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Author Topic: Global Financial Crisis scenarios  (Read 15304 times)
Marlo Stanfield
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June 30, 2014, 08:21:48 PM
 #21

If there was another major global financial crisis like we recently saw I think it would be almost certain that money would flow into bitcoin and we would see large gains in value. When the capital flows shift in a flight to safety things like bitcoin and gold are very attractive.

Roosevelt had already expropriated gold in the USA during the Great Depression. So I would be very cautious about precious metals as a safe haven in case of a serious financial crisis. They might not try to take it away from you this time, but could make it illegal to trade, for example (or take to other not so drastic measures).

They could also make bitcoin illegal to trade. Not that it would stop many people. I think they would do that before they did it with gold.
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June 30, 2014, 09:11:41 PM
 #22

Hard to say which way bitcoin will go.

Remember, during the last crisis, even gold and oil went down quite a bit.

Gold has been going up during the years leading to the house crisis, what was a bit surprising to some was to see the USD going up as well

What do you mean by the USD going up - the USD index, i.e. dollar going up against other major currencies?

Yes

So, as long as USDX is not going down, treasuries are ok (i.e. the debt can keep on growing) as well as the U.S. economy, right?
Hypothetically. This could mean everyone is killing their currency faster than the USA.

However, countries with the exchange rate being lowered are now at an advantage. As they export goods, they can pay their employees more, and 80% of the time the purchasing power of the currency stays the same, unless something REALLY goes to crap.

If they start paying their employees more, that would cause inflation, and the purchasing power of the currency will not stay the same, especially if this process takes on (future expectations on inflation would invariably kick in).

Inflation is the increase of the money supply, the increase of prices is a consequence of inflation and salaries are a price

If there was another major global financial crisis like we recently saw I think it would be almost certain that money would flow into bitcoin and we would see large gains in value. When the capital flows shift in a flight to safety things like bitcoin and gold are very attractive.

Roosevelt had already expropriated gold in the USA during the Great Depression. So I would be very cautious about precious metals as a safe haven in case of a serious financial crisis. They might not try to take it away from you this time, but could make it illegal to trade, for example (or take to other not so drastic measures).

Gold is manipulated and can be regulated like everything else : interest rates, wages, human capital, real estate, natural ressources companies ect.

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June 30, 2014, 11:06:38 PM
 #23

It would likely increase in price as it did when crypress had it's banking crisis last year.

A financial crisis by definition put the financial stability of banks into question. When banks ability to pay depositors is questioned then people will have an incentive to look elsewhere to hold their money. Bitcoin is a likely answer to this

I entirely agree with you; Bitcoin and Gold will increase in price if there is a financial crisis; when the market will understand that the USD will be inflated to death and will be abandoned in world settlements it will benefit Bitcoin (and Gold) as well

The likely scenario is the fall of USD, market panic, big banks failures, interest rates rise that will be fought by the FED via more QE then riots, marshall law and curfew in the US; the world economy is very integrated so everyone will suffer at first

But China and countries that have natural ressources, low debt and/or work well/hard will come up on top while Europe and the US will not be as powerful relatively to other countries; they will still have a lot of human&financial&physical capital, attraction and ressources so they will probably bounce back if the people doesn't fall for the speech of extremists
It really depends on the level of severity of a financial crisis. In the 2008 financial panic, the dollar and treasury bonds rose sharply as they are considered to be a safe haven. In general US banks were safe from runs on banks by depositors due to FDIC protection so I think your scenario would be unlikely.

In a financial crisis, credit will generally contract, causing people to be able to spend less money, causing deflation. The Fed would attempt to use low interest rates to battle this deflation. Deflation for large economies is a bad thing because it goes into a positive feedback loop that ultimately result in lower economic activity (even after accounting for the lower prices) and lower standard of living. 
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July 01, 2014, 06:44:51 PM
 #24

So, as long as USDX is not going down, treasuries are ok (i.e. the debt can keep on growing) as well as the U.S. economy, right?
Hypothetically. This could mean everyone is killing their currency faster than the USA.

However, countries with the exchange rate being lowered are now at an advantage. As they export goods, they can pay their employees more, and 80% of the time the purchasing power of the currency stays the same, unless something REALLY goes to crap.

