Pros/cons of deflation?

[kaggie]

I would like a discussion on the pros or cons of deflation. Please add in your 2 bits.

I do not believe that either inflation nor deflation are bad if they are predictable and within a small percentage. It is the rapid inflation and deflation or unpredictability that causes massive failures.

Deflation is inherent in the system that we live in. As humans, we try to produce everything more efficiently. It's what drives us. It frees us to deal with new or unexpected problems. Deflation is obtaining more value for less work. Deflation is the increased production efficiency of goods, which efficiency we should strive for.

The typical argument against deflation is that it prevents spending, which causes a collapse of the system. This argument is self-defeating: if deflation causes collapse of the system, there is no reason to hold onto the coin that causes that deflation (and therefore deflation doesn't exist). Usually deflation is blamed for economic depressions, but instead, it's normally the other way around: massive inflation had preceded these depressions until production and investment capacity had become unsustainable and untethered to real value, which caused massive distrust of such systems. That distrust then led to deflation to find the ground-floor of value. Deflation is often the by-product of the poor preceding policies that perpetuated perennial problems, but was not the cause. Policies often try to alleviate this poor policy pain by inflating their currencies, but it is difficult to fight fire with more fire (but not impossible). Deflation can be a healthy, but painful, correction of these systems (as we see in bitcoin boom-bust cycles). It's better to have good policies in the first place instead of having to worry about how to make a 'soft landing'.

Another argument against deflation is that people who were first into the system benefit more than people who enter later. This happens with any system, and inflation does not remove this problem. New amounts of money, the new inflated amounts, are normally awarded to those who maintain power over the system and causes similar, if not worse, rewards to those at top. In this sense, inflation is worse than deflation because it allows an artificial group to remain at the top, rather than allowing that money to be distributed throughout the system. Inflation without proper policy does not change this problem of deflation.

A usual argument is that inflation allows people to pay off their debts. This is only true if people's salaries rise with the inflationary measures, which you are lucky if this holds true. The problem with inflation here is that the new inflation amounts of the currency are given originally to close allies, rather than through broad distribution among all classes. It is difficult to force all businesses to keep up with inflationary policies. Companies must have also received inflation-related gains to be able to award their employees with similar (or usually lower) gains. Employees also have to continue to receive those matching gains to benefit, so they must have enough soft power within their organisations to argue for those gains, otherwise they do not receive higher compensations. It is far too easy for companies higher in the chain of companies to keep their inflation-given gains and not pass them on, and for companies to not pass those inflation-given gains to their employees.

Are there other arguments to inflation or deflation? I'm interested in hearing more discussion on this. Thanks.

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[odolvlobo]

In my view, inflation and deflation are equal but opposite.

Inflation encourages spending and investing, but discourages saving and lending. Deflation encourages saving and lending, but discourages spending and investing.

Inflation promotes medium-of-exchange at the expense of store-of-value. Deflation promotes store-of-value at the expense of medium-of-exchange.

High inflation is bad and so is high deflation. Low inflation is not as bad, and so is low deflation. 0 is best.

The risks of low deflation leading to a deflationary spiral are no worse than low inflation leading to an inflationary spiral.

[darkangel11]

For fiat money to be deflationary you'd have to stop printing. Only replace the damaged bills and keep the supply steady. It's almost impossible for economies that rely on debt.
I'd like to live in a world where deflationary currency is used but I really doubt I ever will.

For me the ideal situation would be either 0 inflation, or a small deflation. People would continue to spend money even knowing the currency deflates, but it would give them a chance to save if they wanted to. They wouldn't have to use banks for that and risk having their money taken away from them, like people in China.

[Hydrogen]

I think most have trouble defining inflation vs deflation in real world terms.

They're both different tools for different jobs.

Examples of deflation are limited edition artwork. Collectible comic books. Serialized collectible coins and sports memorabilia. Exotic sports cars. Deflation definitely has its place where its well suited towards producing long term value.

Examples of inflation could be the number of automobiles tesla produces every year rising significantly. Which contributes towards the value of EVs declining over the long term. The value of lithium batteries could decline under inflation as production ramps up. Inflation can also produce long term value for consumers and markets. Albeit in a different fashion.

Both deflation and inflation have their place and their uses.

I think where most get confused is thinking both should be used for the same task.

In financial markets and economies inflation and deflation likewise have their pros and cons in different areas.

