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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

#91

Post by Chathamization »

rondon2 wrote: post #87
Chathamization wrote: post #52

Earlier quoted context omitted.

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.

Depending on your definition of temporary - as Keynes said “in the long run we’re all dead.” Eventually things will work themselves out, but how many years of self-imposed pain will it take? Employees are going to be much less likely to quit in a tight job market, especially if they’d be paid less at their new job (since, per your example, new hires would be paid less). If you’re waiting for employees to die (or retire, and they’re more likely to retire late in a tight job market), you’re talking about a price correction that happens once every several decades.

Re: Why Falling Prices Are Actually a Really Bad Thing

#92

Post by [deleted] »

icebraining wrote: post #90
Jtsummers wrote: post #84

Earlier quoted context omitted.

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.

[deleted]

Re: Why Falling Prices Are Actually a Really Bad Thing

#93

Post by freeasindave »

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.

No it's not. Millions of PC's are sold each quarter, even though they cost as much as a TV and they get cheaper all the time. When you need it, you need it. You might wait a couple of months, but at the end of the day you have to pull the trigger based on need. It's called marginal utility. When you determine that the usefulness of a good (to you) outweighs the usefulness of the cash that good would displace, you buy it.

Re: Why Falling Prices Are Actually a Really Bad Thing

#94

Post by freeasindave »

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…

You're assuming macro-economics is concrete, peer reviewed science. Lot's of people disagree. The great depression lasted way longer than it should have because of the anti-deflationary measures put into place, like slaughtering millions of livestock to prop up commodity prices while starving, out of work people looked on in horror. If prices had been allowed to fall, wage rates could have come down to a price where hiring made sense.

Read Rothbard's "America's Great Depression" for a good overview of the case against macro-economics and deflationary interventionism.

Re: Why Falling Prices Are Actually a Really Bad Thing

#95

Post by Retric »

icebraining wrote: post #70
Retric wrote: post #66

Earlier quoted context omitted.

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.

The gap between getting a new phone every 18 months vs 2 years is fewer purchases over the long term. (~1 fewer phones every 8 years.)

The same thing works for durable goods not just improving goods like PC's. Consider if you wait 1 month when buying a chair it's 1 month newer so you’re likely to wait an extra month before replacing it. Multiplied by 100 million a people and even just 1 month becomes significantly lower consumption.

'This' starts a vicious cycle where fewer durable goods are produced so make fewer goods and thus have less money which reduces consumption of durable goods and non-durable goods. Using the TP example if your broke you can slightly cut back on TP use.

Re: Why Falling Prices Are Actually a Really Bad Thing

#96

Post by dang »

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…

> Congratulations for confusing micro and macroeconomics.

This comment would be much better without this acerbic swipe. Please don't do that on Hacker News.

Re: Why Falling Prices Are Actually a Really Bad Thing

#97

Post by mikeash »

facepalm wrote: post #85
mikeash wrote: post #75

Earlier quoted context omitted.

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?

I said I don't need those things, but I want them, and I think a world where people only buy what they need is a world where those things don't exist.

If I misinterpreted what you meant by "stuff you actually need" then maybe you should explain what you meant, because I don't see how else it could go.

Re: Why Falling Prices Are Actually a Really Bad Thing

#98

Post by dublinben »

debacle wrote: post #42
dublinben wrote: post #12

Earlier quoted context omitted.

>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.

I think the true test of this system comes sometime in the next century when human population peaks. Expansionist policies assume growth (growing population) and don't handle shrinking or stable populations well.

Re: Why Falling Prices Are Actually a Really Bad Thing

#99

Post by skywhopper »

rondon2 wrote: post #86
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.

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.

But the cheaper place will never get built unless the builder can finance it without any debt.

Re: Why Falling Prices Are Actually a Really Bad Thing

#100

Post by skywhopper »

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…

The other responses are good as well. Key thing is that you're right that credit gets used for lots of wasteful things in our traditional consumer economy. Buying a television on credit is not a wise financial decision. However, purchases that improve efficiency or allow new kinds of labor can be good uses of credit.

If you can make $1000 more per month at a job that's inaccessible to you via transit, but you don't have $10,000 to buy a car, it would be worth it to get a loan with a $300/month payment, and say another $300/month worth of car-related expenses to net out $400/month income that can be used for saving up for that TV or what-have-you.

In terms of items that retain their value, like houses, apartment buildings, factories... no one would be wise to invest in those items in a deflationary environment because if you're interested in growing your net worth, you'd be better off keeping your money in the bank.

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