Is deflation truly that bad for an economy?

[johnyj]

The colors in this chart are outrageously misleading. For example, you easily confuse Japan with U.S. Social Security Trust Fund, Belgium with U.S. Federal Reserve, China with U.S. Military Retirement Fund, and so on. I'm curious, is this done intentionally?

Even if you have difficulty in separating those colors, there is a reading order called clockwise

Your impression of China holding large amount of US debt is based on some statistics that showing all the foreign owners share, and that share is about one third of the total US debt

[1714287958]

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[1714287958]

1714287958

[tee-rex]

Even if you have difficulty in separating those colors, there is a reading order called clockwise

Your impression of China holding large amount of US debt is based on some statistics that showing all the foreign owners share, and that share is about one third of the total US debt

Foreigners, as of March 6, 2015, held $6.1 trillion debt which constitutes approximately 47% of the debt held by the public (or about 33% of the total U.S. national debt). But the debt held by government accounts and intragovernmental debt (about $5 trillion) are not relevant here, so we actually should compare debt held by foreign investors against the total debt held by the public.

[Realpra]

There are no historical precedent or empirical evidence of deflation being bad for the economy.

There are many historical examples of strong currencies - ie. deflationary currencies - supporting strong and growing economies.

The only example often mentioned is the US "Great Depression", however reading into the details of that the problems were caused by a lot of bad investments by banks and a drought.
When all these investments went belly up the investors fled to cash which caused price deflation.

In other words deflation was not the cause, but just a side effect.


There is no such thing as "Laws of economics" the whole field refuses to practice the scientific approach.

All money are just virtual points that mean nothing. What means something is what people are doing: Take the US, lots of banking, insurance costs and wars. Not so much education, healthcare or manufacturing.
These REAL things are why the US economy is doing badly.

If all Americans woke up from their stupidity and started doing productive things their economy would do well again - even if they burned all their money.

"Money" and "the economy" are entirely ephemeral things.

If you measure "the economy" by the monetary unit, more inflation is always the best of course... such is the stupidity of mainstream economists.


Now to really answer: Inflation means the government gets to spend most virtual points and direct the flow of resources. Deflation means that individuals get to direct the flow of points and resources.

Which spender is best for an economy? Again history shows that big bureaucratic empires are not long lasting.

In conclusion deflation improves the efficiency of the virtual points system we call "Money" - Bitcoin is deflationary once mining rewards taper off and is therefore superior to fiat.

[tee-rex]

There are no historical precedent or empirical evidence of deflation being bad for the economy.

There are many historical examples of strong currencies - ie. deflationary currencies - supporting strong and growing economies.

The only example often mentioned is the US "Great Depression", however reading into the details of that the problems were caused by a lot of bad investments by banks and a drought.
When all these investments went belly up the investors fled to cash which caused price deflation.

If you read into the history (as you pretend you did), you would have known about a train of economic crises in the second half of the 19th century, which ultimately led to the First World War. Furthermore, a drought and bad decisions by banks could not even in theory have caused an economic collapse that lasted through decades and led to yet another world war.

[Realpra]

If you read into the history (as you pretend you did), you would have known about a train of economic crises in the second half of the 19th century, which ultimately led to the First World War. Furthermore, a drought and bad decisions by banks could not even in theory have caused an economic collapse that lasted through decades and led to yet another world war.

Well if "bad decisions" is not sufficient explanation neither is "too few paper notes"

As for what bad decisions can do Mao's "great leap forward" where many resources were poured into steel production for largely no benefit directly led to millions starving.

I'm not going to argue with you or disprove all the examples you may think you have, I just wrote to say how it is.

[tee-rex]

If you read into the history (as you pretend you did), you would have known about a train of economic crises in the second half of the 19th century, which ultimately led to the First World War. Furthermore, a drought and bad decisions by banks could not even in theory have caused an economic collapse that lasted through decades and led to yet another world war.

Well if "bad decisions" is not sufficient explanation neither is "too few paper notes"

As for what bad decisions can do Mao's "great leap forward" where many resources were poured into steel production for largely no benefit directly led to millions starving.

I'm not going to argue with you or disprove all the examples you may think you have, I just wrote to say how it is.

I'm not going either. But there is a simple test. You have a collapse in aggregate demand which leads to deflation (that is, to decline in prices). How will this affect enterprise, negatively, positively, or there will be no influence at all (enterprise productivity remains the same)?