If they start paying their employees more, that would cause inflation, and the purchasing power of the currency will not stay the same, especially if this process takes on (future expectations on inflation would invariably kick in).

Inflation is the increase of the money supply, the increase of prices is a consequence of inflation and salaries are a price

I used the word inflation in this context as overall price increases when currency is losing its purchasing power (as the word is primarily used in this sense). That is price inflation.
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July 02, 2014, 12:35:34 AM
 #25

It would likely increase in price as it did when crypress had it's banking crisis last year.

A financial crisis by definition put the financial stability of banks into question. When banks ability to pay depositors is questioned then people will have an incentive to look elsewhere to hold their money. Bitcoin is a likely answer to this

I entirely agree with you; Bitcoin and Gold will increase in price if there is a financial crisis; when the market will understand that the USD will be inflated to death and will be abandoned in world settlements it will benefit Bitcoin (and Gold) as well

The likely scenario is the fall of USD, market panic, big banks failures, interest rates rise that will be fought by the FED via more QE then riots, marshall law and curfew in the US; the world economy is very integrated so everyone will suffer at first

But China and countries that have natural ressources, low debt and/or work well/hard will come up on top while Europe and the US will not be as powerful relatively to other countries; they will still have a lot of human&financial&physical capital, attraction and ressources so they will probably bounce back if the people doesn't fall for the speech of extremists
It really depends on the level of severity of a financial crisis. In the 2008 financial panic, the dollar and treasury bonds rose sharply as they are considered to be a safe haven. In general US banks were safe from runs on banks by depositors due to FDIC protection so I think your scenario would be unlikely.

In a financial crisis, credit will generally contract, causing people to be able to spend less money, causing deflation. The Fed would attempt to use low interest rates to battle this deflation. Deflation for large economies is a bad thing because it goes into a positive feedback loop that ultimately result in lower economic activity (even after accounting for the lower prices) and lower standard of living. 

The prices going down are the only good thing about a crisis; nobody complains about falling prices in energy prices or electronics; restrain for consuming because prices have been a bit lower than last year and the fact that consumers anticipate lower prices thus delay their spending is a TOTAL myth : who would delay buying gas if the price goes down by 1% or even 5%? Who would delay buying gas if he thinks the price will be 1 or 5% less in a year?? Who would delay buying anything because the price went down?? You will wait a year to buy food, a haircut, clothes, a vacation because you think it will be a bit lower in a year??
When the prices go down you are happy and richer so you buy more

Consumption is a an indirect utility function of the price meaning that consumers consume more not less when the price is lower thus they consume more when the price goes down, it has been proven each time a price has been going down

So, as long as USDX is not going down, treasuries are ok (i.e. the debt can keep on growing) as well as the U.S. economy, right?
Hypothetically. This could mean everyone is killing their currency faster than the USA.

However, countries with the exchange rate being lowered are now at an advantage. As they export goods, they can pay their employees more, and 80% of the time the purchasing power of the currency stays the same, unless something REALLY goes to crap.

If they start paying their employees more, that would cause inflation, and the purchasing power of the currency will not stay the same, especially if this process takes on (future expectations on inflation would invariably kick in).

Inflation is the increase of the money supply, the increase of prices is a consequence of inflation and salaries are a price

I used the word inflation in this context as overall price increases when currency is losing its purchasing power (as the word is primarily used in this sense). That is price inflation.

OK, the "new definition" of inflation is indeed the increase of prices but inflation is really the increase of the money supply

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July 02, 2014, 05:35:10 AM
 #26

It would likely increase in price as it did when crypress had it's banking crisis last year.

A financial crisis by definition put the financial stability of banks into question. When banks ability to pay depositors is questioned then people will have an incentive to look elsewhere to hold their money. Bitcoin is a likely answer to this

I entirely agree with you; Bitcoin and Gold will increase in price if there is a financial crisis; when the market will understand that the USD will be inflated to death and will be abandoned in world settlements it will benefit Bitcoin (and Gold) as well

The likely scenario is the fall of USD, market panic, big banks failures, interest rates rise that will be fought by the FED via more QE then riots, marshall law and curfew in the US; the world economy is very integrated so everyone will suffer at first

But China and countries that have natural ressources, low debt and/or work well/hard will come up on top while Europe and the US will not be as powerful relatively to other countries; they will still have a lot of human&financial&physical capital, attraction and ressources so they will probably bounce back if the people doesn't fall for the speech of extremists
It really depends on the level of severity of a financial crisis. In the 2008 financial panic, the dollar and treasury bonds rose sharply as they are considered to be a safe haven. In general US banks were safe from runs on banks by depositors due to FDIC protection so I think your scenario would be unlikely.

