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from the should-not-embrace-deflation-either dept.
Currently we can observe a general slowdown in the annual growth rate in price inflation across major countries around the world. [...] Most commentators are of the view that deflation generates expectations for a decline in prices. As a result, it is held, consumers are likely to postpone their buying of goods at present since they expect to buy these goods at lower prices in the future. This weakens the overall flow of spending and in turn weakens the economy. Hence, such commentators believe that policies that counter deflation will also counter the economic slump.
Inflation is not about general increases in prices as such, but about the increase in the money supply. [...] For instance, if the money supply increases by 5% and the quantity of goods increases by 10%, prices will fall by 5%. A fall in prices however, cannot conceal the fact that we have inflation of 5% here because of the increase in money supply. The reason why inflation is bad news is not of increases in prices as such, but because of the damage inflation inflicts to the wealth-formation process.
The economic effect of money that was created out of thin air is the same as that of counterfeit money — it impoverishes wealth generators. The money created out of thin air diverts real wealth towards the holders of new money. [...] So, countering a falling growth momentum of the CPI by means of loose monetary policy (i.e., by creating inflation) is bad news for the process of wealth generation and hence for the economy. [...] Furthermore, if a fall in the growth momentum of prices emerges on the back of the collapse of bubble activities in response to a softer monetary growth, then this should be seen as good news. The less non-productive bubble activities the better it is for the wealth generators and hence for the overall pool of real wealth.
https://mises.org/wire/central-banks-shouldnt-fight-deflation
(Score: 3, Interesting) by Immerman on Thursday March 28 2019, @04:42PM (2 children)
>Basically, in a depreciating economy, you have to ask yourself whenever you want to spend money or invest in anything, "Is this actually going to be better than stuffing the money under my mattress, or will putting my money into this item/asset/house/whatever just lock the money into a spiral of losing value over time?"
Not quite. The value of things isn't affected by inflation or deflation - only the value of money is. Your house, stack of gold bricks, etc. might be worth 3% fewer dollars next year under deflation, but the *value* remains unchanged, it's only the value of the dollars you're measuring it in with has changed. It's rather as though they redefined the length of a meter to be 3% longer this year - the measurements of everything would get smaller, but their actual size would not.
The proper question you should ask with deflation is, "Would the value of the money stuffed in my mattress increase faster than the value of the asset I'm buying?" Essentially the same question you'd ask under inflation, except under inflation you have to stick your money in a generous interest-bearing account in order for it to grow, rather than your mattress.
Of course that does mean that under deflation banks would have to offer a positive "real value" interest rate in order to compete with safes and mattresses, unlike today where they can get away with offering you interest rates less than inflation and then pocket the difference, since you'll at least be losing money more slowly.
As for wages, etc. - I don't see how it's any different than today - employers would just have to give you an explicit annual wage reduction, rather than letting inflation give you an automatic "invisible" one.
Basically, any exchange of goods and services should be minimally impacted by inflation or deflation - currency is just a convenient medium of exchange for real value, and a free(ish) market will automatically adjust prices to reflect the actual value being exchanged. Prices and salaries will both constantly fall, but the actual value reflected by that price will remain constant.
In terms of inherent economic impacts, inflation versus deflation is all about investment - under deflation, only those investments with an expected return greater than the deflation rate are even worth considering, while under inflation *any* positive return is better than leaving your money to depreciate in a vault.
And that directly impacts the lower classes most strongly since getting, say, a 3%-better-than-inflation return on investment is a lot easier with the connections and economic clout of wealth than it is for a working-class stiff with a few thousand dollars of savings. While under deflation *everyone* gets that 3% (or whatever the deflation rate is) return on their savings as the default, and the wealthy who would have been looking for a 3% return will instead be looking for a 6% return.
The real question is, would the working class benefit more from that personal deflationary return-on-savings, or from the economic growth stimulated by investors investing at lower-than-inflation expected returns? And that's not an easy question to answer.
(Score: 2) by AthanasiusKircher on Friday March 29 2019, @12:04AM (1 child)
Okay, you managed to pick one of the few places where I tripped up in my post. I was trying to be somewhat careful about not using words like "value," so as not to get bogged down with this stuff. If you read what I wrote I kept trying to say "money" and "currency" and "nominally valued in currency," because that's what I'm talking about.
