Is deflation truly that bad for an economy?

[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!!
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

I have to disagree to a degree. In reality it doesn't work as we all would have wanted it to work out. If a company finds a way to bring down costs to manufacture a product, they won't lower the price but most likely market a new model at the same price and stop producing the previous model altogether. If you look at the price of consumer electronics (say, personal computers) for the last twenty or so years, you will see that the prices didn't change much within this time span.

[johnyj]

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.

Enterprise does not create value, value comes from the demand, and enterprise just create supply, they can't artificially create demand

When you have eaten your dinner, you don't want more food, you can eat some medicine and squeeze in even more food, but that will just create severe problem for your health

Same, when a society has finished its major job and want to have a rest, any simulation will not work, simply because people don't want to spend more. In stead of getting more houses and more cars, they might want to save more and retire earlier, it is that behavior of saving caused deflation

[twiifm]

People spend when they have access to surplus money (or credit).  Alternately, when they think their future income is at risk they don't spend (save).  This is common sense.  Has very little to do with prices being cheap or expensive.

All this nonsense about smartphone prices is a non-argument.  If you look at the flagship models the prices have been steadily increasing.  Samsung Galaxy S6 is more then S5, and more than S4 and more than S3, etc.. at release.  Of course the manufacturer has to discount previous model to clear inventory for new models.  This is not the meaning of deflation when economists are using the term

It easier to understand inflation / deflation when looking at housing prices where interest rates have effect.   When credit expands, prices rise due to increased aggregate demand.  When credit contracts prices deflate to pick up the slack in demand.  When prices deflate, firms have to cut back expenditure but wages tend to be sticky so instead to cutting back your wages they usually look for labor market offshore.  Increased unemployment  creates a large swath of population unable to consume or have access to credit so aggregate demand falls further leading to deflationary spiral.

[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.

Enterprise does not create value, value comes from the demand, and enterprise just create supply, they can't artificially create demand

Some other guys here even come to the point of saying that value is being created by speculation. You evidently seem to be of the same kind. I'm not going to get into nit-picking (value added vs value created) since your understanding (or, rather, lack thereof) of what's what is pretty obvious (at least, to me). But just in case, if enterprise doesn't create value, why do we need it at all?

And you still didn't explain how a company's real income is increased when the company suffers losses due to decreases in prices.

[Possum577]

Doesn't currency deflation result in product/service price inflation?

If so, that sounds bad.

[johnyj]

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?

Exactly, using fiat money (that is created out of nothing) as unit of value is the main reason that we have waves and waves of financial trouble. But without cash, people don't even know how to measure value, since value is a very subjective thing, it changes based on supply and demand all the time. A universal standard of value never exist in reality: Even gold worth less near a gold mine

So, the banks must coin an abstract concept of "money", that fits into everyone's imagination. Since everyone need money to do trading, the demand is huge, you just need to create it based on those demand, that was what John Law discovered: Money is wealth, its value can be arbitrarily decided as long as people's trust on its value does not change

The reason that fiat money's value does not change is not because those fancy tricks banks are doing, it is because the trust to fiat money seldom changes, and the major task of banks is to maintain that trust. In fact, unless the country is extremely poor or you produce 10 times more money every month and pour them to factories to produce weapons during a war, the resilience of that trust is extremely high. FED just showed that printing 5x more money will not shake majority of people's trust in USD's value

[johnyj]

Some other guys here even come to the point of saying that value is being created by speculation. You evidently seem to be of the same kind. I'm not going to get into nit-picking (value added vs value created) since your understanding (or, rather, lack thereof) of what's what is pretty obvious (at least, to me). But just in case, if enterprise doesn't create value, why do we need it at all?

And you still didn't explain how a company's real income is increased when the company suffers losses due to decreases in prices.

Gambling have been existing since human exists, it is a real demand, especially for rich people. It provides fun and excitement and a hope for a potential gain, just like any other game

As a business owner, I can tell you that my income purely depends on market demand, and that demand changes vastly during each year (up to 100%), due to competition and seasonal factors. Even a very mature business can not reach a stable state of constant income

So what FED is doing has nothing to do with my business, in fact when they print more money to shift wealth to banks, the majority of my customers will become poorer, and consume less, resulting less sales at my side

True, if banks later spend their income, we will get some boost in consumption and income, but look at what banks are buying: loads of debts and assets, they only consume a little and re-invest a lot

[Monetizer]

They have both their good and bad effects. Overall I would say it is better to have an economically stable currency with small swings but being neither inflationary nor deflationary.

