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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

#81

Post by icebraining »

Jtsummers wrote: post #72
icebraining wrote: post #58

Earlier quoted context omitted.

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 ignor…

But how can you ignore the interest? If the interest drops to along with your salary, you won't have to pay the same nominal amount each year - which is exactly what's been happening in the EU.

Re: Why Falling Prices Are Actually a Really Bad Thing

#82

Post by dragonwriter »

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.

> Hasn't this shown to have been un-true in the last 5 years?

Strictly speaking, no.

> Higher profits has not meant more money going around to workers.

That doesn't mean that lower profits don't reduce the maximum that can be distributed to workers, however. (The fact that the actual amount distributed hasn't historically increased when the maximum has is a different issue.)

Re: Why Falling Prices Are Actually a Really Bad Thing

#83

Post by Amezarak »

msandford wrote: post #76
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…

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?

If you better represent the average American and what you would actually do in a deflationary economy, yes. Most Americans even in boom times don't just buy new flatscreens and computers on a whim, because they can't afford to.

But since the average American (or, well, citizen of any country) has been consistently observed over centuries not to behave in the manner described by that rebuttal, it doesn't matter. To be fair, the article is simplistic and almost encourages that kind of rebuttal. Your edit essentially addresses that and I don't disagree with it - anyone who is saying that spending "stops" is clearly being silly. It begins as a marginal effect that worsens over time, and TV purchases are the first to go while TP and rent takes a while longer.

Re: Why Falling Prices Are Actually a Really Bad Thing

#84

Post by Jtsummers »

icebraining wrote: post #81
Jtsummers wrote: post #72

Earlier quoted context omitted.

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 ignor…

But how can you ignore the interest? If the interest drops to along with your salary, you won't have to pay the same nominal amount each year - which is exactly what's been happening in the EU.

For the calculations I ignored it. The discussion was inflation/deflation. Putting it in only changes my example by adding more arithmetic (calculating interest paid per period), but doesn't offer any insight into paying debts under inflation or deflation. EDIT: For the sake of this discussion pretend that the $100k paid includes the interest if you really want it to be there.

So in the EU interest rates are pegged to salary? Can it go negative? Because that's what needs to happen for loans under deflation to make sense. Your effective interest rate in a deflationary economy is deflation rate + interest rate. If you take out a 2% loan with 2% deflation your effectively paying 4% rates. The higher the deflation, the worse your rates become.

Now, if interest can go negative, then borrowing under deflation makes sense. But lending doesn't. Because the lender would be handing over money that would be more valuable kept under a mattress than loaned out at a negative interest rate.

Re: Why Falling Prices Are Actually a Really Bad Thing

#85

Post by facepalm »

mikeash wrote: post #75
facepalm wrote: post #68

Earlier quoted context omitted.

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.

Only because you choose to interpret "stuff you actually need" in a nitpicking, negative way. You are not trying to understand my point.

You said you need certain things like computers. So where is the problem?

Re: Why Falling Prices Are Actually a Really Bad Thing

#86

Post by rondon2 »

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.

The renter will get a break actually because newly constructed apartments are cheaper than the older apartments so he can move to a newer/nicer/cheaper place.

Deflation is a big problem for highly leveraged businesses and individuals. But for savers deflation is not a disaster at all.

Re: Why Falling Prices Are Actually a Really Bad Thing

#87

Post by rondon2 »

Chathamization wrote: post #52
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?

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.

That is only a temporary problem. Eventually employees will quit or die. And when that happens you will hire a replacement at current market rates.

Re: Why Falling Prices Are Actually a Really Bad Thing

#88

Post by dragonwriter »

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?

> Are most mortgages in the US not pegged to some reference rate like Euribor?

There are both fixed and variable rate mortgages in the US, but variable rate mortgages usually have a minimum interest rate regardless of how low the index it is pegged to goes.

Re: Why Falling Prices Are Actually a Really Bad Thing

#89

Post by dragonwriter »

icebraining wrote: post #81
Jtsummers wrote: post #72

Earlier quoted context omitted.

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 ignor…

But how can you ignore the interest? If the interest drops to along with your salary, you won't have to pay the same nominal amount each year - which is exactly what's been happening in the EU.

> If the interest drops to along with your salary

With deflation, interest rates might be low [0], but they aren't likely to decline over time (unless the rate of deflation is increasing), whereas salaries will decline over time. So the interest rate won't drop along with your salary. Your salary will drop, and while the interest rate might (with the caveat noted previously) be low, its not likely to go down over time (if it does do so constantly due directly to deflation, that means your salary is likely not only declining, but doing so at an accelerating rate), your salary will be dropping both in nominal terms and proportional to the interest payments on your debt.

[0] but probably not; availability of credit will be low because risk-free instruments -- cash -- with a positive expected real rate of return exist, so there is little incentive to lend. Low credit availability doesn't make low interest particularly likely (it does make high interest rate volatility more likely, though.)

Re: Why Falling Prices Are Actually a Really Bad Thing

#90

Post by icebraining »

Jtsummers wrote: post #84
icebraining wrote: post #81

Earlier quoted context omitted.

But how can you ignore the interest? If the interest drops to along with your salary, you won't have to pay the same nominal amount each year - which is exactly what's been happening in the EU.

For the calculations I ignored it. The discussion was inflation/deflation. Putting it in only changes my example by adding more arithmetic (calculating interest paid per period), but doesn't offer any insight into paying debts under inflation or deflation. EDIT: For the sake of this discussion pretend that the $100k paid includes the interest if you really want it to be there. So in the EU interest rates are pegged t…

Your loans would become more expensive, certainly. It's still not correct to say that the "mortgage payments are not going to go down", which is what I replied to. They would - to a certain point, at least.
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