Is deflation truly that bad for an economy?

[V for Varoufakis]

Deflation decreases velocity, and an economy without velocity is a dead economy, like eurozone.

[dinofelis]

Deflation decreases velocity, and an economy without velocity is a dead economy, like eurozone.

At least in Weimar, there was an important velocity of money :-)  The economy must have been booming there 

[dinofelis]

Deflation decreases velocity, and an economy without velocity is a dead economy, like eurozone.

BTW, deflation can also happen with decreasing money supply.  Or with increasing production, and identical money supply and velocity.  So how do you link causally the change in velocity to the decrease in consumption (and not the other way around) ?

Remember that you cannot demonstrate the direction of a causal relationship with a statistical correlation.

[V for Varoufakis]

Eurozone is a light version of gold standard or close to it, and bitcoin is a hard-core version. Both are flawed.

[dinofelis]

Eurozone is a light version of gold standard or close to it, and bitcoin is a hard-core version. Both are flawed.

Actually, I quite like the Euro, even though it is a fiat currency and hence open to corruption (as we see now, with those QE propositions) and seigniorage in the pockets of the first line banks.  Its principles of being non-economically and non-politically steered are pretty sound.  Also the fact that it isn't related to any government per se (and is as such the very first non-national fiat currency as far as I know) is a step in the right direction.

It is a bit hard to say that gold, which has been the back bone of monetary history for 5 millennia, is "flawed".  It has allowed for world wide commerce since the dawn of civilisation.  Corrupt states couldn't stand it, that's true.  And today, the fact that it is a physical asset makes that it starts having difficulties as a currency.

[tee-rex]

Eurozone is a light version of gold standard or close to it, and bitcoin is a hard-core version. Both are flawed.

Actually, I quite like the Euro, even though it is a fiat currency and hence open to corruption (as we see now, with those QE propositions) and seigniorage in the pockets of the first line banks.  Its principles of being non-economically and non-politically steered are pretty sound.  Also the fact that it isn't related to any government per se (and is as such the very first non-national fiat currency as far as I know) is a step in the right direction.

Your knowledge is inaccurate. The Euro is actually a euphemism for Reichsmark, and Germany is the main engine behind it and the European Union both politically and economically. The recent tensions between Greece and the EU (read Germany) have a long story.

[687_2]

do you think bitcoins (deflationary) will see a wider adoption by retailers in future?

Undoubtedly, yes. I would love to have my business partners use XBT. Here's why:

1. It's a faster and more secure method of paying/getting paid (lower transaction friction means sales go up)
2. Zero third party risk
3. Money supply is known and behavior is 100% predictable (very important for business) and can't be tampered with - superior to inflationary fiat.

[dinofelis]

Your knowledge is inaccurate. The Euro is actually a euphemism for Reichsmark, and Germany is the main engine behind it and the European Union both politically and economically. The recent tensions between Greece and the EU (read Germany) have a long story.

I hope it is the Deutch Mark and not the Reichsmark 

[roadbits]

In a deflation,the people delay purchases.  This reduces demand for goods and services, which means employers have to reduce production, which means they reduce wages or hours and lay off workers

[dinofelis]

In a deflation,the people delay purchases.  This reduces demand for goods and services, which means employers have to reduce production, which means they reduce wages or hours and lay off workers

You mean: if a certain product A costs a price X now, and you know that the same product A will cost 95% of X 2 years from now, you will not buy product A now and wait for 2 years ?

Do people do that with the i-phone 4 ?  Have people done that with the i-phone 4S ?  Have people done that with the i-phone 5 ?  Have people done that with personal computers ?  Did people not buy a personal computer in 2002, because they could have bought a very similar machine in 2004 for less money ? 

This hypothesis is so terribly contradicted by empirical evidence that it is funny that so many people repeat it as the standard explanation of why deflation would be bad.

[V for Varoufakis]

Read about the deflationary problems of 18th-19th century:



"The great lesson of the 19th century and the gold standard was that such a limited amount of monetary systems causing continual crises and deflation are tight corset in any development effort

The other big lesson of the 18th and 19th century is that if the radical new entrepreneurial era lacked the narrow corset of gold over his head, then it was much easier to develop above and beyond the norms of ancient corruption (ie the church and the aristocracy). As the currency was literally rare and one gold sovereign not ever saw before you, all investments should be made through the already payers and / or privileges. And so the new entrepreneurship acquired kinship ties with the old privileges and companies took the form of the East India Company, a construct that is that no relationship was with the current concept of business.

