Can someone please school me on why that would be bad?
I'm not saying this conventional wisdom is wrong, but it's not obviously right.
Groceries, sure, but then as a consumer you are still impacted because suppliers are less likely to provide the goods you want.
Deflation is really bad. One of the consequences of the gold standard was the big swings (inflationary after a big gold strike, like California' Yukon, or Victoria; deflationary when the gold supply could not keep up with economic activity) that you can easily see in the second half of the 19th century.
Businesses don't collectively decide to reduce prices month after month out of generosity. They do it because the economy is in a position where none of them are selling enough at the current price. If everyone is selling less stuff at lower prices, then sooner or later the problem becomes the employees'...
So, I'm with you. I've had it explained to me many times, and it still doesn't make much sense to me. I'm going to buy cars / houses / investments / goods / services when I need them and can afford them-- not based on speculation about their future prices (well, except for investments, if I have some magic insight).
From a business perspective, I've been involved in many purchasing decisions and never once was "it might be cheaper or more expensive in the future" a part of the decision making process.
It really feels like "deflation is bad" is an economic theory that should be tested. Yes. We've had deflationary shocks, and those were bad, but that was because a) it was a shock rather than a gradual slope and b) it usually followed a period of marked excess. I'm not convinced that deflation itself was the enemy as much as the other ancillary issues. It's hard to disentangle that, though.
Think about the prevalence of sales, and their impact on moving goods. If you need a TV, but the need is not urgent, you (okay, not you, but most people) might wait for the New Year's sales in a couple of weeks to save a few bucks. Same with cars and other appliances. Or people look for a coupon code to save some money.
If sales and coupons make sense, consumer decision making in deflationary environments should also make sense. If you don't understand why people wait for sales to purchase things, you may want to talk to some working-class people to understand what it is like to not have enough money to buy everything you need immediately when you need it.
> it was a shock
Japan has been in a gradually deflating environment for decades.
This will obviously not mean skipping eating, but will manifest more as fewer "special" meals like steak or lobster or whatever.
> a fridge, a new roof
If you are a homeowner, you know that most equipment failures are a decision to either repair or replace. In a deflationary environment, owners will bias toward patching things as long as they can. (The opposite is true in an inflationary environment.)
> a new car
You may be extremely fortunate. Most people would try to make it through (say) a year of public transit/rideshare/etc. if they could save (say) 8% on a car. Average price of a new car in 2022 is ~$48k; saving 8% on that is something like half a month's pay at the average American salary, which is larger than the annual raises most people get at even good jobs, even in good times. Don't underestimate the sacrifice people will make to earn another few hundred $/mo.
So if we live more sustainably, the economic system colapses?
Is that a bug or a feature?
I just had my landlord throw away the dishwasher because replacing the tiny pump was not worth the effort. Myfriend threw away a fridge because replacing a single part, the compressor, was not worth the trouble.
[1] https://foreignpolicy.com/2022/04/25/inflation-japan-deflati...
This may be the misconception that is driving this. Nothing will be cheaper ( decrease in price ). It will simply not appreciate in price as much ( price will increase less ).
<< When everyone slows spending at once, it can lead to severe a recession or depression.
Agreed, especially in US where consumer spending drives the economy.
Still, in US, for better or worse, a lot of personal wealth is stored in real estate ( which also manages to explain some US idiosyncrasies ). Deflation would 'destroy' equity for owners of that real estate so a lot is regularly being done to keep the housing prices high and even more to keep them from going lower.
It is not bad in itself. Frankly, I personally see deflation as a way of economy correction, but that is one person that has limited exposure to some of those pressures. But deflation is not what is happening here. Deflation would be a negative inflation rate ( and that is not the case ).
Now..there are few other angles to consider. Higher inflation means our debt is 'worth' less; deflation means it is worth 'more'. If you owe a million dollars in an environment, where an average house costs a million dollars, it is likely that it becomes the norm ( and it is technically good for the borrower ). Interestingly, some would argue US was actually trying to inflate their way out of its staggering debt.
There are also import/export considerations for companies that operate in that space ( as you also noted ), but I am hardly an expert ( or even that interested in that subject ).
I strongly recommend you review the definition of deflation.
> Higher inflation means our debt is 'worth' less
Inflation is a huge benefit to the debtor class, which includes most homeowners. The rhetorical tactic of focusing on high gas prices brilliantly misdirects people from asking the relevant question of why their wages aren't increasing at the same rate as inflation. Once wages catch up to this recent bout of inflation (they eventually will), most consumers will be much better off than if the inflation had never happened.
