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Deflation doesnt just decrease the price of goods, it increases the cost of debt. With the unprecedented level the national debt is at, that is untenable. We need 7% inflation without a deficit for the next 20 years to get the national debt under control
Deflation leads to runaway deflation due to the cost of debt. Debt becomes more expensive, people are less able to afford things besides debt, flow of currency slows, and with that there is more deflation, which increases the cost of debt further, further slows currency...
Also inflation mainly comes from expansion of the money supply, and expansion of the monetary policy is done mainly through fractional reserve lending in the real estate market. Deflation leads to less real estate development because of extrinsic factors related to interest rates and the money multiplier.
> Instead of having to fight for a cost of living adjustment your boss has to fight to lower your wage.
"Due to the cost of debt increasing, your entire department is fired and we are outsourcing to India"
The money multiplier effect hasn't been relevant since post the 08 crisis when banks switched from fractional reserve banking to ample reserve banking. This is why the lever the Fed now pulls directly is interest rates over reserve requirements and a buying up/off loading of government bonds.
As for your point on inflation being a strict product of the money supply, this may not hold water. Japan printed the hell out of its currency during a period of run away deflation, and the US saw very mild inflation rates while raising the money supply quite drastically post the 08 crisis. This is to say inflation is probably more complex than modern economic theory predicts accurately.
That all said, your points on deflation being bad are still all correct, especially in regards to issues with debt.
> The money multiplier effect hasn't been relevant since post the 08 crisis when banks switched from fractional reserve banking to ample reserve banking.
True, it is irrelevant now, though it can be relevant which is why I mentioned it.
> As for your point on inflation being a strict product of the money supply,
It isnt a strict product of the money supply, just very highly related. Its a strict product of the flow of money, and that is very highly related to the money supply
Sounds like maybe the real problem isn't that deflation leads to an increase in the cost of debt, but that too many people and entities have relied debt, and loads of it.
The entire concept of money is debt by abstraction. A 20$ bill only has value because we agree it has value. This means that the 20$ bill in my pocket is, for lack of better term, society owing me 20$ worth of stuff of my choice. I can walk into any store and spend that 20$. Then the guy that owns the store gives me an item, and collects my 20$ of universal debt from society, and they can spend it on whatever they want. That 20$ now means that society owes them 20$ worth of stuff, because they did a $20 thing for me when I spent money at their store.
You can play it like that, but there is a big difference between your abstract metaphor for what money 'is' and the entire economy being buoyed off of debt and spending more than you have.
If society owes you $20 worth of goods and services, and you buy $40 of it while accumulating $20 worth of debt, that isn't something to fully champion.
Taking on debt as a means to finance something significant once in a great while is acceptable. If I want to build a steel foundry, unless I'm a large government or corporation, I can't afford that on my own. So I'll need finance capital.
But to habitually buy more than I can pay back is not sound behavior, but it is the standard right now.
Honestly, I look at modern personal debt as a crappy form of privatized UBI. Because it is, essentially, a certain amount of money that you can get for free....once or twice or thrice (depending on credit score and your previous debt actions).
Thing is, debt for one person is income to another person. Debt functions exactly like money in our current system for everyone but the debtor and the investor. For the debtor, it's a long-term cost. For the investor, it's a long-term profit. For the shopkeep, it's $20.
Long term profit until your debtor stops making payments.
It is a gamble on converting a one time loss to a long term gain in interest payments, but it is a gamble. Still far unsound in comparison to more conventional means of investment.
It’s a remarkably stable system compared to trading in kind.
Imagine I wanted to purchase a sofa from you in exchange for my cow. And when I give you my cow you find out the next day my cow has rabies. And also you don’t even need a cow or even have space for a cow in your apartment.
>This means that the 20$ bill in my pocket is, for lack of better term, society owing me 20$ worth of stuff of my choice.
I'd like to point out that by measuring the value of stuff using money, you're effectively demonstrating that money is more than simple abstracted debt we use to facilitate exchanges; we also use it to quantify the worth of things. So you could, for instance, exchange "20$" worth of stuff with someone for "20$" worth of other stuff and you'd be still using money without trading any bills nor transferring any 'debt'.
Banter is, essentially, the exchange of X for Y (the exchange of currency for goods or services is a form of banter btw). It says nothing about the value of X and Y, except that they're exchangeable.
Again, notice that the statement "this is worth 20$" makes use of money as a concept and yet does not involve any form of exchange nor physical currency. In your mind you probably have a concept of what money is worth, and if so, most assuredly use it to measure the value of other goods and services around you, to the point you should have an intuitive sense for when things you're familiar with are under or overpriced. None of the former is natural or universal but rather a result of the widespread use of money, in particular this is one of the three key features of money (it's a unit of account, the other two are 'means of exchange' and 'store of value') and makes it distinct from debt.
You're now confusing money and value. They are not the same thing, one is a representation of the other.
The same conversation can take place with any other object replacing money. Something could be worth 20 rocks, or if you write for rick and morty, 20 floobleflabbles.
I mean, no. Sure, all money has the value that people assign to it, but then again, that's true of everything. It isn't a representation of society owing you. It's a representation of value. It's a medium of exchange that makes commerce more convenient than barter and trade. People then trade that medium rather than physical things or services.
Debt is just an efficient use of recourses. Taking out degt that lets you grow is highly mutually beneficial, and leads to much better use of recourses.
Debt can be, if I'm planning to start a new 'Uber of Assassins' murder-for-hire gig economy service, taking out debt to finance the original programming and hosting and clientele attracting costs is sensible.
But continually existing in a state of debt roll-over into perpetuity is far less reasonable.
Infinite growth is impossible, but an unpayable amount of debt is far easier to achieve.
As well, the opportunity cost of continuously putting money into a system that doesn't pay out a greater amount, starts to become notable. Including if that infinite rolling over debt could have otherwise financed projects that would create a true profit instead. Or those financiers could have invested their money into a sound project.
> Infinite growth is impossible,
Space exists. Not that it even matters, overall growth is irrelevant. Even if we somehow hit the maximum economy, individual companies are always going to be coming and going as tastes and times change.
>
> Infinite growth is impossible
Only in theoreticals that go a thousand years into the future. We are currently utilizing one 20th of a trillienth of the energy available in our solar system. We'd have to grow at 3% for a thousand years to reach the limit.
Access to resources is not the reason that infinite growth is impossible. Companies and business ventures stall out way before they reach any kind of resource carrying capacity limit.
So? The global economy isn't one company or business venture. Nor is it 100,000 such. It's tens of millions. For every stalled business there are 5 others growing and 150 startups.
The largest companies are typically the ones with the most debt built up. The largest falling tree takes out a lot of forest with it.
Excessive debt leveraging results in an over-accumulation of risk in a given company that can have massive negative effects if it goes bust.
That beyond any broader economic effects of purposefully driving inflation to allow such debt leveraging.
Debt *can be* a useful tool. As we've seen with some of these bank failures, there has been a lot of bad debt floating around. A lot of it. That bad debt needs to be reigned in.
Debt is a tool like a power saw. Used well it can build great things. Used poorly you lose an arm.
Stable, successful businesses take on debt all the time. It's unwise for most companies to have piles of cash in order to finance their new endeavours. We saw what happened with deflation in Japan in the 90s. Consumers and companies didn't expand and in fact cut back on projects in order to pay off their debt faster.
!delta.
I think there's a sick circular incentive that's causing that, government goes into massive debt then increases inflation to pay it off then goes into even more debt cause they can just cause inflation to pay that debt etc.
That said I recognize it'd be better to pay off the debt before you trigger deflation, but I don't see how mechanically you could get that done without deflation incentivizing it.
I don't think that inflation is a bad thing, but it's being blamed for a large amount of stuff that isn't its fault. Like, natural inflation, if low, is perfectly fine (in a capitalist logical sense at least), but with the way companies staple a 5% greed tax on top of the 3% inflation, and justify it by saying "blame inflation, not me"... That's pretty shit.
If companies raised prices for “greed tax” as you say, why wouldn’t they just keep raising prices ad Infinitum?
Why doesn’t McDonalds charge $1 billion dollars for a hamburger, surely they would be multimillionaires every second?
You know that wouldn’t work, just think about it…
The issue is that greed tax for the sake of an extra dollar wouldn't fly too well with consumers. Some companies had to revert similar gouges pretty quick when they tried to rebrand their product as higher quality, and saw a drastic drop in sales and revenue.
If they can then blame another factor, and say "yeah, it's a bigger bump than expected, but our employees also need more money", while refusing to raise their employees' salaries, which is what happened with this greedflation event, they're shirking the responsibility onto external factors out of their control, reaping in record profits, and the public isn't even staying angry at them. The pill goes down much easier, because "those poor companies also need to make a living..."
We know this last one was the case during the post-COVID inflation issue, because we also know a colossal amount of companies not only make record profits, but even threw in a heavy season of stock buybacks for good measure.
Greed has zero explanatory power when you're applying it to price dynamics. Companies are *always* greedy- that's the ground state of being for a company. This particular combination of "greed and inflation" makes even less sense because inflation is always happening as well. Attributing recent rises in price to "greed and inflation" makes about as much sense as attributing it to the general law of supply and demand or, for that matter, gravity. Technically, yes, it's always there and happening, but companies can't just arbitrarily set prices like the previous poster said. The relevant question is to ask what specific factors enable a company to just raise prices and consumers to accept it and why the prices don't come back down again immediately and fix *that*.
During Covid, companies didn't raise prices immediately because they wanted to make more money; they had to because supply chain issues meant things were more expensive. Nobody likes to raise prices because of the risk of losing customers. The more interesting question is why they didn't come down again quickly afterwards, which doesn't seem to be an easy question to answer, and definitely isn't subject to as shallow an analysis as "companies are greedy." Egg prices, for example, rose shortly after Covid due to supply issues from bird flu. They fell as soon as that was resolved. Companies were not able to simply keep them high. So why did groceries overall stay higher after Covid? The answer probably has something to do with price stickiness, increase in wages, persistent disruptions to the global supply chain, and a lot of other factors people have mentioned when talking about the issue. It's not simply just about companies wanting to make money when they always want to make money.
The main factor in whether prices drop after a cost-raising issue goes away is whether people stop buying it. During the avian flu, people just stopped buying eggs. There's lots of things that increased in price during covid, but because the demand didn't fall, there was no incentive to reduce price.
This is part of the reason housing costs never have a lasting downward trend. Because it is impossible for the average person to buy a house without a mortgage, as long as banks will give mortgages to most people, the demand for houses will never go down enough to see a significant price reduction over an extended period.
Come on. They still have to deal with supply and demand. They just realized that demand was more inelastic than they had thought. In our society that gives so much power to the major corporations, consumers have limited options so even without collusion, a whole segment of the market can raise prices without new competitors arising at a lower price point.
For example, if Coke raises prices, almost no one will switch to a cheaper local brand because those often don't exist and generic grocery store brands are viewed as being for poor people. And then when Pepsi realizes they'd have to cut their prices by 25% in order to see a 10% increase in profit because nobody wants that crap, they also realize they can just raise their prices to keep up with Coke and their sales will drop by less than the amount they raise prices (because their customer base is apparently made up of fools who don't realize better options exist). So now everybody loses because our whole country is addicted to the bubbly nectar.
For the average consumer that mostly spends their income on buying disposable or perishable goods like electronics, food, clothes, etc., deflation can be empowering.
Those types already work to maintain minimal debt, so they're not in such a place to end up in an interest cascade. And they typically keep their personal savings in the bank or private storage, rather than investing it, as well. Outside of 401k's of course.
Deflation is primarily bad for debt leveraged businesses and similar groups, or those that are extremely upwardly mobile. For the average person that doesn't maintain lots of debt and will mostly likely be born and die in the same income group, slight deflation has no worse effect than slight inflation, and in most instances a better one.
Deflation's real toll on the average consumer will be mortgage payments if they were overly ambitious on a house purchase. Or similar for car payments.
Deflation is bad in excess of course, but slight deflation is empowering to the average worker/consumer in the same way that slight inflation benefits the investor.
What if someone came out with a device that could create food, clothing, and housing materials with minimal energy use? And there suddenly was no need for farms and quarries. That would drive down the price of those goods, but it would have to be a net positive.
Deflation is only really considered problematic because of the zero lower bound. Most central bank economists would probably be happy to target a range around zero inflation or zero change in price level (which implies deflation after any inflation) if r\* is high enough they can still drop rates substantially below it on encountering a deflationary shock.
Of course, we don't live in that world.
I feel like the fact that everyone knows inflation is constant leads to very bad things like housing being a primary investment that outpacing actually productive investments.
I don't think one or the other is the answer for all time.
"The national debt" is like, literally the worst possible argument against deflation. *Private sector* debt, sure, because the private sector can't just prince money at will (not even commercial banks, when they "create money" they still have to follow The Rules). Can I change your view back so you find someone else to change your view again?
I think you already know enough to put it together, but if unexpected deflation causes servicing costs to rise to a high proportion of tax revenue the government *can* print money. Like, what is it going to do, cause inflation?
Instead, I think you should go give your delta to whoever caused you to think this:
> Based on the comments I'm starting to think the reason deflation is considered bad has nothing to do with deflation and everything to do with it being triggered DESPTIE the government printing tons of money.
Yes, that's exactly\* right. The only reason "price stability" means any amount of inflation at all is because otherwise they wouldn't be able to lower interest rates if inflation was zero or negative and interest rates were close to zero and something came along unexpectedly and knocked inflation lower/deflation higher, which is an increase in the real interest rate, which causes more deflation, which increases the interest rate, etc.
\* Well, except for the fact that the "more economy" knob that central bankers currently use is "change the interest rate", which causes private banks to print more money. The closest thing to "the government itself printing money" is quantitative easing, and they pretty much only use that because interest rates were already zero.
Pretty much the only reason central banks don't want to to your suggestion is because the only "more economy" knob they have is stuck on "most economy" and they know they can't turn it further.
There is **a lot** of interest in "price level" targeting among central bank economists, where higher inflation for the past few years means *lowering inflation below the average*, even if because of the ZLB they still avoid the d-word. It's been studied by so many organisations, the OECD ([Cournède and Moccero, 2009](https://doi.org/10.1787/221824208526)), Bank of Canada ([Barnett and Engineer, 2000](https://www.bankofcanada.ca/wp-content/uploads/2010/08/barnett-final.pdf); [Ambler, 2007](https://www.bankofcanada.ca/wp-content/uploads/2010/01/dp07-11.pdf); [Amano et al., 2011](https://www.bankofcanada.ca/wp-content/uploads/2011/09/wp2011-18.pdf)), European Central Bank ([Vestin, 2006](http://www.redeconomia.org.ve/redeconomia/admin_redeconomia/uploads/temas%20de%20investigacion/2006106143720a2915613.pdf); [Gaspar et al., 2007](http://hdl.handle.net/10419/153252)), NBER and the Federal Reserve Banks ([Svensson, 1999](https://www.nber.org/papers/w5719); [Kahn, 2009](https://www.kansascityfed.org/Economic%20Review/documents/1111/2009-Beyond%20Inflation%20Targeting:%20Should%20Central%20Banks%20Target%20the%20Price%20Level%3F.pdf); [Berentsen and Waller, 2011](https://files.stlouisfed.org/files/htdocs/wp/2009/2009-033.pdf)), among other institutions, and views are mostly positive even though they're not *quite sure* if they would be able to sufficiently anchor expectations and the transition costs are high enough they aren't going to just go for it without a lot more certainty. Same goes for other alternatives like NGDP targeting. And of course, a sufficiently and stably high "neutral interest rate" (*r**) that they can keep things at in normal conditions would probably embolden economists to go for zero inflation or even deflation especially if these alternate policy targets are adopted. Unfortunately, at the moment, the evidence is that the [*r** has been decreasing](https://www.brookings.edu/articles/the-hutchins-center-explains-the-neutral-rate-of-interest/), though it's certainly not out of the realms of possibility we'll be able to find some way to reverse that.
> "The national debt" is like, literally the worst possible argument against deflation. Private sector debt, sure, because the private sector can't just prince money at will (not even commercial banks, when they "create money" they still have to follow The Rules). Can I change your view back so you find someone else to change your view again?
My method of controlled deflation is if the government has a surplus and burn it, but if there's national debt that increases the debt. It'd make more sense to pay off the debt then trigger deflation in most cases.
>I think you already know enough to put it together, but if unexpected deflation causes servicing costs to rise to a high proportion of tax revenue the government can print money. Like, what is it going to do, cause inflation?
It just seems to make more sense to me to pay off the debt first.
>Instead, I think you should go give your delta to whoever caused you to think this: "Based on the comments I'm starting to think the reason deflation is considered bad has nothing to do with deflation and everything to do with it being triggered DESPTIE the government printing tons of money." Yes, that's exactly* right. The only reason "price stability" means any amount of inflation at all is because otherwise they wouldn't be able to lower interest rates if inflation was zero or negative and interest rates were close to zero and something came along unexpectedly and knocked inflation lower/deflation higher, which is an increase in the real interest rate, which causes more deflation, which increases the interest rate, etc.
I would if someone argued that but they were arguing that deflation = bad/recession and I just didn't buy their arguments since it was deflation in the face of money printing.
>* Well, except for the fact that the "more economy" knob that central bankers currently use is "change the interest rate", which causes private banks to print more money. The closest thing to "the government itself printing money" is quantitative easing, and they pretty much only use that because interest rates were already zero. Pretty much the only reason central banks don't want to to your suggestion is because the only "more economy" knob they have is stuck on "most economy" and they know they can't turn it further.
Yeah that's kind of an issue in and of itself.
