Deflation - Are lower prices scarier than higher ones?

What? The latter half of the 19th century had ridiculous booms and busts.

I agree with your reasoning as to why deflation is dangerous, but I feel compelled to point out that the 19th century most emphatically WAS a period with lots of boom bust cycles.

There was the recession of 1802, the depression of 1807, the recession of 1812, the depression of 1815, the recessions of 1822, 1825, 1828, 1833, then a couple of depressions in 1836, and 1839... I could go on, but you can read the wikipedia page yourself. http://en.wikipedia.org/wiki/List_of_recessions_in_the_Unite...

These weren't small either. Many of them saw decreases in business activity of over 15%. Contrast this with the postwar growth period of the late 1940s through the late 1990s, where you see inflation and strong steady economic growth (there were recessions, but they were all under 4%, and they were quickly erased by the growth that followed).

So without trying to start an economic flame war, whatever they were doing in the 19th century for the most part clearly didn't work, and whatever they were doing from the great depression to the late 1990s early 2000s clearly did, if what you are optimizing for is steady growth and to moderate boom / bust cycles.

The period of deflation in the 18th century was associated with the Long Depression, and overall it was probably more severe than the Great Depression though/because it took its course more slowly

http://en.wikipedia.org/wiki/Long_Depression

Actually, a 5% return looks BETTER not worse, when there's deflation - you're getting the return, plus the base value of the investment which later can buy MORE. In your example the investment would allow buying 10% more later, the mattress-money only 5%. Actually getting that 5% will likely be more difficult though. When there's inflation, you're return has to match the inflation rate for you to effectively break even in buying power terms and that's not counting being hit by taxes on the gain that wouldn't buy more.

The real danger of deflation comes when people stop spending thinking it is better to buy later because things will get cheaper. Along with problems getting funds, that's the killer with home buying. If people think there's continued deflation in housing, they'll try to hold off buying. Of course behavior has to be adjusted for other factors too.

Deflation from things like falling oil prices is good. Many consumers will buy more of other products if their energy costs fall. It would help others pay down debt. That's good, we don't want them to default. Of course those in the oil industry want things to fall just enough to kill/delay alternatives or improvements in efficiency. It's good if we reduce the percentage of our spending on imports if those prices fall, but bad if exchange rate shifts reduce demand for our exports. Deflation won't be flat across the board by wages, products, or region so analysis is very complex.

Income is another issue. Considering that most worked-for incomes haven't kept pace with inflation for some time now, our value to the workforce has deflated.

Deflation is bad in the sense of allowing those out of the country holding dollars to buy up more assets like real estate. We want people abroad buying our products and services, not our land. Not owning our land effectively makes us slaves.

I think there is wisdom in the first part of your plan, but I'm not so sure about the second.

Notice the phrasing. Not government borrowing, not "quantitative easing" (printing money) but spending. In the US and UK there's never been a peacetime high-spending government that didn't also borrow unsustainably.

So if you're say Sweden (high tax, high spending) then perhaps you can avoid high inflation, but you can't extrapolate from there to dissimilar economies.

Yeah, but qualitatively you usually got more for your money by waiting with tech, the price may have gone down on the original product only because something better replaced it. The price drops are predictably cyclical.

If I buy a commodity like corn, oil, or steel I'm still getting a virtually indistinguishable good regardless when it is bought. The expectation of price drop can create a deflationary feedback if it happens in enough commodities.

Plus the title of this post takes a naive twist to this topic. It's not the current prices that makes deflation bad for an economy, but that the (perceived?) future price will be even lower than the current price, which discourages investment since the investment will just lose.

As for the comment about computer hardware (and this applies to cars), the opportunity cost of using the physical good now vs later is a bit more concrete than throwing money in a "business", esp. startups, which are by nature extremely risky.

You're right.

Inflation actually refers to an increasing number of dollars in the economy, not increasing prices of goods. More dollars in the economy will lead to higher prices of goods and services, so this leads to the common misconception. But like you said, if government spending is larger without larger deficits, this would mean they're spending more existing dollars, no new dollars are created, and prices of goods stay the same.

That's not been the case for Japan.

The cause of the inflation in Zimbabwe is the collapse of their economy, not the other way around. More here: http://bilbo.economicoutlook.net/blog/?p=3773

There is actually deflation in Zimbabwe now. From Wikipedia: """In an effort to combat inflation and foster economic growth the Zimbabwean Dollar was suspended indefinitely on 12 April 2009. Zimbabwe now allows trade in the United States Dollar and various other currencies such as the South African Rand, Euro, Sterling, and Botswana Pula. The use of the US Dollar yielded enormous results within weeks as inflation actually fell below zero to -3 percent."""

Also, a brief repetition of what we have learned from Keynes: """Economies can and often do suffer from an overall lack of demand, which leads to involuntary unemployment.The economy's automatic tendency to correct shortfalls in demand, if it exists at all, operates slowly and painfully. Government policies to increase demand, by contrast, can reduce unemployment quickly. Sometimes increasing the money supply won't be enough to persuade the private sector to spend more, and government spending must step into the breach"""

This is the point we are at now "government spending must step into the breach". And we can borrow to our harts content because we are in a liquidity trap where rates are zero, and deflation is the clear and present danger, not inflation. If inflation comes back, we should cheer, because that means that the economy is doing better again. Comparing the US to Zimbabwe is complete nonsense.

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