In short as the amount of players and the amount of goods are not fixed in an economy, a stable currency would function as either corset (when the economy was growing up), or as loose pants (when the economy was shrinking). And even more impressive is that the fixed amount of currency itself would be that would cause the economy shrink as deflation would make each transaction completely undesirable. Let us not forget the great problem of the 19th century. There were so few shoes and so many barefoot people. When someone was making a shoe factory to footwear these people, the more he made shoes, so dropped the "price" of the shoe as a result end up bankrupt with shoes in the store at the same time when the world was still barefoot."

see more:   http://www.techiechan.com/

[dinofelis]

"The great lesson of the 19th century and the gold standard was that such a limited amount of monetary systems causing continual crises and deflation are tight corset in any development effort

It is true that since the gold standard was de facto released (about around 1914), we haven't known any crises any more 

[johnyj]

In a deflation,the people delay purchases.  This reduces demand for goods and services, which means employers have to reduce production, which means they reduce wages or hours and lay off workers

From first look, it seems reasonable, but if you look long term, it is totally different: In a deflative environment, people will delay the consumption and accumulate large amount of savings, with that amount of savings, their financial health is better and better, thus the whole society is stronger. But in an inflative environment, people will borrow more and more, and ends up with huge load of debt that they struggle to pay back, that will impoverish the whole society and make majority of people heavily enslaved by the banking class

Obviously, banks don't want you to save more and more, thus they have to pay you more and more interest, they want you to borrow more and more so that you can pay them interest, that is the true reason behind the inflative monetary policy

And all these talk about inflation and deflation is based on people's misunderstanding that fiat money is an unit of value, and an inflative monetary policy will greatly reduce the value of fiat money, which is even better for banks since they loan out money and hold assets

[alani123]

I' sure that this topic has ben discussed before. Bitcoin isn't a state currency nor should be one. At least not to today's standards. Economies of the modern world are (in most of the cases) a bet on development. Investors fund states so they can work out their missing payments. Sorta like fractional reserve but you get incidents like the ones of Cyprus and Greece in times of crises...

[tee-rex]

In a deflation,the people delay purchases.  This reduces demand for goods and services, which means employers have to reduce production, which means they reduce wages or hours and lay off workers

From first look, it seems reasonable, but if you look long term, it is totally different: In a deflative environment, people will delay the consumption and accumulate large amount of savings, with that amount of savings, their financial health is better and better, thus the whole society is stronger. But in an inflative environment, people will borrow more and more, and ends up with huge load of debt that they struggle to pay back, that will impoverish the whole society and make majority of people heavily enslaved by the banking class

Strange logic. People hoard gold (for example), production decreases, thus less real value is being created, and the whole society allegedly becomes stronger... What purpose that gold will be when there is no enterprise any longer?

To sum it up, what are you going to eat?

[johnyj]

In a deflation,the people delay purchases.  This reduces demand for goods and services, which means employers have to reduce production, which means they reduce wages or hours and lay off workers

From first look, it seems reasonable, but if you look long term, it is totally different: In a deflative environment, people will delay the consumption and accumulate large amount of savings, with that amount of savings, their financial health is better and better, thus the whole society is stronger. But in an inflative environment, people will borrow more and more, and ends up with huge load of debt that they struggle to pay back, that will impoverish the whole society and make majority of people heavily enslaved by the banking class

Strange logic. People hoard gold (for example), production decreases, thus less real value is being created, and the whole society allegedly becomes stronger... What purpose that gold will be when there is no enterprise any longer?

To sum it up, what are you going to eat?

Exactly, production can only decrease to a certain level (malinvestment will fail), real demand never disappear because of a deflative monetary policy, people are adaptive, they will save more but not stop spending. Imagine that you remove all the fiat money in circulation (maximum deflation), it will not crash the economy, people will immediately find other ways to do the trade, there are so many things can be used as currency

And, people don't hoard gold, banks do, you give them the gold/land/debt, they give you paper or numbers, that's the deal. Take Switzerland for example, they don't produce too much, they just hold lots of gold, isn't their society not strong enough?

