, not that deflation is the boogeyman. That'd certainly be more anti-fragile.

Again, while debt is an issue, the bigger issue is the disincentive for investment.

Re: Why Falling Prices Are Actually a Really Bad Thing

#79

Post by Amezarak » Thu, Jan 22, 2015, 4:08 PM UTC

icebraining wrote: post #73

Amezarak wrote: post #71

Earlier quoted context omitted.

Because by the time people are looking at cutting TP costs, it's because their household income is down probably substantially, or they're afraid it will be in the near future.

But why would their income be down (in real terms) in the first place?

Because someone in the household lost their job.

Deflation makes employees more expensive even as demand slows. Even in some kind of ideal economy without downward nominal wage rigidity (which leads to people getting outright fired instead(, their wages get cut. But that can end up being almost as bad: almost everyone has mortgages, student loan debt, car notes, or credit card debt, and suddenly that debt is consuming more of their annual income, forcing them to cut back.

It's a problem with aggregate behavior and feedback loops. As long as you're zoomed in on the individual level, it doesn't make sense.

This is exactly what happened during the 2008 recession. Once triggered (in that case by the housing bubble, subprime mortgages, etc) it spreads through the economy and it's hard to break out of - we still haven't really done so. The Fed is still failing to meet the target inflation rate despite extraordinary monetary measures.

Re: Why Falling Prices Are Actually a Really Bad Thing

#80

Post by dragonwriter » Thu, Jan 22, 2015, 4:11 PM UTC

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…

> Obviously, less lending is bad for the banks, but I fail to see how it would be bad for the consumer

Its not generally bad for consumers qua consumers (though there are ways that it can be, because it prevents large purchases that save in the long term), but its bad for the same people that are consumers as laborers because less borrowing by business and less investment in business (both effects of deflation) mean less paid work available, and less utility produced regardless of the distribution.

> So, can you explain, in a way that doesn't involve trickle-down economics, how borrowing money is a net gain for consumers?

It enables you to do things like buy a car to go to work at a job that pays well before you have amassed sufficient retained income from that job to pay for the car. Without the ability to borrow money, you may not be able to take (or, if you take it, keep) the job because you can't get to it.