Is deflation truly that bad for an economy?

[dinofelis]

Do you understand that by saying this you are losing touch with reality (and simple reason at that)?

Ask any business if money, locked up in a warehouse, buildings, machines, etc... is not a cost factor.
If you calculate, for any business, the discounted cash flow, then any "frozen" money during a time is discounted as a cost equal to the interest you pay on that amount of money during that time.

If you are going to claim that you make a profit, because you've locked up 10 million dollars during a year in material, and you got a return of 200 dollars over what you spent, I wonder how many people are going to consider that *you* are still in touch with reality

And if you think that a savings account has zero real interest, you should change bank.  Because a bank uses your money you put on a savings account to lend it to people wanting to get a loan.
It is true, however, that these days, real interest rates are so terribly low (because low demand, and high offer) that you hardly distinguish nominal rate and inflation.  But on a savings account, you're supposed to get more than just the inflation.

And finally, I already explained that caveat.

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[tee-rex]

Do you understand that by saying this you are losing touch with reality (and simple reason at that)?

Ask any business if money, locked up in a warehouse, buildings, machines, etc... is not a cost factor.
If you calculate, for any business, the discounted cash flow, then any "frozen" money during a time is discounted as a cost equal to the interest you pay on that amount of money during that time.

If you are going to claim that you make a profit, because you've locked up 10 million dollars during a year in material, and you got a return of 200 dollars over what you spent, I wonder how many people are going to consider that *you* are still in touch with reality

Why are you permanently trying to confuse concepts? If you've bought raw materials and are producing goods from them, how on Earth does it happen that you have "frozen" the money? Even if so, how come that you would not "freeze" the money If you just borrowed that money to buy the same raw materials at the same time (but would have to pay interest on it at that)?!

Do you understand that the further you go the more laughable your arguments become?

[dinofelis]

Why are you permanently trying to confuse concepts? If you've bought raw materials and are producing goods from them, how on Earth does it happen that you have "frozen" the money?

If you are buying goods on Monday for $1000 000.- and you can only sell your products on Friday, then you have frozen one million dollars during a week.  The cost of that freezing of money in your raw materials is the interest on it.
That's very elementary business accountancy, you know.

Even if so, how come that you would not "freeze" the money If you just borrowed that money to buy the same raw materials at the same time (but would have to pay interest on it at that)?!

You do freeze the money.  That's why you pay interest on it !

The interest rate that is used is normally the "risk free interest rate", usually determined by state bonds.  Savings accounts are usually slightly lower.  So, no, you do not compare to the return on investment of drugs dealers. 

[tee-rex]

Even if so, how come that you would not "freeze" the money If you just borrowed that money to buy the same raw materials at the same time (but would have to pay interest on it at that)?!

You do freeze the money.  That's why you pay interest on it !

Thus you freeze the money in both cases, right? Then why did you raise the issue of "frozen" money at all?

[twiifm]

Even if so, how come that you would not "freeze" the money If you just borrowed that money to buy the same raw materials at the same time (but would have to pay interest on it at that)?!

You do freeze the money.  That's why you pay interest on it !

Thus you freeze the money in both cases, right? Then why did you raise the issue of "frozen" money at all?

Dinofelus is talking BS that has nothing to w real world.

Its just cashflow.  Dont need to make it sound conplicated

[dinofelis]

Dinofelus is talking BS that has nothing to w real world.

Its just cashflow.  Dont need to make it sound conplicated

Yes, it is cashflow.  Now tell me, is cash flow free ?
If you immobilise (I called it "freeze") money in raw materials, machines and other things for a year, do you think that that is for free ?  

Consider these two different business plans:

A) Joe needs to buy a computer worth $10 000 000 on January, and will design, using that computer, a new spoon.  In June he will buy $1000 of metal and make spoons out of it, which he will sell in December for $1200,-.  At that point he will sell his computer for $10 000 000.

B) Jack needs to buy a PC worth $1000 on January, and will design, using his PC, a new spoon.  In June he will buy $1000 of metal, make spoons out of it, and he will sell them in December for $1200,-.  At that point he will sell also his PC for $1000,-.

Are you SERIOUSLY saying that both Joe and Jack are going to make the same profit, namely $200,-

My point is that if the interest rate is, say, 2%, then Jack is making a profit of $200 - $10 - $20 = $170
(the $10 is the $1000 of metal that he immobilised for 6 months, and the $20 is the $1000 of his PC that he immobilised 1 year)

Joe, on the other hand, is making a monumental loss of about $200 000.  In fact, his loss is exactly:
200 000 + 10 - 200 = $199 810,-

If you monopolise capital (here, $10 000 000) during a certain time (if you "freeze" it), then that costs money.  The cost is called the interest.

[tee-rex]

Dinofelus is talking BS that has nothing to w real world.

Its just cashflow.  Dont need to make it sound conplicated

Yes, it is cashflow.  Now tell me, is cash flow free ?
If you immobilise (I called it "freeze") money in raw materials, machines and other things for a year, do you think that that is for free ? 