In a financial crisis, credit will generally contract, causing people to be able to spend less money, causing deflation. The Fed would attempt to use low interest rates to battle this deflation. Deflation for large economies is a bad thing because it goes into a positive feedback loop that ultimately result in lower economic activity (even after accounting for the lower prices) and lower standard of living. 

The prices going down are the only good thing about a crisis; nobody complains about falling prices in energy prices or electronics; restrain for consuming because prices have been a bit lower than last year and the fact that consumers anticipate lower prices thus delay their spending is a TOTAL myth : who would delay buying gas if the price goes down by 1% or even 5%? Who would delay buying gas if he thinks the price will be 1 or 5% less in a year?? Who would delay buying anything because the price went down?? You will wait a year to buy food, a haircut, clothes, a vacation because you think it will be a bit lower in a year??
When the prices go down you are happy and richer so you buy more

Consumption is a an indirect utility function of the price meaning that consumers consume more not less when the price is lower thus they consume more when the price goes down, it has been proven each time a price has been going down

So, as long as USDX is not going down, treasuries are ok (i.e. the debt can keep on growing) as well as the U.S. economy, right?
Hypothetically. This could mean everyone is killing their currency faster than the USA.

However, countries with the exchange rate being lowered are now at an advantage. As they export goods, they can pay their employees more, and 80% of the time the purchasing power of the currency stays the same, unless something REALLY goes to crap.

If they start paying their employees more, that would cause inflation, and the purchasing power of the currency will not stay the same, especially if this process takes on (future expectations on inflation would invariably kick in).

Inflation is the increase of the money supply, the increase of prices is a consequence of inflation and salaries are a price

I used the word inflation in this context as overall price increases when currency is losing its purchasing power (as the word is primarily used in this sense). That is price inflation.

OK, the "new definition" of inflation is indeed the increase of prices but inflation is really the increase of the money supply

Most business school are taught seeing things from the supplier side. Hence, deflation and low consumption is a bad thing.



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July 02, 2014, 06:38:44 AM
 #27

The prices going down are the only good thing about a crisis; nobody complains about falling prices in energy prices or electronics; restrain for consuming because prices have been a bit lower than last year and the fact that consumers anticipate lower prices thus delay their spending is a TOTAL myth : who would delay buying gas if the price goes down by 1% or even 5%? Who would delay buying gas if he thinks the price will be 1 or 5% less in a year?? Who would delay buying anything because the price went down?? You will wait a year to buy food, a haircut, clothes, a vacation because you think it will be a bit lower in a year??
When the prices go down you are happy and richer so you buy more

Consumption is a an indirect utility function of the price meaning that consumers consume more not less when the price is lower thus they consume more when the price goes down, it has been proven each time a price has been going down


Most of your examples are necessities that have fairly inelastic demand.  Without major lifestyle changes, you still need about the same amount of gas, food, electricity, etc.  When you need to cut expenses, you generally look at optional purchases.  Can a new computer wait until next year?  Can I get by with this old car for another year?  And all of that aside, have you never waited for a sale, or a better sale than the current sale, to buy clothing or a vacation trip?  Have you never postponed filling your gas tank because prices are falling and you have a pretty good idea from experience that they will be a few cents cheaper next week (assuming you don't need to fill your gas tank every week)?

