The real story behind Deflation and what da fuck it is

[lavaai]

Alright well I thought more people on here would have a solid understanding of economics and I have been summarily proven wrong on this point by the looks of this most recent thread on inflation/deflation.

And I just wanted to share my understanding, because it is glorious:


Deflation, defined:
prices fall because either the supply of goods grew or the supply of money shrank. Same drop in price, two different mechanisms.


Inflation is symmetric.

Deflation has nuanced non-symmetry.

Groceries at the store, for example. Groceries have a price. If the abundance of groceries increases while the money stays put, the price drops. If the money increases while the groceries stay put, the price rises.

While with deflation, think of a large canvas, two things can happen to the deep blue paint you use on the canvas:

• you add more deep blue paint and make it a lot denser
• you magically bunch up all the blue paint in the center and trim the excess white boundary/border of the canvas.

In one you are increasing the amount of blue paint and its density on the canvas. In two you are making the canvas smaller.

Deflation works the same way. You either increase the "supply of goods" or decrease "the supply of money."

Both have the same net effect on "price," which means the worthiness or weightiness of the money has improved/enhanced/increased.

I hope this subtlety makes sense. One direction is trimming the canvas while the other is increasing the density of paint.

The whole thing, neatly:

• Paint = goods, canvas = money. More paint or a smaller canvas both make the blue denser.
• Deflation has two doors. Increase the supply of goods, or decrease the supply of money.
• Either door, same result on price. The money gets weightier.
• The asymmetry: inflation has one story (more money chasing goods). Deflation has two, and people keep arguing as if there's only one.

[safar1980]

I remember the times when stores ran out of graphics cards because miners were buying up all the cards for Ethereum mining. Graphics cards were selling for three times the recommended price on the secondary market. Why don't you think that's inflation? It's called cost-push inflation.

[lavaai]

I remember the times when stores ran out of graphics cards because miners were buying up all the cards for Ethereum mining. Graphics cards were selling for three times the recommended price on the secondary market. Why don't you think that's inflation? It's called cost-push inflation.

Price going up because supply is decreasing is not inflation.  Inflation is specifically pointing to the volume of circulating money supply available.  The balloon of monetary volume inflates and therefore more money-per-item is needed to keep the ratio the same.  Selling out of graphics cards and the tail-end of the supply ramping up in price is just supply and demand.  Not every change in price is inflation, we should avoid speaking about it this way.

Mainstream definitions are where the confusion comes from, honestly. "Inflation = any sustained rise in the price index" bundles two different things: a change in the money, and a change in the goods. Once you lump them together, you can't tell whether prices rose because the currency got diluted or because something got scarce.

Keeping inflation to the money supply is the useful definition, because it isolates the one cause the central bank actually controls and tells you what the currency itself is doing. GPU prices tripling tells you about GPUs. It tells you nothing about the money.

[STT]

Technology usually is deflationary though we get price spikes like the memory prices right now, the overall trend is deflation due to tech development advances.   This is the easiest way to understand deflation as a good thing in an economy not the recession idea that might pop up automatically.

   A big obvious deflationary price is solar panels, the price per watt can be traced from the 1970's to now continually dropping and its amazing because anyone can have usable solar power now.
  Its still not cheap as such, greater advancement is always wanted hence the market demand is partnered to advancement and revenue increases justifying production investment.

[safar1980]

I remember the times when stores ran out of graphics cards because miners were buying up all the cards for Ethereum mining. Graphics cards were selling for three times the recommended price on the secondary market. Why don't you think that's inflation? It's called cost-push inflation.

Price going up because supply is decreasing is not inflation.  Inflation is specifically pointing to the volume of circulating money supply available.  The balloon of monetary volume inflates and therefore more money-per-item is needed to keep the ratio the same.  Selling out of graphics cards and the tail-end of the supply ramping up in price is just supply and demand.  Not every change in price is inflation, we should avoid speaking about it this way.

Mainstream definitions are where the confusion comes from, honestly. "Inflation = any sustained rise in the price index" bundles two different things: a change in the money, and a change in the goods. Once you lump them together, you can't tell whether prices rose because the currency got diluted or because something got scarce.

Keeping inflation to the money supply is the useful definition, because it isolates the one cause the central bank actually controls and tells you what the currency itself is doing. GPU prices tripling tells you about GPUs. It tells you nothing about the money.

The microchip market is currently experiencing cost-push inflation, which is even jokingly referred to as "chipflation."

This is a unique example of cost-push and demand-pull inflation in the IT market. Equipment manufacturers are forced to buy chips at any price, and the production shortage will continue for several more years because contracts have already been signed for non-existent products.

[Darker45]

Technology usually is deflationary though we get price spikes like the memory prices right now, the overall trend is deflation due to tech development advances.   This is the easiest way to understand deflation as a good thing in an economy not the recession idea that might pop up automatically.

Yeah, so deflation doesn't happen just because of two things, "either the supply of goods grew or the supply of money shrank".

As with technology, for example, it could also happen because models or versions would get obsolete. New upgrades would hit the market, making old ones much cheaper. There's not necessarily an increase in supply or a decrease in money.

