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Comment by tmountain | Hacker News Reader

Governments are afraid of deflation (prices going down) because consumers can go into a holding pattern (stopping spending while waiting for prices to continue to decrease) which can cause the economy to stall out.

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Is there any evidence that modest deflation actually causes this "holding pattern" in the overall economy? I see this theory stated a lot for the reason that deflation is bad, and it definitely checks out on a basic logical level. But economics is complex right? So I'm curious what the evidence is in the real world.

I can imagine this happening with large deflation (10%, say), but what about 2% or 1%? It's not obvious to me that people would not buy a TV they really wanted if they knew it would be $392 instead of $400 next year. If consumers actually acted this sensitively toward a drop in prices, then wouldn't nearly all consumers wait for sales for all purchases? But we know that is not the case. Hell, if consumers were this sensitive toward their finances, they certainly wouldn't pay lots of interest on avoidable credit card debt, right?

It's more the bigger investments that drive a lot of the economy that are the concern - think real estate and stocks. Why buy a $1 million home today if you'll be able to buy it from $980k next year, and maybe $965k the year after that? More importantly, why continue paying the mortgage on your million dollar home when it's likely never to be worth a million again? Why buy 10,000 shares of a company now, when in a few years you could buy 10,500 shares for the same price?

That's fair - but that is assuming indefinite long-term deflation. What about intermittent modest deflation as a tool to bring prices down? It seems that just the idea of deflation is immediately rejected in any conversation about monetary policy.

Also, I think in the real world today, a home would still sell in a deflationary environment, given serious supply shortages. Especially for those buyers which are looking for a home and not an investment (investors would lose long term in a deflationary environment, as you say). Couldn't temporary, modest deflation actually open the housing market up for those "real" buyers primarily looking for a place to live?

The fear with trying for temporary deflation is it will become an out of control feedback loop, because there aren't as many "reasonable" monetary tools to combat it as there are with inflation.

As an extreme example, everyone knows about Germany hyperinflation in the 20s. Fewer people are aware that 1929-1932 was a period of massive deflation in Germany that led to the German economy collapsing, the Nazis siezing power, and 10 years later most of Europe being occupied by Fascists.

So it's pretty reasonable to be concerned about deflation.

There was a 20-year period of mild deflation during the Victorian Era: https://en.wikipedia.org/wiki/The_Great_Deflation

Broadly it was a time of sustained growth in both the United States and United Kingdom, despite the deflation which was driven by industrialization and productivity gains. However, certain industries did suffer as a result of the deflation, so it was neither an unvarnished good or bad economic period.

Prices drop and people spend less? That's silly.

It’s not silly. If you know prices are only going down you might hold off on buying that house or car until later because you know you’ll just get it cheaper.

Depends if you need a house or not, the idea that people are treating future consumption as an investment does not seem to hold much weight. In a competitive market others will be making a similar gamble meaning rents will be higher than normal due to increased demand, and the market will normalize.

It's more people see prices dropping hence their money increase in relative value so they save up more instead of spending it.

It just reminds me how unserious economic theory is. You can tell any kind of story you want.

So silly that it's exactly what happened during the Great Depression.

Context matters. Prices dropped because people had less money. They didn’t drop because people were sitting on piles of cash hoping for cheaper prices next year.

Well personally I'm cutting out as much consumption as possible, how is inflation not resulting in big drops in people spending?

You know what causes a downward spiral? People stop buying things, sales drops, layoffs / cuts, people buy less, etc.

I see companies freak out over 1-2% drops in sales, how is inflation not causing people to drop consumption by 10%? I don't travel, I'm eating out WAY less, I am price/bargain hunting far more. I never buy gas without gas price map checking. I'm holding back on as much purchases as possible. I don't even think about buying any clothes not on sale. Hell, I basically don't buy clothes unless absolutely needed.

Nobody is going to wait a year to save 3% on food or energy.

No, but they will for cars, housing, even having children,

Speculative asset bubbles seem to tank money velocity more than small amounts of deflation. I think the 2% inflation target roughy yields the maximum long term sustainable capital gains tax.

If our government was actually as "green" as they say they are, they'd aim for this because consumers would slow down consumption to only buy what they need. But they know that inflation is another form of tax, and they're too greedy to say that inflation is anything but "good".

For a government, "green" isn't an end-goal, but a nice-to-have. People like the environment, but continued existence comes first, and that in turn required having a huge economy in order to make a huge military affordable, and that military is needed to maintain the continued existence of the government (as an institution rather than the specific jobs of specific people within it).

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