Also keep in mind that in a deflationary environment, as a whole, wages also drop along with prices (where a "drop in wages" may come in the form of job cut).  If I think I'm going to be making less next year, or if I fear I will lose my job, then I'm going to save every penny I can this year.  That kind of mentality leads to less spending and further slowing of the economy.
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July 02, 2014, 07:51:12 AM
 #28

The prices going down are the only good thing about a crisis; nobody complains about falling prices in energy prices or electronics; restrain for consuming because prices have been a bit lower than last year and the fact that consumers anticipate lower prices thus delay their spending is a TOTAL myth : who would delay buying gas if the price goes down by 1% or even 5%? Who would delay buying gas if he thinks the price will be 1 or 5% less in a year?? Who would delay buying anything because the price went down?? You will wait a year to buy food, a haircut, clothes, a vacation because you think it will be a bit lower in a year??
When the prices go down you are happy and richer so you buy more

Consumption is a an indirect utility function of the price meaning that consumers consume more not less when the price is lower thus they consume more when the price goes down, it has been proven each time a price has been going down


Most of your examples are necessities that have fairly inelastic demand.  Without major lifestyle changes, you still need about the same amount of gas, food, electricity, etc.  When you need to cut expenses, you generally look at optional purchases.  Can a new computer wait until next year?  Can I get by with this old car for another year?  And all of that aside, have you never waited for a sale, or a better sale than the current sale, to buy clothing or a vacation trip?  Have you never postponed filling your gas tank because prices are falling and you have a pretty good idea from experience that they will be a few cents cheaper next week (assuming you don't need to fill your gas tank every week)?

Also keep in mind that in a deflationary environment, as a whole, wages also drop along with prices (where a "drop in wages" may come in the form of job cut).  If I think I'm going to be making less next year, or if I fear I will lose my job, then I'm going to save every penny I can this year.  That kind of mentality leads to less spending and further slowing of the economy.

Less spending means the society is saving and make efficiency use of capital. Compare to the west, citizen of the east save at least 20% of their earning, low interest rate allowed the state to take on mega infrastructure project that will benefit the local citizen in the long run.

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July 02, 2014, 08:24:25 AM
 #29

The prices going down are the only good thing about a crisis; nobody complains about falling prices in energy prices or electronics; restrain for consuming because prices have been a bit lower than last year and the fact that consumers anticipate lower prices thus delay their spending is a TOTAL myth : who would delay buying gas if the price goes down by 1% or even 5%? Who would delay buying gas if he thinks the price will be 1 or 5% less in a year?? Who would delay buying anything because the price went down?? You will wait a year to buy food, a haircut, clothes, a vacation because you think it will be a bit lower in a year??
When the prices go down you are happy and richer so you buy more

Consumption is a an indirect utility function of the price meaning that consumers consume more not less when the price is lower thus they consume more when the price goes down, it has been proven each time a price has been going down


Most of your examples are necessities that have fairly inelastic demand.  Without major lifestyle changes, you still need about the same amount of gas, food, electricity, etc.  When you need to cut expenses, you generally look at optional purchases.  Can a new computer wait until next year?  Can I get by with this old car for another year?  And all of that aside, have you never waited for a sale, or a better sale than the current sale, to buy clothing or a vacation trip?  Have you never postponed filling your gas tank because prices are falling and you have a pretty good idea from experience that they will be a few cents cheaper next week (assuming you don't need to fill your gas tank every week)?

Also keep in mind that in a deflationary environment, as a whole, wages also drop along with prices (where a "drop in wages" may come in the form of job cut).  If I think I'm going to be making less next year, or if I fear I will lose my job, then I'm going to save every penny I can this year.  That kind of mentality leads to less spending and further slowing of the economy.

What about smartphones it is not a necessity but people buy more even when they know the price has been going down and is likely to go down
When the price goes up people can consume less

Salaries going down are a bad effect of a crisis and it is upset by the deflation of prices which is excellent

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July 02, 2014, 09:29:11 AM
 #30

The prices going down are the only good thing about a crisis; nobody complains about falling prices in energy prices or electronics; restrain for consuming because prices have been a bit lower than last year and the fact that consumers anticipate lower prices thus delay their spending is a TOTAL myth : who would delay buying gas if the price goes down by 1% or even 5%? Who would delay buying gas if he thinks the price will be 1 or 5% less in a year?? Who would delay buying anything because the price went down?? You will wait a year to buy food, a haircut, clothes, a vacation because you think it will be a bit lower in a year??
When the prices go down you are happy and richer so you buy more

Consumption is a an indirect utility function of the price meaning that consumers consume more not less when the price is lower thus they consume more when the price goes down, it has been proven each time a price has been going down


Most of your examples are necessities that have fairly inelastic demand.  Without major lifestyle changes, you still need about the same amount of gas, food, electricity, etc.  When you need to cut expenses, you generally look at optional purchases.  Can a new computer wait until next year?  Can I get by with this old car for another year?  And all of that aside, have you never waited for a sale, or a better sale than the current sale, to buy clothing or a vacation trip?  Have you never postponed filling your gas tank because prices are falling and you have a pretty good idea from experience that they will be a few cents cheaper next week (assuming you don't need to fill your gas tank every week)?

