Is deflation truly that bad for an economy?

[D05GTO]

Wait while I fall out on the floor.  Lambchop just suggested to buy Bitcoins and hold it in your trezor!   

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[NotLambchop]

Wait while I fall out on the floor.  Lambchop just suggested to buy Bitcoins and hold it in your trezor!   

Threadstalking me again?  That's just creepy, bro
Besides, don't you Bitcoiners like your prey a little younger?

Why do you keep doing it, Bitcoiners?  

[D05GTO]

What??? oh yeah still on ignore   haha

[Wekkel]

...
I would really like people to finally put the non-argument...

Whelp, calling an argument you can't counter "non-argument" seems like a good start.

Would you seriously argue that someone will not purchase a car because he expects it to be 2% cheaper next year?
And what about the next year: again no purchase due to the same reason?

Asking the question is answering it. It's really a non-argument.

Would I put off buying a fleet of new cars for my company if cars depreciated more substantially?  The answer is "obviously yes."

So you would never ever buy new cars for your company (and why did you purchase cars at all: remember, the fallacy argument is that such purchase is (forever) postponed).

[johnyj]

It depends on the person

From a consumer's point of view, deflation stimulate spending, since his money now have more value, he can buy more things. Inflation will stimulate saving, since his money can buy less things and he will save the money to buy more important things

From an investor point of view, deflation will increase his cash holding, and inflation will increase his investment and asset holding

So, for a consumer driven economy like US, deflation is good; for an investment driven economy like China, inflation is good

[dinofelis]

Depends on the cause of the deflation. Deflation due to a collapse in aggregate demand is bad. Deflation due to an increase in aggregate supply is good, at least in a healthy economic system. Any deflation is bad in the current system because there's way too much debt.

This sums it up better for me than the countless numbers of posts on this topic. A little monetary deflation is just the opposite of a little monetary inflation. Nothing dramatic.

I would really like people to finally put the non-argument of people postponing purchasing of goods due to falling prices to rest. No one has unlimited time on this planet so no one is going to walk for another year (and then again as in perpetuity) because a car would be 2% cheaper the next year.

We deserve better thinking.

Indeed !  The non-argument is easily wiped from the table when you look at one of the biggest markets on earth: consumer electronics.  You know that the i-phone you spend a fortune on today will cost much less next year when the newer model will come out.  Nevertheless, people cue in front of an Apple store to be the first to buy it at high prices when it comes available.
We've seen the same effect in the personal computer market for 2 or 3 decades now.  People want to consume here and now, even if it will be WAY cheaper next year, for the same, or even a better product.

Nobody will delay much of his consumption because it will be 2% cheaper next year.

But a little deflation has a HUGE advantage over a little inflation: you do not need a bank any more if you want a modest interest rate on money.  You can just KEEP it.  A little deflation is a disaster for banksters, who are supposed to distribute part of the seigniorage that comes with the money printing necessary to sustain inflation in a growing economy. 

What is problematic though (and especially for banksters) is that in a slightly inflationary system, you have an advantage if you live on debt.  If suddenly the rules change, and you find yourself indebted in a deflationary system where the debt is expressed in the monetary asset that deflates (that rises in price), then you are in deep shit too.

So a little deflation (which you get on average with a supply stable currency) would avoid having a huge amount of banksters and be good for the economy simply because of that (all the resourses spend on banking can now go to do productive stuff) ; but a sudden change from inflation to deflation will make more than one go bankrupt, because of the debt spiral in which he finds himself.

People say that in a deflationary system there can be no loans.  But that is not true of course.  Only, loans will have only very small interest rates.  A zero-interest rate loan will cost the debtor a real interest rate of the order of the growth of the economy (= the deflation rate).  Indeed, if he borrows 1000 shinkels today, and will have to pay back 1000 shinkels in 2 years, then those 1000 shinkels to pay back can buy about 4% more (assuming a deflation rate of 2%) than what he borrowed.  He has to earn about 4% more value to pay back the loan.  In fact, that would be a normal return on investment: if you have your average Joe investment, you should at least produce the average economic growth on the capital, otherwise you better do something else, if people on average can have that ROI.

Point is, nobody is going to lend you 1000 shinkels to get 1000 shinkels back in 2 years, with the counterparty risk.  If you have 1000 shinkels, you will just KEEP them.  So if you lend out 1000 shinkels, you want to get somewhat more back, at least to cover the counterparty risk. 