It is possible I am working with old mental models, but first search result defines it as:
"Deflation is a fall in the overall level of prices in an economy and an increase in the purchasing power of the currency. It can be driven by an increase in productivity and the abundance of goods and services, by a decrease in total or aggregate demand, or by a decrease in the supply of money and credit."
If prices increase ( albeit at a lower rate ), it is still inflation ( especially if purchasing power stays where it is, which it typically would ).
Can you elaborate on your thought process? It is possible I am misreading something.
<< Once wages catch up to this recent bout of inflation (they eventually will), most consumers will be much better off than if the inflation had never happened.
Um.. I think I have to categorize that statement as wishful thinking. Federal minimum wage remains very low and even recent attempts to update it were shot down. I think 'eventually' is doing a lot of heavy lifting here ( it likely is true, but the time horizon on that statement is fairly long ).
I am open to discussion, but I am not convinced at this time.
[1]https://www.investopedia.com/articles/personal-finance/03091...
The first part of that sentence says that prices decrease. They do not increase at a lower rate, they actually fall in deflation. Deflation is negative inflation, if you want to think of it that way. Deflation is _not_ small positive inflation.
Since we are on a tech-focused site, the best example is that tech goods are typically deflationary. 1 TB of SSD costs less than it did 3 years ago. Imagine this happening to everything in the economy and you understand deflation.
The second part is maybe confusing you:
> increase in the purchasing power of the currency.
This says that if I have $100 and a good costs $10 today, I can buy 10 of them. If prices decrease (because this is deflation, prices go down) and now the good is $5, I can buy 20 of them with the same $100. The purchasing power of my $100 has increased.
> I think I have to categorize that statement as wishful thinking.
Average US wage in 1970 was about $6,200 (per year!). Then inflation spiked, prices rose on everything. Eventually that filtered back into the labor market because nobody will work if the wage won't buy food at the newly inflated prices. This will happen again, but it will take longer due to labor generally having less power in today's economy vs that of 1970. This will happen whether or not the minimum wage increases, but more of necessity -- laborers will not come to jobs that don't pay their bills.
The original if clause may be true( "If the expectation is that everything will be cheaper next month than this month, that creates an incentive for everyone (and every business) to delay purchases as long as possible (because they will save money buying in the future"), but it is not applicable to the current environment as we are not experiencing deflation, but inflation. As in, business are not expecting lower cheaper ( lower prices ). They will be expecting less high prices. If they will curtail spending it is because got prohibitively expensive. If anything, they will save money buy stocking up, while the price is low. I personally think your interpretation model for what is happening is off here.
Hope that makes more sense now.
Let me see if I can sum up the main argument until now:
You post >> If the expectation is that everything will be cheaper next month than this month, that creates an incentive for everyone (and every business) to delay purchases as long as possible (because they will save money buying in the future).
I post >> [ but ] Nothing will be cheaper ( decrease in price ) [ next month ]
You post >> I strongly recommend you review the definition of deflation.
I post >> "Deflation is a fall in the overall level of prices in an economy and an increase in the purchasing power of the currency. It can be driven by an increase in productivity and the abundance of goods and services, by a decrease in total or aggregate demand, or by a decrease in the supply of money and credit."
You post >> "Deflation is negative inflation, if you want to think of it that way. Deflation is _not_ small positive inflation."
I post >> this post since we seem to saying the same thing so I revisit initial assumptions
You may want to join the top-level thread, which is about the current inflationary environment.
If you're driving at 120 mph and tap the brakes, that's different than driving the speed limit and braking, the latter is much more likely to cause a traffic jam.
I don't understand the magical thinking often demonstrated in these threads. Just because it sounds plausible, that doesn't necessarily mean its true.
I have no faith in central banks to engineer a perfect landing, that's not the argument, it's simply that the concept of "deflation = bad" is not necessarily a universal truth.
But we aren't in normal economic times. We're coming off (or, at 7+%, still experiencing) a period of ultra-high inflation (for the US) where prices seem to be rising out of control, where credit card debt is increasing rapidly. If prices were to fall, say 2% in 2023, I think that would be preferable for almost every consumer than prices continuing to rise even further. And the idea that the economy would grind to a halt and sink into recession as people delay purchases hoping for another 1% drop in prices, is pretty absurd.
2. If a building is on fire, the goal is not to make the building a meat locker for a few months/years to "compensate" for the fire. The goal is to put the fire out and return to a normal temperature.
Well, you do put out fires with a CO2 file extinguisher blasting at 50 or 60 below zero.
> let's not catastrophize here.
Minus 2 percent inflation would be closer to the "Fed target" than the recent 7-8% we have been experiencing. The idea that many of you are trying to push, that deflation of any kind is a guaranteed financial disaster, that's the hyperbole that ought to be suppressed.