Also keep in mind that in a deflationary environment, as a whole, wages also drop along with prices (where a "drop in wages" may come in the form of job cut).  If I think I'm going to be making less next year, or if I fear I will lose my job, then I'm going to save every penny I can this year.  That kind of mentality leads to less spending and further slowing of the economy.

What about smartphones it is not a necessity but people buy more even when they know the price has been going down and is likely to go down
When the price goes up people can consume less

Salaries going down are a bad effect of a crisis and it is upset by the deflation of prices which is excellent

Fashion do not belong to the necessity category. Consumers are being brainwashed by marketing to buy items that gives marginal benefit. And this phenomenal only occur in big city and 1st world country.

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July 02, 2014, 12:08:27 PM
 #31

Unlike all the predictions of skyrocketing , I think Bitcoin will fall horribly.
Nobody wants their money invested in anything volatile when they are likely to lose it all.
Hence , most people would divest causing Bitcoin to fall at any time of a major crisis.

Bitcoin's rise relies on the public feeling economically secure.

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July 02, 2014, 01:25:20 PM
 #32

Unlike all the predictions of skyrocketing , I think Bitcoin will fall horribly.
Nobody wants their money invested in anything volatile when they are likely to lose it all.
Hence , most people would divest causing Bitcoin to fall at any time of a major crisis.

Bitcoin's rise relies on the public feeling economically secure.

Say goodbye to bitcoin -> say hello to your savings deprecate to half in ten years.

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July 02, 2014, 01:27:50 PM
 #33

Unlike all the predictions of skyrocketing , I think Bitcoin will fall horribly.
Nobody wants their money invested in anything volatile when they are likely to lose it all.
Hence , most people would divest causing Bitcoin to fall at any time of a major crisis.

Bitcoin's rise relies on the public feeling economically secure.

HAHA hope you were being sarcastic because if not it is a terrible analysis since people will buy bitcoins to protect themselves; you are going to say people buy Gold when they feel economically secure?

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July 02, 2014, 02:37:46 PM
 #34

Two countries are currently on everyone radar right now.

Argentina and Bulgaria.

What effect they have on their neighbor countries and their creditors is still not known at this time.

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July 02, 2014, 03:20:46 PM
 #35

The prices going down are the only good thing about a crisis; nobody complains about falling prices in energy prices or electronics; restrain for consuming because prices have been a bit lower than last year and the fact that consumers anticipate lower prices thus delay their spending is a TOTAL myth : who would delay buying gas if the price goes down by 1% or even 5%? Who would delay buying gas if he thinks the price will be 1 or 5% less in a year?? Who would delay buying anything because the price went down?? You will wait a year to buy food, a haircut, clothes, a vacation because you think it will be a bit lower in a year??
When the prices go down you are happy and richer so you buy more

Consumption is a an indirect utility function of the price meaning that consumers consume more not less when the price is lower thus they consume more when the price goes down, it has been proven each time a price has been going down


Most of your examples are necessities that have fairly inelastic demand.  Without major lifestyle changes, you still need about the same amount of gas, food, electricity, etc.  When you need to cut expenses, you generally look at optional purchases.  Can a new computer wait until next year?  Can I get by with this old car for another year?  And all of that aside, have you never waited for a sale, or a better sale than the current sale, to buy clothing or a vacation trip?  Have you never postponed filling your gas tank because prices are falling and you have a pretty good idea from experience that they will be a few cents cheaper next week (assuming you don't need to fill your gas tank every week)?

Also keep in mind that in a deflationary environment, as a whole, wages also drop along with prices (where a "drop in wages" may come in the form of job cut).  If I think I'm going to be making less next year, or if I fear I will lose my job, then I'm going to save every penny I can this year.  That kind of mentality leads to less spending and further slowing of the economy.