[johnyj]

They have both their good and bad effects. Overall I would say it is better to have an economically stable currency with small swings but being neither inflationary nor deflationary.

Exactly, and it is almost impossible to find something that can be used as a standard unit of value

Since value is decided by supply and demand, if you are going to create a universal standard of value, what should you do? You try to find something that is equally needed by everyone, and the supply is similar to everyone too. But once it becomes a standard of value, some of the people will try to accumulate more of it and some others will just lose their share. So eventually the value of this currency will drop for the rich and rise for the poor: A 100 dollar bill's value is totally different in the eyes of a bank and a plumber

The current system is trying to make 99% of people similarly poor, so that currency's value is similar to majority of them, thus keep the value of currency stable during the process

[dinofelis]

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

They have to do with the Bogey man argument against deflation, namely that people would postpone consumption if they knew that prices are falling.  i-phones and personal computers indicate that this is simply not true.  People buy NOW, at higher prices, rather than wait for a year, to buy THE SAME thing at a lower price.

It is that last hypothesis that warns against "the deflationary spiral".  The argument is stupid, and is empirically shown to be wrong.

Of course, "i-phones lowering in price" is NOT the same as macro-economic deflation.  That's clear.  But that's not the argument to "show" how  a little deflation would induce a deflationary spiral.

That argument goes as follows, and is based upon hypothesis (H):

1) people are used to certain prices and wages
2) there is a mild deflation (say 2% a year)
3) people holding money, realize that if they wait to spend their money, they will be able to buy more with that money next year
4) ===>>>> (H) people will hold their money and spend next year
5) this increased hoarding of money makes the velocity of money go down
6) a lower velocity of money means still lower prices
7) the deflation increases: instead of 2% a year, we have now 4% per year
people realise that the prices will STILL be lower next year
9) =====>>>> (H) people will hoard even more
10) etc...

Given that the falling price of the i-phone 5 hasn't pushed people to postpone their buying of the i-phone 5, (H) is wrong.

In fact, you could tell the dual story against inflation:

1) people are used to certain prices and wages
3) there is mild inflation (say 2% a year)
3) people having money will know that things will be more expensive next year
4) they will spend everything right away !
5) this increased spending increases V
6) that increases prices even more
7) inflation increases: instead of 2% we now have 4%
people realize that the prices will still be higher next year
9) they spend even more right away
10) etcc...
HYPERINFLATION.

With light inflation of 2%, no hyperinflation is in sight.

With light deflation of 2%, no deflationary spiral is in sight.

[twiifm]

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

They have to do with the Bogey man argument against deflation, namely that people would postpone consumption if they knew that prices are falling.  i-phones and personal computers indicate that this is simply not true.  People buy NOW, at higher prices, rather than wait for a year, to buy THE SAME thing at a lower price.

It is that last hypothesis that warns against "the deflationary spiral".  The argument is stupid, and is empirically shown to be wrong.

Of course, "i-phones lowering in price" is NOT the same as macro-economic deflation.  That's clear.  But that's not the argument to "show" how  a little deflation would induce a deflationary spiral.

That argument goes as follows, and is based upon hypothesis (H):

1) people are used to certain prices and wages
2) there is a mild deflation (say 2% a year)
3) people holding money, realize that if they wait to spend their money, they will be able to buy more with that money next year
4) ===>>>> (H) people will hold their money and spend next year
5) this increased hoarding of money makes the velocity of money go down
6) a lower velocity of money means still lower prices
7) the deflation increases: instead of 2% a year, we have now 4% per year
people realise that the prices will STILL be lower next year
9) =====>>>> (H) people will hoard even more
10) etc...

Given that the falling price of the i-phone 5 hasn't pushed people to postpone their buying of the i-phone 5, (H) is wrong.

In fact, you could tell the dual story against inflation:

1) people are used to certain prices and wages
3) there is mild inflation (say 2% a year)
3) people having money will know that things will be more expensive next year
4) they will spend everything right away !
5) this increased spending increases V
6) that increases prices even more
7) inflation increases: instead of 2% we now have 4%
people realize that the prices will still be higher next year
9) they spend even more right away
10) etcc...
HYPERINFLATION.

With light inflation of 2%, no hyperinflation is in sight.

With light deflation of 2%, no deflationary spiral is in sight.

Smartphones are a terrible example.  These things naturally depreciate.

Use housing or real estate as an example because they are usually purchased w mortgages and they are affected by interest rates. Either that or use stocks and bonds as example.

In your example if inflation gets too high the CB can raise interest rate but when deflation occurs we can hit the zero bound on interest giving us no easy fix.  QE hasn't shown to be effective

[Wekkel]

...
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.