Because "value" is a much more complicated thing. And no, it's exceptionally unlikely that inflation or deflation will leave the relative values of all goods untouched. Generally, as either one gets larger, it introduces different behaviors that cause people to value other things more or less, which was precisely the point of my post. Not only might one's house lose monetary value in a depreciating economy, but it might then begin to lose relative value compared to other places people might want to put their money, making its worth even less. If anything, deflation can lead to acceleration in depreciation in any asset/good requiring significant investment, which is a REAL loss in value for those assets.
Well, first of all, that's simply NOT how businesses respond in such situations, according to loads of historical data. As I said in my post, the typical response to decreased revenue is layoffs, not across-the-board wage reductions. However, even if we suppose your model to be valid, it actually enhances my original point: which is that the deflationist fantasy that "my salary can buy more stuff" is likely to be false, as one's salary is likely to decrease along with the deflation around you.
Sorry, but there I have to disagree completely, based on any basic understanding of economics or history. Severe inflation definitely has major economic impacts that disrupt all sorts of exchanges of goods and services. Deflation, when it rarely occurs, has also been known to cause severe issues. This is simply false. What makes currency function well as currency is that it is relatively stable. When it starts swinging widely in relative value, people start behaving in weird ways. This is well-known.
While what you said was perhaps true in the past, with the easy access to low-fee funds (often with low minimums), even lower-middle-class folks can easily have access to many of the market opportunities that the rich have. Of course, investment is always a gamble. Rich people lose lots of money in the market too. A "3%-better-than-inflation" guaranteed return is quite difficult to obtain for either rich or poor.
Yes, and my point in my post is that the 3% is only relevant to one's SAVINGS already in the bank. Poor people, as you point out, don't tend to have a lot of savings sitting around in their money bin. They tend to live paycheck-to-paycheck. And, as I noted (and you noted too), their paychecks will likely go down (with annual salary decreases) or simply cease to exist (in the case of layoffs). Meanwhile, any significant assets that they managed to invest in -- a house, a car, etc. -- will depreciate in value so if they ever are in need to sell out of desperation or to get something new, they will possibly be in worse shape than when they first bought the item in question... certainly worse than if they had stuffed the money under their mattress, which means perhaps they'll simply not buy said assets again, perhaps renting or leasing major assets as everyone starts dumping them and values of assets go into the toilet.
Oh, and heaven help them if they took out loans, because their loan terms will stay the same, as they have to keep shelling out the same month-to-month payment as their paychecks get smaller. (The only people who will buy big assets in a deflationary economy will eventually be those with big money bins who don't care about losing some.) Which means they start defaulting on their loans. Banks rein in credit and stop giving new loans, which further reduces investment in the economy. Eventually, financial institutions fail to make money and begin to collapse.
That's called a "deflationary spiral," and it's rarely been seen in history (much less than hyperinflation), though many economists regard it as a major cause of the Great Depression, as debt values rose relative to economic activity, leading to defaults, leading to bank runs, etc., etc. and a downward spiral to very little economic activity at all as people tried to hoard anything they could.
Well, history of the past few centuries (which are the only ones relevant to modern economies) clearly suggest there's an easy answer, which is the reason why most central banks target an inflation rate that is 0 to slightly positive, rather than negative (i.e., deflation). The view that "lower working class people will be bailed out by their savings" is a kind of Randian mindset -- every man for himself, if only he can accumulate his own wealth. Most blue collar workers, again, are not rolling in enough dough to toss into the money bin to save like you assume they would. They live paycheck-to-paycheck. If they had the money you think they have, they'd actually do stuff like buy a house with it, which is often difficult for many poorer folks.
No, the question isn't difficult at all. I like to see two sides of things, but deflation is simply not as innocuous as you claim.
(Score: 3, Insightful) by Immerman on Friday March 29 2019, @04:20PM
Sure, the relative values of things change - they're changing constantly regardless, and inflation/deflation will influence that as well. My point is that the price tag will continue to follow the value the same way as ever. And yes - as soon as you talk "assets" then you're talking investments rather than goods and services, and the real impact of *flation will be seen.