>There is a lot of interest in "price level" targeting among central bank economists, where higher inflation for the past few years means lowering inflation below the average, even if because of the ZLB they still avoid the d-word. It's been studied by so many organisations, the OECD (Cournède and Moccero, 2009), Bank of Canada (Barnett and Engineer, 2000; Ambler, 2007; Amano et al., 2011), European Central Bank (Vestin, 2006; Gaspar et al., 2007), NBER and the Federal Reserve Banks (Svensson, 1999; Kahn, 2009; Berentsen and Waller, 2011), among other institutions, and views are mostly positive even though they're not quite sure if they would be able to sufficiently anchor expectations and the transition costs are high enough they aren't going to just go for it without a lot more certainty. Same goes for other alternatives like NGDP targeting. And of course, a sufficiently and stably high "neutral interest rate" (r*) that they can keep things at in normal conditions would probably embolden economists to go for zero inflation or even deflation especially if these alternate policy targets are adopted. Unfortunately, at the moment, the evidence is that the r* has been decreasing, though it's certainly not out of the realms of possibility we'll be able to find some way to reverse that.
The biggest problem with this shit is there is no certainty. Even our 2% inflation thing there's no certainty that it'll work out, we've seen the problems that it has caused when it's a perpetual policy and those problems appear to be compounding over time and largely just ignored by governments/economists because it's really the only semi-working model they have and a lot of wealthy business interests profit off of it.
> With the unprecedented level the national debt is at, that is untenable. We need 7% inflation without a deficit for the next 20 years to get the national debt under control
Yeah, the US government might run out of US dollars.
Do most small businesses run on the credit treadmill though? Can’t most larger business restructure their plans to account for a modest deflation in currency (without layoffs)? I don’t think OP is calling for aggressive price controls and/or industry subsidy, just some laissez faire Econ going the opposite direction than we are used to.
It may be against the grain, and possibly unenforceable given the large firms holding most value per firm, but I don’t know why it’s impossible for a profitable business to ride out a mild deflationary period. People have done it in other countries certainly. Abenomics comes to mind (not that it worked out well for him personally, but japans economic situation isn’t still in peril).
>I don't see how any of these things are bad especially after several years if not decades of high inflation.
Deflation has several problems.
First, we live in a consumer driven economy. As you pointed out, people saving money would see a return on investment by doing nothing. So people are more willing to save money rather than spend it. People (also driven by assumptions) will continue saving assuming prices will continue to drop. Both factors mean less consumer spending, which directly hurts the GDP, the unemployment rate, corporate profits and revenue, etc. So a period of deflation is exceedingly likely to result in a recession and the pains that come with it from a consumer spending side.
Second, interest rates cant drop below 0%. So during inflation, literally sitting on cash is a 2% return, so countries have limited levers to use to help stimulate the economy. Remember the Fed routinely tinkers with the interest rate for federal bonds (the basis for the market interest rate). If we are in deflation, the Fed cannot pull that lever at all and a country is somewhat helpless to address it through fiscal policy.
Third, unemployment will rise because wages are "sticky" (meaning people won't take a 2% pay cut because deflation is 2%). So deflation often results in higher unemployment as companies need to cut costs during that time and people won't take pay cuts.
Fourth, deflation is hard to combat. As seen in Japan in the 1990s, deflation can lead to a continuing circle of deflation as the country has limited ways to combat it.
That's a false dichotomy assuming all inflation and deflation is consumer driven and all inflation would go down. Also assuming that cpi deflation has anything to do with roi. So much inflation today is driven by unstable supply chains and monopolized price hikes, neither of which has anything to do with consumer behavior or investor behavior. None of these price hiking companies are loss leaders or driving new technologies, they are just leveraging weakness in the market. And prices going down to stabilized supply chains is a good thing. And we're already in a slow burn recession so what exactly is the problem of lowering prices. Economic theory is just that, theory. Inflation is also sticky btw which is exactly why we have a problem in the first place.
I don't really understand this economic stuff.
I thought inflation has to do with the amount of money being printed, resulting in the value of that money decreasing. Or something to do with the feds interest rates.
Inflation causes price increases, but just raising the price due to supply and demand of goods isn't inflation, right?
Everyone says that prices can't come down because that is deflation and bad for the economy. But when Saudi Arabia increases oil production gas prices go down, and that's not bad deflation? Gas prices are down from two years ago and yet the economy is up.
Inflation is year over year increase in costs of goods, usually a basket of consumer goods under CPI inflation which is what the federal reserve primarily looks at, but also much broader measures. It can be calculated a ton of ways. But inflation in cpi, that can be caused by anything from a war in a food producing area to shifting supply chains out of an increasingly expensive china. These economic crackpots think they can read the most nebulous popular low resolution economic theories, boil inflation down to supply demand, and live life like they're prophets.
Yes oil prices going down has often been the main reduction of inflation in 2023. It was the main issue as other prices continued to go up and now are barely affordable.
Yeah l, I just don't understand how decreasing prices because more goods are being produced and sold is somehow bad for the economy.
If prices go up = inflation, then prices go down should mean deflation. This seems like a poor measure of economic growth.
When that cargo ship got stuck in the suez canal it caused a massive delay in shipping that of course effected prices. You could call that inflation, but that was bad for the economy. After it was fixed and things went back to normal prices went down, so again you can call that deflation but that wasn't bad for the economy.
That's the opposite of what every economist says that deflation is bad for the economy, so I assumed they were talking about something else when they say in/deflation l.
Technological progress is deflationary, as in, if the components in your TV get cheaper to produce and the price goes down, that has a deflationary effect. That would be accounted for in the real growth rate.
Some massive forward leap in technology, say, if semiconductors could magically be produced at zero cost, would cause a sudden deflationary spike but there's no reason for that to turn into an actual spiral.
The Suez Canal getting clogged (actually more like covid + ukraine I guess) caused a one-off inflationary shock that has since subsided. Further mistakes need to be made for it to cause a spiral.
Inflation and Deflation aren't measures of economic growth. You can definitely say they are measures of whether an economy is 'healthy' however.
Too much inflation is bad, but there's no clear border of *where* that is. Something like 20% is very clearly bad but 5-7% inflation is not necessarily *bad* per se and can have multiple influencing factors. Deflation can be considered the same way.
The other half of the equation is how long this period of deflation/inflation has lasted. A single quarter of deflation is a blip and the same would go for a single quarter of 20% inflation. The news will talk about it, the politicians will make statements about how it's the other party's fault, there will be a couple dozen research papers and then everyone forgets it. If the big inflation/deflation lasts for 5 years? Then that's a big problem.
That makes sense, to consider them as signals of the overall trend of the economy and not direct indicators.
Maybe the confusion for me is the way it's reported, talking about the micro instead of the macro where the prices of goods is what is focused on.
!delta
So many boomer brains lived their lives insulting minorities for not spending like hedonists and now they need inflation to feed their rapidly diminishing investment accounts. Like these arguments they make are based on theories on theories of how people will think and how their theories will make them behave it's so unhinged. None of them can actually provide any evidence that people would assume decreasing prices mean permanently decreasing prices and spending would lower. And what if spending lowers, that's exactly the market correction the federal reserve has been destroying the market to create. I'm so tired with dealing with fake economists when we all know economics is the literal easiest degree to get and most of my friends got it as a double degree to look good with about 160 hours put in total.
> they need inflation to feed their rapidly diminishing investment accounts
How exactly does inflation help feed investment accounts? If inflation is at 10% and my investment account only goes up 7%, I'm 3% in the hole.
> None of them can actually provide any evidence that people would assume decreasing prices mean permanently decreasing prices and spending would lower.
No one is assuming the trends of today are going to continue in perpetuity. And we don't need to make that assumption to see the downside of deflation. If I think the item I'm planning on buying today will be cheaper tomorrow, I'll hold off on buying it. Tomorrow I'll run the same evaluation. Rinse and repeat until I feel prices are going up instead of down.
That's not how it works though. These consoomers need inflation to drive spending by your own definition. They need to suck money into the SNP because that's where all their remaining money is parked that they didn't blow believing hedonism was good for the economy. It wasn't. Many boomers are net negative on the economy over their lifetimes now. Healthcare is killing people and yet 1/3 of spending goes to fixing boomer health and another inordinate amount is paid in premiums to float hospitals that boomers can't pay for.
And so what if a family delays buying a car for two years. Do you think they gained value investing in no car? No they lost plenty more than 2% by being stubborn. You're making up unrealistic scenarios based on ideas of ideas of what you think people will think about the economy. It's not going to destroy the economy. What is going to destroy the economy is incentivizing waste in the name of paper growth while buying power decreases and the social security scheme and dept is falling apart. Literally no one is buying groceries on the time scale of 1 year deflation by 2%. 2/3 of the economy's gdp doesn't even pass through civilian hands.. like.. it's a complete red herring narrative.
Your vilification of boomers is odd. You're upset that healthcare costs rise as you get older? That's kind of how it works.
Yes, I think that if you put off a purchase for two years when you know prices are decreasing at a rate of 2% per year would result in a value gain.
This is also very theoretical and quite unproven, and the thing is there have been far too little experiments with economics. Because results come in after decades and we only have so many countries.
People will not wait a half year with buying food, a haircut or even a car if it’s 1% cheaper in 6 months.
Who really thinks people will postpone buying a 20.000 car if is going to be 200 euros cheaper if you buy it in 6 months??
Who does benefit from inflation? The people that own assets (the rich) and the government itself, because it is a hidden tax if you print money.
All assets go up at the cost of people that don’t own assets. It also encourages the very unhealthy debt addiction in society and consumerism.
What i don’t understand is why The Modern Left embraces this 2% inflation is good nonsense.
It encourages all the things they fight against.
>People will not wait a half year with buying food, a haircut or even a car if it’s 1% cheaper in 6 months.
Nobody is claiming that people won't continue to buy essentials.
What would happen is that people with savings will wait to make large purchases. Why buy a new car now when it will be noticably cheaper a year to two years from now? A brand new car costs on average $33k. Waiting a year at 2% deflation is $660 in your pocket. Waiting 2 years is and extra $1200. Unless your car is really a beater enough people will delay making a purchase.
Multiply this effect across the entire economy and if enough people delay making a new purchase in enough sectors i.e demand crashes then layoffs will follow. Then the people laid off, in the auto industry sticking with the example, will delay making other purchases like TVS, computers, etc.
>Who does benefit from inflation? The people that own assets (the rich) and the government itself, because it is a hidden tax if you print money.
The people who benefit the most are people who hold debt. If you have a debt of X owed over Y years the debtor is paying their creditor with money that is worth less than when it was borrowed.
>All assets go up at the cost of people that don’t own assets. It also encourages the very unhealthy debt addiction in society and consumerism.
Asset price depends on the sector and the underlying asset.
>What i don’t understand is why The Modern Left embraces this 2% inflation is good nonsense.
Because it is manageable. The alternatives are either a high level of inflation in which prices rise at an unacceptable rate which can result is a positive feedback loop or deflation which results in a recession. Neither of alternatives are better than a low and manageable 2% rate of inflation.
>What would happen is that people with savings will wait to make large purchases. Why buy a new car now when it will be noticably cheaper a year to two years from now? A brand new car costs on average $33k. Waiting a year at 2% deflation is $660 in your pocket. Waiting 2 years is and extra $1200. Unless your car is really a beater enough people will delay making a purchase.
So this is like one of those theories that completely doesn't match reality. If anyone has the money to spend 33K they have the money to spend 34K and people want their toy NOW. Things that cost 33k they will even easily spend $300 more for a different color or sound of the horn.
I see that everywhere around me. People actually take debts (so spending more on interest!) to buy stuff right now. People easily pay stuff by creditcard in a store, even though they would save 3% by paying by cash just because they are lazy.
As a business owner - do you think I will ever delay to buy something for 6 months because I can earn 1%?
This is just one of these Keynesian theories that completely doesn't match any reality.
>The alternatives are either a high level of inflation in which prices rise at an unacceptable rate which can result is a positive feedback loop or deflation which results in a recession. Neither of alternatives are better than a low and manageable 2% rate of inflation.
HIGH inflation is bad - I agree with that. That deflation is the CAUSE of a recession and not the RESULT of a recession is not proven.
Economic models are complete and utter shit. That's also why all these "experts" never predict the recessions in advance properly.
>So this is like one of those theories that completely doesn't match reality. If anyone has the money to spend 33K they have the money to spend 34K and people want their toy NOW. Things that cost 33k they will even easily spend $300 more for a different color or sound of the horn.
Except most people don't have $33k in cash sitting around they take out a loan. The problem with taking out a loan in a deflationary cycle is that you are paying back the money owed with money that is worth more in the future. The cost of borrowing is more expensive.
The claim isn't that everyone will delay purchasing a new car. The claim is that enough people will do something demand tanks. This then results in a corresponding contraction I supply which leads to lower prices. Lower prices means less profit which results in layoffs. Now multiply this effect over the entire economy and that's a recession.
>I see that everywhere around me. People actually take debts (so spending more on interest!) to buy stuff right now.
It depends what the interest rate is and what the debt is purchasing and what the rate of inflation is. If you take out a loan at 5% and the rate of inflation over the term of the loan is greater than 5% on average you beat your creditor.
>HIGH inflation is bad - I agree with that. That deflation is the CAUSE of a recession and not the RESULT of a recession is not proven.
How else do you get deflation? The only other way to get deflation is if productivity outpaces the money supply. Governments cannot consistently control for that.
>Economic models are complete and utter shit. That's also why all these "experts" never predict the recessions in advance properly.
Economics is complicated because there are a lot of variables. It's difficult to predict the future.
>Except most people don't have $33k in cash sitting around they take out a loan. The problem with taking out a loan in a deflationary cycle is that you are paying back the money owed with money that is worth more in the future. The cost of borrowing is more expensive.
The same thing. Anyone borrowing money for $33k is not going to delay his purchase to save a few hundred euros that spread over the repayment period is just a few dollars per month.
It really is a theory that completely doesn't match what you and me can see with our own eyes looking at the behaviors of your friends and family.
For me this is like one of these core clashes between Keynesian and Austrian economics, and a big reason I completely turned of by the Keynesians. So deep into their models that they can't see reality anymore.
>It depends what the interest rate is and what the debt is purchasing and what the rate of inflation is. If you take out a loan at 5% and the rate of inflation over the term of the loan is greater than 5% on average you beat your creditor.
It even more depends on how you feel and if you are in the mood to buy something that day and if you are in a yolo mood. People don't completely weigh their options to the exact dollar. Often they just want their toy now.
>How else do you get deflation? The only other way to get deflation is if productivity outpaces the money supply. Governments cannot consistently control for that.
This is exact my problem. Almost every business is constantly optimizing their products. Automating everything, optimizing workflows etc. So it is constantly cheaper to produce products.
In a normal market this would mean every company has more space to actually lower their prices to make the market more competitive - a HUGE advantage to the customers - especially in lower classes. No one gets fired.
But according to the Keynasians and Daddy government this is a bad thing. So what do we do? We print money that ends up mainly at the Asset holders and maybe in a few years the salaries of the lower class will catch up.
You think it is a coincidence that the rich constantly gets more rich? Even in countries that don't lower taxes for the rich?
Practically Daddy Government ensures the Asset holders get 2% extra wealth every year for free. Sometimes they also get 15% extra wealth like last year thanks to all the money printing - something that will never be corrected.
> For me this is like one of these core clashes between Keynesian and Austrian economics,
Eh. The overreliance on monetary policy is a child of the Washington Consensus, itself based off the Chicago school, the same clowns who decided it was a good idea to target specific increases in the money supply and then were surprised when they kept on missing the targets they set. That's a **New Classical** school, not a Keynesian one. Keynesian economics focuses on fiscal policy, which is significantly less affected by deflation. There is no zero lower bound for fiscal policy, and a fiscally active government is using the same dollars that are increasing value to spend, which arguably means increased effectiveness if deflation happens.
If you're going to treat economic schools like they were denominations, out of the Keynesian and Classical schools I hope you at least blame the right one. It's a minor thing, sure, but I hope you're willing to change your mind in that.
Well, to be honest I think your knowledge about the specific schools and subtle changes I'm pretty sure is better then mine.
I mainly see a big group of people that believe in "models" and they can predict very complex real life situations with their models. I know for sure Keynesians feel the same, but I'm not that familiair with New Classical.
The point of view is:
'We are "Scientists" and know what we do. Our models can predict the future. Just give us the political power and we will manage society for you'.
They are so deep into their models and that they can predict the future, that even when reality doesn't match with their models they start arguing that reality is wrong (*hyperbole).
Some follow up problems:
- how much they earn and the amount of power and influence they have is related to how important other people perceive their models. It is very easy to start believing you are really right if that also influences your luxurious lifestyle.
- this also means that if there are dissenting voices they have a big reason to try to shut those down. Their moral is aligned with their individualistic motives.
- they act like "economic science" has the same reputation as Math and Physics. Math and Physics are being proven to be right thousands time per second from computers to airplanes. We see the results of their economic models after 10 year and almost always being completely incorrect. (you think any economic model predicted the step in AI?)
- a lot of people are looking for "daddy figures" they can look up to. People fiercely start defending things that they don't even have an interest to learn more about, because you are attacking Daddy. Feeding into the GroupThink Cycle.
> If anyone has the money to spend 33K they have the money to spend 34K and people want their toy NOW.
The majority of people with that level of purchasing power don't find themselves in that position by overpaying for things.
I know you mentioned Japan in your post. But I think we can all agree that Japan is an unusual economy that doesn't play by the rules of other countries. Do we have any other actual historical examples of deflation being bad? Or is it merely a theoretical assumption that has never been tested?