[Meuh6879]

Deflation is bad ... for gov.
Not for people. 

https://www.youtube.com/watch?v=Rmvpqq9QOUw

[picolo]

Deflation is bad ... for gov.
Not for people. 

https://www.youtube.com/watch?v=Rmvpqq9QOUw

Deflation means you can buy more with the amount of money so it is good for the people but inflation allows the governement to hide their mistakes and lie.

[johnyj]

You have a collapse in aggregate demand which leads to deflation (that is, to decline in prices). How will this affect enterprise, negatively, positively, or there will be no influence at all (enterprise productivity remains the same)?

Take 1929 for example, the collapsing aggregate demand means most of the people have become poorer, that was a direct result of the earlier inflative monetary expansion: The economy bubble attracted many people to put their money in stocks and assets and greatly increased their spending

During the last phase of bubble, banks successfully cashed out and ran away with the money (gold). The banks were reluctant to spend the gold in the following crash, since then their effort of bubble making will be erased, they'd rather sitting on their loot and quietly watching the economy collapse. That is the reason there was heavy deflation



If we have not removed gold standard, same thing would still happen during 2008 crash. But now banks can create money out of nothing, so they have a new way to deal with bubble bursting: They create money to buy everything dirt cheap during a collapse and collect even more loot, so they not only benefit from the bubble making also benefit from the bubble bursting. After each bubble and burst cycle, large amount of wealth moved to banks

[tee-rex]

You have a collapse in aggregate demand which leads to deflation (that is, to decline in prices). How will this affect enterprise, negatively, positively, or there will be no influence at all (enterprise productivity remains the same)?

Take 1929 for example, the collapsing aggregate demand means most of the people have become poorer, that was a direct result of the earlier inflative monetary expansion: The economy bubble attracted many people to put their money in stocks and assets and greatly increased their spending

Could you please cite authoritative sources about the inflative monetary expansion back then. I'm singularly curious how this is possible under the Gold Standard Act (which set de facto gold standard in the U.S., and was canceled only in 1933, that is after the Great Depression had already begun) when the U.S. dollar had been freely redeemed for gold (1 dollar per 1.5046 grams of pure gold).

[bank of bits]

If there is deflation, people will tend to hoard the money they have since the "value" of currency will increase in the coming future. This will reduce the demand of the goods drastically.

[tee-rex]

If there is deflation, people will tend to hoard the money they have since the "value" of currency will increase in the coming future. This will reduce the demand of the goods drastically.

This is yet another common misconception based on nothing but intuitive (mis)understanding. When you buy a car, it starts depreciating right after you begin driving it (in fact, it would depreciate even if you didn't drive it at all). According to your reasoning, people wouldn't buy cars and other quickly depreciating things they can happily live without.

Deflation can actually postpone consumption, but this effect will be temporary and short-lived.

[tee-rex]

If there is deflation, people will tend to hoard the money they have since the "value" of currency will increase in the coming future. This will reduce the demand of the goods drastically.

This is yet another common misconception based on nothing but intuitive (mis)understanding. When you buy a car, it starts depreciating right after you begin driving it (in fact, it would depreciate even if you didn't drive it at all). According to your reasoning, people wouldn't buy cars and other quickly depreciating things they can happily live without.

Deflation can actually postpone consumption, but this effect will be temporary and short-lived.

Deflation is not the same as depreciation.  Deflation is a decrease in the general price level.  Depreciation is the consumption of capital. 

You seem to be writing just for the sake of writing and having your word heard. What exactly do you disagree with me on? I never said that deflation is the same as depreciation, I was trying to explain the psychological motives behind human behavior, why people will still spend under deflation.

[tee-rex]

If there is deflation, people will tend to hoard the money they have since the "value" of currency will increase in the coming future. This will reduce the demand of the goods drastically.

This is yet another common misconception based on nothing but intuitive (mis)understanding. When you buy a car, it starts depreciating right after you begin driving it (in fact, it would depreciate even if you didn't drive it at all). According to your reasoning, people wouldn't buy cars and other quickly depreciating things they can happily live without.

Deflation can actually postpone consumption, but this effect will be temporary and short-lived.

Deflation is not the same as depreciation.  Deflation is a decrease in the general price level.  Depreciation is the consumption of capital. 