I think we are getting somewhere. Definitely progressing to something here. Mild deflation would influence your calculation, but you will not stop buying goods and services. The economy will not screech to a halt with people postponing purchases for the rest of their lives. The balance just shifts.

Next item to explore: if the economy does not halt with screeching tyres, what does exactly happen then?

I think Maegfaer already raised a few interesting items so no need to start all over again 

[galdur]

Deflation is definitely very bad for credit driven economies. Instead of buying on installments you´d obviously save cash and wait for prices to drop. Same goes for other debt. Why borrow when prices are going down. It makes no sense.

[tee-rex]

It can have good and bad results. Sometimes deflation results from an increase in aggregate supply. This tends to be pretty good: it's associated with lowish unemployment rates and high levels of real income (or highish rates of real income growth, depending on exactly how you set up the model). There's an argument that the central bank should accommodate this sort of deflation (and Greenspan did do just that in the late 1990s).

However, sometimes deflation results from a decrease in nominal spending. This tends to be rather bad: it's associated with highish unemployment rates, and low or stagnant real income growth. Sometimes it comes with a general stagnation in real income, as in Japan in the 1990s.

Japan did not deflate on net though they periodically did.

Real per capita income in Japan continued to rise during that period.

A large benign inflation has never existed in history.  Real debt levels rise to unservicable heights, and the financial structure collapses.

Hmm... johnyj says (in this post) that it is not a big deal really. Do you agree with him, and if you do, how does it match up with what you say here? Quoting below his post:

Foreign-held US debts are small comparing with what US hold domestically, and when Chinese government spend dollars to buy US products, it will create job and boom. And those bonds have no risk of default, US government will always borrow more USD from FED to repay them with good interest

Is this debt not real (surreal?), or inflation is negligible to make its levels dangerous (though inflation could only depreciate it after all)?

[johnyj]

[freedomno1]

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.

Agree with this logic, basically deflation is not essentially a bad thing in small amounts
What matters most is if their is more return on investment holding the money today or holding the money tomorrow also known as the time value of money.  
If it was deflation at 10% then some people might consider holding their currency unless they can invest it at a higher rate etc.

[tee-rex]

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?

[Agestorzrxx]

Deflation coupled with debt and/or leverage is always bad. Most nations have nearly doubled the amount of debt and leverage that existed in 2008.

[tee-rex]

It can have good and bad results. Sometimes deflation results from an increase in aggregate supply. This tends to be pretty good: it's associated with lowish unemployment rates and high levels of real income (or highish rates of real income growth, depending on exactly how you set up the model). There's an argument that the central bank should accommodate this sort of deflation (and Greenspan did do just that in the late 1990s).

However, sometimes deflation results from a decrease in nominal spending. This tends to be rather bad: it's associated with highish unemployment rates, and low or stagnant real income growth. Sometimes it comes with a general stagnation in real income, as in Japan in the 1990s.

Japan did not deflate on net though they periodically did.

Real per capita income in Japan continued to rise during that period.

A large benign inflation has never existed in history.  Real debt levels rise to unservicable heights, and the financial structure collapses.

Hmm... johnyj says (in this post) that it is not a big deal really. Do you agree with him, and if you do, how does it match up with what you say here? Quoting below his post:

Foreign-held US debts are small comparing with what US hold domestically, and when Chinese government spend dollars to buy US products, it will create job and boom. And those bonds have no risk of default, US government will always borrow more USD from FED to repay them with good interest

Is this debt not real (surreal?), or inflation is negligible to make its levels dangerous (though inflation could only depreciate it after all)?

I'm not sure what is not supposed to be a big deal really or what I'd be agreeing with, but I didn't say that last quote, and I say any price instability is harmful to those denominated in such an issue.

No, you didn't say that last quote, but I never pretended that you did in the first place. And you're not sure whether you agree with the quote or not? How come?

But that's not my point altogether. You say that any price instability is harmful to the debt denominated in the fluctuating currency (if I got you right). This can hardly be agreed with since it all on depends on both the counterparty you look at and direction of the price movement. Inflation is beneficial for borrowers (unless the interest rate can be changed, of course) while deflation is more advantageous to lenders.

[Fat Ronaldo]

Of course it's bad. How can losing money or value not be?

Deflation coupled with debt and/or leverage is always bad. Most nations have nearly doubled the amount of debt and leverage that existed in 2008.

The debt is bad for the people but good for the entities that the money is owed to. It's just one way politicians can launder cash into businesses legally so debt will always be there as it's profitable to the corrupt as long as they can get away with this legal money laundering loophole.