Which means that the borrower will have to have a higher-than-average ROI on the capital borrowed, in order to be able to pay back the loan.  Which is a good thing.  It means that people will only invest in "over-the-average" return activities.

In as much as this would slow down the economy, it would also slow down the (average) deflation, and as such, it would automatically lower the effective interest rate (which is the asked interest rate, plus the deflation rate). 

It would stop encouraging people to invest with debt in lower-than-average efficient economical activities, and as such prevent misallocation of resources, which is the big problem with an inflationary system.  There would still be debt, but much less, and only debt that has a high potential for investment and return.
 
Which would be the big disaster for banksters.

[NotLambchop]

...
Would I put off buying a fleet of new cars for my company if cars depreciated more substantially?  The answer is "obviously yes."

So you would never ever buy new cars for your company (and why did you purchase cars at all: remember, the fallacy argument is that such purchase is (forever) postponed).

[img width]http://doctorfeelgood.co.nz/wp-content/uploads/2014/06/spock-illogical.jpg[/img]

Of course I would buy new cars.  I just wouldn't buy as many cars in my lifetime as I would if the money I held was going to be worth less next year.
Let's say I live for a hundred years.  In that time, my dealer could sell me 2 cars, or 200.  Which do you suppose he'd like more?

Getting back to something more realistic & my company's fleet: It could be replaced every 3 years, or every 4.  Or every 5.  Yes, I would buy new cars, but not as often.  Get it?  

Now asking a Bitcoiner to read an entire post in one go is mean and unreasonable, so read the text below again.
Bonus: see if you've missed anything.

...
Would I put off buying a fleet of new cars for my company if cars depreciated more substantially?  The answer is "obviously yes."
No one is talking about necessities, like morning coffee.  I don't care if I have to pay double @ 7am for the same cup I could buy for its regular price @ 7pm.  Don't extrapolate from this that I don't care about saving money, and that 200% daily deflation would not alter my buying habits.

My turn:
Would you invest in car company stock that nets 2% a year, knowing that keeping your money in your mattress Trezor would be both safer & net the same end result?

Now, if you still feel that you've made a cogent argument, keep rereading until that feeling goes away.
You're welcome.

[johnyj]

It depends on the person

From a consumer's point of view, deflation stimulate spending, since his money now have more value, he can buy more things. Inflation will stimulate saving, since his money can buy less things and he will save the money to buy more important things

From an investor point of view, deflation will increase his cash holding, and inflation will increase his investment and asset holding

So, for a consumer driven economy like US, deflation is good; for an investment driven economy like China, inflation is good

A relatively small yet sharp deflation in 2008 gave the US the worst recession since the Great Depression.

Inflation is hurting China.  That and a closed credit market makes investment except in real estate and hot money impossible.  They would do well to abandon the yuan for a price stable alternative and to open the credit market to foreign investment.  They will have to deal with the endless ghost cities first.  Frozen bank accounts of the poor should do it, that or accept a counter-revolution.

For an inflation based economy, deflation is kill, just like penicillin to bacteria

The deflation in 2008 is a cure for the disease that US has caught since 1971, however the bacteria has not been killed, they kidnap the whole world by printing more money

The slaveholders were sick, and the king decided to have all the slaves voluntarily double their work for free to make them recover from the disease.

The interesting thing is, the slavery is not intended, but a natural result of countless human's selection over hundreds of years, all the other solutions had been unstable and abolished (like gold standard), is it a human nature to prefer slavery over instability?

[D4C]

It means people won't buy anything. Why buy something worth $ 200 today when you can get it tomorrow for $175. People don't buy, business go bankrupt and people lose their jobs. No jobs=no economy since there is no demand and now you have to inject a fortune to get it rolling again.

[V for Varoufakis]

Just remember the deflationary crises of the 19th century.

[Maegfaer]

It means people won't buy anything. Why buy something worth $ 200 today when you can get it tomorrow for $175. People don't buy, business go bankrupt and people lose their jobs. No jobs=no economy since there is no demand and now you have to inject a fortune to get it rolling again.

Do you realize that your example has 12.5% deflation, per day? That's hyper deflation, not normal deflation. Rephrase that example to: "Would you buy something for 200$ today if you can get it for 196$ next year?" (2% deflation per year).

[tee-rex]

We are being told deflation is bad for our economies and this is used as excuse from our central banks to print more money and destroy our savings/currencies. What they say is that in a deflationary environment, the price of goods falls so people would not buy anything and would rather wait to buy in future, therefore slowing the economy. If so why smartphones sell like hot cakes? their price is falling and people are buying them actually because of that. Maybe because each time the price decreases customers feel like they are getting a good deal, therefore are prompted to buy!!

