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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

#101

Post by marssaxman »

Alex3917 wrote: post #20
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 obvious example would be bitcoin. No one ever spends their BTC, because of the fear that something that costs 1 BTC today will cost only 0.5 BTC tomorrow.

I don't care whether bitcoin goes up or down tomorrow; I only care whether it goes up or down between the time I buy the bitcoin and the time I send it to someone. That is: bitcoin is a medium of exchange, not a store of value.

Re: Why Falling Prices Are Actually a Really Bad Thing

#102

Post by brc »

freeasindave wrote: post #94
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…

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…

Well, yes. But those who insist that deflation is terrible are hardly going to agree that the depression was made worse by all the ham fisted attempts to fix it.

Re: Why Falling Prices Are Actually a Really Bad Thing

#103

Post by brc »

marcosdumay wrote: post #18
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…

The usual example of a deflation spiral is the 29's crisis. Altough it's not helped by the fact that most developed countries got into a crisis by about the same time, with several kinds of monetary policies, from US deflation to Germany iperinflation, with everything in the middle. The only point of the article that makes any sense is #5. The author does even ignore the keynesian theory of sticky salaries pricing pe…

I don't agree that a reduction in growth (recession or depression) is a deflationary spiral. Yes, there was deflation, but it didn't go into an uncontrolled tailspin.

The problem was the old canard of irrational exuberance and excessive bad debt. Which must be cleared by letting bad choices come home and businesses go broke so that resources can be reallocated. The measures to 'fight' it, like confiscating and refining the price of gold, and other measures, most likely prolonged it.

Re: Why Falling Prices Are Actually a Really Bad Thing

#104

Post by brc »

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…

The increase of value of debt is the big problem, which is in the original op because banks get stuck with a lot of bad debt and many would fail.

While this is unfortunate, I see it as garbage collection for the economy. Once completed, there are new resources ready to go for the next phase of growth. If there is a deleveraging and saving phase, that provides the capital base for the next growth event. Keeping old processes running forever out of fear of a reboot is worse for the long term. Incentivising bad decisions during boom times with a Greenspan put creates moral hazard.

Re: Why Falling Prices Are Actually a Really Bad Thing

#105

Post by dragonwriter »

brc wrote: post #102
freeasindave wrote: post #94

Earlier quoted context omitted.

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…

Well, yes. But those who insist that deflation is terrible are hardly going to agree that the depression was made worse by all the ham fisted attempts to fix it.

> But those who insist that deflation is terrible are hardly going to agree that the depression was made worse by all the ham fisted attempts to fix it.

Pretty much everyone, everywhere on the political spectrum, irrespective of what they think about deflation, agrees that the depression was made worse by "all the ham fisted attempts to fix it".

There's some disagreement about which of the particular policy responses fall into the category of "ham fisted attempts", sure, but the Fed's initial deflationary policy is one of the most widely accepted (I mean, its a point on which Keynesians and Hayek agree.)

Re: Why Falling Prices Are Actually a Really Bad Thing

#106

Post by brc »

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…

Hoarding is Keynesian fantasy, and can only exist if people stuff gold or cash in their mattress. Paying down debt or saving is a healthy base for a a economy to grow from.

Japan suffered a deflationary event, but has not had a deflationary spiral. The problems for japan have been exacerbated by following the madness of Keynesian policy prescription, to the point where they have increased their debt to 2x GDP over two decades, redirecting their resources towards building bridges to nowhere, instead of allowing entrepreneurs and innovators to allocate capital.

All while they have their demographic death spiral in place.

Plenty of other Asian countries have suffered large setbacks, particularly during the Asian financial crisis, but by avoiding the same path that Japan slavishly followed, have rebounded with strong growth ever since.

What is necessary is a short sharp correction, which will include bad debts and higher unemployment. This will be bad. This is still better than two decades of a zombie economy where an entire generation don't experience a growing economy and the benefits that entails.

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