But it may not be accurate to say that one is necessarily better than the other.

[davis196]

Examples of deflation are limited edition artwork. Collectible comic books. Serialized collectible coins and sports memorabilia. Exotic sports cars. Deflation definitely has its place where its well suited towards producing long term value.

This isn't deflation. This is scarcity and the market law of supply and demand. Deflation is the process of increasing the value of paper money by reducing their quantity. It has nothing to do with rare items.

Examples of inflation could be the number of automobiles tesla produces every year rising significantly. Which contributes towards the value of EVs declining over the long term. The value of lithium batteries could decline under inflation as production ramps up. Inflation can also produce long term value for consumers and markets. Albeit in a different fashion.

This isn't inflation. It's just the benefit of mass production and economies of scale, which lead to a lower average cost per product.
Inflation is the process of reducing the value of paper/fiat money, caused by their increased quantity.

Both inflation and deflation can be good and bad. It depends of how you take advantages of them what is your asset and risk managements.
In general, the rich people get more benefit from inflation and deflation, while the poor and working class people get damaged.
You know the saying. "The rich become even more rich, while the poor become homeless".

[Obito]

There's only pro in deflation when your economy is well above average or higher than normal rate of inflation, deflation is a sign of decrease of growth in economy since the value of products are going down and this also includes decrease of the value of the currency used in the economy.

[Welsh]

High inflation is bad and so is high deflation. Low inflation is not as bad, and so is low deflation. 0 is best.

The thing is, low inflation is almost impossible to achieve since inflation tends to compound onto existing inflation, and therefore increasing it. I don't think realistically in the world we live in, with all the anomalies that present themselves, low inflation is achievable in the long term.

At the moment to slash inflation, we're basically introducing measures which will guarantee we have to raise inflation in the future. Allowing people to buy things cheaper, is only a temporary measure, and because of the way capitalism works, temporarily loaning people money or giving them allowances only helps in the short term, and again inflation rises in the long term.

Capitalism, and inflation go hand in hand, but it doesn't work. Maybe, another ideology would help with inflation, but for the time being I genuinely believe a deflationary system is going to be best for most people.

[Zilon]

In as much as both inflation and deflation are man made economic problems they are also powerful tools in the hands of economists who understands how to trade in both directions. Deflation only tends to favour producers more and inflation on the other hand are smiling pills to investors.

Paying off debts during inflation is only applicable to investors who have invested during deflation. With the two economic scenario what becomes a pros to one fellow could become a cron to another if they failed to act in regards to the trend.

High inflation or deflation rate is what an individual makes of it .

[348Judah]

I do not believe that either inflation nor deflation are bad if they are predictable and within a small percentage. It is the rapid inflation and deflation or unpredictability that causes massive failures.

i aggre with this, basically we could see alot of factors contributing to the rate at which inflation and deflation occur but the most considering fact here is when the range or time limit to either inflation or deflation exceed the minimum capacity, then it becomes difficult to bear and the side most affected win the race to being noticed in an economy as rise or fall in price.

if deflation causes collapse of the system, there is no reason to hold onto the coin that causes that deflation

more thanks to the advance technology in cryptocurrency, where things were meant to be running well in dealing with bitcoin in the economy, whereby everyone has control over his assets and decide on what to do in other to make income over it instead of deflating in value and price over time.

inflation is worse than deflation because it allows an artificial group to remain at the top

this is one of the most annoying things about inflation, ones it occur on a high scale, it's difficult to come down as before.

[hatshepsut93]

The typical argument against deflation is that it prevents spending, which causes a collapse of the system. This argument is self-defeating: if deflation causes collapse of the system, there is no reason to hold onto the coin that causes that deflation (and therefore deflation doesn't exist).

Why there is no reason to hold the deflating currency if you are profiting from it? It's a typical Tragedy of the commons scenario. Everyone act in their self-interest and as the result everyone losses. Very few people would switch to an alternative currency for altruistic and patriotic motives.

[DrBeer]

You can argue and discuss a lot, but as practice shows: a deflationary financial system not only reduces investment attractiveness, but also makes the product produced in this country less competitive. On the other hand, inflation has advantages ONLY IF it has a "restrained character", and in fact is controlled and not high. Any deviation from these limits leads to problems both in the economy and in the population of the country.

