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Comment by cjensen | Hacker News Reader

Nope.

Initially, deflation is a symptom as you suggest. The problem is that deflation is a stable state within the economic system.

Once in deflation, people say "I could invest this $100, and in the long run I'll get back $98. Or I could stick it in a mattress and get back $100 in the long run." Investment ceases. If a manufacturing line needs to be refurbished, the owners will lay off workers and quit rather than pouring in money they will never get back.

This is why the Fed in the US panicked so hard when during the last recession: we were approaching the stable state and they were willing to do anything to prevent that from happening.

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What's the driver?

Is it a continual decrease in money? That's easy enough to solve through a central bank. You can even solve the problem with specie currency by devaluing that (you'll find historical evidence of this in the Roman denarius and in Adam Smith's discussions of currency).

If the problem is that the real rate of return has fallen, then again, deflation isn't the cause but the symptom of a larger problem.

I'm not sure what the solution in this case is, though a tax on excess retained wealth might be one approach. This is what negative interest rates are aimed at curing.

The Chinese accomplished this on paper currency through requiring bills to be regularly stamped, for, you guessed it, a stamp fee. Effectively a tax on retained monetary savings. (We're talking ancient China, I'd have to look up the specific dates.) This could be accomplished by other means, including re-issuing currency and retiring old bills (again, for a fee).

Possibly others as well.

In the UK we're told we have negligible inflation (or deflation some months), but the indexes don't include mortgage payments or rents which are rising extremely rapidly especially in London. So I dispute that we actually have low inflation.

(I should note this is quite different from the situation in Japan where even house prices are declining, especially outside Tokyo)

I hate to say it, but my only thought is that if every economic indicator is saying negligible inflation and property prices are soaring... that's almost certainly an indicator of an unsustainable bubble.

The problem is that you never know when they are going to burst and what the fallout will be. But my guess is this scenario (if I'm right, you have to quote me later...): At some point there will be a collapse of the pound (possibly due to shenanigans around short term consumer debt). To bolster the currency, interests rates will go up slightly. However, for people who are already incredibly stretched on their mortgages, they will be foreclosed when their term needs to be renegotiated. This will put houses on the market at fire sale prices and put the market into free fall.

Essentially the same thing happened in 91 or 92 (can't remember) when Britain linked their currency to the Deutsche mark which pushed interest rates up. It was only rescued by the Japanese who purchased up all the real estate. The problem is that this time I'm not sure there will be anyone around to mop up.

But on another note, I live in rural Japan and was considering buying a house. My neighbour said, "Look at the age of all the people in this neighbourhood. Everyone is over 60. Soon every house will be for sale." So... it probably pays to wait. Deflation indeed...

Absolutely it's a bubble. That doesn't stop people right now from having large increases in rental payments, so inflation is real. It might become massive deflation when the bubble bursts and as you say in rural Japan it's hard even to sell a house at any price sometimes.

Why, just because deflation is happening, must shares of businesses depreciate? Is deflation incompatible with profits?

Deflation means that rather than buy a car this year, maybe buy it next year when it's cheaper. It's a massive encouragement to buy nothing and save as much money as possible.

Manufacturing capacity which was keeping up with demand suddenly has too much capacity. Factories shut down. People get laid off. New jobs aren't created.

How do you make a profit in a world where people won't buy a new thing because they think it'll be cheaper in a few years? And you can't compete in the market for old things because there is already too much excess capacity.

It's a giant snowball of bad for everyone involved: both business and for the everyday working guy.

There's only so much purchasing as can be deferred.

People as a whole need water, food, shelter, and clothing. Even under deferred purchase, other infrastructure eventually wears out and needs replacing.

In this circumstance, particularly with lower levels of income falling below living wages, a simple transfer payment from rich to poor will increase trade markedly.

If your real rate of return remains negative, that's another problem, but a somewhat tractable one at modest scales.

>How do you make a profit in a world where people won't buy a new thing because they think it'll be cheaper in a few years?

I don't know, but this isn't the world we live in. For this to work, deflation should be at least 10% (for consumers).

Would postpone buying a smartphone for 5 years, because it will be 5% cheaper then?

I have heard this line of reasoning before, but I'm skeptical.

I don't think I have ever once said to myself "i should hurry up and buy X before inflation makes it more expensive." It doesn't seem like people will reason like this unless the price changes are observable from day to day, or maybe week to week.

And people already spend so irrationally. Is a little bit of extra delayed gratification is incentive enough to change spending patterns that much?

It typically doesn't work much for individuals as the frequently lack good data, disposable cash or credit, and stockpiling capabilities.

Businesses can do this through warehousing or futures contracts -- going long or short on a commodity (price rise or fall respectively). Especially fuels (Southwest Airlines has famously done this to good effect repeatedly during oil price spikes).

I also think that this may affect business investment more than consumer spending. I remain hazy on this element of economics.

Thank you for being the only reasonable person in this thread.

That argument -- that people would defer consumption forever -- is the craziest thing in the world, and every economist and wannabe economist seem to take it without question.

It's nice to be regarded as reasonable.

My question, one to which I have not been able to find an answer, is:

   Is this questionable premise (I'm not quite willing to call it crazy, 
   but it is non-obvious) the entire basis for all of monetary policy?

Approachable texts about why and how the money supply should be controlled seem hard to find. In conversation, this is the only reason I've ever been given for us to need the Fed to ensure that the money supply grows with the economy.

I've also been looking at and for texts on money. Adam Smith and William Stanley Jevons are two of the earlier significant works. Reading Milton Friedman probably has value. Keynes as well.

Niall Ferguson's The Ascent of Money is a well-received popular work on money, trade, and exchange.

(NB: I'm not particularly well-disposed toward either Friedman or Ferguson.)

The answer is yes, and the lack of clear statements confirming it shows that economists feel that it is a stupid idea but they go a long way to hide that from themselves.

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