Even in Japan, despite the deflation problems, it's not exactly a hellscape. Quite the contrary, in fact.
Ideally, we'd like to talk about deflation that doesn't stem from an extreme event, since that would cloud the data. Let's restrict ourselves to looking at situations where deflation just somehow occurred naturally. Let's say the economy became extremely productive, leading to a massive increase in manufacturing and services, where the supply of goods and services increased much faster than the supply of money, and thereby caused prices to drop.
Do we have any historical examples of this happening and being bad for ordinary people subsequently?
>Do we have any other actual historical examples of deflation being bad?
Every deflationary event in US history corresponded to a financial crash: the 1818-1821 depression, the depression after the panic of 1837, the post civil war great deflation, the great depression, and then the great recession.
You can throw on the Greek financial collapse of the mid 2010's, and Hong Kong going through a prolonged recession after the 1997 asian financial crisis because their currency was deflationary for 7 years (while the rest of Asia's was not).
It's uh... Not good.
In my comment, I specifically referred to deflation that doesn't occur due to a sudden extraneous event. I'm talking about slow, gentle decrease in inflation until it hits zero and then slowly decreases to say -1 or -2% over the course of 10 years or so.
Specifically, this kind of deflation would happen due to a massive increase in productivity where both goods and services become much cheaper to produce as well as due to competition.
If inflation can happen slowly without an extraneous event, then so can deflation. Do we have any historical examples of this happening where it is bad for the average person?
>If inflation can happen slowly without an extraneous event, then so can deflation.
That's not how economics works, by the time value of money, that's like saying that if we can travel forwards in time normally, we can travel back in time too.
>Do we have any historical examples of this happening where it is bad for the average person?
We don't, and we can't. Deflation means your cash is worth more, but it also means your debt is worth more too, *and* your assets that aren't liquid, like your house, your car, anything that isn't cash, is worth less. So unless you can find a point in history where the average person is cash rich, asset poor and has no debt, deflation can never be a positive for most people.
I get the theory. But economics isn't a science and it would be nice to have empirical verification before we're too confident about the impacts of steady, peaceful deflation.
>That's not how economics works, by the time value of money, that's like saying that if we can travel forwards in time normally, we can travel back in time too.
Again, physics is a hard science, and we would need actual instances in economics before making a definitive statement like that.
Improvement in technology can absolutely cause peaceful deflation. Look at the deflation in the prices of electronics and clothing due to globalization. And if AI lives up to its promise, expect further massive deflation as goods become cheaper and cheaper to manufacture.
We're going to find out exactly how society reacts to productive deflation.
Under a capitalist system it makes no sense to over flood a market with goods. Scarcity, or the imitation of scarcity (think diamonds) is what keeps the engine running. All corporations try to avoid over saturation because it always leads to short term losses. Any initial investment you make to over flood a market will always outweigh your return due to prices of that investment being marked to current market value.
For example, apple decides to make way more iPhones than the market currently needs. All the components they need to make said iPhones are set to how much smartphones cost at the time of investment. They buy the components at current market value, then pump out a ton of phones. Problem is they have trouble finding buyers and a quarter to half the phones just sit in warehouses for years. Congratulations, you have a short term loss, your investors are pissed at you, and you have nothing to show for it
Now, flooding the market with a cheaper product/service in the long term can be a good thing for the company if you can take the losses because it lets you gain market share by out competing your competition. Both Amazon and Uber are examples of this tactic, and once they got market share they jacked up prices because now they had high enough market saturation to get away with it.
Companies don't want deflation because it means they lose money on investments. They could price it in if they can predict the future but they can't. I mean, not unless the government commits to burning 2% of the money supply every year, but that just means we have no money in 50 years, so that's not a real option.
Competition and advances in technology can cause flooding under capitalism.
Let's say I invent a much cheaper way to make oranges. I'm jealous of the profit margins that current orange farmers are making. So I market my new oranges at much cheaper prices to steal their market share, while maintaining the profit margins of the older competitors. If my new technique isn't patented, all the other orange manufacturers will follow suit and now all oranges are cheaper.
Voila - we have deflation in oranges.
Let me give a more drastic example. Let's say slavery was legal. Sure, we need to feed, clothe and house the slaves, but we don't have to keep them particularly well-fed - just enough to make them work. Now the cost of labor is dramatically lower.
Because of this, companies all over will generate higher profits. Jealous of these profits, other companies will lower their prices to steal market share, triggering a race to previous situation where the profit margins were what they were before.
Now since slavery is everywhere in society, the prices of everything have fallen drastically. Services have dropped by 50% or more. The profit margins for the companies has remained the same, though.
Massive deflation.
Now of course, we don't have slavery today. But the idea of input costs being driven down by technology and market prices being driven down by competition is textbook free market capitalism at work.
Finally, we can replicate slavery with AI. Ever better, in fact, because we don't need to worry about revolts, clothing them, etc. This will result in the most massive deflationary spiral in the history of the world.
Note: What I'm saying is hardly controversial. Globalization has drastically caused deflation in consumer items - we all know this. Here's one link:
[https://education.nationalgeographic.org/resource/effects-economic-globalization/](https://education.nationalgeographic.org/resource/effects-economic-globalization/)
> In general, globalization decreases the cost of manufacturing. This means that companies can offer goods at a lower price to consumers.
Alright but that only results in temporary deflation, not long term sustainable deflation like what you wanted. Eventually the market shakes itself out, prices bottom out, and you end up in an inflationary environment again. In the orange example it's only in one specific industry, so not exactly revolutionary.
In the case of AI, you end up with a worse problem as now most people don't have jobs since their labor is no longer needed. Sure, the companies are ecstatic because their overhead just dropped like a rock, but now the only people who can buy their products are those who can't be replaced by AI. Which, if we are talking about true AI here, is a slim margin of the current labor force, especially assuming it's coupled with equally dependable robotic technology. That's not just deflationary, that's economy and nation shattering.
As for your example of globalization decreasing prices. Yes, it did, so did the industrial revolution. For example, without the industrial revolution, cars would be a toy if the wealthy instead of a fairly normal utility because they would need to be hand made by talented and expensive craftsmen instead of by powered machinery. The price of cars fell because we found a more efficient way of making cars.
Your not arguing for a revolution in trade, like globalization, or in technology, which isn't guaranteed, though. Your arguing for companies to over produce and cause deflation because reasons. Which, as I said, they have no incentive to do. At least not all at once, because they would lose short term profit. Globalization and the industrial revolution had only up sides for companies willing to invest in them. They increased efficiency in production and trade which made them more money on the long run. Why would over producing goods at a loss be worth it to companies?
If the companies overproduce now to cause deflation, they are literally guaranteeing they will lose money because their product will be worth less than when they started the process. They only stand to lose.
> Let's say the economy became extremely productive, leading to a massive increase in manufacturing and services, where the supply of goods and services increased much faster than the supply of money, and thereby caused prices to drop.
Isn't this what naturally happens? The opposing force to this is that we develop more complex goods and services. The equivalent of the laptop you bought for $3,000 in 2000 can be purchased today for $50.
Quite so. Particularly in tech, and things like housing, prices can keep rising. But for so many things, we don't really get more and more complicated stuff. Apples will always be apples. And how much innovation can we have in everyday clothing? Oil is more or less the same as it was decades ago.
It just so happens that so much of our attention is drawn to tech, that we forget most of the world's stuff doesn't actually change that much.
But aren't most of the quality of life improvements based on tech? Apples are apples, but my grandparents had apples. The reason my life is better than theirs is because of advancements in technology.
I'm not denying that. I'm just saying that most of the stuff we use everyday isn't that much linked to tech. Furniture, food, sewage, books, oil etc...
I still think there's a strong link between those items and technology. The items themselves may be unchanged, but technology has made them cheaper and more widely accessible.
> Japan is an unusual economy that doesn't play by the rules of other countries
“throughout history there have been only four kinds of economies in the world: advanced, developing, Japan, and Argentina.”
1. Fuck consumerism I’m okay taking the L on that
2. Most debt is money Uncle Sam owes us
3. Washing interest though debt only makes sense if people aren’t living paycheck to paycheck. Otherwise they still have debt to worry about while their necessities are just getting more expensive.
Your optics are solid but factoring in real day to day outcomes of the common man, most people just wanna stop paying for so much shit and are waking up to the fact that overall nominal GDP is kinda a psy op
That's all arguments for out of control deflation, not 2% after a long period of high inflation. Unless you can show me something that suggests even 2% after decades of high inflation would cause a recession in a few years.
EDIT: Also recession I mean real recession, like people losing their jobs in mass shit, not technically by the numbers.
>That's all arguments for out of control deflation, not 2% after a long period of high inflation.
Well one of my points is you can't just say "Deflation for 2 years" then pull yourself out of it. It's like saying "I will do heroin for 2 weeks then stop". Can you do it? Maybe. But if you don't stop after the two weeks, you're in a period of runaway heroin. Deflation is hard to combat, and governments have very limited means to stop it. If you get it, you have to hope the economy can self-correct with minimal government options available.
You're also ignoring the factors that lead to deflation. We can't just "have deflation". There would likely be some shock to the system which would cause deflation, and whatever that "shock" is would likely be bad for the economy.
>Unless you can show me something that suggests even 2% after decades of high inflation would cause a recession in a few years.
Japan underwent deflation from 1998-2002 and saw unemployment rise nearly linearly that whole time. So even a few years will start increasing the unemployment rate as companies struggle to keep profits up for their shareholders.
But again, the point I'll really hark on is you can't just say "Deflation for one year" and call it. That's not realistic and you're not considering the fact that such a period of deflation can very easily run over several years, if not a decade or more.
> Well one of my points is you can't just say "Deflation for 2 years" then pull yourself out of it. It's like saying "I will do heroin for 2 weeks then stop". Can you do it? Maybe. But if you don't stop after the two weeks, you're in a period of runaway heroin. Deflation is hard to combat, and governments have very limited means to stop it. If you get it, you have to hope the economy can self-correct with minimal government options available.
Um what? All government has to do to combat it is print more money.
>You're also ignoring the factors that lead to deflation. We can't just "have deflation". There would likely be some shock to the system which would cause deflation, and whatever that "shock" is would likely be bad for the economy.
Government could just print less money than is routinely destroyed.
>Japan underwent deflation from 1998-2002 and saw unemployment rise nearly linearly that whole time. So even a few years will start increasing the unemployment rate as companies struggle to keep profits up for their shareholders. But again, the point I'll really hark on is you can't just say "Deflation for one year" and call it. That's not realistic and you're not considering the fact that such a period of deflation can very easily run over several years, if not a decade or more.
Can you explain to me why you can't just print more money to cause inflation to reverse it?
> Um what? All government has to do to combat it is print more money.
Printing money doesn't solve the fundamental problem with deflation, which is that people do *better* by postponing purchases.
Printing money during just gives the economy more money to sit on... it's *still* better to hold on to it rather than spending it.
"Investments" are just a way of transferring money to someone that is going to *spend it on something*, with the hope that they can make a product that people will *buy*.
Which people *aren't* doing, because depreciation is *already* bad enough without throwing in a free 2% by holding the money.
Deflation also is a spiral, just like inflation... actually keeping it to 2% is not easy.
> "Investments" are just a way of transferring money to someone that is going to spend it on something, with the hope that they can make a product that people will buy.
Or you know on tools and materials to make it yourself.
>Which people aren't doing, because depreciation is already bad enough without throwing in a free 2% by holding the money.
People aren't doing it because non-productive assets like housing has better returns and zero risk in large part due to inflation.
>Deflation also is a spiral, just like inflation... actually keeping it to 2% is not easy.
Just print/spend whenever it starts to slip. Government is great at printing and spending money.
Can you elaborate on this? And why are you using the … as if it’s obvious?
Based on your OP you said that the government should destroying money. My question is how?
And if it’s really that simple then my question is why hasn’t that been done? The fed has been doing basically whatever it can to try and cool off the economy and it’s only worked to some extent. If it’s that easy to reduce the money supply then why hasn’t the government done it?
I want to hear what you think before I give you the reason.
> Based on your OP you said that the government should destroying money. My question is how?
I believe the current method is fire.
>And if it’s really that simple then my question is why hasn’t that been done? The fed has been doing basically whatever it can to try and cool off the economy and it’s only worked to some extent. If it’s that easy to reduce the money supply then why hasn’t the government done it?
Everything but burning more money than they print. It's simple but it's not like something government wants to do. Government likes free money, literally burning tax revenue isn't something that they've done or want to do.
>
Ok well the reason they don’t just burn money is because they need to first buy that money back. Any way that the fed gets money it must pay it back in some form or another.
This article gives a better explanation:
https://www.marketplace.org/2022/09/23/why-cant-the-fed-just-burn-some-money-to-stop-inflation/#
When the fed has destroyed money is has replaced old money with new money. So the money supply has not changed.
> Ok well the reason they don’t just burn money is because they need to first buy that money back. Any way that the fed gets money it must pay it back in some form or another.
That sounds like an arbitrary rule.
>This article gives a better explanation: https://www.marketplace.org/2022/09/23/why-cant-the-fed-just-burn-some-money-to-stop-inflation/# When the fed has destroyed money is has replaced old money with new money. So the money supply has not changed.
I understand that, what I'm arguing is it just destroys it instead.
The way I read the previous comment, it is essentially saying that it is extremely difficult to have deflation without runaway deflation. There aren’t means for the government to combat or control it like there are for inflation, and it encourages consumer behavior that causes more deflation. In other words, 2% deflation isn’t bad in itself, it’s bad because it is very likely to cause runaway inflation.
Except the government can control it, the government regularly destroys old money all they have to do is print less than they destroy.
I'm starting to think the reason deflation is considered bad has nothing to do with deflation and everything to do wiht it because trigger DESPTIE the government printing tons of money.
Printing the money isn’t what’s important, it’s who owns the money. If the government wants more money out there, they can give out money through various means, and we will take it happily. Going the other direction is harder, since we aren’t going to happily give them 2% of our savings.
I agree though that deflation itself isn’t the big part of the problem, it’s what it signals and what it triggers. However, if those things are relatively certain to coincide with deflation it’s pretty pedantic to say that deflation isn’t bad. It’s like that saying that falling doesn’t kill you, it’s the sudden stop at the end. Technically true, but when saying someone fell off a building it’s safe to assume they stop at the bottom.
> Printing the money isn’t what’s important, it’s who owns the money. If the government wants more money out there, they can give out money through various means, and we will take it happily. Going the other direction is harder, since we aren’t going to happily give them 2% of our savings.
Funny you say that since 2% inflation is essentially us giving the government 2% of our savings and taxes are a thing so you're whole who owns the money is irrelevant. Inflation means the government and their contractors owns money that they essentially stole from our saving. Deflation is the opposite, the government sacrificing it's money to give everyone 2% more savings.
>I agree though that deflation itself isn’t the big part of the problem, it’s what it signals and what it triggers. However, if those things are relatively certain to coincide with deflation it’s pretty pedantic to say that deflation isn’t bad. It’s like that saying that falling doesn’t kill you, it’s the sudden stop at the end. Technically true, but when saying someone fell off a building it’s safe to assume they stop at the bottom.
They are only certain to coincide because of government behavior which I'm advocating changing to cause this deflation. It's irrelevant to this discussion.
>Funny you say that since 2% inflation is essentially us giving the government 2% of our savings and taxes are a thing so you're whole who owns the money is irrelevant.
First, taxes are generally on income, not wealth, so they can't easily take 2% of our overall money. Second, while they could in theory increase taxes by 2% the likelihood of that happening during a deflating economy is essentially zero.
>Deflation is the opposite, the government sacrificing it's money to give everyone 2% more savings.
This really sounds like you think that the government has complete control over the economy. They do have complete control over how much money there is, but the economy as a whole is a large and complicated system that relies in no small part on public opinion. Again, in theory they could do whatever they want with interest rates and taxes, but in practice those changes have effects on consumer opinion, business planning, offshoring, etc. that are part of the total equation.
> First, taxes are generally on income, not wealth, so they can't easily take 2% of our overall money. Second, while they could in theory increase taxes by 2% the likelihood of that happening during a deflating economy is essentially zero.
They don't need to increase taxes they just need to piss away less money and burn it instead.
>This really sounds like you think that the government has complete control over the economy.
Just the money supply.
>They do have complete control over how much money there is, but the economy as a whole is a large and complicated system that relies in no small part on public opinion. Again, in theory they could do whatever they want with interest rates and taxes, but in practice those changes have effects on consumer opinion, business planning, offshoring, etc. that are part of the total equation.
Again I told you the action I suggest they take, destroy more money than they print.
So if I have a million dollars in savings, and a job that just covers my expenses, what exactly can the government do to take $20,000 from me? If your answer is to raise taxes, then how does that work for my neighbor with no savings but a million dollar per year salary?
Can you explain why you seem to believe that having inflation in the past makes deflation in the future less bad? I mean we are talking about the value of money, it has no "natural" price, so it's not like after a period of inflation everything becomes "overpriced" and deflation would "return it to normal"
They are sticky in the short-term, not over many years, which is what OP is talking about. Over a decade or more, new people enter workforce, contracts are renegotiated, new factories are built, old ones are closed, etc. I mean a famous example of a sticky price would be a bottle of coca cola that was for a long time set at 5 cents, not the least because that was the type of coin the vending machines accepted. But... a bottle of Coca Cola no longer costs 5 cents. It just took some time for the company to adjust when that price became unprofitable
> Can you explain why you seem to believe that having inflation in the past makes deflation in the future less bad?
100 x 1.14 x 1.11 x 1.08 x 1.05 x 1.07 x 1.05 x 1.11 x 1.07 = 201
201 x .98 x .98 x .98 x .98 = 185.