Don't know if the smartphone prices are actually falling (apart from the obsolete models, of course), but if this is really the case, then we see technological innovation and competition at work driving the prices down. Regarding people not buying anything, you evidently don't see the whole picture. What matters more here is producers' profits decline, which is the primary cause of the drop in demand (in the majority of cases, at least).

[Allurestorm]

Debt shouldn't be the only way to raise funds to start a company..with cryptocurrencies hopefully it will become easier for everybody to issue shares and fund a company without having to make debts. It would force people to make good business plans (otherwise nobody would join their project) plus if you were to own shares of a supermarket in your neighborhood I'm sure you would try to shop always there. However this cannot work if there is not some sort of regulation/supervision. Unfortunately people are always looking for ways to scam others so somebody has to supervise.

[tee-rex]

Debt shouldn't be the only way to raise funds to start a company..with cryptocurrencies hopefully it will become easier for everybody to issue shares and fund a company without having to make debts. It would force people to make good business plans (otherwise nobody would join their project) plus if you were to own shares of a supermarket in your neighborhood I'm sure you would try to shop always there. However this cannot work if there is not some sort of regulation/supervision. Unfortunately people are always looking for ways to scam others so somebody has to supervise.

In fact, taking debt is not that bad in the long run. In both cases (taking debt vs issuing shares) you will have to share some of your profits, but in the former case you pay out the debt and are done with it while in the latter case you are stuck paying out indefinitely long.

[picolo]

We are being told deflation is bad for our economies and this is used as excuse from our central banks to print more money and destroy our savings/currencies. What they say is that in a deflationary environment, the price of goods falls so people would not buy anything and would rather wait to buy in future, therefore slowing the economy. If so why smartphones sell like hot cakes?their price is falling and people are buying them actually because of that. Maybe because each time the price decreases customers feel like they are getting a good deal, therefore are prompted to buy!!
If our economies are not growing it means that there isn't much inflation pressure, so I don't see any reason to artificially induce inflation by destroying our currencies. I would like to know your view on that..also do you think bitcoins (deflationary) will see a wider adoption by retailers in future?

Peope don't delay their spending because they think the price is going to go down a litlle bit or they would not buy iphones that will go down 50% in price in a year or they wouldn't buy as much with their credit cards. Deflation is good for the consumer but deflation happens during a drepression and when there is a lack of demand so it is sometimes associated with it but it is a consequence of the lack of demand not a cause.

[Maegfaer]

deflation happens during a drepression and when there is a lack of demand so it is sometimes associated with it but it is a consequence of the lack of demand not a cause.

Yes, but it's not the only possible cause. It's also possible to have deflation due to an increase in aggregate supply. Then it's benign deflation. So whether deflation is good or bad depends on the underlying cause of deflation. Obviously a collapse in aggregate demand is bad.

The relevant questions concerning this topic are:

• In the current economic system, can central banks effectively combat deflation due to collapses in aggregate demand? Are quantitative easing and zero/negative interest rate policies real solutions or does it just kick the can down the road?
• What are typical causes of collapses in aggregate demand?
• In an economy with a fixed supply of money, is a continued collapse in aggregate demand (deflationary spiral) inevitable?

[tee-rex]

deflation happens during a drepression and when there is a lack of demand so it is sometimes associated with it but it is a consequence of the lack of demand not a cause.

Yes, but it's not the only possible cause. It's also possible to have deflation due to an increase in aggregate supply. Then it's benign deflation. So whether deflation is good or bad depends on the underlying cause of deflation. Obviously a collapse in aggregate demand is bad.

The relevant questions concerning this topic are:

• In the current economic system, can central banks effectively combat deflation due to collapses in aggregate demand? Are quantitative easing and zero/negative interest rate policies real solutions or does it just kick the can down the road?
• What are typical causes of collapses in aggregate demand?
• In an economy with a fixed supply of money, is a continued collapse in aggregate demand (deflationary spiral) inevitable?

In the current economic system, can central banks effectively combat deflation due to collapses in aggregate demand?

Don't know what you mean by the current economic system (there are many in this context), but yes, they can, provided the economy you refer to is not built on debt. Otherwise, they can try to "restart" the economy through effectively writing off the existing debt (what they seem to be doing).

What are typical causes of collapses in aggregate demand?

There is a story of economic cycles, the longest of which (but not limited to) are associated with the so-called technological paradigm shifts (e.g. transition from manual to mechanized labor).

