Is deflation truly that bad for an economy?

[tee-rex]

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.

Deflation caused by the contraction in aggregate demand is always damaging to the employment. And this impact is twofold. First and most obvious, producers have to cut production (i.e. the number of employees) due to less demand for their goods. Secondly, the decrease in prices leads to shortening profit margins, which, per se, is more damaging to large-scale production enterprises that earn profit through volume (and where the number of persons employed is higher). This way more companies go belly up, and consequently more people are laid off.

[dinofelis]

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.

But this is exactly contradicted by the observation that people are willing to spend a night before an Apple shop to buy an i-phone 5 when it came out, while if they waited for a year, they would have gotten that same i-phone 5 for much less money (namely when the i-phone 6 came out).

So this myth is empirically not true.

And not just for i-phones.  It has been true for the personal computer market since about 3 decades.  The SAME product in the computer market devaluates like hell, and nevertheless it is part of the biggest industry (consumer electronics) on this planet.  If you go to the supermarket, and you look up the price of a specific computer NOW, and you look at its price 6 months from now, you will see that it has lowered in price (simply because more performing machines came out).  So, according to this myth, NOBODY would buy computers, because they will be cheaper 6 months from now.  That is NOT what is observed, on the contrary.

So this "people will stop buying because it would be cheaper for them to buy the same thing 6 months from now" is simply NOT TRUE.

And that kills the main argument for "inflation is needed for people to spend stuff and deflation will kill consumption".

[dinofelis]

Don't know if the smartphone prices are actually falling (apart from the obsolete models, of course)

But that is exactly the whole point !!  Why would you buy an i-phone 6 TODAY, when you can buy that SAME i-phone 6 next year for less money (when the i-phone 7 will come out) ?

Because THAT is the anti-deflationary argument: people won't buy stuff TODAY because the SAME STUFF will be cheaper tomorrow.  (not newer and better stuff, the SAME stuff).  Well, we observe empirically that this is simply NOT TRUE.

Why did people buy personal computers when they knew that 3 years later, they could have gotten a machine with similar performance for a much lower price ?

[tee-rex]

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.

But this is exactly contradicted by the observation that people are willing to spend a night before an Apple shop to buy an i-phone 5 when it came out, while if they waited for a year, they would have gotten that same i-phone 5 for much less money (namely when the i-phone 6 came out).

So this myth is empirically not true.

And not just for i-phones.  It has been true for the personal computer market since about 3 decades.  The SAME product in the computer market devaluates like hell, and nevertheless it is part of the biggest industry (consumer electronics) on this planet.  If you go to the supermarket, and you look up the price of a specific computer NOW, and you look at its price 6 months from now, you will see that it has lowered in price (simply because more performing machines came out).  So, according to this myth, NOBODY would buy computers, because they will be cheaper 6 months from now.  That is NOT what is observed, on the contrary.

So this "people will stop buying because it would be cheaper for them to buy the same thing 6 months from now" is simply NOT TRUE.

And that kills the main argument for "inflation is needed for people to spend stuff and deflation will kill consumption".

There is deflation caused by the increase in productivity and technological innovations (consumer electronics as the most obvious example), and there is deflation caused by the contraction in consumption. In the latter case the phrase "deflation will kill consumption" makes no sense, since deflation is an effect, not a cause. I hope this won't be a matter of dispute.

[V for Varoufakis]

All financial crises in history, made by deflation.

[tee-rex]

All financial crises in history, made by deflation.

Not necessarily, the insane financial policies, leading to a run-away inflation in the total majority of cases, also take their toll, like the incessant train of money devaluations in Zimbabwe.

[NotLambchop]

...
Because THAT is the anti-deflationary argument: people won't buy stuff TODAY because the SAME STUFF will be cheaper tomorrow...

No, it's a straw man; refuted ad nauseum by the likes of stormfront.org, mises.org, zerohedge, MyBeanieFortune and other beacons of economic learnings & light on the interweb.

[ffe]

...
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

By this argument inflation is irrelevant since inflation's "negative impact is just based on a stubbornly held belief that currency is a benchmark of value".

By this argument all the "benefits" of deflation are an illusion.