You seem to be writing just for the sake of writing and having your word heard. What exactly do you disagree with me on? I never said that deflation is the same as depreciation, I was trying to explain the psychological motives behind human behavior, why people will still spend under deflation.

They may continue to spend during deflation, but they spend at lower rates evidenced by the drops in velocity.

Deflation and depreciation cannot be related.  Since depreciation is consumption of capital, yet deflation is an increase of the general price level without any consumption, there is no way to relate them sensibly.

Just in case, deflation is a decrease in general price level. Depreciation means a decrease in value (just like deflation a decrease in price), what you refer to here is a narrow definition from accounting (but this is still the same concept of losing value). I think I explained it pretty well to repeat myself in respect to psychological aspects being effectively the same for both deflation and depreciation.

[tee-rex]

You seem to be writing just for the sake of writing and having your word heard. What exactly do you disagree with me on? I never said that deflation is the same as depreciation, I was trying to explain the psychological motives behind human behavior, why people will still spend under deflation.

They may continue to spend during deflation, but they spend at lower rates evidenced by the drops in velocity.

Deflation and depreciation cannot be related.  Since depreciation is consumption of capital, yet deflation is an increase of the general price level without any consumption, there is no way to relate them sensibly.

Just in case, deflation is a decrease in general price level. Depreciation means a decrease in value (just like deflation a decrease in price), what you refer to here is a narrow definition from accounting (but this is still the same concept of losing value). I think I explained it pretty well to repeat myself in respect to psychological aspects being effectively the same for both deflation and depreciation.

Yes, the typo should read "deflation" instead of "inflation", but no, depreciation as a consumption of capital is an economic theory supported by resale prices relative to purchase prices.  Accounting can only serve to approximate the sample.  Accounting is the sampling method while economics is the theoretical construct.

A change in the general price level does not even take into account consumption of investment much less represent general consumption though it does strongly lag a decrease in velocity thus consumption.

So what do you actually disagree with me on? You seem to be trying to hide the lack of thought behind the flow of words (which are irrelevant to the issue in question you are making an effort to argue against).

[Truecurrency]

If there is deflation, people will tend to hoard the money they have since the "value" of currency will increase in the coming future. This will reduce the demand of the goods drastically.

This is yet another common misconception based on nothing but intuitive (mis)understanding. When you buy a car, it starts depreciating right after you begin driving it (in fact, it would depreciate even if you didn't drive it at all). According to your reasoning, people wouldn't buy cars and other quickly depreciating things they can happily live without.

Deflation can actually postpone consumption, but this effect will be temporary and short-lived.

Deflation is not the same as depreciation.  Deflation is a decrease in the general price level.  Depreciation is the consumption of capital.  

You seem to be writing just for the sake of writing and having your word heard. What exactly do you disagree with me on? I never said that deflation is the same as depreciation, I was trying to explain the psychological motives behind human behavior, why people will still spend under deflation.

They may continue to spend during deflation, but they spend at lower rates evidenced by the drops in velocity.

Deflation and depreciation cannot be related.  Since depreciation is consumption of capital, yet deflation is an increase of the general price level without any consumption, there is no way to relate them sensibly.

Just in case, deflation is a decrease in general price level. Depreciation means a decrease in value (just like deflation a decrease in price), what you refer to here is a narrow definition from accounting (but this is still the same concept of losing value). I think I explained it pretty well to repeat myself in respect to psychological aspects being effectively the same for both deflation and depreciation.

tee-rex, you're wrong buddy. Deflation does increase hoarding and lack of incentive to spend money. As others have said, deflation alone is bad for an economy. Also depreciation is not the same as Deflation....where are you getting this stuff from?

[tee-rex]

Deflation is not the same as depreciation.  Deflation is a decrease in the general price level.  Depreciation is the consumption of capital.  

You seem to be writing just for the sake of writing and having your word heard. What exactly do you disagree with me on? I never said that deflation is the same as depreciation, I was trying to explain the psychological motives behind human behavior, why people will still spend under deflation.

They may continue to spend during deflation, but they spend at lower rates evidenced by the drops in velocity.

Deflation and depreciation cannot be related.  Since depreciation is consumption of capital, yet deflation is an increase of the general price level without any consumption, there is no way to relate them sensibly.