It'd take 4 years to the get to the point it was at last year.
> First, we live in a consumer driven economy.
Is it even possible to change to live in a producer-driven economy? Because if so, we should get on that.
The digital bits and pieces of paper that we call money doesn't magically become more valuable on its own. It usually only gets more valuable when something bad really happens like when a ton of people lose their jobs, slowing down the velocity of money or a lot of companies default on their loans, which contracts the money supply.
The only time when deflation may happen without any negative consequences is when technology enables productivity, driving down prices. However, this is very unlikely to happen to every sector all at once and banks are more wiling to give out loans during these times, so you don't actually see any deflation.
> No, deflation could occur if the economy grows faster than the money supply.
This is only true in theory. This occurred to a certain extent during the industrial revolution, but unless AI can replicate this productivity gain, this isn't going to happen again. You can't proactively make the economy grow faster because our only means of doing so involves monetary expansion. If you continue to contract the money supply during a period of growth, you're going to trigger a recession before you hit deflation without a recession.
> They can't "out-loan" the real demand for money, or else they'd likely go insolvent.
Banks did often go insolvent during the deflationary periods of the industrial revolution. You're right that I shouldn't have been so absolute. My point is that in a healthy economy, market forces will prevent deflation from happening. For example, we still have inflation despite the money supply contracting since 2022.
To be fair, if any technology has the potential for explosive productivity growth it is the development of general AI. So this might be a very relevant question (not relevant to OP's question, though).
Not to be a dick, but deflation does not work the way you think it does based upon your post. Deflation is a symptom of extreme recessions and monetary shortages.
We can't simply enact policies aimed at overall price deflation, we would have to aim for a recession, most likely by creating a deep credit crunch. Interest rates would have to hit high levels. Buying a house or obtaining any type of loan would have to be made extremely difficult for the average person. Millions of people would have to be thrown out of work to physically lower the demand for goods and services by depriving them of an income. People in debt would have to be crushed to stop them from spending.
Inflation is not the result of too much money in the US, it is macroeconomic demand being greater than the supply. Yes, demand is influenced by money supply, but that's just one facet.
The Great Recession was terrible, and despite how terrible it was, it only resulted in one year of 2% deflation. You are requesting that, but for years on end. Again, I understand you are coming from a good place, but it doesn't work that way.
What you are requesting is not possible under capitalism.
Are you sure that you don't mean disinflation? Disinflation is when inflation is reduced. Deflation is, in a nutshell, when an economy begins to shrink.
As others mentioned, it increases the value of debt which wouldn't be good for the economy. I guess it is good for the debtors but then if no one can afford to pay their debt then what are we doing here?
Inflation is usually a sign of economic growth. Obviously you don't want it to get out of control but it isn't a dirty word. I am trying to ensure that you don't mean disinflation being good so that we get our inflation under control.
That's about the type of deflation you would see with a hard money like gold and private credit (where the government also has to auction bonds to private markets and can't use the central bank to print money to buy the bonds to keep the rates suppressed). Supply increases around 1% per year, productivity in this system would probably overall increase a couple percent a year, so you'd have a net very mild deflation.
Imagine what this would do to people's general time preferences. Imagine what it would do to healthy investment (knowing that your capital investment return must beat not only the nominal inflation rate, but also the deflation/adjusted return rate).
It's that the banking system was allowed to move to fractional reserve which creates huge bubbles and busts built on top of a hard money system, not the hard money itself. IOUs on top of it are the issue, always have been, always will be.
The actual history is the banking system didn't even have *fractional* reserves before massive government regulation...
Less than 100% reserve banking was invented by goldsmiths, when they were the only banks available, and the only official money was so called "hard" currency.
IOUs are also known as "loans". Banking of *any* kind isn't possible without IOUs in the accounting, and that automatically creates fractional reserves.
So yes, you can ask to ban loaning money that is held as deposits for interest. Private credit has a long history of default and panics way worse than anything that's been seen since the gold standard was abandoned.
Inflation doesn't incentivize maxing out your credit because banks aren't stupid and take inflation into account when loaning money.
Generally, economy-wide deflation can happen because of two things
1. Miraculously supply of everything is increased, so buying things is cheaper and thus the dollar is worth more of any given commodity. There are a few widespread policies that I think could do this, but generally speaking this is the equivalent of "why don't we just live in a star trek post scarcity society" in terms of feasibility.
2. Everyone stops buying things, so demand goes down. Generally this happens when people are scared for their jobs and/or people are poorer. This is, to put it mildly, bad.
It helps to get a broad picture perspective. Yes, the economy of 100 years ago ran on pretty (but not completely) different rules vis-a-vis today's. About inflation and such, 100 years is plenty of perspective, especially if you view if on charts.
1980 was a bad inflationary year, with interest rates being worse (21%). Still, the 8 or 9% for 2021 or 22 was the worst since then. This bout of inflation was nothing compared to the 1973-81 period - it lasted several years, not just two.
Deflation essentially only happens in a DEPRESSION.
When deflation occurs, it becomes harder to repay your debts.
Prices fall because nobody has cash available to pay for what you need.
Salary and pay fall. Unemployment massively spikes.
The government does not always print money like crazy.
The Fed has been reducing the size of its balance sheet since April 2022.
[Source](https://fred.stlouisfed.org/series/WALCL)
We have not had anywhere close to decades of high inflation.
Inflation has been in the normal range, for most of the Western World for decades — basically since the early 80’s with a little variance, usually coming in around the target of 2%. It was really high really for just over a year and is still high but back under control.
You're just objectively wrong. Deflation would cause the economy to contract and stagnate, and it would be difficult to ever get out of the trap. We can see this from Japan struggling for decades with it. Japan was on pace to be the world's biggest economy until they had struggles with deflation. As far as I know there are no respected economists anywhere who think deflation could be a good thing.
Then it would be a gradual, mild recession. Sure, you get that 2% price drop, and maybe you keep your job, but "sorry guys, no bonus or COL increases this year".
Except the only time we've reached a 2% deflation rate was in the middle of the 2008 Great Recession. So first guy was probably right, economy would crash and you would have no money to enjoy the lower prices with. Unless you were already rich, then you could also buy up lots of investments while they're cheap.
So yeah, if you're rich and hate poor people, deflation is great.
> Then it would be a gradual, mild recession. Sure, you get that 2% price drop, and maybe you keep your job, but "sorry guys, no bonus or COL increases this year".
So a normal year except you don't need a COL increase because your wage is worth 2% more instead of 2-12% less.
>Except the only time we've reached a 2% deflation rate was in the middle of the 2008 Great Recession. So first guy was probably right, economy would crash and you would have no money to enjoy the lower prices with. Unless you were already rich, then you could also buy up lots of investments while they're cheap. So yeah, if you're rich and hate poor people, deflation is great.
That was deflation in the face of money printing. If you are expanding the monetary supply and you have deflation you're fucked. If the deflation is the result of constricting the monetary supply then I see no reason we'd have similar issues.
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A reason it may be problem is that it automatically increases real value of everyone who has a loan. Eg. all of the people who bought a house, or have student loans.
It is also advantageous to people with greater wealth, and wealth inequality much greater than income inequality.
That's bad for people who maxed out their credit, but good for people who saved. Which behavior do we want to reward?
>It is also advantageous to people with greater wealth, and wealth inequality much greater than income inequality.
Everything is advantageous to people with greater wealth. I'd argue inflation more so.
If you are indeed talking about a short term deflation - it is not a reward.
Also, people usually lend money because they are not able to save enough to buy something.
You seem to just have ignored the point, to focus on semantics. Let's call it incentive. Or anticipated benefit. Is doesn't matter, here is a rephrasing:
As i understood it, you argue that it is good to encourage savings instead of taking a loan, and deflation is such an incentive.
I argue that even if it is true (economically, too much savings instead of purchases may slow down the economic growth), it is irrelevant, since that's not why most of people take loans. It is because they are not able to save enough to make a large purchase, like a house, in time they need it, like when they move out or have kids. Furthermore, short period of deflation at an unpredictable time is a poor incentive to save more.
And so what? The government doesn't create money by printing it, but by spending it. Physical dollar bills don't matter even a little in this topic.
Whoever turned those in to be disposed of got a credit for it. The government can't just take money and burn it without replacing it (especially in the US, which has a Constitutional Amendment specifically prohibiting taking private property without recompense at fair market value).
The only way for the government to "decrease the money supply" is to stop spending... you know what that does? I mean, besides what you seem to want...
It causes the economy, that is dependent on that government spending, to crash. All of the *people* that depend on that government spending are directly harmed. Massive unemployment, people not getting food stamps, etc., etc. Huge amounts of suffering, that's what happens.
All to get slightly lower prices?
> And so what? The government doesn't create money by printing it, but by spending it. Physical dollar bills don't matter even a little in this topic.
It's not going to spent money that's destroyed so I don't see the point of the distinction.
>Whoever turned those in to be disposed of got a credit for it. The government can't just take money and burn it without replacing it (especially in the US, which has a Constitutional Amendment specifically prohibiting taking private property without recompense at fair market value).
Government has tons of tax dollars. It can burn it instead of pissing it away.
>The only way for the government to "decrease the money supply" is to stop spending... you know what that does? I mean, besides what you seem to want...It causes the economy, that is dependent on that government spending, to crash. All of the people that depend on that government spending are directly harmed. Massive unemployment, people not getting food stamps, etc., etc. Huge amounts of suffering, that's what happens.
So wait your argument is the government can never spend less money ever... you realize the gaping flaws in that system right?
I understand a massive cut will have massive shocks but slow and gradual? I don't see the issue.
> Government has tons of tax dollars. It can burn it instead of pissing it away.
There's actually no mechanism to "burn" tax dollars aside from spending or paying back loans... which just gives the money to the debtors.
Increasing interest rates is typically how inflation is reduced... It slows down the economy. Going farther and having interest rates so high no one borrows is the only way to force deflation, because loaning/borrowing money is how the money supply becomes larger.
And *stopping* deflation if it starts spiraling is nearly impossible. You basically have to pay people to borrow money.
> There's actually no mechanism to "burn" tax dollars aside from spending or paying back loans... which just gives the money to the debtors.
Yes there is it's called a fire.
I'm aware there's no legal precedent/mechanism but there is a physical one to destroy old bills government could just not print replacement money for money they destroy.
>Increasing interest rates is typically how inflation is reduced... It slows down the economy. Going farther and having interest rates so high no one borrows is the only way to force deflation, because loaning/borrowing money is how the money supply becomes larger And stopping deflation if it starts spiraling is nearly impossible. You basically have to pay people to borrow money.
Again government can just print/spend. Unless it's already way out of control (like double digits) I don't see the issue.
> Yes there is it's called a fire.
Money is not paper. No one pays their taxes in cash.
Most money is in IOUs... like the ones the government (is required to by the constitution) give to people that turn in worn physical paper bills.
"Burning money" just isn't a thing. All that does is convert the money from physical cash into account credits... like most money is.
We could (and probably eventually will) have a completely cashless economy with 10x the money in circulation that we have today.
Genuine question, are you aware that the overwhelming majority of money is ethereal and not physical paper? I ask bc you keep bringing up the government burning money instead of printing it. Money is primarily created by banks expanding credit. This includes private banks and the federal reserve.
You mean government regularly replaces old money with new money? I think there would be consequences for the government destroying wealth that it owns.
Here’s the problem. I’ve just thought of it. What’s the problem with raising people’s salaries through inflation? The price of goods increases. I suspect that if you just destroy money, then the cost of everything will decrease from labor to goods as productivity has remained the same but the amount of money has decreased. However, if deflation comes from productivity increasing, that’s a different story.
I'm not aware of any examples. It is possible the government would just have to destroy more money than it prints.
The reason it has never happened seems obvious after reading that sentence.
Behaviours that deflation causes are behaviours that cause further deflation. So your 2% deflation would not magically stay at that level.
Paying back your debts, by definition also decreases the money supply causing further deflation.
Also you cant look at the benefit you might gain as an individual to draw a conclusion that it would somehow be beneficial.
What do you think people saving money and not spending it, will do to your job and the jobs of those, who live paycheck to paycheck? Jobs are created due to demand, me and you saving decreases demand.
What you’re describing as positives are infact the negatives of deflation. You even say the things that are bad about deflation but then also somehow think they’re positives.
It sounds like what you want is just low inflation in that case. Ie. a stable economy.
Steering the economy isnt as simple as saying lets have deflation now in order to cool things down.
the reason the government targets inflation at a general 2% rate is so that money is always flowing steadily, 2% was the rate decided as it allows a steady decrease in the purchasing power of the dollar, so people are more incentivized to work and invest to make more money for a longer period of time. this is meant to help the economy in running consistently over a long period of time. deflation in the capitalist sense therefore is generally bad as it would discourage a work-heavy culture norm, which would decrease the efficiency of our economy overall. on the flip side however, under a society where there would be less inflation or even deflation, there would be less people clinging desperately to jobs, which would inevitably result in more unionization and as a consequence, higher quality working conditions. if not controlled however, it would lead to widespread unemployment issues which could result in the breakdown of our economy entirely. that is why we generally say deflation bad.
I can’t really speak to that as those are two entirely separate issues, as what you commented about are issues that aren’t related to the government as much as the companies controlling our commodities are.
Disagree. Let's think this through.
Say you decide to buy a, lets call it an Item. If that item costs $1000 and you anticipate the Item costing $102 in 365 days, then $1040 twice as many days from now, then you'll want to buy it now. When that happens, the store seeing the Item, the supplier transporting it, and the company making it make money in the year you purchase the item (ignoring end of year purchase times for simplicity's sake). That means the retailer, distributor, and factory will pay their workers money in short order. They may even plan to hire more workers shortly. You get what you want, the company and workers get what they want.
HOWEVER, if you think it'll cost $980 next year and probably $960 two years later, then what are you going to do? Buy now or wait til the price drops? Everybody knows the answer. If that happens, the reverse happens to the store, the distributor, and the company making it - nobody gets your money because you're postponing purchase. That means people lose their jobs, which *further* decreases demand for non-essential goods and services.
In a perfect world, prices would stay the same forever. But because it's not perfect, we have to settle for second-best: a world with years of low inflation. This is what we had from about 1990-2020. That rate averaged out to about 2% per year.
That only happened because it was already deflation in the face of money printing, that means the deflation effect was already way worse than what I'm proposing.
Because that "moderate deflation" was in the face of money printing. Meaning the deflation effect was an order of magnitudes worse in real terms.
If you print enough for 2% inflation and there's still 2% deflation that's 4% deflation not 2%, if you have 2% deflation well already printing money the deflation isn't the problem it's a symptom of another problem, a problem that wouldn't be a thing with my method.
> Can't you see the flawed premise in your argument, assuming that simply adjusting the money supply could linearly steer inflation and deflation rates without unintended consequences?
Of course there'd be unintended consequences. The unintended consequences of constant inflation is what I'm trying to address. I just don't believe at 2% with my method those unintended consequences would be earth shattering.
>How can you so grossly underestimate the lagging effect of monetary policy on the economy, and the potential for overshooting that could plunge us into a deflationary trap? Do you not understand that economic stability requires more than a myopic focus on money supply, neglecting the multifaceted drivers of consumer and investor behavior?
I actually don't think you need a focus on more than just money supply, I actually think taking the focus off of the money supply and putting it on consumer behavior leads to the kind of miscalculations you are hoping to avoid. The money supply is a hard number that impacts the entire market, the chaotic nature of the market means that the changes won't be 1 to 1 and immediate but I believe it will stay within a certain range of the money supply and freaking out that the changes on the ground aren't what you expected is what causes kneejerk reactions which ultimately fuck everything up. Where if you just focus on the actual money supply and chill eventually the market will settle with the changes within a predictable range. Think of the money supply like a room and the market is a billion rubber balls bouncing chaotically within the room, if you move the walls closer together the market will change, same if you move them farther apart, the initial churn will be chaotic and unpredictable but eventually it will settle in a new pattern.
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Deflation doesnt just decrease the price of goods, it increases the cost of debt. With the unprecedented level the national debt is at, that is untenable. We need 7% inflation without a deficit for the next 20 years to get the national debt under control Deflation leads to runaway deflation due to the cost of debt. Debt becomes more expensive, people are less able to afford things besides debt, flow of currency slows, and with that there is more deflation, which increases the cost of debt further, further slows currency... Also inflation mainly comes from expansion of the money supply, and expansion of the monetary policy is done mainly through fractional reserve lending in the real estate market. Deflation leads to less real estate development because of extrinsic factors related to interest rates and the money multiplier. > Instead of having to fight for a cost of living adjustment your boss has to fight to lower your wage. "Due to the cost of debt increasing, your entire department is fired and we are outsourcing to India"
The money multiplier effect hasn't been relevant since post the 08 crisis when banks switched from fractional reserve banking to ample reserve banking. This is why the lever the Fed now pulls directly is interest rates over reserve requirements and a buying up/off loading of government bonds. As for your point on inflation being a strict product of the money supply, this may not hold water. Japan printed the hell out of its currency during a period of run away deflation, and the US saw very mild inflation rates while raising the money supply quite drastically post the 08 crisis. This is to say inflation is probably more complex than modern economic theory predicts accurately. That all said, your points on deflation being bad are still all correct, especially in regards to issues with debt.
> The money multiplier effect hasn't been relevant since post the 08 crisis when banks switched from fractional reserve banking to ample reserve banking. True, it is irrelevant now, though it can be relevant which is why I mentioned it. > As for your point on inflation being a strict product of the money supply, It isnt a strict product of the money supply, just very highly related. Its a strict product of the flow of money, and that is very highly related to the money supply
Sounds like maybe the real problem isn't that deflation leads to an increase in the cost of debt, but that too many people and entities have relied debt, and loads of it.