It's also possible for the price to fall simply because demand is dwindling. Or, production cost is going down. Although it doesn't necessarily result into mass production, which means a massive growth in the supply, it could also bring down prices.

[lavaai]

The microchip market is currently experiencing cost-push inflation, which is even jokingly referred to as "chipflation."

This is a unique example of cost-push and demand-pull inflation in the IT market. Equipment manufacturers are forced to buy chips at any price, and the production shortage will continue for several more years because contracts have already been signed for non-existent products.

I get where you're coming from,; this mainstream idea that any increase in price is "inflation" but as I said in my previous reply, labeling any upwards price movement as inflation conflates and obscures whether it was a change in the supply of money or a change in the supply of goods that is associated with that change.   This is why I think the mainstream framing that has departed from the Austrian school of Economics' working definition of inflation is to be eschewed, shirked, and avoided: it muddles the picture significantly.  Inflation has become a modern buzzword that means "things are more expensive" but historically and classically it exclusively meant the monetary supply was increasing at a rate more rapid than the increase in goods/technological advances.  Sure we can say off-hand things such as "chipflation" to describe that chips are more expensive now, but that is due to a decrease in the supply of resources for chips relative to the ongoing increase in monetary supply.  Supply of money still outpacing supply of chip-resources.  Chip-resources are incrementally more scarce, more challenging to source, and more competed over for component-assembly.  It's a combination of both factors.

If you go to a party and there are many women, for men this is something desirable.  If the number of men increases significantly it becomes a sausage fest.  If the number of women decreases significantly, it becomes "slim pickings."  The headcount ratio can come out identical, but the makeup of the room is completely different, and so is the diagnosis.  That is exactly the error with calling everything inflation: the math matches, the situations don't.

[lavaai]

Yeah, so deflation doesn't happen just because of two things, "either the supply of goods grew or the supply of money shrank".

As with technology, for example, it could also happen because models or versions would get obsolete. New upgrades would hit the market, making old ones much cheaper. There's not necessarily an increase in supply or a decrease in money.

It's also possible for the price to fall simply because demand is dwindling. Or, production cost is going down. Although it doesn't necessarily result into mass production, which means a massive growth in the supply, it could also bring down prices.

In fact the supply of [obsolete] goods increased at the same time that advanced goods increased. Do you think demand dwindles, or moves elsewhere? Money that stops chasing one good goes chasing another, which makes it a relative price move, not a change in the price level. If demand falls everywhere at once, that's the effective supply of money chasing goods shrinking, which is the second door.

Production cost going down is the same side of the equation as supply increasing, because for the same amount of resources we can produce more goods.

The two categories presented are for simplicity's sake. An exhaustive list of more scenarios is welcome.

[crwth]

Consider that when credit or an additional money supply from debt increases, buying power rises and things become more desirable.

It doesn't necessarily mean having more money, but as long as there is a change in currency flow or any three-sided supply, it could really affect prices.

[abhiseshakana]

inflation has one story (more money chasing goods)

Dude, this is not only theory but happen in my country, increase on money supply does not automatically lead to rise on prices. Do you ever thing how if additional money supply not used for transactions or keep it for savings with various reason such as frugal living or because people loose purchasing power. Will transaction increase ? No. Is demand increasing? No. Prices won't necessarily rise. Inflation are situation where nominal spending/demand grows faster than the economy's ability to supply goods and services, among other possible mechanisms. Simple example a year ago my government providing USD 17 billion cash stimulus to state owned banks. Increasing banking liquidity with purpose that demand rises and the economy moves faster, but matter of fact the result is zonk which said that liquidity is not the same as aggregate demand. So money supply is not the same thing as money actually being spent.

You see money only a stock you don't think about how the money stock transform into demand.

[viljy]

inflation has one story (more money chasing goods)

Dude, this is not only theory but happen in my country, increase on money supply does not automatically lead to rise on prices. Do you ever thing how if additional money supply not used for transactions or keep it for savings with various reason such as frugal living or because people loose purchasing power. Will transaction increase ? No. Is demand increasing? No. Prices won't necessarily rise. Inflation are situation where nominal spending/demand grows faster than the economy's ability to supply goods and services, among other possible mechanisms. Simple example a year ago my government providing USD 17 billion cash stimulus to state owned banks. Increasing banking liquidity with purpose that demand rises and the economy moves faster, but matter of fact the result is zonk which said that liquidity is not the same as aggregate demand. So money supply is not the same thing as money actually being spent.

You see money only a stock you don't think about how the money stock transform into demand.

Exactly. An excess supply of money may not reach the consumer level if most of the money is held in savings, financial markets, etc. The OP is looking at this too abstractly, i.e., imposing an ideal model of deflation or inflation onto reality. That’s why his definition of inflation is too monetarist (his model doesn’t include cost‑push inflation), and his definition of deflation is too "mechanistic". Well, at least that’s what it seemed to me.