Less spending means the society is saving and make efficiency use of capital. Compare to the west, citizen of the east save at least 20% of their earning, low interest rate allowed the state to take on mega infrastructure project that will benefit the local citizen in the long run.


Saving is indeed wise and important.  But there's a difference between saving and hoarding.  I'm talking about the latter.  Even good savers will still spend a little money here and there on unnecessary things like going to movies or occasionally getting a new computer or smartphone.  But if everyone cuts out all those extras, it will hurt the economy.
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July 02, 2014, 03:37:00 PM
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The prices going down are the only good thing about a crisis; nobody complains about falling prices in energy prices or electronics; restrain for consuming because prices have been a bit lower than last year and the fact that consumers anticipate lower prices thus delay their spending is a TOTAL myth : who would delay buying gas if the price goes down by 1% or even 5%? Who would delay buying gas if he thinks the price will be 1 or 5% less in a year?? Who would delay buying anything because the price went down?? You will wait a year to buy food, a haircut, clothes, a vacation because you think it will be a bit lower in a year??
When the prices go down you are happy and richer so you buy more

Consumption is a an indirect utility function of the price meaning that consumers consume more not less when the price is lower thus they consume more when the price goes down, it has been proven each time a price has been going down


Most of your examples are necessities that have fairly inelastic demand.  Without major lifestyle changes, you still need about the same amount of gas, food, electricity, etc.  When you need to cut expenses, you generally look at optional purchases.  Can a new computer wait until next year?  Can I get by with this old car for another year?  And all of that aside, have you never waited for a sale, or a better sale than the current sale, to buy clothing or a vacation trip?  Have you never postponed filling your gas tank because prices are falling and you have a pretty good idea from experience that they will be a few cents cheaper next week (assuming you don't need to fill your gas tank every week)?

Also keep in mind that in a deflationary environment, as a whole, wages also drop along with prices (where a "drop in wages" may come in the form of job cut).  If I think I'm going to be making less next year, or if I fear I will lose my job, then I'm going to save every penny I can this year.  That kind of mentality leads to less spending and further slowing of the economy.

Less spending means the society is saving and make efficiency use of capital. Compare to the west, citizen of the east save at least 20% of their earning, low interest rate allowed the state to take on mega infrastructure project that will benefit the local citizen in the long run.


Saving is indeed wise and important.  But there's a difference between saving and hoarding.  I'm talking about the latter.  Even good savers will still spend a little money here and there on unnecessary things like going to movies or occasionally getting a new computer or smartphone.  But if everyone cuts out all those extras, it will hurt the economy.

A country is rich when its currency is strong without inflation or with deflation, low taxes, low government, free entreprise, high rate of savings and investment

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July 02, 2014, 03:38:12 PM
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The prices going down are the only good thing about a crisis; nobody complains about falling prices in energy prices or electronics; restrain for consuming because prices have been a bit lower than last year and the fact that consumers anticipate lower prices thus delay their spending is a TOTAL myth : who would delay buying gas if the price goes down by 1% or even 5%? Who would delay buying gas if he thinks the price will be 1 or 5% less in a year?? Who would delay buying anything because the price went down?? You will wait a year to buy food, a haircut, clothes, a vacation because you think it will be a bit lower in a year??
When the prices go down you are happy and richer so you buy more

Consumption is a an indirect utility function of the price meaning that consumers consume more not less when the price is lower thus they consume more when the price goes down, it has been proven each time a price has been going down


Most of your examples are necessities that have fairly inelastic demand.  Without major lifestyle changes, you still need about the same amount of gas, food, electricity, etc.  When you need to cut expenses, you generally look at optional purchases.  Can a new computer wait until next year?  Can I get by with this old car for another year?  And all of that aside, have you never waited for a sale, or a better sale than the current sale, to buy clothing or a vacation trip?  Have you never postponed filling your gas tank because prices are falling and you have a pretty good idea from experience that they will be a few cents cheaper next week (assuming you don't need to fill your gas tank every week)?

Also keep in mind that in a deflationary environment, as a whole, wages also drop along with prices (where a "drop in wages" may come in the form of job cut).  If I think I'm going to be making less next year, or if I fear I will lose my job, then I'm going to save every penny I can this year.  That kind of mentality leads to less spending and further slowing of the economy.