The observable fact is that the adjustment from mild inflation to mild deflation is painful. People lose jobs because both employees and employers do not reduce salaries fast enough and loans are paid off in fixed amounts and end up sucking more resources than expected to pay off and therefore reducing investment.

The ironic thing is you are right that, theoretically, the value of money does not matter and is quite arbitrary. It's the unforeseen changes in the rate of change of money value that causes problems. Steady is best. You can write contracts (loans and employment contracts) that take a steady %2 inflation or a %2 deflation into account.

So, given that we were at %2 inflation, why not just leave it there since contracts already take that into account? Why call for unneeded pain by calling for switching to a currency with deflation when the benefits are an illusion?

[johnyj]

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).

Increased productivity means less value for produced goods, since the supply increased and demand does not change, this is the basic economy 123

Output and input should not be expressed in currency, since the currency's value is changing all the time (Ruble dropped 50% against USD in a year, is that mean Russian's productivity suddenly doubled?)

In fact, there is no good way to measure the value, fiat money usually were used as an approximation, the precision of this approximation is about +-20%, any deflation or inflation is much lower than that scale, the pro-inflation talk can be regarded as an excuse for banks to print more money for themselves to spend

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.

Speculation is also part of the economy, and in fact majority of today's economy is driven by speculation on assets, all of the newly created money directly goes to assets, not consumption, it is also the speculation of those assets caused the financial crisis

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).

Again, it is a common mistake by economists to use currency as an absolute measure of value. But I understand that it is extremely difficult for them to understand that currency's value fluctuates all the time, since they have been using currency to measure value since they barely can do 1+1. If they start from an international point of view by looking at FOREX market, then they will understand that currency's stable value is just an illusion. Get rid of that illusion, then people will not look at the numbers in their account to decide if they are profitable or not, they will look at what they really gain from a certain economy activity

[johnyj]

...
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

By this argument inflation is irrelevant since inflation's "negative impact is just based on a stubbornly held belief that currency is a benchmark of value".

By this argument all the "benefits" of deflation are an illusion.

The observable fact is that the adjustment from mild inflation to mild deflation is painful. People lose jobs because both employees and employers do not reduce salaries fast enough and loans are paid off in fixed amounts and end up sucking more resources than expected to pay off and therefore reducing investment.

The ironic thing is you are right that, theoretically, the value of money does not matter and is quite arbitrary. It's the unforeseen changes in the rate of change of money value that causes problems. Steady is best. You can write contracts (loans and employment contracts) that take a steady %2 inflation or a %2 deflation into account.

So, given that we were at %2 inflation, why not just leave it there since contracts already take that into account? Why call for unneeded pain by calling for switching to a currency with deflation when the benefits are an illusion?

Exactly, if you get rid of the illusion of stable value of currency, then all the talks about inflation or deflation will be dismissed. In fact, even if you use currency as benchmark of value, in a same day, something's price is going down and some other things' price is going up, inflation and deflation happens at all levels at the same time in the economy due to supply and demand change, it does not matter

But saying that deflation will destroy job and create recession is some kind of political campaign: Banks want to create more money for themselves, so they prefer an inflative model, so they first inflate it and then stop printing and crash the economy, and tell people that deflation is bad, so that they could print more money for themselves. Considering that FED has successfully printed money of future 30 years and handed them to commercial banks, the success of this political campaign is enormous

If the mainstream economists insists on a deflative model, the world will be a totally different world, at least banks won't get a chance to rob during a financial crisis, and there would never have been a financial crisis in the first place

[tee-rex]

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).

Again, it is a common mistake by economists to use currency as an absolute measure of value. But I understand that it is extremely difficult for them to understand that currency's value fluctuates all the time, since they have been using currency to measure value since they barely can do 1+1. If they start from an international point of view by looking at FOREX market, then they will understand that currency's stable value is just an illusion. Get rid of that illusion, then people will not look at the numbers in their account to decide if they are profitable or not, they will look at what they really gain from a certain economy activity

I have just one question. What are you as a producer going to do with negative profit, i.e. a loss that you may incur as a result of decreasing prices? Remember that you have to pay wages from your income, and your employees don't care about your ideas (absolute measure of value and all that) but love cash.