[Hydrogen]

Examples of deflation are limited edition artwork. Collectible comic books. Serialized collectible coins and sports memorabilia. Exotic sports cars. Deflation definitely has its place where its well suited towards producing long term value.

This isn't deflation. This is scarcity and the market law of supply and demand. Deflation is the process of increasing the value of paper money by reducing their quantity. It has nothing to do with rare items.

Examples of inflation could be the number of automobiles tesla produces every year rising significantly. Which contributes towards the value of EVs declining over the long term. The value of lithium batteries could decline under inflation as production ramps up. Inflation can also produce long term value for consumers and markets. Albeit in a different fashion.

This isn't inflation.

If 100 limited edition ferraris are manufactured. Over time, some will be destroyed in accidents. Or left to rust in junk yards. The number of limited edition units will decrease over time. The way that bitcoin rewards decrease. It is an example of deflation. This precedent applies to every item I listed.

Inflation essentially says increasing the supply of something, reduces its value. The opposite of deflation. It has pros and cons. Inflation in the money supply makes it easier to produce liquidity and credit. While deflation has the opposite effect. This is part of why cash works well for loan markets. While deflationary bitcoin typically does not. Gold, silver and precious metals while not being deflationary in a hard sense. Also could be considered less desirable for use in loan markets for similar reasons. The limited supply makes it harder to produce credit and liquidity.

[lucates]

There's only pro in deflation when your economy is well above average or higher than normal rate of inflation, deflation is a sign of decrease of growth in economy since the value of products are going down and this also includes decrease of the value of the currency used in the economy.

Deflation generates a vicious circle. Prices go down, profits tend to go down with them and the economy suffers and a lot of people lose their jobs or have to accept lower wages. So people have less money, so they consume less lead to reduce demand. Therefore, deflation is more dangerous than inflation. Because eventually, production, investment, employment and GDP take significant hit.

[odolvlobo]

Deflation Inflation generates a vicious circle. Prices go down up, profits tend to go down with them and the economy suffers the rich get richer and a lot of people lose their jobs or have to accept lower inadequate wages. So people have less demand more money, so they consume less lead to reduce demand prices increase. Therefore, deflation is no more dangerous than inflation. Because eventually, production, investment, employment and GDP take significant hit.

FTFY

[Ultegra134]

There's only pro in deflation when your economy is well above average or higher than normal rate of inflation, deflation is a sign of decrease of growth in economy since the value of products are going down and this also includes decrease of the value of the currency used in the economy.

Deflation generates a vicious circle. Prices go down, profits tend to go down with them and the economy suffers and a lot of people lose their jobs or have to accept lower wages. So people have less money, so they consume less lead to reduce demand. Therefore, deflation is more dangerous than inflation. Because eventually, production, investment, employment and GDP take significant hit.

The same goes for inflation, though, doesn't it? Prices keep increasing, the living costs increase and burden consumers who are looped into a vicious cycle of more and more expensive products. Certainly, both deflation and inflation are bad. I remember, a few weeks ago, reading an example of why deflation is worse than inflation. You're going to buy a car, the price has changed and now costs $500 less. Hearing this, you're waiting and expecting the price to drop even further, thus, you're not spending, the dealership is not making any money and is unable to pay their employees, who are made redundant.

With inflation though, you're pressured to purchase in advance, because you're expecting price increases, thus, money is being spent, which is beneficial for the economy.

A personal example, when the war started, we were expecting massive price increases in petrol. Thus, I proceeded to put fuel before the price increased any further. On the other hand, when oil crashed a few weeks ago, I waited a couple of days till gas prices dropped at the pumps.

[palle11]

There's only pro in deflation when your economy is well above average or higher than normal rate of inflation, deflation is a sign of decrease of growth in economy since the value of products are going down and this also includes decrease of the value of the currency used in the economy.

Deflation generates a vicious circle. Prices go down, profits tend to go down with them and the economy suffers and a lot of people lose their jobs or have to accept lower wages. So people have less money, so they consume less lead to reduce demand. Therefore, deflation is more dangerous than inflation. Because eventually, production, investment, employment and GDP take significant hit.

Deflation is known in economics as the opposite of inflation while inflation is met with high cost of goods, deflation is seen to cause decrease in price of goods. Just like the points have been made, one of the major disadvantage of deflation is that it doesn't encourage production in the country and that cause the country to earn less, also because of no production the job losses will be high as employment rate will decrease. At the long run it also may increase the rate of interest rate to loans to discourage more people from having excess money that will further increase the deflation but it also has some advantage which is the standard of living, reduced price and demand etc.