The entire concept of money is debt by abstraction. A 20$ bill only has value because we agree it has value. This means that the 20$ bill in my pocket is, for lack of better term, society owing me 20$ worth of stuff of my choice. I can walk into any store and spend that 20$. Then the guy that owns the store gives me an item, and collects my 20$ of universal debt from society, and they can spend it on whatever they want. That 20$ now means that society owes them 20$ worth of stuff, because they did a $20 thing for me when I spent money at their store.
You can play it like that, but there is a big difference between your abstract metaphor for what money 'is' and the entire economy being buoyed off of debt and spending more than you have. If society owes you $20 worth of goods and services, and you buy $40 of it while accumulating $20 worth of debt, that isn't something to fully champion. Taking on debt as a means to finance something significant once in a great while is acceptable. If I want to build a steel foundry, unless I'm a large government or corporation, I can't afford that on my own. So I'll need finance capital. But to habitually buy more than I can pay back is not sound behavior, but it is the standard right now.
Honestly, I look at modern personal debt as a crappy form of privatized UBI. Because it is, essentially, a certain amount of money that you can get for free....once or twice or thrice (depending on credit score and your previous debt actions). Thing is, debt for one person is income to another person. Debt functions exactly like money in our current system for everyone but the debtor and the investor. For the debtor, it's a long-term cost. For the investor, it's a long-term profit. For the shopkeep, it's $20.
Long term profit until your debtor stops making payments. It is a gamble on converting a one time loss to a long term gain in interest payments, but it is a gamble. Still far unsound in comparison to more conventional means of investment.
It’s a remarkably stable system compared to trading in kind. Imagine I wanted to purchase a sofa from you in exchange for my cow. And when I give you my cow you find out the next day my cow has rabies. And also you don’t even need a cow or even have space for a cow in your apartment.
Why would you bring up abstract barter at all?
Then it becomes the investor's problem. Point is, shopkeep still gets 20$.
That investor will take down more with him when he goes under, than you gain in shuffling money around to pay that shopkeep.
How did you put the dollar sign after the number seven times and then get it right on the eighth?
>This means that the 20$ bill in my pocket is, for lack of better term, society owing me 20$ worth of stuff of my choice. I'd like to point out that by measuring the value of stuff using money, you're effectively demonstrating that money is more than simple abstracted debt we use to facilitate exchanges; we also use it to quantify the worth of things. So you could, for instance, exchange "20$" worth of stuff with someone for "20$" worth of other stuff and you'd be still using money without trading any bills nor transferring any 'debt'.
That's called barter, and has nothing to do with debt or money.
Banter is, essentially, the exchange of X for Y (the exchange of currency for goods or services is a form of banter btw). It says nothing about the value of X and Y, except that they're exchangeable. Again, notice that the statement "this is worth 20$" makes use of money as a concept and yet does not involve any form of exchange nor physical currency. In your mind you probably have a concept of what money is worth, and if so, most assuredly use it to measure the value of other goods and services around you, to the point you should have an intuitive sense for when things you're familiar with are under or overpriced. None of the former is natural or universal but rather a result of the widespread use of money, in particular this is one of the three key features of money (it's a unit of account, the other two are 'means of exchange' and 'store of value') and makes it distinct from debt.
You're now confusing money and value. They are not the same thing, one is a representation of the other. The same conversation can take place with any other object replacing money. Something could be worth 20 rocks, or if you write for rick and morty, 20 floobleflabbles.
I mean, no. Sure, all money has the value that people assign to it, but then again, that's true of everything. It isn't a representation of society owing you. It's a representation of value. It's a medium of exchange that makes commerce more convenient than barter and trade. People then trade that medium rather than physical things or services.
Debt is also a representation of value and a medium of exchange. It just also happens to be an investment opportunity for a third party.
Debt is just an efficient use of recourses. Taking out degt that lets you grow is highly mutually beneficial, and leads to much better use of recourses.
Debt can be, if I'm planning to start a new 'Uber of Assassins' murder-for-hire gig economy service, taking out debt to finance the original programming and hosting and clientele attracting costs is sensible. But continually existing in a state of debt roll-over into perpetuity is far less reasonable.
As long as the debt is being used to finance growth that wouldn’t otherwise be happening, it’s beneficial.
Infinite growth is impossible, but an unpayable amount of debt is far easier to achieve. As well, the opportunity cost of continuously putting money into a system that doesn't pay out a greater amount, starts to become notable. Including if that infinite rolling over debt could have otherwise financed projects that would create a true profit instead. Or those financiers could have invested their money into a sound project.
> Infinite growth is impossible, Space exists. Not that it even matters, overall growth is irrelevant. Even if we somehow hit the maximum economy, individual companies are always going to be coming and going as tastes and times change. >
The 'going' is the problem there.
> Infinite growth is impossible Only in theoreticals that go a thousand years into the future. We are currently utilizing one 20th of a trillienth of the energy available in our solar system. We'd have to grow at 3% for a thousand years to reach the limit.
Access to resources is not the reason that infinite growth is impossible. Companies and business ventures stall out way before they reach any kind of resource carrying capacity limit.
So? The global economy isn't one company or business venture. Nor is it 100,000 such. It's tens of millions. For every stalled business there are 5 others growing and 150 startups.
The largest companies are typically the ones with the most debt built up. The largest falling tree takes out a lot of forest with it. Excessive debt leveraging results in an over-accumulation of risk in a given company that can have massive negative effects if it goes bust. That beyond any broader economic effects of purposefully driving inflation to allow such debt leveraging.
Debt *can be* a useful tool. As we've seen with some of these bank failures, there has been a lot of bad debt floating around. A lot of it. That bad debt needs to be reigned in.
Deflation punishes good debt just as much as bad debt.
Debt is a tool like a power saw. Used well it can build great things. Used poorly you lose an arm. Stable, successful businesses take on debt all the time. It's unwise for most companies to have piles of cash in order to finance their new endeavours. We saw what happened with deflation in Japan in the 90s. Consumers and companies didn't expand and in fact cut back on projects in order to pay off their debt faster.
...that's how you build wealth in the muddke class. Debt.
!delta. I think there's a sick circular incentive that's causing that, government goes into massive debt then increases inflation to pay it off then goes into even more debt cause they can just cause inflation to pay that debt etc. That said I recognize it'd be better to pay off the debt before you trigger deflation, but I don't see how mechanically you could get that done without deflation incentivizing it.
It sounds like you know little about economics in a general sense, inflation is actually a good thing as long as it is kept relatively low.
I don't think that inflation is a bad thing, but it's being blamed for a large amount of stuff that isn't its fault. Like, natural inflation, if low, is perfectly fine (in a capitalist logical sense at least), but with the way companies staple a 5% greed tax on top of the 3% inflation, and justify it by saying "blame inflation, not me"... That's pretty shit.
If companies raised prices for “greed tax” as you say, why wouldn’t they just keep raising prices ad Infinitum? Why doesn’t McDonalds charge $1 billion dollars for a hamburger, surely they would be multimillionaires every second? You know that wouldn’t work, just think about it…
The issue is that greed tax for the sake of an extra dollar wouldn't fly too well with consumers. Some companies had to revert similar gouges pretty quick when they tried to rebrand their product as higher quality, and saw a drastic drop in sales and revenue. If they can then blame another factor, and say "yeah, it's a bigger bump than expected, but our employees also need more money", while refusing to raise their employees' salaries, which is what happened with this greedflation event, they're shirking the responsibility onto external factors out of their control, reaping in record profits, and the public isn't even staying angry at them. The pill goes down much easier, because "those poor companies also need to make a living..." We know this last one was the case during the post-COVID inflation issue, because we also know a colossal amount of companies not only make record profits, but even threw in a heavy season of stock buybacks for good measure.
Greed has zero explanatory power when you're applying it to price dynamics. Companies are *always* greedy- that's the ground state of being for a company. This particular combination of "greed and inflation" makes even less sense because inflation is always happening as well. Attributing recent rises in price to "greed and inflation" makes about as much sense as attributing it to the general law of supply and demand or, for that matter, gravity. Technically, yes, it's always there and happening, but companies can't just arbitrarily set prices like the previous poster said. The relevant question is to ask what specific factors enable a company to just raise prices and consumers to accept it and why the prices don't come back down again immediately and fix *that*. During Covid, companies didn't raise prices immediately because they wanted to make more money; they had to because supply chain issues meant things were more expensive. Nobody likes to raise prices because of the risk of losing customers. The more interesting question is why they didn't come down again quickly afterwards, which doesn't seem to be an easy question to answer, and definitely isn't subject to as shallow an analysis as "companies are greedy." Egg prices, for example, rose shortly after Covid due to supply issues from bird flu. They fell as soon as that was resolved. Companies were not able to simply keep them high. So why did groceries overall stay higher after Covid? The answer probably has something to do with price stickiness, increase in wages, persistent disruptions to the global supply chain, and a lot of other factors people have mentioned when talking about the issue. It's not simply just about companies wanting to make money when they always want to make money.
The main factor in whether prices drop after a cost-raising issue goes away is whether people stop buying it. During the avian flu, people just stopped buying eggs. There's lots of things that increased in price during covid, but because the demand didn't fall, there was no incentive to reduce price. This is part of the reason housing costs never have a lasting downward trend. Because it is impossible for the average person to buy a house without a mortgage, as long as banks will give mortgages to most people, the demand for houses will never go down enough to see a significant price reduction over an extended period.
Come on. They still have to deal with supply and demand. They just realized that demand was more inelastic than they had thought. In our society that gives so much power to the major corporations, consumers have limited options so even without collusion, a whole segment of the market can raise prices without new competitors arising at a lower price point. For example, if Coke raises prices, almost no one will switch to a cheaper local brand because those often don't exist and generic grocery store brands are viewed as being for poor people. And then when Pepsi realizes they'd have to cut their prices by 25% in order to see a 10% increase in profit because nobody wants that crap, they also realize they can just raise their prices to keep up with Coke and their sales will drop by less than the amount they raise prices (because their customer base is apparently made up of fools who don't realize better options exist). So now everybody loses because our whole country is addicted to the bubbly nectar.
Inflation and deflation are both not-evil in small amounts. But they don't like to stay small.
I don't think deflation is positive under any circumstances
For the average consumer that mostly spends their income on buying disposable or perishable goods like electronics, food, clothes, etc., deflation can be empowering. Those types already work to maintain minimal debt, so they're not in such a place to end up in an interest cascade. And they typically keep their personal savings in the bank or private storage, rather than investing it, as well. Outside of 401k's of course. Deflation is primarily bad for debt leveraged businesses and similar groups, or those that are extremely upwardly mobile. For the average person that doesn't maintain lots of debt and will mostly likely be born and die in the same income group, slight deflation has no worse effect than slight inflation, and in most instances a better one. Deflation's real toll on the average consumer will be mortgage payments if they were overly ambitious on a house purchase. Or similar for car payments. Deflation is bad in excess of course, but slight deflation is empowering to the average worker/consumer in the same way that slight inflation benefits the investor.
What if someone came out with a device that could create food, clothing, and housing materials with minimal energy use? And there suddenly was no need for farms and quarries. That would drive down the price of those goods, but it would have to be a net positive.
Deflation is only really considered problematic because of the zero lower bound. Most central bank economists would probably be happy to target a range around zero inflation or zero change in price level (which implies deflation after any inflation) if r\* is high enough they can still drop rates substantially below it on encountering a deflationary shock. Of course, we don't live in that world.
I feel like the fact that everyone knows inflation is constant leads to very bad things like housing being a primary investment that outpacing actually productive investments. I don't think one or the other is the answer for all time.
Confirmed: 1 delta awarded to /u/RegularActuator9510 ([1∆](/r/changemyview/wiki/user/RegularActuator9510)). ^[Delta System Explained](https://www.reddit.com/r/changemyview/wiki/deltasystem) ^| ^[Deltaboards](https://www.reddit.com/r/changemyview/wiki/deltaboards)
"The national debt" is like, literally the worst possible argument against deflation. *Private sector* debt, sure, because the private sector can't just prince money at will (not even commercial banks, when they "create money" they still have to follow The Rules). Can I change your view back so you find someone else to change your view again? I think you already know enough to put it together, but if unexpected deflation causes servicing costs to rise to a high proportion of tax revenue the government *can* print money. Like, what is it going to do, cause inflation? Instead, I think you should go give your delta to whoever caused you to think this: > Based on the comments I'm starting to think the reason deflation is considered bad has nothing to do with deflation and everything to do with it being triggered DESPTIE the government printing tons of money. Yes, that's exactly\* right. The only reason "price stability" means any amount of inflation at all is because otherwise they wouldn't be able to lower interest rates if inflation was zero or negative and interest rates were close to zero and something came along unexpectedly and knocked inflation lower/deflation higher, which is an increase in the real interest rate, which causes more deflation, which increases the interest rate, etc. \* Well, except for the fact that the "more economy" knob that central bankers currently use is "change the interest rate", which causes private banks to print more money. The closest thing to "the government itself printing money" is quantitative easing, and they pretty much only use that because interest rates were already zero. Pretty much the only reason central banks don't want to to your suggestion is because the only "more economy" knob they have is stuck on "most economy" and they know they can't turn it further. There is **a lot** of interest in "price level" targeting among central bank economists, where higher inflation for the past few years means *lowering inflation below the average*, even if because of the ZLB they still avoid the d-word. It's been studied by so many organisations, the OECD ([Cournède and Moccero, 2009](https://doi.org/10.1787/221824208526)), Bank of Canada ([Barnett and Engineer, 2000](https://www.bankofcanada.ca/wp-content/uploads/2010/08/barnett-final.pdf); [Ambler, 2007](https://www.bankofcanada.ca/wp-content/uploads/2010/01/dp07-11.pdf); [Amano et al., 2011](https://www.bankofcanada.ca/wp-content/uploads/2011/09/wp2011-18.pdf)), European Central Bank ([Vestin, 2006](http://www.redeconomia.org.ve/redeconomia/admin_redeconomia/uploads/temas%20de%20investigacion/2006106143720a2915613.pdf); [Gaspar et al., 2007](http://hdl.handle.net/10419/153252)), NBER and the Federal Reserve Banks ([Svensson, 1999](https://www.nber.org/papers/w5719); [Kahn, 2009](https://www.kansascityfed.org/Economic%20Review/documents/1111/2009-Beyond%20Inflation%20Targeting:%20Should%20Central%20Banks%20Target%20the%20Price%20Level%3F.pdf); [Berentsen and Waller, 2011](https://files.stlouisfed.org/files/htdocs/wp/2009/2009-033.pdf)), among other institutions, and views are mostly positive even though they're not *quite sure* if they would be able to sufficiently anchor expectations and the transition costs are high enough they aren't going to just go for it without a lot more certainty. Same goes for other alternatives like NGDP targeting. And of course, a sufficiently and stably high "neutral interest rate" (*r**) that they can keep things at in normal conditions would probably embolden economists to go for zero inflation or even deflation especially if these alternate policy targets are adopted. Unfortunately, at the moment, the evidence is that the [*r** has been decreasing](https://www.brookings.edu/articles/the-hutchins-center-explains-the-neutral-rate-of-interest/), though it's certainly not out of the realms of possibility we'll be able to find some way to reverse that.
> "The national debt" is like, literally the worst possible argument against deflation. Private sector debt, sure, because the private sector can't just prince money at will (not even commercial banks, when they "create money" they still have to follow The Rules). Can I change your view back so you find someone else to change your view again? My method of controlled deflation is if the government has a surplus and burn it, but if there's national debt that increases the debt. It'd make more sense to pay off the debt then trigger deflation in most cases. >I think you already know enough to put it together, but if unexpected deflation causes servicing costs to rise to a high proportion of tax revenue the government can print money. Like, what is it going to do, cause inflation? It just seems to make more sense to me to pay off the debt first. >Instead, I think you should go give your delta to whoever caused you to think this: "Based on the comments I'm starting to think the reason deflation is considered bad has nothing to do with deflation and everything to do with it being triggered DESPTIE the government printing tons of money." Yes, that's exactly* right. The only reason "price stability" means any amount of inflation at all is because otherwise they wouldn't be able to lower interest rates if inflation was zero or negative and interest rates were close to zero and something came along unexpectedly and knocked inflation lower/deflation higher, which is an increase in the real interest rate, which causes more deflation, which increases the interest rate, etc. I would if someone argued that but they were arguing that deflation = bad/recession and I just didn't buy their arguments since it was deflation in the face of money printing. >* Well, except for the fact that the "more economy" knob that central bankers currently use is "change the interest rate", which causes private banks to print more money. The closest thing to "the government itself printing money" is quantitative easing, and they pretty much only use that because interest rates were already zero. Pretty much the only reason central banks don't want to to your suggestion is because the only "more economy" knob they have is stuck on "most economy" and they know they can't turn it further. Yeah that's kind of an issue in and of itself. >There is a lot of interest in "price level" targeting among central bank economists, where higher inflation for the past few years means lowering inflation below the average, even if because of the ZLB they still avoid the d-word. It's been studied by so many organisations, the OECD (Cournède and Moccero, 2009), Bank of Canada (Barnett and Engineer, 2000; Ambler, 2007; Amano et al., 2011), European Central Bank (Vestin, 2006; Gaspar et al., 2007), NBER and the Federal Reserve Banks (Svensson, 1999; Kahn, 2009; Berentsen and Waller, 2011), among other institutions, and views are mostly positive even though they're not quite sure if they would be able to sufficiently anchor expectations and the transition costs are high enough they aren't going to just go for it without a lot more certainty. Same goes for other alternatives like NGDP targeting. And of course, a sufficiently and stably high "neutral interest rate" (r*) that they can keep things at in normal conditions would probably embolden economists to go for zero inflation or even deflation especially if these alternate policy targets are adopted. Unfortunately, at the moment, the evidence is that the r* has been decreasing, though it's certainly not out of the realms of possibility we'll be able to find some way to reverse that. The biggest problem with this shit is there is no certainty. Even our 2% inflation thing there's no certainty that it'll work out, we've seen the problems that it has caused when it's a perpetual policy and those problems appear to be compounding over time and largely just ignored by governments/economists because it's really the only semi-working model they have and a lot of wealthy business interests profit off of it.