[Maegfaer]

So, given that we were at %2 inflation, why not just leave it there since contracts already take that into account? Why call for unneeded pain by calling for switching to a currency with deflation when the benefits are an illusion?

I disagree that there are no benefits. The currency would be a better store of value for one.

Also, we want a different economic system, one that is more free and more sustainable, where common people don't become debt slaves en masse and the banking pyramid doesn't rob people en masse. Where the main currency isn't money by decree of government but by choice of the majority of individuals.

If people are going to pick a currency themselves they're probably not going to pick one that constantly devalues. It's nice to be able to have savings in money that doesn't vaporize over time.

[Maegfaer]

I have just one question. What are you as a producer going to do with negative profit, i.e. a loss that you may incur as a result of decreasing prices? Remember that you have to pay wages, and your employees don't care about your ideas but love cash.

If in your example there would be deflation due to an increase in aggregate supply then you're simply failing as a company to keep up with the rest of the economy, since apparently your company's increase in productivity did not match the economy's average.

If on the other hand in your example deflation is due to a collapse in aggregate demand, then yes, the company has a problem.

[NotLambchop]

...
If people are going to pick a currency themselves they're probably not going to pick one that constantly devalues. It's nice to be able to have savings in money that doesn't vaporize over time.

So...  Looking at 2014 & 2015... Bitcoin's knda out, right?

But hey, you're free to pick whichever currency you want--Bitcoin, Doge, BTCeanies.
Sadly, others are also free to not take you seriously, and guilelessly laugh in your face as you try to buy things from them (using your coin of choice).

[tee-rex]

I have just one question. What are you as a producer going to do with negative profit, i.e. a loss that you may incur as a result of decreasing prices? Remember that you have to pay wages, and your employees don't care about your ideas but love cash.

If in your example there would be deflation due to an increase in aggregate supply then you're simply failing as a company to keep up with the rest of the economy, since apparently your company's increase in productivity did not match the economy's average.

If on the other hand in your example deflation is due to a collapse in aggregate demand, then yes, the company has a problem.

I thought it was evident that we were discussing here deflation due to aggregate demand contraction. I guess many have an intuitive assumption that company profits would be decreasing in proportion to the decrease in prices of the goods the company sells (hence comes the idea that their real income will increase despite the drop in prices).

This is flat-out wrong.

[johnyj]

Again, it is a common mistake by economists to use currency as an absolute measure of value. But I understand that it is extremely difficult for them to understand that currency's value fluctuates all the time, since they have been using currency to measure value since they barely can do 1+1. If they start from an international point of view by looking at FOREX market, then they will understand that currency's stable value is just an illusion. Get rid of that illusion, then people will not look at the numbers in their account to decide if they are profitable or not, they will look at what they really gain from a certain economy activity

I have just one question. What are you as a producer going to do with negative profit, i.e. a loss that you may incur as a result of decreasing prices? Remember that you have to pay wages from your income, and your employees don't care about your ideas (absolute measure of value and all that) but love cash.

Indeed, if you use cash as unit of value, you will have this problem. And Keynes said that people prefer a rising cash income and rising price over a dropping cash income and dropping price. It is this basic instinct make inflative monetary policy seems reasonable

The problem is, in today's inflation based model, most of the new money do not enter economy as increased projects and salary, those money were used to buy assets and debt, which makes majority of people poorer

However, if new money can not be created at ease, and money becomes more valuable over time, business can still profit if there is demand

Take a bitcoin mining business for example, a mining rig of 2000W power now generate far less bitcoin income than 2011, but as a thumb of rule, the mining operation still roughly holds a line of 6 months return on investment (btc wise), regardless of bitcoin's exchange rate. And now the whole mining industry is making much more income than 2011, they are building larger sites, hiring more people. Those employees have much less bitcoin income comparing to 2011 due to the rise of bitcoin's exchange rate, but their purchasing power increased due to the overall industry is expanding. The reason is simply because the market demand is increasing at a fast pace, it is the market demand, not money supply, decide if a business is profitable or not