Are you really that dumb? Your money "frozen" in raw materials (from which you make goods that you later sell) earns you revenue. And as long as it is above inflation, you are still making profits by any means. By the way, your "risk free interest rate" is actually below inflation. For example, inflation in the US was 1.6% for 2014, while 1 yr US treasury bonds yielded only about 0.25% the same year, so you are obviously dancing upon nothing...

[dinofelis]

Are you really that dumb? Your money "frozen" in raw materials (from which you make goods that you later sell) earns you revenue. And as long as it is above inflation, you are still making profits by any means.

So, for you, if you need for $ 10 000 000 of material during a year, or you only need $1000 of material during a year, if in the end you sell for $200 more than the expenses you did a year before, you made a benefice of $200 ?

As I told you, good luck with your business

By the way, your "risk free interest rate" is actually below inflation. For example, inflation in the US was 1.6% for 2014, while 1 yr US treasury bonds yielded only about 0.25% the same year, so you are obviously dancing upon nothing...

This simply means that the real risk-less interest rate was negative.  There is so much demand to place money, and there is so little demand to borrow money, that people even want to pay for others to keep their money.  This is a real possibility when there is inflation: that you are willing to PAY for people to borrow your money, because you can attenuate somewhat the loss of value due to inflation.

[tee-rex]

By the way, your "risk free interest rate" is actually below inflation. For example, inflation in the US was 1.6% for 2014, while 1 yr US treasury bonds yielded only about 0.25% the same year, so you are obviously dancing upon nothing...

This simply means that the real risk-less interest rate was negative. 

Thereby it cannot serve as a proof of what you are trying to prove. If you take a look at historical risk-free rates of short-term treasuries (or other short-term financial assets of the kind, for that matter), you will find plenty of periods where rates have been significantly below inflation in the same period.

[tee-rex]

Are you really that dumb? Your money "frozen" in raw materials (from which you make goods that you later sell) earns you revenue. And as long as it is above inflation, you are still making profits by any means.

So, for you, if you need for $ 10 000 000 of material during a year, or you only need $1000 of material during a year, if in the end you sell for $200 more than the expenses you did a year before, you made a benefice of $200 ?

As I told you, good luck with your business

It just means that one business is less profitable than another, that's all. As long as profit earned is above inflation (mind this), the business is sustainable in the long run. Which will never be the case if it continuously suffers losses due to deflation, whatever interest rates might then be. I don't really understand why you are trying to argue against this simple fact.

[GreenStox]

It just means that one business is less profitable than another, that's all. As long as profit earned is above inflation (mind this), the business is sustainable in the long run. Which will never be the case if it continuously suffers losses due to deflation, whatever interest rates might then be. I don't really understand why you are trying to argue against this simple fact.

In deflation the business can save more money and whilst many competitors will compete with it, this could bring true capitalism with better and better products.

In inflation the banks eat your money by inflation and also by debt that you hold. Many companies hold alot of debt, if interest rates were to rise, they would all go bankrupt.

Together wit the CB aswell and later the whole world.

[tee-rex]

It just means that one business is less profitable than another, that's all. As long as profit earned is above inflation (mind this), the business is sustainable in the long run. Which will never be the case if it continuously suffers losses due to deflation, whatever interest rates might then be. I don't really understand why you are trying to argue against this simple fact.

In deflation the business can save more money and whilst many competitors will compete with it, this could bring true capitalism with better and better products.

In inflation the banks eat your money by inflation and also by debt that you hold. Many companies hold alot of debt, if interest rates were to rise, they would all go bankrupt.

What kind of companies (save for financial institutions indeed) you mean that hold debt? In fact, companies usually borrow money from banks to finance their working capital or make investments into their fixed assets (property, plant, and equipment). Also, expand more on how businesses can save more money in deflation, through laying off their stuff, maybe?

[GreenStox]

What kind of companies (save for financial institutions indeed) you mean that hold debt? In fact, companies usually borrow money from banks to finance their working capital or make investments into their fixed assets (property, plant, and equipment). Also, expand more on how businesses can save more money in deflation, through laying off their stuff, maybe?

They save alot of money because the underlying money instrument gets more valuable, so the fact that they sell their products cheaper doesnt matter, because they can also buy more resources with that money and pay less salary for workers (while the purchasing power of that less moeny is still better than of that before).


In inflation they just create a giant debt bubble for the whole country which will pop out every 7-10 years and create massive unemployment.

And after about 50 years the whole system collapses under the huge amounts of debt.

Clock is ticking:
http://www.nationaldebtclocks.org/

[twiifm]

Are you really that dumb? Your money "frozen" in raw materials (from which you make goods that you later sell) earns you revenue. And as long as it is above inflation, you are still making profits by any means.

So, for you, if you need for $ 10 000 000 of material during a year, or you only need $1000 of material during a year, if in the end you sell for $200 more than the expenses you did a year before, you made a benefice of $200 ?