Johan Law has tried to discredit gold and even forbidden citizens from holding gold, just to make sure his paper money hold its value

Indeed, you can not do anything with gold, you can not even eat it, but that is also true for almost any liquid assets

[tee-rex]

In a deflation,the people delay purchases.  This reduces demand for goods and services, which means employers have to reduce production, which means they reduce wages or hours and lay off workers

From first look, it seems reasonable, but if you look long term, it is totally different: In a deflative environment, people will delay the consumption and accumulate large amount of savings, with that amount of savings, their financial health is better and better, thus the whole society is stronger. But in an inflative environment, people will borrow more and more, and ends up with huge load of debt that they struggle to pay back, that will impoverish the whole society and make majority of people heavily enslaved by the banking class

Strange logic. People hoard gold (for example), production decreases, thus less real value is being created, and the whole society allegedly becomes stronger... What purpose that gold will be when there is no enterprise any longer?

To sum it up, what are you going to eat?

Exactly, production can only decrease to a certain level (malinvestment will fail), real demand never disappear because of a deflative monetary policy, people are adaptive, they will save more but not stop spending. Imagine that you remove all the fiat money in circulation (maximum deflation), it will not crash the economy, people will immediately find other ways to do the trade, there are so many things can be used as currency

It will. You yourself recently explained to me the reasons why the U.S. economy had collapsed in the Great Depression (people lost their money when banks went bust), and this had been miles from "removing all the fiat money in circulation". Did people find ways to do the trade?

Money is the blood of the economy.

[johnyj]

Exactly, production can only decrease to a certain level (malinvestment will fail), real demand never disappear because of a deflative monetary policy, people are adaptive, they will save more but not stop spending. Imagine that you remove all the fiat money in circulation (maximum deflation), it will not crash the economy, people will immediately find other ways to do the trade, there are so many things can be used as currency

It will. You yourself recently explained to me the reasons why the U.S. economy had collapsed in the Great Depression (people lost their money when banks went bust), and this had been miles from "removing all the fiat money in circulation". Did people find ways to do the trade?

Money is the blood of the economy.

In my opinion, 1929 depression is caused by the fact that most of the people have been robbed off of their wealth long before the bubble burst. It does not matter if you find other ways to trade when you have already spent all your wealth in exchange for some useless paper. And without inflation monetary policy throughout the decade before 1929, such kind of thing would never happen

Money is not the blood of economy, but a tool used by banks to extract blood from the economy. Injecting a lot of water (money created out of nothing) into the economy will just dilute the thickness of the existing blood and make the body struggle to make more blood

[tee-rex]

Exactly, production can only decrease to a certain level (malinvestment will fail), real demand never disappear because of a deflative monetary policy, people are adaptive, they will save more but not stop spending. Imagine that you remove all the fiat money in circulation (maximum deflation), it will not crash the economy, people will immediately find other ways to do the trade, there are so many things can be used as currency

It will. You yourself recently explained to me the reasons why the U.S. economy had collapsed in the Great Depression (people lost their money when banks went bust), and this had been miles from "removing all the fiat money in circulation". Did people find ways to do the trade?

Money is the blood of the economy.

In my opinion, 1929 depression is caused by the fact that most of the people have been robbed off of their wealth long before the bubble burst. It does not matter if you find other ways to trade when you have already spent all your wealth in exchange for some useless paper. And without inflation monetary policy throughout the decade before 1929, such kind of thing would never happen

You say that most of the people had been robbed off of their wealth long before the bubble burst, but this alone would immediately cause the instantaneous collapse of the bubble (right after people had lost their wealth), since the bubble can only exist as long as new money is flowing in it, and in ever increasing amounts at that.

[GreenStox]

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?

Nope its propaganda, deflation will increase purchasing power of people who can then spend more on stuff.

Yes people could hoard and some consumption will be decreased, however those consumption levels are not healthy anyway.

Resources are finite, people should not consume madly like nowadays do with this credit card scam system, and some businesses are not meant to operate. The financial speculative sector is like 40% of the GDP of any western nation, which is totally unproductive, it should be like 3-4%.

And besiedes the whole fractional reserve system that we have now is only fueling the global ponzi scheme of credit speculation, which is directly funded by your tax money and it is the collateral for it.

Thats why governments bail out banks from tax payer money because its the collateral for it. So its stupid when people protest about it, because it was set up this way from the beginning.