Is deflation truly that bad for an economy?

[tee-rex]

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).

What do you mean by "underlying money instrument", I don't quite understand. Could you give an example of such an instrument? if the business begins suffering losses, they won't miraculously turn into profits, even if the "underlying money instrument" gets more valuable.

[1715139965]

1715139965

[1715139965]

1715139965

[1715139965]

1715139965

[1715139965]

1715139965

[1715139965]

1715139965

[tee-rex]

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.

You seem to be desperately trying to catch at a straw and again confuse different concepts, most likely through lack of knowledge or proper understanding. If businesses have a high profit margin, and there is plenty of demand for their goods, it is profitable for them to expand production through credit. Thereby they get more profit in absolute terms, even though their profit margin is diminished by the interest paid on debt.

And when demand collapses such companies are left with debts and the need to refinance these debts somehow.

[tee-rex]

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.

I was talking about profit margin, I thought it was evident. In fact, you are very hypocritical in your answers. At first you imply that businesses should have profit margin above nominal interest rate to be considered as profitable, since they could get there by just doing nothing. Then, when I point it out that you won't be able to get there since you can't eat at the money lenders interest (what you call real interest), you switch topics and start talking about risk-free financial instruments such as government bonds. But, as it turns out, in half of the cases these assets yield interest well below inflation, you again backpedal this issue and try to ridicule the facts through intimidating numbers. This won't work.

It doesn't matter how much money is "locked" as long as your profit is above inflation. Why don't you loudly orate now about how much real income you would actually lose if you "locked" money in these risk-free interest bearing assets, which, according to you, we should use as a yardstick for profitability? It was your idea after all, wasn't it?

[dinofelis]

I was talking about profit margin, I thought it was evident. In fact, you are very hypocritical in your answers. At first you imply that businesses should have profit margin above nominal interest rate to be considered as profitable, since they could get there by just doing nothing. Then, when I point it out that you won't be able to get there since you can't eat at the money lenders interest (what you call real interest), you switch topics and start talking about risk-free financial instruments such as government bonds. But, as it turns out, in half of the cases these assets yield interest well below inflation, you again backpedal this issue and try to ridicule the facts through intimidating numbers. This won't work.

No, what I'm saying, what I'm repeating, and what you don't seem to understand, although this is very elementary in every form of business, is that money that is used on time A, and made only available again on time B, has a cost, equal to the interest rate times the amount of money, times (B - A).

That has nothing to do with inflation or deflation.  It is the fact that that value is blocked during that time in whatever you spent it on.  

Now, what interest rate to pick exactly is a point of discussion: is it the savings account rate, the "risk free interest rate", or is it the best possible loan rate you could get, that can be discussed, but doesn't alter the principle.

If you spend an amount of money X at time A in order to produce, to only get it back at time B when you sell your stuff, then the COST of that "frozen" amount of money equals s * (B - A) * X, and it is a cost, just like the cost of using electricity or the rent or whatever.

Look up http://en.wikipedia.org/wiki/Discounted_cash_flow and http://en.wikipedia.org/wiki/Time_value_of_money

These are very elementary concepts, you know.

Consider no inflation/deflation, and an interest rate of 5% (whether this is on a savings account, the best loan you can get, or the "risk free interest rate").

Suppose, case A, that you spend today $1000,- and that you will sell your product for $1200 in a year from now.
Using the method of discounted cash flow, that $1200 a year from now has to be reduced by the interest:
$1200/(1.05) = $1143.-
The value of selling something for 1200 in a year is worth 1143 today.
And you are spending 1000 today.  So the value of your undertaking is $143,-

Suppose now, case B, that you spend $10 000 000 today, and that you will sell your product for $10 000 200 in a year from now.
Using that method again, 10 000 200 a year from now is worth (10 000 200 / 1.05) = 9523809 today.
But you are spending 10 000 000 today.  So the value of your undertaking is - $476 190.-
You're making a loss of half a million almost !

Now go and study "discounted cash flow" and "time value of money".  I'm not going to explain this basic concept again, 10 times in a row.

I'll just copy part of the Wiki example, that is almost exactly the same as the examples I'm using here:

To show how discounted cash flow analysis is performed, consider the following simplified example.

    John Doe buys a house for $100,000. Three years later, he expects to be able to sell this house for $150,000.

Simple subtraction suggests that the value of his profit on such a transaction would be $150,000 − $100,000 = $50,000, or 50%. If that $50,000 is amortized over the three years, his implied annual return (known as the internal rate of return) would be about 14.5%. Looking at those figures, he might be justified in thinking that the purchase looked like a good idea.

1.145^3 x 100000 = 150000 approximately.

However, since three years have passed between the purchase and the sale, any cash flow from the sale must be discounted accordingly. At the time John Doe buys the house, the 3-year US Treasury Note rate is 5% per annum. Treasury Notes are generally considered to be inherently less risky than real estate, since the value of the Note is guaranteed by the US Government and there is a liquid market for the purchase and sale of T-Notes. If he hadn't put his money into buying the house, he could have invested it in the relatively safe T-Notes instead. This 5% per annum can therefore be regarded as the risk-free interest rate for the relevant period (3 years).