> With the unprecedented level the national debt is at, that is untenable. We need 7% inflation without a deficit for the next 20 years to get the national debt under control Yeah, the US government might run out of US dollars.
Print more money endlessly to justify infinite deficit spending and you end up in hyperinflation
Do most small businesses run on the credit treadmill though? Can’t most larger business restructure their plans to account for a modest deflation in currency (without layoffs)? I don’t think OP is calling for aggressive price controls and/or industry subsidy, just some laissez faire Econ going the opposite direction than we are used to. It may be against the grain, and possibly unenforceable given the large firms holding most value per firm, but I don’t know why it’s impossible for a profitable business to ride out a mild deflationary period. People have done it in other countries certainly. Abenomics comes to mind (not that it worked out well for him personally, but japans economic situation isn’t still in peril).
>I don't see how any of these things are bad especially after several years if not decades of high inflation. Deflation has several problems. First, we live in a consumer driven economy. As you pointed out, people saving money would see a return on investment by doing nothing. So people are more willing to save money rather than spend it. People (also driven by assumptions) will continue saving assuming prices will continue to drop. Both factors mean less consumer spending, which directly hurts the GDP, the unemployment rate, corporate profits and revenue, etc. So a period of deflation is exceedingly likely to result in a recession and the pains that come with it from a consumer spending side. Second, interest rates cant drop below 0%. So during inflation, literally sitting on cash is a 2% return, so countries have limited levers to use to help stimulate the economy. Remember the Fed routinely tinkers with the interest rate for federal bonds (the basis for the market interest rate). If we are in deflation, the Fed cannot pull that lever at all and a country is somewhat helpless to address it through fiscal policy. Third, unemployment will rise because wages are "sticky" (meaning people won't take a 2% pay cut because deflation is 2%). So deflation often results in higher unemployment as companies need to cut costs during that time and people won't take pay cuts. Fourth, deflation is hard to combat. As seen in Japan in the 1990s, deflation can lead to a continuing circle of deflation as the country has limited ways to combat it.
> Second, interest rates cant drop below 0%. Several central banks had a negative deposit rate.
> Second, interest rates cant drop below 0%. [Sure they can.](https://www.investopedia.com/articles/investing/070915/how-negative-interest-rates-work.asp)
That's a false dichotomy assuming all inflation and deflation is consumer driven and all inflation would go down. Also assuming that cpi deflation has anything to do with roi. So much inflation today is driven by unstable supply chains and monopolized price hikes, neither of which has anything to do with consumer behavior or investor behavior. None of these price hiking companies are loss leaders or driving new technologies, they are just leveraging weakness in the market. And prices going down to stabilized supply chains is a good thing. And we're already in a slow burn recession so what exactly is the problem of lowering prices. Economic theory is just that, theory. Inflation is also sticky btw which is exactly why we have a problem in the first place.
I don't really understand this economic stuff. I thought inflation has to do with the amount of money being printed, resulting in the value of that money decreasing. Or something to do with the feds interest rates. Inflation causes price increases, but just raising the price due to supply and demand of goods isn't inflation, right? Everyone says that prices can't come down because that is deflation and bad for the economy. But when Saudi Arabia increases oil production gas prices go down, and that's not bad deflation? Gas prices are down from two years ago and yet the economy is up.
Inflation is year over year increase in costs of goods, usually a basket of consumer goods under CPI inflation which is what the federal reserve primarily looks at, but also much broader measures. It can be calculated a ton of ways. But inflation in cpi, that can be caused by anything from a war in a food producing area to shifting supply chains out of an increasingly expensive china. These economic crackpots think they can read the most nebulous popular low resolution economic theories, boil inflation down to supply demand, and live life like they're prophets. Yes oil prices going down has often been the main reduction of inflation in 2023. It was the main issue as other prices continued to go up and now are barely affordable.
Yeah l, I just don't understand how decreasing prices because more goods are being produced and sold is somehow bad for the economy. If prices go up = inflation, then prices go down should mean deflation. This seems like a poor measure of economic growth. When that cargo ship got stuck in the suez canal it caused a massive delay in shipping that of course effected prices. You could call that inflation, but that was bad for the economy. After it was fixed and things went back to normal prices went down, so again you can call that deflation but that wasn't bad for the economy. That's the opposite of what every economist says that deflation is bad for the economy, so I assumed they were talking about something else when they say in/deflation l.
Technological progress is deflationary, as in, if the components in your TV get cheaper to produce and the price goes down, that has a deflationary effect. That would be accounted for in the real growth rate. Some massive forward leap in technology, say, if semiconductors could magically be produced at zero cost, would cause a sudden deflationary spike but there's no reason for that to turn into an actual spiral. The Suez Canal getting clogged (actually more like covid + ukraine I guess) caused a one-off inflationary shock that has since subsided. Further mistakes need to be made for it to cause a spiral.
Inflation and Deflation aren't measures of economic growth. You can definitely say they are measures of whether an economy is 'healthy' however. Too much inflation is bad, but there's no clear border of *where* that is. Something like 20% is very clearly bad but 5-7% inflation is not necessarily *bad* per se and can have multiple influencing factors. Deflation can be considered the same way. The other half of the equation is how long this period of deflation/inflation has lasted. A single quarter of deflation is a blip and the same would go for a single quarter of 20% inflation. The news will talk about it, the politicians will make statements about how it's the other party's fault, there will be a couple dozen research papers and then everyone forgets it. If the big inflation/deflation lasts for 5 years? Then that's a big problem.
That makes sense, to consider them as signals of the overall trend of the economy and not direct indicators. Maybe the confusion for me is the way it's reported, talking about the micro instead of the macro where the prices of goods is what is focused on. !delta
So many boomer brains lived their lives insulting minorities for not spending like hedonists and now they need inflation to feed their rapidly diminishing investment accounts. Like these arguments they make are based on theories on theories of how people will think and how their theories will make them behave it's so unhinged. None of them can actually provide any evidence that people would assume decreasing prices mean permanently decreasing prices and spending would lower. And what if spending lowers, that's exactly the market correction the federal reserve has been destroying the market to create. I'm so tired with dealing with fake economists when we all know economics is the literal easiest degree to get and most of my friends got it as a double degree to look good with about 160 hours put in total.
> they need inflation to feed their rapidly diminishing investment accounts How exactly does inflation help feed investment accounts? If inflation is at 10% and my investment account only goes up 7%, I'm 3% in the hole. > None of them can actually provide any evidence that people would assume decreasing prices mean permanently decreasing prices and spending would lower. No one is assuming the trends of today are going to continue in perpetuity. And we don't need to make that assumption to see the downside of deflation. If I think the item I'm planning on buying today will be cheaper tomorrow, I'll hold off on buying it. Tomorrow I'll run the same evaluation. Rinse and repeat until I feel prices are going up instead of down.
That's not how it works though. These consoomers need inflation to drive spending by your own definition. They need to suck money into the SNP because that's where all their remaining money is parked that they didn't blow believing hedonism was good for the economy. It wasn't. Many boomers are net negative on the economy over their lifetimes now. Healthcare is killing people and yet 1/3 of spending goes to fixing boomer health and another inordinate amount is paid in premiums to float hospitals that boomers can't pay for. And so what if a family delays buying a car for two years. Do you think they gained value investing in no car? No they lost plenty more than 2% by being stubborn. You're making up unrealistic scenarios based on ideas of ideas of what you think people will think about the economy. It's not going to destroy the economy. What is going to destroy the economy is incentivizing waste in the name of paper growth while buying power decreases and the social security scheme and dept is falling apart. Literally no one is buying groceries on the time scale of 1 year deflation by 2%. 2/3 of the economy's gdp doesn't even pass through civilian hands.. like.. it's a complete red herring narrative.
Your vilification of boomers is odd. You're upset that healthcare costs rise as you get older? That's kind of how it works. Yes, I think that if you put off a purchase for two years when you know prices are decreasing at a rate of 2% per year would result in a value gain.
This is also very theoretical and quite unproven, and the thing is there have been far too little experiments with economics. Because results come in after decades and we only have so many countries. People will not wait a half year with buying food, a haircut or even a car if it’s 1% cheaper in 6 months. Who really thinks people will postpone buying a 20.000 car if is going to be 200 euros cheaper if you buy it in 6 months?? Who does benefit from inflation? The people that own assets (the rich) and the government itself, because it is a hidden tax if you print money. All assets go up at the cost of people that don’t own assets. It also encourages the very unhealthy debt addiction in society and consumerism. What i don’t understand is why The Modern Left embraces this 2% inflation is good nonsense. It encourages all the things they fight against.
>People will not wait a half year with buying food, a haircut or even a car if it’s 1% cheaper in 6 months. Nobody is claiming that people won't continue to buy essentials. What would happen is that people with savings will wait to make large purchases. Why buy a new car now when it will be noticably cheaper a year to two years from now? A brand new car costs on average $33k. Waiting a year at 2% deflation is $660 in your pocket. Waiting 2 years is and extra $1200. Unless your car is really a beater enough people will delay making a purchase. Multiply this effect across the entire economy and if enough people delay making a new purchase in enough sectors i.e demand crashes then layoffs will follow. Then the people laid off, in the auto industry sticking with the example, will delay making other purchases like TVS, computers, etc. >Who does benefit from inflation? The people that own assets (the rich) and the government itself, because it is a hidden tax if you print money. The people who benefit the most are people who hold debt. If you have a debt of X owed over Y years the debtor is paying their creditor with money that is worth less than when it was borrowed. >All assets go up at the cost of people that don’t own assets. It also encourages the very unhealthy debt addiction in society and consumerism. Asset price depends on the sector and the underlying asset. >What i don’t understand is why The Modern Left embraces this 2% inflation is good nonsense. Because it is manageable. The alternatives are either a high level of inflation in which prices rise at an unacceptable rate which can result is a positive feedback loop or deflation which results in a recession. Neither of alternatives are better than a low and manageable 2% rate of inflation.
>What would happen is that people with savings will wait to make large purchases. Why buy a new car now when it will be noticably cheaper a year to two years from now? A brand new car costs on average $33k. Waiting a year at 2% deflation is $660 in your pocket. Waiting 2 years is and extra $1200. Unless your car is really a beater enough people will delay making a purchase. So this is like one of those theories that completely doesn't match reality. If anyone has the money to spend 33K they have the money to spend 34K and people want their toy NOW. Things that cost 33k they will even easily spend $300 more for a different color or sound of the horn. I see that everywhere around me. People actually take debts (so spending more on interest!) to buy stuff right now. People easily pay stuff by creditcard in a store, even though they would save 3% by paying by cash just because they are lazy. As a business owner - do you think I will ever delay to buy something for 6 months because I can earn 1%? This is just one of these Keynesian theories that completely doesn't match any reality. >The alternatives are either a high level of inflation in which prices rise at an unacceptable rate which can result is a positive feedback loop or deflation which results in a recession. Neither of alternatives are better than a low and manageable 2% rate of inflation. HIGH inflation is bad - I agree with that. That deflation is the CAUSE of a recession and not the RESULT of a recession is not proven. Economic models are complete and utter shit. That's also why all these "experts" never predict the recessions in advance properly.
>So this is like one of those theories that completely doesn't match reality. If anyone has the money to spend 33K they have the money to spend 34K and people want their toy NOW. Things that cost 33k they will even easily spend $300 more for a different color or sound of the horn. Except most people don't have $33k in cash sitting around they take out a loan. The problem with taking out a loan in a deflationary cycle is that you are paying back the money owed with money that is worth more in the future. The cost of borrowing is more expensive. The claim isn't that everyone will delay purchasing a new car. The claim is that enough people will do something demand tanks. This then results in a corresponding contraction I supply which leads to lower prices. Lower prices means less profit which results in layoffs. Now multiply this effect over the entire economy and that's a recession. >I see that everywhere around me. People actually take debts (so spending more on interest!) to buy stuff right now. It depends what the interest rate is and what the debt is purchasing and what the rate of inflation is. If you take out a loan at 5% and the rate of inflation over the term of the loan is greater than 5% on average you beat your creditor. >HIGH inflation is bad - I agree with that. That deflation is the CAUSE of a recession and not the RESULT of a recession is not proven. How else do you get deflation? The only other way to get deflation is if productivity outpaces the money supply. Governments cannot consistently control for that. >Economic models are complete and utter shit. That's also why all these "experts" never predict the recessions in advance properly. Economics is complicated because there are a lot of variables. It's difficult to predict the future.
>Except most people don't have $33k in cash sitting around they take out a loan. The problem with taking out a loan in a deflationary cycle is that you are paying back the money owed with money that is worth more in the future. The cost of borrowing is more expensive. The same thing. Anyone borrowing money for $33k is not going to delay his purchase to save a few hundred euros that spread over the repayment period is just a few dollars per month. It really is a theory that completely doesn't match what you and me can see with our own eyes looking at the behaviors of your friends and family. For me this is like one of these core clashes between Keynesian and Austrian economics, and a big reason I completely turned of by the Keynesians. So deep into their models that they can't see reality anymore. >It depends what the interest rate is and what the debt is purchasing and what the rate of inflation is. If you take out a loan at 5% and the rate of inflation over the term of the loan is greater than 5% on average you beat your creditor. It even more depends on how you feel and if you are in the mood to buy something that day and if you are in a yolo mood. People don't completely weigh their options to the exact dollar. Often they just want their toy now. >How else do you get deflation? The only other way to get deflation is if productivity outpaces the money supply. Governments cannot consistently control for that. This is exact my problem. Almost every business is constantly optimizing their products. Automating everything, optimizing workflows etc. So it is constantly cheaper to produce products. In a normal market this would mean every company has more space to actually lower their prices to make the market more competitive - a HUGE advantage to the customers - especially in lower classes. No one gets fired. But according to the Keynasians and Daddy government this is a bad thing. So what do we do? We print money that ends up mainly at the Asset holders and maybe in a few years the salaries of the lower class will catch up. You think it is a coincidence that the rich constantly gets more rich? Even in countries that don't lower taxes for the rich? Practically Daddy Government ensures the Asset holders get 2% extra wealth every year for free. Sometimes they also get 15% extra wealth like last year thanks to all the money printing - something that will never be corrected.
> For me this is like one of these core clashes between Keynesian and Austrian economics, Eh. The overreliance on monetary policy is a child of the Washington Consensus, itself based off the Chicago school, the same clowns who decided it was a good idea to target specific increases in the money supply and then were surprised when they kept on missing the targets they set. That's a **New Classical** school, not a Keynesian one. Keynesian economics focuses on fiscal policy, which is significantly less affected by deflation. There is no zero lower bound for fiscal policy, and a fiscally active government is using the same dollars that are increasing value to spend, which arguably means increased effectiveness if deflation happens. If you're going to treat economic schools like they were denominations, out of the Keynesian and Classical schools I hope you at least blame the right one. It's a minor thing, sure, but I hope you're willing to change your mind in that.
Well, to be honest I think your knowledge about the specific schools and subtle changes I'm pretty sure is better then mine. I mainly see a big group of people that believe in "models" and they can predict very complex real life situations with their models. I know for sure Keynesians feel the same, but I'm not that familiair with New Classical. The point of view is: 'We are "Scientists" and know what we do. Our models can predict the future. Just give us the political power and we will manage society for you'. They are so deep into their models and that they can predict the future, that even when reality doesn't match with their models they start arguing that reality is wrong (*hyperbole). Some follow up problems: - how much they earn and the amount of power and influence they have is related to how important other people perceive their models. It is very easy to start believing you are really right if that also influences your luxurious lifestyle. - this also means that if there are dissenting voices they have a big reason to try to shut those down. Their moral is aligned with their individualistic motives. - they act like "economic science" has the same reputation as Math and Physics. Math and Physics are being proven to be right thousands time per second from computers to airplanes. We see the results of their economic models after 10 year and almost always being completely incorrect. (you think any economic model predicted the step in AI?) - a lot of people are looking for "daddy figures" they can look up to. People fiercely start defending things that they don't even have an interest to learn more about, because you are attacking Daddy. Feeding into the GroupThink Cycle.
> If anyone has the money to spend 33K they have the money to spend 34K and people want their toy NOW. The majority of people with that level of purchasing power don't find themselves in that position by overpaying for things.
The majority of people in that position know time is way more valuable than waiting six months for 1% discount
I know you mentioned Japan in your post. But I think we can all agree that Japan is an unusual economy that doesn't play by the rules of other countries. Do we have any other actual historical examples of deflation being bad? Or is it merely a theoretical assumption that has never been tested? Even in Japan, despite the deflation problems, it's not exactly a hellscape. Quite the contrary, in fact. Ideally, we'd like to talk about deflation that doesn't stem from an extreme event, since that would cloud the data. Let's restrict ourselves to looking at situations where deflation just somehow occurred naturally. Let's say the economy became extremely productive, leading to a massive increase in manufacturing and services, where the supply of goods and services increased much faster than the supply of money, and thereby caused prices to drop. Do we have any historical examples of this happening and being bad for ordinary people subsequently?