As I told you, good luck with your business

It just means that one business is less profitable than another, that's all. As long as profit earned is above inflation (mind this), the business is sustainable in the long run. Which will never be the case if it continuously suffers losses due to deflation, whatever interest rates might then be. I don't really understand why you are trying to argue against this simple fact.

Yes yes yes! Dont know why nobody gets this.  Most business depend on credit in some fashion.  So a even a steady deflation rate will discourage borrowing which in turn discourage activity.

Deflation is bad for everybody.  Inlflation advantages those with capital but tolerable for most.  Inflation harms those without access to credit

It doesnt matter if things are cheaper in the long run.  What matters is the economic machine keeps running

[GreenStox]

Yes yes yes! Dont know why nobody gets this.  Most business depend on credit in some fashion.  So a even a steady deflation rate will discourage borrowing which in turn discourage activity.

Deflation is bad for everybody.  Inlflation advantages those with capital but tolerable for most.  Inflation harms those without access to credit

It doesnt matter if things are cheaper in the long run.  What matters is the economic machine keeps running

The same keynesian propaganda nonsese here.

Deflation as i already said will help people have more purchasing power. Giving credit to people is just fixing the problem that was created by it in thefirst place.

While inflation robs people you just give more credit back to them as they were robbed. This whole credit based economy will collapse soon.

[dinofelis]

Yes yes yes! Dont know why nobody gets this.  Most business depend on credit in some fashion.  So a even a steady deflation rate will discourage borrowing which in turn discourage activity.

Could you please explain that to tee-rex who thinks that the amount of money blocked in the production process (that is, between the moment you need to spend it, and the moment you get to sell your production) has no cost.

[dinofelis]

In fact, companies usually borrow money from banks to finance their working capital or make investments into their fixed assets (property, plant, and equipment). Also, expand more on how businesses can save more money in deflation, through laying off their stuff, maybe?

And of course they get that money for free and don't pay any interest on it, right ?

So whether they have to borrow $10 000 000, or $1000 during a year, for a certain production on which they will make a "profit" of $200 in both cases, is entirely equivalent to you

[dinofelis]

It just means that one business is less profitable than another, that's all.

Assume no deflation or inflation, right.

WHY would one business be less profitable than the other then according to you ??  After all, they both made $200 of profit according to you.  The first one uses $1000,- in January, and sells for $1200,- in December ; the second one uses $10 000 000 in January, and sells for $10 000 200, - in December.

From what amount onward wouldn't they become profitable ?
When they need to block 1 billion ?  20 billion ?  500 billion ?
Because even a company that needs to use 500 billion in January, if it can, according to you, sell his production and everything else for $500 billion + $200,-, is profitable according to you, right ?

[dinofelis]

Yes yes yes! Dont know why nobody gets this.  Most business depend on credit in some fashion.  So a even a steady deflation rate will discourage borrowing which in turn discourage activity.

The long term deflation is normally equal to the economic growth, assuming average constant velocity in the long run.

As such, if activity would diminish, deflation would also diminish.  In periods of economic recession, a fixed money supply would give rise to inflation.

The only ESSENTIAL difference between inflation and deflation, is that in inflation, you need a financial sector to help protect your savings from value decrease, a financial sector which takes a margin between borrowing and saving ; while in the case of deflation, you don't need that financial intermediate, as a pile of money "brings his own interest".  You can still use financial intermediates, to get MORE than the deflation rate, and they can still lend out at a positive nominal interest, but they cannot take too large margins because otherwise the interest they would give you on your savings would become negative.

The only thing for which deflation is bad, is financial institutions.  They live essentially on inflation.

The real interest on a loan, in a deflationary scheme, has a lower bound equal to the deflation rate.  That is, if the deflation rate is 2%, any loan will cost AT LEAST 2% in real terms, and probably somewhat more.  This lower bound on loans avoids people to invest in low-rentability projects.  There wouldn't be any "cheap money" with which bubbles can be blown, and which can be misallocated in huge amounts.  So the correction for mis investment would come much earlier and wouldn't be able to be pushed back and back with more and more cheap money until there is a major crisis.

But there's a feedback.  If that interest rate would be too high, and would cripple businesses, then growth would diminish, and so would deflation rate.  So there is no danger for "permanent depression due to deflation".  After all, at zero growth, there wouldn't be any deflation either !  And if there would be a depression, you'd get inflation.

[twiifm]

Yes yes yes! Dont know why nobody gets this.  Most business depend on credit in some fashion.  So a even a steady deflation rate will discourage borrowing which in turn discourage activity.

Could you please explain that to tee-rex who thinks that the amount of money blocked in the production process (that is, between the moment you need to spend it, and the moment you get to sell your production) has no cost.

No I agree with him.  It has a cost but business take that risk because they have a PO so some inventory is guaranteed sold.  But if there is a steady rate of deflation then the cost is higher.  Less incentive to do business