There’s a reason n=1 samples aren't usually the basis for general descriptions of behavioral trends.
Also think about how tricky itd be to manage a business. Your supply is getting less expensive in $ terms monthly, but also the value of your goods in the market is going down each month. Weird situation.
(There's also an error in assigning unit purchases like washing machines as a proxy for consumer behavior: consumers select within a purchasing category more frequently that then opt out of categories. In other words: deflation and inflation can determine how much you're willing to spend on a washing machine, rather than breaking your commitment to already purchase one.)
Consider yourself extremely fortunate to be able to manage your purchases this way, but also consider that this is not the norm.
Lets say I buy a house for $500,000. I put $25,000 down and get a mortgage for $475,000. Then deflation hits. It's not just that my house becomes worth less in dollar terms (though it does), but also that I'm paying my mortgage with more expensive dollars. (In a real deflation, your salary can decrease.) That hurts. Some people lose their houses. The mortgage holders sell the houses for what they can get, which does two things. It drives down the price of houses. Also, it decreases the amount of dollars that are theoretically in the economy, so dollars become more valuable, and the deflation continues. Historically, this has caused enormous amounts of damage, wiping out businesses and families.
Now, 1% deflation this month won't do any of that. The problem is that the deflation can gain momentum and be very difficult to stop (similar to inflation in fact, but deflation can happen faster). So the Fed prefers to stay away from deflation, preferring something like 2% inflation to give them a bit of margin to work with. And they've been nervous since 2008 because they couldn't get back up to 2% inflation.
Beyond that it's an issue for investors. Interest rates have a nominal lower bound at 0% (because you can always just hold money instead of lending it) so the minimum real interest rate becomes effectively the rate of deflation. So imagine that deflation is 4% and I have a use of capital with a real rate of return of 3%. It won't get funded because investors can achieve a higher real return (4%) by just sitting on capital instead of investing it.
The purpose of money is to facilitate mutually beneficial transactions. When the money supply contracts, the "price" of money goes up. People are incentivized to hoard money for the sake of hoarding money, which adds friction to mutually beneficial transactions. This causes a feedback loop, which leads to even more deflation and even less economic activity.
Since covid, whole industries in retail, food and travel have shut down almost completely.
Also by using inflation to deteriorate savings and cash on hand, it encourages people to invest their money into something that won't lose value over time.
We're fairly convinced that deflation is an effect rather than the cause, but nobody's really 100% sure that it's 100% effect and that deflation doesn't make things worse, so we try and avoid it.
Edit: Meaning that, presumably, you like being paid. So you probably don't want to incentivize being paid less, or not at all. Deflation does both of those things.
A deflationary economy would be a drastic change from the system we operate under now but I don't think it would be all bad. Maybe in a deflationary economy people would feel like they could actually save money. Or it could put an end to the 40 hour work week. I doubt demand of necessities would change much in a deflationary environment: food, medicine, shelter, etc.
Personally, long term I am perfectly willing to accept that deflation is a bad thing for society, but at this time? We should welcome deflation with open arms. Things are way out of whack already and decent price correction is needed for just about everything.
https://www.stlouisfed.org/open-vault/2019/january/fed-infla...
This is an absurd claim. Nobody seriously considering mattress vs CD (or bonds in a low rate environment like we had 2008-2020) is swayed by a return of less than a couple percent. It is a security vs liquidity vs trust calculation, not a return based one.
Furthermore, as the other commenter points out, rates are correlated but not necessarily in lock step with inflation. The rate on your savings account is probably still sub 1% (although bonds have gone up).
It isn't the most up-to-date data and survey results are always a little questionable, but here is some data from 2015[1]:
>A new survey of more than 1,800 people from the American Express Spending and Savings Tracker, however, found that 43% of Americans keep their savings in cash. An alarming 53% of those cash-hoarders "plan to hide bills in a secret location at home."
Those numbers are big enough that even if they are way off, there is still a sizable number of people who are holding onto their savings in physical cash. That would go up if there was no inflation.
[1] - https://www.businessinsider.com/americans-hide-money-under-t...
They’re only linked due to rehypothecation of money supply which is a problem in an of itself. But it gets a little complex to explain.
Edit: my brain skipped over the ‘cash’ part and assumed ‘risk free’ interest would still be collected.
The real interest rate is the nominal interest rate minus inflation. When there is inflation, the real interest rate for holding cash is negative. When there is no inflation, that real interest rate is 0%. The disincentive to holding cash disappears and therefore more people hold cash.
Yes.
> When there is inflation, the real interest rate for holding cash is negative.
No. This assumes nominal interest rate stays constant which it very much will not do.