In an economy with a fixed supply of money, is a continued collapse in aggregate demand (deflationary spiral) inevitable?

Not necessarily, it also greatly depends on the money velocity, the increase in which can potentially make up for the decline in the aggregate demand. Though this doesn't happen in reality.

[johnyj]

All of these problem of deflation is based on one assumption that fiat money's value is constant, and it is used as a benchmark of value, which is not true

For example, when you see a house's price going up and everything else's price keep the same, you think it is the house become more valuable. But the reality is your dollar worth less and everything else also worth less against that house

Why people stubbornly use fiat money as a benchmark of value, like using meter to measure length and using minute to measure time?

If you give up the belief of absolute value of currency, then all the claimed problems of deflation will disappear: When price of something drops, the purchasing power of the currency is increasing, means productivity is higher thus everything become more and cheaper, people will spend more, just like when bitcoin reached $1200, the amount of spent bitcoin is highest

On enterprise side, although the amount of currency they earn decreased, but currency appreciated, their real income will increase, salary become cheaper, they could hire more people and drive larger projects. This also happened when bitcoin price reached $1000+, lots of projects were setup back then

So, the claim of deflation's negative impact is just based on a stubbornly hold belief that currency is a benchmark of value. In fact the whole modern monetary theory is constructed on this blind belief

[tee-rex]

All of these problem of deflation is based on one assumption that fiat money's value is constant, and it is used as a benchmark of value, which is not true

For example, when you see a house's price going up and everything else's price keep the same, you think it is the house become more valuable. But the reality is your dollar worth less and everything else also worth less against that house

Why people stubbornly use fiat money as a benchmark of value, like using meter to measure length and using minute to measure time?

If you give up the belief of absolute value of currency, then all the claimed problems of deflation will disappear: When price of something drops, the purchasing power of the currency is increasing, means productivity is higher thus everything become more and cheaper, people will spend more, just like when bitcoin reached $1200, the amount of spent bitcoin is highest

On enterprise side, although the amount of currency they earn decreased, but currency appreciated, their real income will increase, salary become cheaper, they could hire more people and drive larger projects. This also happened when bitcoin price reached $1000+, lots of projects were setup back then

So, the claim of deflation's negative impact is just based on a stubbornly hold belief that currency is a benchmark of value. In fact the whole modern monetary theory is constructed on this blind belief

A post full of misconceptions and delusions. Just a few notes below:

If you give up the belief of absolute value of currency, then all the claimed problems of deflation will disappear: When price of something drops, the purchasing power of the currency is increasing, means productivity is higher thus everything become more and cheaper

Productivity, as per Wikipedia, is "an average measure of the efficiency of production. It can be expressed as the ratio of output to inputs [emphasis added] used in the production process, i.e. output per unit of input". As both output and input can be expressed in money terms, the money is effectively taken out of the equation, therefore the increase in the purchasing power has nothing to do with productivity.

Strictly speaking, it is not so simple, but your reasoning actually works against your assumption, i.e. it can be said that with the increase in purchasing power productivity is decreasing (since producers make less profit and can actually suffer losses).

just like when bitcoin reached $1200, the amount of spent bitcoin is highest

Yes, people got rid of their bitcoins in every possible way (probably the only chance in our lifetime at such rates). And don't confuse speculation with consumption, which would most likely account for the increase in bitcoin turnover, if it did happen at all.

On enterprise side, although the amount of currency they earn decreased, but currency appreciated, their real income will increase, salary become cheaper, they could hire more people and drive larger projects. This also happened when bitcoin price reached $1000+, lots of projects were setup back then

In real life, producers' profits may turn negative due to decreased prices. But negative is negative, and you can't do anything about it, deflation or not. What you say is probably the most common mistake people make when they discuss deflation "on enterprise side". In short, deflation is not a mirror reflection of inflation (as many erroneously believe).

[tabnloz]

Apologies, havent read the whole thread, so this may have been mentioned.

Deflation is good for regular people, savers etc provided they keep their employment. Bad for govts because falling prices are not taxable. If wages stay stagnant yet prices go down, it's effectively a pay rise.

Inflation; Good for govts as debts gets smaller as everything inflates. This is what the CB's of the world are chasing. They'll never be able to pay their debts, and don't plan to anyway, but inflation knocks the relative size off the debt pile. Inflation usually comes with a wage increase, govts get more tax receipts.

The 'deflationary spiral' is the thing people fear about deflation, although it is much like the Bogeyman; theorized about but never spotted