[#CapsLOck]

I believe the key element in this is the difference between a relative price change and real deflation. If the price of a computer chip falls because the next generation is released, the price of the currency did not get better - it's only one price falling in relation to another. The reverse is true too if there is a shortage of chips and they cost more. But if there was to be any kind of deflation, it would be the general price level that had to come down, not just prices for these commodities. I agree with the statement regarding the money supply versus spending of money money that is not spent does not have an immediate impact. Well, maybe the real question is not so much how much money is there? but how much money is flowing? with respect to the economy's production.

[Alpha Marine]

I remember the times when stores ran out of graphics cards because miners were buying up all the cards for Ethereum mining. Graphics cards were selling for three times the recommended price on the secondary market. Why don't you think that's inflation? It's called cost-push inflation.

Price going up because supply is decreasing is not inflation.  Inflation is specifically pointing to the volume of circulating money supply available.  The balloon of monetary volume inflates and therefore more money-per-item is needed to keep the ratio the same.  Selling out of graphics cards and the tail-end of the supply ramping up in price is just supply and demand.  Not every change in price is inflation, we should avoid speaking about it this way.

The increase in price of one product cannot be termed "inflation". That is simply demand and supply doing their thing. When the demand for something increases, the price of that will definitely increase if the supply stays the same.
It is inflation when the price of all consumer goods in the economy has increased. When you see the prices of everything increasing, then you can call that inflation.

Likewise, the decrease in the price of a particular product is not deflation. The factors that affect demand and supply may be the reason the price is dropping.
For example, if a phone that is unarguably better than the iPhone in everything is produced today and marketed properly, the price of the iPhone might begin to drop; that doesn't mean there is deflation. It's simply because the demand for the iphone will decrease.

[New Judgement]

Dude, this is not only theory but happen in my country, increase on money supply does not automatically lead to rise on prices. Do you ever thing how if additional money supply not used for transactions or keep it for savings with various reason such as frugal living or because people loose purchasing power. Will transaction increase ? No. Is demand increasing? No. Prices won't necessarily rise. Inflation are situation where nominal spending/demand grows faster than the economy's ability to supply goods and services, among other possible mechanisms. Simple example a year ago my government providing USD 17 billion cash stimulus to state owned banks. Increasing banking liquidity with purpose that demand rises and the economy moves faster, but matter of fact the result is zonk which said that liquidity is not the same as aggregate demand. So money supply is not the same thing as money actually being spent.

Let your government increase workers wages, give interest free loans to individuals and businesses, let’s see if the prices of goods will increase or remain the same in your country. When we talk about the economy we look at all sectors not just the banking sector. You increase banking liquidity, but not the workers and businesses owners liquidity. The masses will only withdraw what they saved up in the bank. Let the money that was injected into the economy get to the people and see how the prices of things will increase overnight. When the population have enough money at their disposal the prices of goods will increase.

[abhiseshakana]

Dude, this is not only theory but happen in my country, increase on money supply does not automatically lead to rise on prices. Do you ever thing how if additional money supply not used for transactions or keep it for savings with various reason such as frugal living or because people loose purchasing power. Will transaction increase ? No. Is demand increasing? No. Prices won't necessarily rise. Inflation are situation where nominal spending/demand grows faster than the economy's ability to supply goods and services, among other possible mechanisms. Simple example a year ago my government providing USD 17 billion cash stimulus to state owned banks. Increasing banking liquidity with purpose that demand rises and the economy moves faster, but matter of fact the result is zonk which said that liquidity is not the same as aggregate demand. So money supply is not the same thing as money actually being spent.

Let your government increase workers wages, give interest free loans to individuals and businesses, let’s see if the prices of goods will increase or remain the same in your country. When we talk about the economy we look at all sectors not just the banking sector. You increase banking liquidity, but not the workers and businesses owners liquidity. The masses will only withdraw what they saved up in the bank. Let the money that was injected into the economy get to the people and see how the prices of things will increase overnight. When the population have enough money at their disposal the prices of goods will increase.

Please reconsider my statement " increase on money supply does not automatically lead to rise on prices " which i think can also be interpreted further to as your argument "we look at all sector." But again I said that 0% interest rate for individual and business does not automatically lead to rise on prices and Low interest rates does not automatically transform into effective demand. Japan are the perfect example, Japan experiences prolonged deflation because shortage on demand even after they applied negative interest rate. Inflation remained low because individual and business entities did not automatically transform cheap liquidity into spending.

On 2020, my government also give direct cash assistance to people and MSMEs. At the same time, my central bank also add liquidity support to the financial system, again i found zonk result example, inflation remain stuck low, far below government target. Government claimed the reason are weak domestic demand and adequate supply. So, sometimes, the additional money use  to replace lost income partly, rather than generating new demand that far exceeds the economy's capacity. During pandemic US also give direct economic impact payments but reported that the recipient does not immediately spend the entire amount of money, some part is spent, some part is saved, and some part is used to pay off debt.

You forget that in reality economic has transmission mechanism which make the final outcome not as you suppose

https://www.bls.gov/osmr/research-papers/2021/ec210100.htm