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Why is Deflation so Worrying?

posted by janrinok on Saturday February 21 2015, @08:30AM   Printer-friendly
from the what-me-worry? dept.

frojack writes:

Some time ago we discussed negative interest rates here on Soylent News. At that time there was some discussion of deflation and why it is such a mixed bag for consumers, companies, and countries.

The Economist has an article that explains deflation rather succinctly.

It turns out that deflation is bad because we are all so burdened with Debt. Not only personal debt, but corporate debt, and national debts. You end up paying debts with money that is more and more dear as time goes on.

Deflation poses several risks, some well-understood, one not. One familiar danger is that consumers will put off spending in the expectation that things will get even cheaper, further muting demand. Likewise, if prices fall across an economy but wages do not, then firms’ margins will be squeezed and employment will stagnate or decline. (Neither of these dangers is yet visible; indeed, America and Britain are seeing strong employment growth.) A third, well-known risk is debt deflation: debts become more onerous because the amount that is owed does not fall, even as earnings do. This is a big worry in the euro zone, where many banks are already stuffed with dud loans.

But in addition, all tools of Monetary Policy become useless.

The least-understood danger is also the most serious, because it is already here. Deflation makes it harder to loosen monetary policy. All of which means that policymakers risk having precious little room for manoeuvre when the next recession hits.

While some have been eager to see monetary policy reigned in, we did see the effects of this during the height of the recent depression, (which some claim we are still suffering from).

The US Federal Reserve had run out points it could cut when lending money to large banks. There were periods in 2010 where the Fed was lending money to banks at Zero Interest Rate. The link explains a number of serious risks with this policy.

 
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  • (Score: 1) by khallow on Monday February 23 2015, @08:56AM

    by khallow (3766) Subscriber Badge on Monday February 23 2015, @08:56AM (#148343) Journal
    I meant meaning 1. Sure, group-based assumption of risk, such as can be found in some sorts of escrow-based insurance (post a bond with a reliable third party against a certain harmful event happening) or charities, can be present in capitalism. But notice I did not specify the type of risk that was being so distributed. Distributing arbitrary risk to others via government or public policy mechanisms merely because you are particularly large, valuable, and/or politically connected is not capitalist.

  • (Score: 2) by c0lo on Monday February 23 2015, @10:25AM

    by c0lo (156) Subscriber Badge on Monday February 23 2015, @10:25AM (#148355) Journal

    Sure, group-based assumption of risk, such as can be found in some sorts of escrow-based insurance (post a bond with a reliable third party against a certain harmful event happening) or charities, can be present in capitalism. But notice I did not specify the type of risk that was being so distributed.

    Actually, I did specify the type of risk: force/military attack by a factor external to the society.
    What strategy do you propose a capitalist society should take against this risk:

    1. ignore it; humans are rational and war doesn't benefit anyone (the risk incidence is minimal)
    2. ignore it: a capitalist society is so efficient no attacker can destroy or steal at the rate the goods are created (the risk impact is minimal)
    3. socialize the cost of maintaining a collective defensive structure - army or militia+central command (reactive risk prevention)
    4. socialize the cost of eliminating the risk factor - e.g. preemptive attacks (proactive risk prevention)
    5. let the individuals deal themselves, is not the society job to protect them. At most, establish an insurance fund to deal with the effects of risk manifestation - insurance against the effect of war (risk mitigation)
    6. other, please specify
    --
    https://www.youtube.com/watch?v=aoFiw2jMy-0 https://soylentnews.org/~MichaelDavidCrawford

    • (Score: 1) by khallow on Monday February 23 2015, @11:10AM

      by khallow (3766) Subscriber Badge on Monday February 23 2015, @11:10AM (#148367) Journal

      Actually, I did specify the type of risk: force/military attack by a factor external to the society.

      And that has nothing to do with too big to fail, the subject of this subthread.

      • (Score: 2) by c0lo on Monday February 23 2015, @11:20AM

        by c0lo (156) Subscriber Badge on Monday February 23 2015, @11:20AM (#148374) Journal
        Mmmm... I see... well, let's narrow down the topic of "risk socialization in capitalism" to "too big to fail".
        The discussion with its plethora of arguments between the next two dots ..
        --
        https://www.youtube.com/watch?v=aoFiw2jMy-0 https://soylentnews.org/~MichaelDavidCrawford

        • (Score: 1) by khallow on Monday February 23 2015, @11:40AM

          by khallow (3766) Subscriber Badge on Monday February 23 2015, @11:40AM (#148382) Journal
          Ok, maybe we'll discuss this next time.