Just in case, deflation is a decrease in general price level. Depreciation means a decrease in value (just like deflation a decrease in price), what you refer to here is a narrow definition from accounting (but this is still the same concept of losing value). I think I explained it pretty well to repeat myself in respect to psychological aspects being effectively the same for both deflation and depreciation.

tee-rex, you're wrong buddy. Deflation does increase hoarding and lack of incentive to spend money. As others have said, deflation alone is bad for an economy. Also depreciation is not the same as Deflation....where are you getting this stuff from?

Hey, man, did you read the post where I explained it all? Depreciation is not the same as deflation, I'm curious beyond myself how you could get my point this way. But if you, nevertheless, got it so, then you obviously have not understood a single bit of what I had written about. Deflation works the same way as depreciation, psychologically, that's why postponement in consumption due to deflation per se will only be temporary and short-termed (I don't mean here an aggregate demand collapse which caused deflation, to clarify this point beforehand).

Actually, it was me who had shown here why precisely deflation is bad for the economy.

[johnyj]

You have a collapse in aggregate demand which leads to deflation (that is, to decline in prices). How will this affect enterprise, negatively, positively, or there will be no influence at all (enterprise productivity remains the same)?

Take 1929 for example, the collapsing aggregate demand means most of the people have become poorer, that was a direct result of the earlier inflative monetary expansion: The economy bubble attracted many people to put their money in stocks and assets and greatly increased their spending

Could you please cite authoritative sources about the inflative monetary expansion back then. I'm singularly curious how this is possible under the Gold Standard Act (which set de facto gold standard in the U.S., and was canceled only in 1933, that is after the Great Depression had already begun) when the U.S. dollar had been freely redeemed for gold (1 dollar per 1.5046 grams of pure gold).

Monetary expansion comes mostly from fractional reserve banking, it does not need the increase in base money. Under a gold standard the base money is very stable, and if you look at base money before 2008, it was also very stable, grew a couple of percent per year

A credit bubble is created by lending out the same money again and again. You suddenly have lots of assets with high market price, then at certain stage, people will definitely want to cash out the gain, only find out that the real money that banks have is only a fraction of the assets total value, so the banks will face a bank run when large scale of cashing out happens

[dinofelis]

They may continue to spend during deflation, but they spend at lower rates evidenced by the drops in velocity.

Velocity is not a measure of consumption rate.  It is a measurement of the average velocity of a single unit of currency (as you know !).

If the money supply is large, and prices are low (deflation !), you can consume just as much with lower velocity.  It doesn't mean that consumption has lowered at all.

Consider this:

There are 100 eggs and 100 apples produced in a toy economy, and there are 10 shinkels.  If velocity is 10, then an apple and an egg will cost half a shinkel.
Q = 100 eggs and 100 apples (equivalent value) = 200
P = 0.5

P Q = 100

M = 10
V = 10

M V = 100.

Now, horror, deflation.  It turns out that the price of an egg drops to 0.25 and the price of an apple too.  Velocity drops from 10 to 5.

What happened ?

P Q = 50 (100 eggs and 100 apples)

M V = 50.

There's no decrease in consumption: 100 eggs and 100 apples have been produced still, and consumed still.  Velocity came down.  Price level came down. So to support this identical consumption, a smaller money flow was NEEDED.  No problem.  Why did the velocity come down ?  Maybe because people were formerly holding sea shells as store of value, and now they traded it to keep money.  There was a shift in the store of value market.   Who knows ?

But velocity has nothing to do with consumption rate a priori.

[dinofelis]

Deflation works the same way as depreciation, psychologically, that's why postponement in consumption due to deflation per se will only be temporary and short-termed (I don't mean here an aggregate demand collapse which caused deflation, to clarify this point beforehand).

Indeed, and as has been shown with i-phones and personal computers now since long, people don't mind paying MORE right now, rather than wait and spend less later.  They want it NOW, even if they could get it much cheaper next year.

So the myth of postponing consumption because of price decrease is simply that: a myth.  People don't postpone consumption because of projected or real price decrease of the *same* item next year.  Nevertheless, this basic assumption needs to be made to "prove" decrease in consumption due to deflation.

Actually, what happens is that historically, one finds *correlations* and one assigns cause and effect the other way around.  Deflation can be a consequence of consumption decrease.  It is not its origin.

Like having a Rolex on one's arm is a consequence of being rich, and not the origin of being rich.  It is not because you put a Rolex on your wrist that you suddenly became rich.  Nevertheless, there's a strong correlation between people being rich and people wearing Rolex.