On the other hand, during 2014, mining rig price dropped as a result of contraction of aggregate demand, but that is a important sign of market telling you that now demand is weak, you must scale down the supply. Artificially increase the demand by printing more money does not change the fact that now aggregate demand is lower: When you are tired, you should sleep, instead of drinking more coffee. Luckily, bitcoin has a fixed daily supply, so the only way to adjust to shrinking demand is to drop its price and scale down the mining operation, everything worked as it should

[tee-rex]

Again, it is a common mistake by economists to use currency as an absolute measure of value. But I understand that it is extremely difficult for them to understand that currency's value fluctuates all the time, since they have been using currency to measure value since they barely can do 1+1. If they start from an international point of view by looking at FOREX market, then they will understand that currency's stable value is just an illusion. Get rid of that illusion, then people will not look at the numbers in their account to decide if they are profitable or not, they will look at what they really gain from a certain economy activity

I have just one question. What are you as a producer going to do with negative profit, i.e. a loss that you may incur as a result of decreasing prices? Remember that you have to pay wages from your income, and your employees don't care about your ideas (absolute measure of value and all that) but love cash.

Indeed, if you use cash as unit of value, you will have this problem. And Keynes said that people prefer a rising cash income and rising price over a dropping cash income and dropping price. It is this basic instinct make inflative monetary policy seems reasonable

So you deem that laying off people and closing business is an issue arising from people (or economy as whole) using cash as unit of value? In other words, it is human nature that is at fault here, and deflation would be good if people were not what they are?

I remember you saying quite the contrary earlier. Did you finally understand that "on enterprise side" deflation (due to demand collapse) is a bad thing?

[picolo]

Again, it is a common mistake by economists to use currency as an absolute measure of value. But I understand that it is extremely difficult for them to understand that currency's value fluctuates all the time, since they have been using currency to measure value since they barely can do 1+1. If they start from an international point of view by looking at FOREX market, then they will understand that currency's stable value is just an illusion. Get rid of that illusion, then people will not look at the numbers in their account to decide if they are profitable or not, they will look at what they really gain from a certain economy activity

I have just one question. What are you as a producer going to do with negative profit, i.e. a loss that you may incur as a result of decreasing prices? Remember that you have to pay wages from your income, and your employees don't care about your ideas (absolute measure of value and all that) but love cash.

Indeed, if you use cash as unit of value, you will have this problem. And Keynes said that people prefer a rising cash income and rising price over a dropping cash income and dropping price. It is this basic instinct make inflative monetary policy seems reasonable

So you deem that laying off people and closing business is an issue arising from people (or economy as whole) using cash as unit of value? In other words, it is human nature that is at fault here, and deflation would be good if people were not what they are?

I remember you saying quite the contrary earlier. Did you finally understand that "on enterprise side" deflation (due to demand collapse) is a bad thing?

Deflation is often a consequence of a lack of demand which means the economy is in a bad shape but deflation is not a bad thing in itself in the sense that it is a positive consequence of a lack of demand and helps people.
People don't buy less if they think the price is going to go down a little bit or even a lot, look at people buying with credit cards or buying iphones which will be half price in a year.

[tee-rex]

Deflation is often a consequence of a lack of demand which means the economy is in a bad shape but deflation is not a bad thing in itself in the sense that it is a positive consequence of a lack of demand and helps people.
People don't buy less if they think the price is going to go down a little bit or even a lot, look at people buying with credit cards or buying iphones which will be half price in a year.

You seem to be still confused about the wrong side of deflation (is there a right side?). There are two things to understand why the collapse in aggregate demand is bad (and very bad at that). First, it is enterprise that creates value, so it comes before anything else. Secondly, when prices are falling, it becomes more risky to run it, since you may end up with less money than if you weren't engaged in enterprise altogether. Thus less value is being created overall, and how this can help people?

By the way, the prices of i-phones going down in half a year have nothing to do with deflation.

[Allurestorm]

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.

thank you for your comment, I think deflation is definitely a symptom of a weak economy but it can also be the results of technological progress and an increase in efficiency in manufacturing. If a company finds a way to bring down costs to manufacture a product it's very likely to lower prices to be more competitive. I think deflation is also the results of globalization, there is much more competition now, and there is a real "price war" between countries