Just to be completely clear, I'm not advocating for deflation as a policy - I'm just arguing that as an occasional fluctuation it's probably not the bogeyman it's made out to be. The difference in investing behavior between 0.5% inflation and 0.5% deflation is unlikely to be dramatically larger than the difference between an inflation rate of 1.5% versus 0.5%. So long as deflation is substantially lower than the typical expected ROI, it's mostly going only going to chip away at the least-profitable fringes of investment, which pretty much by definition contribute the least to total economic growth anyway
> ...Severe inflation definitely has major economic impacts...
Absolutely - any sustained rapid change in the value of money will have major impacts. But we're discussing very modest single-digit changes in a basically stable economy.
>Well, first of all, that's simply NOT how businesses respond in such situations, according to loads of historical data. As I said in my post, the typical response to decreased revenue is layoffs, not across-the-board wage reductions. However, even if we suppose your model to be valid, it actually enhances my original point: which is that the deflationist fantasy that "my salary can buy more stuff" is likely to be false, as one's salary is likely to decrease along with the deflation around you.
Do you have any historical examples of that as a systematic issue specifically in response to very modest deflation? Because in that case you're not actually talking about decreased revenue - the wealth flow remains the same, only the monetary denomination changes. Of course, if you do business in a good that's losing real value due to deflation, then your real revenue will be dropping - but people doing business in goods whose real value is increasing will see an increase in revenue, so it's not a systemic problem, just a personal one for those people whose work is becoming less valuable due to changes in the market. A normal risk for anyone in any market under any conditions.
I'll agree that the "my salary will buy more stuff" is mostly a delusion. Not entirely though, simply because you'll likely get higher annual raises due to deflation putting the psychological ball in the employee's court. Can't tell you how many times I've heard a less-than-inflation wage adjustment called a "raise", and it's a lot more obvious to everyone involved what's really happening if you're adjusting the denomination downwards instead. Meanwhile, a 1-2% annual real-value raise is hardly unreasonable for most occupations, as experience increases your value to the company. So an actual numerical wage reduction is unlikely to be called for in most situations.
>While what you said was perhaps true in the past, with the easy access to low-fee funds (often with low minimums)
Even if that's completely true (and last time I checked there were some flat-rate fees, which are proportionally much more expensive for low-value transactions), there's still the fact that your expected return depends heavily on the amount and quality of research you (or your consultants) do. There's only so much research and attention it's worth doing when a 1% difference on ROI only translates to $10 - which means the expected gain from investing $1000 is going to be a lot lower than for the person investing $100M, where that 1% difference is a million dollars, and spending $10,000 on research will almost certainly pay off handsomely. The rich are also much more likely to have a larger and more reliable network for "hot tips" than the poor. No reputable broker is going to call up someone investing $1000 to see if they want to get in on a lucrative new opportunity.
>Yes, and my point in my post is that the 3% is only relevant to one's SAVINGS already in the bank...
Agreed, though you should include the savings under your mattress. But part of that is because there's not really much benefit to saving for the poor. The ROI is negligible, and the "safety cushion" tends to not actually exist if you'd otherwise qualify for need-based aid, which you mostly don't qualify for until you've burned through your (verifiable) savings.
>their paychecks will likely go down
Again, only in terms of monetary denomination, while the buying power is what actually matters.
>Oh, and heaven help them if they took out loans, because their loan terms will stay the same,
Why would you assume that? Most loan terms track inflation, rather than being fixed rate. If inflation goes negative, the interest rates offered by any honest lender will fall accordingly. There's the risk of "but no lower than x%" clauses interfering, but there's no more reason to allow that to be legal than to allow creditors to refuse repayment during periods of deflation.
>Well, history of the past few centuries (which are the only ones relevant to modern economies) clearly suggest there's an easy answer, which is the reason why most central banks target an inflation rate...
Really? Can you give me a concrete example? Because I've never heard of central banks caring much at all about the impact of their policies on the working class. Their business is with the investor class, who all benefit from economic growth, regardless of the impact on the working class.