[Rruchi man]

it also has some advantage which is the standard of living, reduced price and demand etc.

Reduced demand facilitated by deflation may not always be an advantage to the economy and could even pose a greater risk and damage than inflation. Reduced demand means people are reluctant to spend and use their money and it creates the danger of a "liquidity trap'', an economic situation where people just keep their money rather than spending it or investing it.

[Ultegra134]

it also has some advantage which is the standard of living, reduced price and demand etc.

Reduced demand facilitated by deflation may not always be an advantage to the economy and could even pose a greater risk and damage than inflation. Reduced demand means people are reluctant to spend and use their money and it creates the danger of a "liquidity trap'', an economic situation where people just keep their money rather than spending it or investing it.

Deflation may possibly lead to a decrease in prices of goods, however, it usually comes with a higher price of recession. Both inflation and deflation are negative when in excess and I'm yet to understand if there's enough to be done in order to significantly reduce the impact in the economy. So far, I'm yet to see any improvement nor a satisfying plan to tackle the excessive inflation, which is turning into a vicious cycle of hyperinflation.

[OgNasty]

The pros and cons of deflation are pretty simple.  Lower prices mean that people with fixed incomes have more free money in their budget.  The downside of that is the value of investments and homes also drops, leaving people with less wealth to tap for emergencies or spending.  In an economy fueled by debt, a deflationary spiral can be disastrous, but that's why the Fed prints money like no tomorrow.

[d5000]

Interesting discussion. Odolvlobo has already written about the basic effects of each:

Inflation encourages spending and investing, but discourages saving and lending. Deflation encourages saving and lending, but discourages spending and investing.

But there is a small, but important twist.

Deflation is when money is appreciating over time. It is however not the same than if your average salary (for the same work) is appreciating. Even if we have high (e.g. 10%/year) inflation, your hourly wage could grow 12% per year, and then you have a 2% surplus - your "labor" would be worth more each day.

This is often what is tried to achieve by "traditional" central bank measures, i.e. trying to have a low, but positive inflation (most often the goal is 2%), to encourage spending, and at the same time make grow the real wages (i.e. those adjusted to inflation).

You can then buy each time more things with your salary, even if there is inflation.

How does saving and investing fit in these considerations?

Saving is encouraged if a safe, (almost) risk-less way exists to save your money which gives higher returns than inflation. For example, if a savings account gives interests of 3%/year and inflation is 2%/year, then saving is encouraged even if inflation is over zero. Obviously, if the inflation is negative, then you can "save" even simply holding your money. But this is not necessarily good, as this money is taken out of circulation, while money from a saving accounts boosts the balance of the bank, and they can give out more loans.

Obviously, in the last years due to extremely low interest rates saving accounts returns were near zero, so people went desperately searching other, more risky, saving alternatives. This "cheap money policy" benefitted Bitcoin, after all

About investing, it is even more complex. Companies invest in new facilities etc. if there are 1) market opportunities (i.e. if they can get more profit after having invested) and 2) they can afford the interest rates for the loans they need.

If there is deflation, the problem is 1) is unlikely to be met. Market opportunities, at least in the case of "traditional" joint-stock or limited corporations, need economic growth, as that is the most important factor for a share price increase. Deflation unfortunately often decreases growth as it discourages spending (in our current economic system). 2) can happen, if there is a low-interest policy.

So the effect of deflation on investing is ambiguous (always talking about a pure, traditional capitalist economy, where joint-stock corporations are the most important business model).

However, deflation could encourage investing in companies which are not so much dependant on economic growth. For example, a cooperative, in contrast to a joint-stock corporation or a Limited company, would benefit from deflation, as they are not so dependant on a share price increase, and their costs to operate the company would then be lower each time. Cooperatives benefit their members/investors by providing them services or goods, so there may be always a reason to found one and invest in it.

Long term deflation would thus probably lead to incentives to transition from an economy where joint-stock/limited companies are "the norm" to a model close to cooperatives. This has advantages, as cooperatives are known to be very stable and long-lived, but also disadvantages, as their model does not encourage innovation - innovation would have to be encouraged by external means.

(Sorry for the wall of text )