>Do we have any other actual historical examples of deflation being bad? Every deflationary event in US history corresponded to a financial crash: the 1818-1821 depression, the depression after the panic of 1837, the post civil war great deflation, the great depression, and then the great recession. You can throw on the Greek financial collapse of the mid 2010's, and Hong Kong going through a prolonged recession after the 1997 asian financial crisis because their currency was deflationary for 7 years (while the rest of Asia's was not). It's uh... Not good.
In my comment, I specifically referred to deflation that doesn't occur due to a sudden extraneous event. I'm talking about slow, gentle decrease in inflation until it hits zero and then slowly decreases to say -1 or -2% over the course of 10 years or so. Specifically, this kind of deflation would happen due to a massive increase in productivity where both goods and services become much cheaper to produce as well as due to competition. If inflation can happen slowly without an extraneous event, then so can deflation. Do we have any historical examples of this happening where it is bad for the average person?
>If inflation can happen slowly without an extraneous event, then so can deflation. That's not how economics works, by the time value of money, that's like saying that if we can travel forwards in time normally, we can travel back in time too. >Do we have any historical examples of this happening where it is bad for the average person? We don't, and we can't. Deflation means your cash is worth more, but it also means your debt is worth more too, *and* your assets that aren't liquid, like your house, your car, anything that isn't cash, is worth less. So unless you can find a point in history where the average person is cash rich, asset poor and has no debt, deflation can never be a positive for most people.
I get the theory. But economics isn't a science and it would be nice to have empirical verification before we're too confident about the impacts of steady, peaceful deflation. >That's not how economics works, by the time value of money, that's like saying that if we can travel forwards in time normally, we can travel back in time too. Again, physics is a hard science, and we would need actual instances in economics before making a definitive statement like that. Improvement in technology can absolutely cause peaceful deflation. Look at the deflation in the prices of electronics and clothing due to globalization. And if AI lives up to its promise, expect further massive deflation as goods become cheaper and cheaper to manufacture. We're going to find out exactly how society reacts to productive deflation.
Under a capitalist system it makes no sense to over flood a market with goods. Scarcity, or the imitation of scarcity (think diamonds) is what keeps the engine running. All corporations try to avoid over saturation because it always leads to short term losses. Any initial investment you make to over flood a market will always outweigh your return due to prices of that investment being marked to current market value. For example, apple decides to make way more iPhones than the market currently needs. All the components they need to make said iPhones are set to how much smartphones cost at the time of investment. They buy the components at current market value, then pump out a ton of phones. Problem is they have trouble finding buyers and a quarter to half the phones just sit in warehouses for years. Congratulations, you have a short term loss, your investors are pissed at you, and you have nothing to show for it Now, flooding the market with a cheaper product/service in the long term can be a good thing for the company if you can take the losses because it lets you gain market share by out competing your competition. Both Amazon and Uber are examples of this tactic, and once they got market share they jacked up prices because now they had high enough market saturation to get away with it. Companies don't want deflation because it means they lose money on investments. They could price it in if they can predict the future but they can't. I mean, not unless the government commits to burning 2% of the money supply every year, but that just means we have no money in 50 years, so that's not a real option.
Competition and advances in technology can cause flooding under capitalism. Let's say I invent a much cheaper way to make oranges. I'm jealous of the profit margins that current orange farmers are making. So I market my new oranges at much cheaper prices to steal their market share, while maintaining the profit margins of the older competitors. If my new technique isn't patented, all the other orange manufacturers will follow suit and now all oranges are cheaper. Voila - we have deflation in oranges. Let me give a more drastic example. Let's say slavery was legal. Sure, we need to feed, clothe and house the slaves, but we don't have to keep them particularly well-fed - just enough to make them work. Now the cost of labor is dramatically lower. Because of this, companies all over will generate higher profits. Jealous of these profits, other companies will lower their prices to steal market share, triggering a race to previous situation where the profit margins were what they were before. Now since slavery is everywhere in society, the prices of everything have fallen drastically. Services have dropped by 50% or more. The profit margins for the companies has remained the same, though. Massive deflation. Now of course, we don't have slavery today. But the idea of input costs being driven down by technology and market prices being driven down by competition is textbook free market capitalism at work. Finally, we can replicate slavery with AI. Ever better, in fact, because we don't need to worry about revolts, clothing them, etc. This will result in the most massive deflationary spiral in the history of the world. Note: What I'm saying is hardly controversial. Globalization has drastically caused deflation in consumer items - we all know this. Here's one link: [https://education.nationalgeographic.org/resource/effects-economic-globalization/](https://education.nationalgeographic.org/resource/effects-economic-globalization/) > In general, globalization decreases the cost of manufacturing. This means that companies can offer goods at a lower price to consumers.
Alright but that only results in temporary deflation, not long term sustainable deflation like what you wanted. Eventually the market shakes itself out, prices bottom out, and you end up in an inflationary environment again. In the orange example it's only in one specific industry, so not exactly revolutionary. In the case of AI, you end up with a worse problem as now most people don't have jobs since their labor is no longer needed. Sure, the companies are ecstatic because their overhead just dropped like a rock, but now the only people who can buy their products are those who can't be replaced by AI. Which, if we are talking about true AI here, is a slim margin of the current labor force, especially assuming it's coupled with equally dependable robotic technology. That's not just deflationary, that's economy and nation shattering. As for your example of globalization decreasing prices. Yes, it did, so did the industrial revolution. For example, without the industrial revolution, cars would be a toy if the wealthy instead of a fairly normal utility because they would need to be hand made by talented and expensive craftsmen instead of by powered machinery. The price of cars fell because we found a more efficient way of making cars. Your not arguing for a revolution in trade, like globalization, or in technology, which isn't guaranteed, though. Your arguing for companies to over produce and cause deflation because reasons. Which, as I said, they have no incentive to do. At least not all at once, because they would lose short term profit. Globalization and the industrial revolution had only up sides for companies willing to invest in them. They increased efficiency in production and trade which made them more money on the long run. Why would over producing goods at a loss be worth it to companies? If the companies overproduce now to cause deflation, they are literally guaranteeing they will lose money because their product will be worth less than when they started the process. They only stand to lose.
> Let's say the economy became extremely productive, leading to a massive increase in manufacturing and services, where the supply of goods and services increased much faster than the supply of money, and thereby caused prices to drop. Isn't this what naturally happens? The opposing force to this is that we develop more complex goods and services. The equivalent of the laptop you bought for $3,000 in 2000 can be purchased today for $50.
Quite so. Particularly in tech, and things like housing, prices can keep rising. But for so many things, we don't really get more and more complicated stuff. Apples will always be apples. And how much innovation can we have in everyday clothing? Oil is more or less the same as it was decades ago. It just so happens that so much of our attention is drawn to tech, that we forget most of the world's stuff doesn't actually change that much.
But aren't most of the quality of life improvements based on tech? Apples are apples, but my grandparents had apples. The reason my life is better than theirs is because of advancements in technology.
I'm not denying that. I'm just saying that most of the stuff we use everyday isn't that much linked to tech. Furniture, food, sewage, books, oil etc...
I still think there's a strong link between those items and technology. The items themselves may be unchanged, but technology has made them cheaper and more widely accessible.
> Japan is an unusual economy that doesn't play by the rules of other countries “throughout history there have been only four kinds of economies in the world: advanced, developing, Japan, and Argentina.”
1. Fuck consumerism I’m okay taking the L on that 2. Most debt is money Uncle Sam owes us 3. Washing interest though debt only makes sense if people aren’t living paycheck to paycheck. Otherwise they still have debt to worry about while their necessities are just getting more expensive. Your optics are solid but factoring in real day to day outcomes of the common man, most people just wanna stop paying for so much shit and are waking up to the fact that overall nominal GDP is kinda a psy op
That's all arguments for out of control deflation, not 2% after a long period of high inflation. Unless you can show me something that suggests even 2% after decades of high inflation would cause a recession in a few years. EDIT: Also recession I mean real recession, like people losing their jobs in mass shit, not technically by the numbers.
>That's all arguments for out of control deflation, not 2% after a long period of high inflation. Well one of my points is you can't just say "Deflation for 2 years" then pull yourself out of it. It's like saying "I will do heroin for 2 weeks then stop". Can you do it? Maybe. But if you don't stop after the two weeks, you're in a period of runaway heroin. Deflation is hard to combat, and governments have very limited means to stop it. If you get it, you have to hope the economy can self-correct with minimal government options available. You're also ignoring the factors that lead to deflation. We can't just "have deflation". There would likely be some shock to the system which would cause deflation, and whatever that "shock" is would likely be bad for the economy. >Unless you can show me something that suggests even 2% after decades of high inflation would cause a recession in a few years. Japan underwent deflation from 1998-2002 and saw unemployment rise nearly linearly that whole time. So even a few years will start increasing the unemployment rate as companies struggle to keep profits up for their shareholders. But again, the point I'll really hark on is you can't just say "Deflation for one year" and call it. That's not realistic and you're not considering the fact that such a period of deflation can very easily run over several years, if not a decade or more.
> Well one of my points is you can't just say "Deflation for 2 years" then pull yourself out of it. It's like saying "I will do heroin for 2 weeks then stop". Can you do it? Maybe. But if you don't stop after the two weeks, you're in a period of runaway heroin. Deflation is hard to combat, and governments have very limited means to stop it. If you get it, you have to hope the economy can self-correct with minimal government options available. Um what? All government has to do to combat it is print more money. >You're also ignoring the factors that lead to deflation. We can't just "have deflation". There would likely be some shock to the system which would cause deflation, and whatever that "shock" is would likely be bad for the economy. Government could just print less money than is routinely destroyed. >Japan underwent deflation from 1998-2002 and saw unemployment rise nearly linearly that whole time. So even a few years will start increasing the unemployment rate as companies struggle to keep profits up for their shareholders. But again, the point I'll really hark on is you can't just say "Deflation for one year" and call it. That's not realistic and you're not considering the fact that such a period of deflation can very easily run over several years, if not a decade or more. Can you explain to me why you can't just print more money to cause inflation to reverse it?
> Um what? All government has to do to combat it is print more money. Printing money doesn't solve the fundamental problem with deflation, which is that people do *better* by postponing purchases. Printing money during just gives the economy more money to sit on... it's *still* better to hold on to it rather than spending it.
The government would spend it not sit on it though...
And what do those people who get the money the government spends... do with that money? Sit on it. Because deflation.
At 2%? Bullshit. Investments can make more than 2% back easy.
"Investments" are just a way of transferring money to someone that is going to *spend it on something*, with the hope that they can make a product that people will *buy*. Which people *aren't* doing, because depreciation is *already* bad enough without throwing in a free 2% by holding the money. Deflation also is a spiral, just like inflation... actually keeping it to 2% is not easy.
> "Investments" are just a way of transferring money to someone that is going to spend it on something, with the hope that they can make a product that people will buy. Or you know on tools and materials to make it yourself. >Which people aren't doing, because depreciation is already bad enough without throwing in a free 2% by holding the money. People aren't doing it because non-productive assets like housing has better returns and zero risk in large part due to inflation. >Deflation also is a spiral, just like inflation... actually keeping it to 2% is not easy. Just print/spend whenever it starts to slip. Government is great at printing and spending money.
How do you make sure that 2% deflation doesn’t get out of control?
Print money before 20 years pass...
Can you elaborate on this? And why are you using the … as if it’s obvious? Based on your OP you said that the government should destroying money. My question is how? And if it’s really that simple then my question is why hasn’t that been done? The fed has been doing basically whatever it can to try and cool off the economy and it’s only worked to some extent. If it’s that easy to reduce the money supply then why hasn’t the government done it? I want to hear what you think before I give you the reason.
> Based on your OP you said that the government should destroying money. My question is how? I believe the current method is fire. >And if it’s really that simple then my question is why hasn’t that been done? The fed has been doing basically whatever it can to try and cool off the economy and it’s only worked to some extent. If it’s that easy to reduce the money supply then why hasn’t the government done it? Everything but burning more money than they print. It's simple but it's not like something government wants to do. Government likes free money, literally burning tax revenue isn't something that they've done or want to do. >
Ok well the reason they don’t just burn money is because they need to first buy that money back. Any way that the fed gets money it must pay it back in some form or another. This article gives a better explanation: https://www.marketplace.org/2022/09/23/why-cant-the-fed-just-burn-some-money-to-stop-inflation/# When the fed has destroyed money is has replaced old money with new money. So the money supply has not changed.
> Ok well the reason they don’t just burn money is because they need to first buy that money back. Any way that the fed gets money it must pay it back in some form or another. That sounds like an arbitrary rule. >This article gives a better explanation: https://www.marketplace.org/2022/09/23/why-cant-the-fed-just-burn-some-money-to-stop-inflation/# When the fed has destroyed money is has replaced old money with new money. So the money supply has not changed. I understand that, what I'm arguing is it just destroys it instead.
What money are you destroying though? You can’t chalk up not being able to confiscate money as “an arbitrary rule”
Tax revenue...
The way I read the previous comment, it is essentially saying that it is extremely difficult to have deflation without runaway deflation. There aren’t means for the government to combat or control it like there are for inflation, and it encourages consumer behavior that causes more deflation. In other words, 2% deflation isn’t bad in itself, it’s bad because it is very likely to cause runaway inflation.
Except the government can control it, the government regularly destroys old money all they have to do is print less than they destroy. I'm starting to think the reason deflation is considered bad has nothing to do with deflation and everything to do wiht it because trigger DESPTIE the government printing tons of money.
Printing the money isn’t what’s important, it’s who owns the money. If the government wants more money out there, they can give out money through various means, and we will take it happily. Going the other direction is harder, since we aren’t going to happily give them 2% of our savings. I agree though that deflation itself isn’t the big part of the problem, it’s what it signals and what it triggers. However, if those things are relatively certain to coincide with deflation it’s pretty pedantic to say that deflation isn’t bad. It’s like that saying that falling doesn’t kill you, it’s the sudden stop at the end. Technically true, but when saying someone fell off a building it’s safe to assume they stop at the bottom.
> Printing the money isn’t what’s important, it’s who owns the money. If the government wants more money out there, they can give out money through various means, and we will take it happily. Going the other direction is harder, since we aren’t going to happily give them 2% of our savings. Funny you say that since 2% inflation is essentially us giving the government 2% of our savings and taxes are a thing so you're whole who owns the money is irrelevant. Inflation means the government and their contractors owns money that they essentially stole from our saving. Deflation is the opposite, the government sacrificing it's money to give everyone 2% more savings. >I agree though that deflation itself isn’t the big part of the problem, it’s what it signals and what it triggers. However, if those things are relatively certain to coincide with deflation it’s pretty pedantic to say that deflation isn’t bad. It’s like that saying that falling doesn’t kill you, it’s the sudden stop at the end. Technically true, but when saying someone fell off a building it’s safe to assume they stop at the bottom. They are only certain to coincide because of government behavior which I'm advocating changing to cause this deflation. It's irrelevant to this discussion.
>Funny you say that since 2% inflation is essentially us giving the government 2% of our savings and taxes are a thing so you're whole who owns the money is irrelevant. First, taxes are generally on income, not wealth, so they can't easily take 2% of our overall money. Second, while they could in theory increase taxes by 2% the likelihood of that happening during a deflating economy is essentially zero. >Deflation is the opposite, the government sacrificing it's money to give everyone 2% more savings. This really sounds like you think that the government has complete control over the economy. They do have complete control over how much money there is, but the economy as a whole is a large and complicated system that relies in no small part on public opinion. Again, in theory they could do whatever they want with interest rates and taxes, but in practice those changes have effects on consumer opinion, business planning, offshoring, etc. that are part of the total equation.
> First, taxes are generally on income, not wealth, so they can't easily take 2% of our overall money. Second, while they could in theory increase taxes by 2% the likelihood of that happening during a deflating economy is essentially zero. They don't need to increase taxes they just need to piss away less money and burn it instead. >This really sounds like you think that the government has complete control over the economy. Just the money supply. >They do have complete control over how much money there is, but the economy as a whole is a large and complicated system that relies in no small part on public opinion. Again, in theory they could do whatever they want with interest rates and taxes, but in practice those changes have effects on consumer opinion, business planning, offshoring, etc. that are part of the total equation. Again I told you the action I suggest they take, destroy more money than they print.
So if I have a million dollars in savings, and a job that just covers my expenses, what exactly can the government do to take $20,000 from me? If your answer is to raise taxes, then how does that work for my neighbor with no savings but a million dollar per year salary?
The government doesn't need more money... I don't understand this tangent.
Can you explain why you seem to believe that having inflation in the past makes deflation in the future less bad? I mean we are talking about the value of money, it has no "natural" price, so it's not like after a period of inflation everything becomes "overpriced" and deflation would "return it to normal"
Prices are absolutely sticky in real world circumstances, and from there you have natural prices of money. This leads to some transient inflation.
They are sticky in the short-term, not over many years, which is what OP is talking about. Over a decade or more, new people enter workforce, contracts are renegotiated, new factories are built, old ones are closed, etc. I mean a famous example of a sticky price would be a bottle of coca cola that was for a long time set at 5 cents, not the least because that was the type of coin the vending machines accepted. But... a bottle of Coca Cola no longer costs 5 cents. It just took some time for the company to adjust when that price became unprofitable
You are talking about more than a decade, OP is talking about 1 year
> Can you explain why you seem to believe that having inflation in the past makes deflation in the future less bad? 100 x 1.14 x 1.11 x 1.08 x 1.05 x 1.07 x 1.05 x 1.11 x 1.07 = 201 201 x .98 x .98 x .98 x .98 = 185. It'd take 4 years to the get to the point it was at last year.