What about smartphones it is not a necessity but people buy more even when they know the price has been going down and is likely to go down
When the price goes up people can consume less

Salaries going down are a bad effect of a crisis and it is upset by the deflation of prices which is excellent

Technology in general, especially electronics, is always getting cheaper because of how fast it evolves.  If you want a smartphone, then yes, you eventually have to buy one, even though you know it will cost less next year.  But the question is, have you ever delayed a purchase or bought an earlier generation product because of that fact?  When I look for new computer parts (I build my own), I decide on what I want to get to meet my needs/desires.  Then I wait a little while either for a good sale or for prices to drop when the next generation comes out.  If I were really concerned about money, I'd wait even longer.  If hard economic times lead to consumers buying every other generation of a smartphone rather than every generation, that will have a significant economic impact.

As for the effects of an economic crisis, if prices and wages drop a small amount, that can be beneficial for most (with the exception of those that lose their jobs due to the crisis).  But the danger with deflation is that it's very easy to get into a deflationary death spiral.  People spend less which causes prices to drop and people to lose their jobs, which leads to less spending, lower prices, and more jobs loss, which leads to even less spending, lower prices, more jobs lost, etc.
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July 02, 2014, 03:40:32 PM
 #38

The prices going down are the only good thing about a crisis; nobody complains about falling prices in energy prices or electronics; restrain for consuming because prices have been a bit lower than last year and the fact that consumers anticipate lower prices thus delay their spending is a TOTAL myth : who would delay buying gas if the price goes down by 1% or even 5%? Who would delay buying gas if he thinks the price will be 1 or 5% less in a year?? Who would delay buying anything because the price went down?? You will wait a year to buy food, a haircut, clothes, a vacation because you think it will be a bit lower in a year??
When the prices go down you are happy and richer so you buy more

Consumption is a an indirect utility function of the price meaning that consumers consume more not less when the price is lower thus they consume more when the price goes down, it has been proven each time a price has been going down


Most of your examples are necessities that have fairly inelastic demand.  Without major lifestyle changes, you still need about the same amount of gas, food, electricity, etc.  When you need to cut expenses, you generally look at optional purchases.  Can a new computer wait until next year?  Can I get by with this old car for another year?  And all of that aside, have you never waited for a sale, or a better sale than the current sale, to buy clothing or a vacation trip?  Have you never postponed filling your gas tank because prices are falling and you have a pretty good idea from experience that they will be a few cents cheaper next week (assuming you don't need to fill your gas tank every week)?

Also keep in mind that in a deflationary environment, as a whole, wages also drop along with prices (where a "drop in wages" may come in the form of job cut).  If I think I'm going to be making less next year, or if I fear I will lose my job, then I'm going to save every penny I can this year.  That kind of mentality leads to less spending and further slowing of the economy.

What about smartphones it is not a necessity but people buy more even when they know the price has been going down and is likely to go down
When the price goes up people can consume less

Salaries going down are a bad effect of a crisis and it is upset by the deflation of prices which is excellent

Fashion do not belong to the necessity category. Consumers are being brainwashed by marketing to buy items that gives marginal benefit. And this phenomenal only occur in big city and 1st world country.


True.  Smartphones are convenient, not necessary.
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July 02, 2014, 03:55:04 PM
 #39

A country is rich when its currency is strong without inflation or with deflation, low taxes, low government, free entreprise, high rate of savings and investment

Actually, I'd say a country is rich when its people really care about one another and help each other out.  But that's a different topic. Smiley

Setting aside governmental manipulation, a country's currency is strong when its economy is doing well (generally speaking, anyway--technically, from a value standpoint, a country's currency will increase in value relative to other currencies as long as its economy is doing better than that of other countries).  As deflation and economic contraction generally go hand-in-hand, it would be hard for a country's currency to do well during deflation.
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July 02, 2014, 04:16:21 PM
 #40

Inflation is the increase of the money supply, the increase of prices is a consequence of inflation and salaries are a price

I used the word inflation in this context as overall price increases when currency is losing its purchasing power (as the word is primarily used in this sense). That is price inflation.

OK, the "new definition" of inflation is indeed the increase of prices but inflation is really the increase of the money supply

I'm not interested in nitpicking (and it seems that you are), but this "new definition" of inflation can be traced back as far as the beginning of the 20th century... Cool
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