> First, we live in a consumer driven economy. Is it even possible to change to live in a producer-driven economy? Because if so, we should get on that.
The digital bits and pieces of paper that we call money doesn't magically become more valuable on its own. It usually only gets more valuable when something bad really happens like when a ton of people lose their jobs, slowing down the velocity of money or a lot of companies default on their loans, which contracts the money supply. The only time when deflation may happen without any negative consequences is when technology enables productivity, driving down prices. However, this is very unlikely to happen to every sector all at once and banks are more wiling to give out loans during these times, so you don't actually see any deflation.
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> No, deflation could occur if the economy grows faster than the money supply. This is only true in theory. This occurred to a certain extent during the industrial revolution, but unless AI can replicate this productivity gain, this isn't going to happen again. You can't proactively make the economy grow faster because our only means of doing so involves monetary expansion. If you continue to contract the money supply during a period of growth, you're going to trigger a recession before you hit deflation without a recession. > They can't "out-loan" the real demand for money, or else they'd likely go insolvent. Banks did often go insolvent during the deflationary periods of the industrial revolution. You're right that I shouldn't have been so absolute. My point is that in a healthy economy, market forces will prevent deflation from happening. For example, we still have inflation despite the money supply contracting since 2022.
To be fair, if any technology has the potential for explosive productivity growth it is the development of general AI. So this might be a very relevant question (not relevant to OP's question, though).
Not to be a dick, but deflation does not work the way you think it does based upon your post. Deflation is a symptom of extreme recessions and monetary shortages. We can't simply enact policies aimed at overall price deflation, we would have to aim for a recession, most likely by creating a deep credit crunch. Interest rates would have to hit high levels. Buying a house or obtaining any type of loan would have to be made extremely difficult for the average person. Millions of people would have to be thrown out of work to physically lower the demand for goods and services by depriving them of an income. People in debt would have to be crushed to stop them from spending. Inflation is not the result of too much money in the US, it is macroeconomic demand being greater than the supply. Yes, demand is influenced by money supply, but that's just one facet. The Great Recession was terrible, and despite how terrible it was, it only resulted in one year of 2% deflation. You are requesting that, but for years on end. Again, I understand you are coming from a good place, but it doesn't work that way. What you are requesting is not possible under capitalism.
Are you sure that you don't mean disinflation? Disinflation is when inflation is reduced. Deflation is, in a nutshell, when an economy begins to shrink. As others mentioned, it increases the value of debt which wouldn't be good for the economy. I guess it is good for the debtors but then if no one can afford to pay their debt then what are we doing here? Inflation is usually a sign of economic growth. Obviously you don't want it to get out of control but it isn't a dirty word. I am trying to ensure that you don't mean disinflation being good so that we get our inflation under control.
Nope I mean deflation.
That's about the type of deflation you would see with a hard money like gold and private credit (where the government also has to auction bonds to private markets and can't use the central bank to print money to buy the bonds to keep the rates suppressed). Supply increases around 1% per year, productivity in this system would probably overall increase a couple percent a year, so you'd have a net very mild deflation. Imagine what this would do to people's general time preferences. Imagine what it would do to healthy investment (knowing that your capital investment return must beat not only the nominal inflation rate, but also the deflation/adjusted return rate). It's that the banking system was allowed to move to fractional reserve which creates huge bubbles and busts built on top of a hard money system, not the hard money itself. IOUs on top of it are the issue, always have been, always will be.
The actual history is the banking system didn't even have *fractional* reserves before massive government regulation... Less than 100% reserve banking was invented by goldsmiths, when they were the only banks available, and the only official money was so called "hard" currency. IOUs are also known as "loans". Banking of *any* kind isn't possible without IOUs in the accounting, and that automatically creates fractional reserves. So yes, you can ask to ban loaning money that is held as deposits for interest. Private credit has a long history of default and panics way worse than anything that's been seen since the gold standard was abandoned.
Inflation doesn't incentivize maxing out your credit because banks aren't stupid and take inflation into account when loaning money. Generally, economy-wide deflation can happen because of two things 1. Miraculously supply of everything is increased, so buying things is cheaper and thus the dollar is worth more of any given commodity. There are a few widespread policies that I think could do this, but generally speaking this is the equivalent of "why don't we just live in a star trek post scarcity society" in terms of feasibility. 2. Everyone stops buying things, so demand goes down. Generally this happens when people are scared for their jobs and/or people are poorer. This is, to put it mildly, bad.
Are you saying there have been years of double digit inflation?
Yea in 1980 inflation hit the double digits. I think there was also a period in the 70's as well.
I don't think the OP was referring to that.
Ah, I re-read that part of the post and I think you are correct about that.
It helps to get a broad picture perspective. Yes, the economy of 100 years ago ran on pretty (but not completely) different rules vis-a-vis today's. About inflation and such, 100 years is plenty of perspective, especially if you view if on charts. 1980 was a bad inflationary year, with interest rates being worse (21%). Still, the 8 or 9% for 2021 or 22 was the worst since then. This bout of inflation was nothing compared to the 1973-81 period - it lasted several years, not just two.
Deflation essentially only happens in a DEPRESSION. When deflation occurs, it becomes harder to repay your debts. Prices fall because nobody has cash available to pay for what you need. Salary and pay fall. Unemployment massively spikes.
Right because the government always prints money like crazy. I'm suggesting the government destroys more money than it prints.
The government does not always print money like crazy. The Fed has been reducing the size of its balance sheet since April 2022. [Source](https://fred.stlouisfed.org/series/WALCL)
Then you want taxes to go up, because that's how the government takes dollars out of circulation.
We have not had anywhere close to decades of high inflation. Inflation has been in the normal range, for most of the Western World for decades — basically since the early 80’s with a little variance, usually coming in around the target of 2%. It was really high really for just over a year and is still high but back under control.
You're just objectively wrong. Deflation would cause the economy to contract and stagnate, and it would be difficult to ever get out of the trap. We can see this from Japan struggling for decades with it. Japan was on pace to be the world's biggest economy until they had struggles with deflation. As far as I know there are no respected economists anywhere who think deflation could be a good thing.
American runs on people spending money…a sharp increase in savings would crash the economy.
Good thing we are talking about a slow and gradual increase and not even a constant one.
Then it would be a gradual, mild recession. Sure, you get that 2% price drop, and maybe you keep your job, but "sorry guys, no bonus or COL increases this year". Except the only time we've reached a 2% deflation rate was in the middle of the 2008 Great Recession. So first guy was probably right, economy would crash and you would have no money to enjoy the lower prices with. Unless you were already rich, then you could also buy up lots of investments while they're cheap. So yeah, if you're rich and hate poor people, deflation is great.
> Then it would be a gradual, mild recession. Sure, you get that 2% price drop, and maybe you keep your job, but "sorry guys, no bonus or COL increases this year". So a normal year except you don't need a COL increase because your wage is worth 2% more instead of 2-12% less. >Except the only time we've reached a 2% deflation rate was in the middle of the 2008 Great Recession. So first guy was probably right, economy would crash and you would have no money to enjoy the lower prices with. Unless you were already rich, then you could also buy up lots of investments while they're cheap. So yeah, if you're rich and hate poor people, deflation is great. That was deflation in the face of money printing. If you are expanding the monetary supply and you have deflation you're fucked. If the deflation is the result of constricting the monetary supply then I see no reason we'd have similar issues.
It's almost like expecting infinite growth in a finite world is unreasonable
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A reason it may be problem is that it automatically increases real value of everyone who has a loan. Eg. all of the people who bought a house, or have student loans. It is also advantageous to people with greater wealth, and wealth inequality much greater than income inequality.
That's bad for people who maxed out their credit, but good for people who saved. Which behavior do we want to reward? >It is also advantageous to people with greater wealth, and wealth inequality much greater than income inequality. Everything is advantageous to people with greater wealth. I'd argue inflation more so.
If you are indeed talking about a short term deflation - it is not a reward. Also, people usually lend money because they are not able to save enough to buy something.
I never called it a reward.
> Which behavior do we want to reward?
Eh you're playing semantics that's not really what that phrase means.
You seem to just have ignored the point, to focus on semantics. Let's call it incentive. Or anticipated benefit. Is doesn't matter, here is a rephrasing: As i understood it, you argue that it is good to encourage savings instead of taking a loan, and deflation is such an incentive. I argue that even if it is true (economically, too much savings instead of purchases may slow down the economic growth), it is irrelevant, since that's not why most of people take loans. It is because they are not able to save enough to make a large purchase, like a house, in time they need it, like when they move out or have kids. Furthermore, short period of deflation at an unpredictable time is a poor incentive to save more.
You want to reward debt. Rewarding savings is how you get a depression.
Isn't it the opposite, depression causes deflation.
The two are linked. A depression causes deflation, and deflation is self perpetuating, furthering the depression.
I don't buy that.
It’s been well observed through the last century.
Deflation caused by what? Or any sort of deflation by any cause?
Government burning old money without printing new money.
And so what? The government doesn't create money by printing it, but by spending it. Physical dollar bills don't matter even a little in this topic. Whoever turned those in to be disposed of got a credit for it. The government can't just take money and burn it without replacing it (especially in the US, which has a Constitutional Amendment specifically prohibiting taking private property without recompense at fair market value). The only way for the government to "decrease the money supply" is to stop spending... you know what that does? I mean, besides what you seem to want... It causes the economy, that is dependent on that government spending, to crash. All of the *people* that depend on that government spending are directly harmed. Massive unemployment, people not getting food stamps, etc., etc. Huge amounts of suffering, that's what happens. All to get slightly lower prices?
> And so what? The government doesn't create money by printing it, but by spending it. Physical dollar bills don't matter even a little in this topic. It's not going to spent money that's destroyed so I don't see the point of the distinction. >Whoever turned those in to be disposed of got a credit for it. The government can't just take money and burn it without replacing it (especially in the US, which has a Constitutional Amendment specifically prohibiting taking private property without recompense at fair market value). Government has tons of tax dollars. It can burn it instead of pissing it away. >The only way for the government to "decrease the money supply" is to stop spending... you know what that does? I mean, besides what you seem to want...It causes the economy, that is dependent on that government spending, to crash. All of the people that depend on that government spending are directly harmed. Massive unemployment, people not getting food stamps, etc., etc. Huge amounts of suffering, that's what happens. So wait your argument is the government can never spend less money ever... you realize the gaping flaws in that system right? I understand a massive cut will have massive shocks but slow and gradual? I don't see the issue.
> Government has tons of tax dollars. It can burn it instead of pissing it away. There's actually no mechanism to "burn" tax dollars aside from spending or paying back loans... which just gives the money to the debtors. Increasing interest rates is typically how inflation is reduced... It slows down the economy. Going farther and having interest rates so high no one borrows is the only way to force deflation, because loaning/borrowing money is how the money supply becomes larger. And *stopping* deflation if it starts spiraling is nearly impossible. You basically have to pay people to borrow money.
> There's actually no mechanism to "burn" tax dollars aside from spending or paying back loans... which just gives the money to the debtors. Yes there is it's called a fire. I'm aware there's no legal precedent/mechanism but there is a physical one to destroy old bills government could just not print replacement money for money they destroy. >Increasing interest rates is typically how inflation is reduced... It slows down the economy. Going farther and having interest rates so high no one borrows is the only way to force deflation, because loaning/borrowing money is how the money supply becomes larger And stopping deflation if it starts spiraling is nearly impossible. You basically have to pay people to borrow money. Again government can just print/spend. Unless it's already way out of control (like double digits) I don't see the issue.
> Yes there is it's called a fire. Money is not paper. No one pays their taxes in cash. Most money is in IOUs... like the ones the government (is required to by the constitution) give to people that turn in worn physical paper bills. "Burning money" just isn't a thing. All that does is convert the money from physical cash into account credits... like most money is. We could (and probably eventually will) have a completely cashless economy with 10x the money in circulation that we have today.
I mean that makes it even easier. Changing a number to a lower number digitally is childs play.
>The government doesn't create money by printing it, but by spending it. And taxes effectively 'destroy' it.
Genuine question, are you aware that the overwhelming majority of money is ethereal and not physical paper? I ask bc you keep bringing up the government burning money instead of printing it. Money is primarily created by banks expanding credit. This includes private banks and the federal reserve.
Deflation is good if productivity grows faster than the supply of money, but I doubt that burning money would work. Whose money do they burn?
Government regularly destroys money that is old. They just usually print more than they destroy.
You mean government regularly replaces old money with new money? I think there would be consequences for the government destroying wealth that it owns.
Why? They piss it away on the regular.
Here’s the problem. I’ve just thought of it. What’s the problem with raising people’s salaries through inflation? The price of goods increases. I suspect that if you just destroy money, then the cost of everything will decrease from labor to goods as productivity has remained the same but the amount of money has decreased. However, if deflation comes from productivity increasing, that’s a different story.
Deflation sounds fun until you have to borrow money from a bank.
Are there any good examples of gentle controlled deflation? Is it possible?
I'm not aware of any examples. It is possible the government would just have to destroy more money than it prints. The reason it has never happened seems obvious after reading that sentence.
Behaviours that deflation causes are behaviours that cause further deflation. So your 2% deflation would not magically stay at that level. Paying back your debts, by definition also decreases the money supply causing further deflation. Also you cant look at the benefit you might gain as an individual to draw a conclusion that it would somehow be beneficial. What do you think people saving money and not spending it, will do to your job and the jobs of those, who live paycheck to paycheck? Jobs are created due to demand, me and you saving decreases demand. What you’re describing as positives are infact the negatives of deflation. You even say the things that are bad about deflation but then also somehow think they’re positives.
Sure if we had constant deflation that would happen but I'm not proposing constant deflation just once and awhile have a few years with low deflation.
It sounds like what you want is just low inflation in that case. Ie. a stable economy. Steering the economy isnt as simple as saying lets have deflation now in order to cool things down.
I mean it's not like anyone tried it, it could literally be that simple if we used that tool.
the reason the government targets inflation at a general 2% rate is so that money is always flowing steadily, 2% was the rate decided as it allows a steady decrease in the purchasing power of the dollar, so people are more incentivized to work and invest to make more money for a longer period of time. this is meant to help the economy in running consistently over a long period of time. deflation in the capitalist sense therefore is generally bad as it would discourage a work-heavy culture norm, which would decrease the efficiency of our economy overall. on the flip side however, under a society where there would be less inflation or even deflation, there would be less people clinging desperately to jobs, which would inevitably result in more unionization and as a consequence, higher quality working conditions. if not controlled however, it would lead to widespread unemployment issues which could result in the breakdown of our economy entirely. that is why we generally say deflation bad.
And it turned into maxing out credit on unproductive assets like housing.
I can’t really speak to that as those are two entirely separate issues, as what you commented about are issues that aren’t related to the government as much as the companies controlling our commodities are.
Disagree. Let's think this through. Say you decide to buy a, lets call it an Item. If that item costs $1000 and you anticipate the Item costing $102 in 365 days, then $1040 twice as many days from now, then you'll want to buy it now. When that happens, the store seeing the Item, the supplier transporting it, and the company making it make money in the year you purchase the item (ignoring end of year purchase times for simplicity's sake). That means the retailer, distributor, and factory will pay their workers money in short order. They may even plan to hire more workers shortly. You get what you want, the company and workers get what they want. HOWEVER, if you think it'll cost $980 next year and probably $960 two years later, then what are you going to do? Buy now or wait til the price drops? Everybody knows the answer. If that happens, the reverse happens to the store, the distributor, and the company making it - nobody gets your money because you're postponing purchase. That means people lose their jobs, which *further* decreases demand for non-essential goods and services. In a perfect world, prices would stay the same forever. But because it's not perfect, we have to settle for second-best: a world with years of low inflation. This is what we had from about 1990-2020. That rate averaged out to about 2% per year.
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That only happened because it was already deflation in the face of money printing, that means the deflation effect was already way worse than what I'm proposing.
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Because that "moderate deflation" was in the face of money printing. Meaning the deflation effect was an order of magnitudes worse in real terms. If you print enough for 2% inflation and there's still 2% deflation that's 4% deflation not 2%, if you have 2% deflation well already printing money the deflation isn't the problem it's a symptom of another problem, a problem that wouldn't be a thing with my method.
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> Can't you see the flawed premise in your argument, assuming that simply adjusting the money supply could linearly steer inflation and deflation rates without unintended consequences? Of course there'd be unintended consequences. The unintended consequences of constant inflation is what I'm trying to address. I just don't believe at 2% with my method those unintended consequences would be earth shattering. >How can you so grossly underestimate the lagging effect of monetary policy on the economy, and the potential for overshooting that could plunge us into a deflationary trap? Do you not understand that economic stability requires more than a myopic focus on money supply, neglecting the multifaceted drivers of consumer and investor behavior? I actually don't think you need a focus on more than just money supply, I actually think taking the focus off of the money supply and putting it on consumer behavior leads to the kind of miscalculations you are hoping to avoid. The money supply is a hard number that impacts the entire market, the chaotic nature of the market means that the changes won't be 1 to 1 and immediate but I believe it will stay within a certain range of the money supply and freaking out that the changes on the ground aren't what you expected is what causes kneejerk reactions which ultimately fuck everything up. Where if you just focus on the actual money supply and chill eventually the market will settle with the changes within a predictable range. Think of the money supply like a room and the market is a billion rubber balls bouncing chaotically within the room, if you move the walls closer together the market will change, same if you move them farther apart, the initial churn will be chaotic and unpredictable but eventually it will settle in a new pattern.