Using the DPV formula above (FV=$150,000, i=0.05, n=3), that means that the value of $150,000 received in three years actually has a present value of $129,576 (rounded off). In other words we would need to invest $129,576 in a T-Bond now to get $150,000 in 3 years almost risk free. This is a quantitative way of showing that money in the future is not as valuable as money in the present ($150,000 in 3 years isn't worth the same as $150,000 now; it is worth $129,576 now).

[loan4]

Yes it is. According to the laws of economics, the amount of banknotes in circulation,

must correspond to the quantity of goods and services in the market.

[GreenStox]

Yes it is. According to the laws of economics, the amount of banknotes in circulation,

must correspond to the quantity of goods and services in the market.

No it doesnt, where did you get your diploma from the banksters? This seems to me cheap keynesian propaganda.

You can have any amount of money in circulation, if the goods are less, then the price of it will be lower, because it's worth more.

And thats beneficial because less amount of money is needed to buy alot of goods and services.

It's almost as same as the current keynesian model from objective perspective, except the 8 year periodic crashes, debt bubbles and hyperinflation.

I see no flaws in deflation at all.

Of course i bet many keynesian propagandists will mock me for this...

[thaaanos]

This is my take on it.
1. Deflation postpones Production
why? because it makes sense not to commit into depreciating resources (materials, labour) until you absolutely have to.
2. Your bussiness model must convert to "on-demand Production" / Pre-Ordering.
Question1 Can/Will the client accept all the production risk/delay ?
Question2 Can all bussinesses convert to such a model? How about bussinesses
 

• with large inventory requirements - Can be aleviated by JIT Production ie 3D Printing ?
• with continuous production requirements (ie coke factories) -  Can safely assume continuous demand ?
• with Deep supply chain -  Set up contract networks that get triggered on the demand end (deferred transactions in blockchain or smart contracts)? 

Will time constrains be met?

• with Labour requirements  - Very liquid service oriented labour market ?
• with Long Time to market (ie raising crops/livestock or even knowledge workers) - Food will become scarce? 
• that leverage economies of scale -  Can leverage economies of scope instead?  Europe and US are anyway in a de-industrialisation phase

3. On demand-Production leads to more economical resource usage
A major advantage will be a more eco-friendly production (less waste)
4. Riskier investment options, less private investment.
Are savings banks going to survive? Who will broker investements for the masses?

In all I see a lot of preconditions for a deflatory economy to work, and it seems to me to make it work you have to kiss capitalism byebye and move on to a computed-planned economy. Still point 3 may be a game-changer

 

[Btcvilla]

A small amount of inflation is good for a healthy economy, it helps it grow.

Bitcoin's inflation is not a big deal right now.

[dinofelis]

This is my take on it.
1. Deflation postpones Production
why? because it makes sense not to commit into depreciating resources (materials, labour) until you absolutely have to.
2. Your bussiness model must convert to "on-demand Production" / Pre-Ordering.
Question1 Can/Will the client accept all the production risk/delay ?
Question2 Can all bussinesses convert to such a model? How about bussinesses

There is a cost to storing value in stocks, whether there is inflation or not.  There is a cost to buying stuff now, that you will only use in your production 2 years from now.  That cost is financial (I had a long discussion about this in the previous posts), and that cost is also one of storage, and risk of it getting stolen or degraded.  Nobody buys expensive electronic components now to be soldered on a board 2 years from now.  

So in ANY CASE it is best to limit the amount of stock of goods you have, and to obtain them as late as possible, ideally just in time for production.

You don't postpone production of course, because production is your source of income.  You don't want your income to be delayed further in the future.  

Whether there is inflation or deflation, you want:
1) to get your production time to be as short as possible (the time between having to spend money to start your production, and to sell your product)

2) get your product out as soon as you can (to be the first one on the market, to beat the competition).

You are simply indoctrinated with an idea that has no ground, and that idea is that "a little inflation is good".  If you analyse EVERY aspect, EVERY argument that would be in favor of "a little inflation", you see that it contains a major economic misunderstanding, and that it has a mirror argument with "a little deflation".  But "a little inflation is good" is an unfounded dogma that is repeated so often, for which so many bogus after-the-fact arguments are given, that it is hard to see the evident falsehood of that claim.

"a little inflation is good" for the financial sector.  That's all.

There is also a lot of empirical evidence that people DO NOT POSTPONE buying articles because their price depreciates over time.

[thaaanos]

This is my take on it.
1. Deflation postpones Production
why? because it makes sense not to commit into depreciating resources (materials, labour) until you absolutely have to.
2. Your bussiness model must convert to "on-demand Production" / Pre-Ordering.
Question1 Can/Will the client accept all the production risk/delay ?
Question2 Can all bussinesses convert to such a model? How about bussinesses

There is a cost to storing value in stocks, whether there is inflation or not.  There is a cost to buying stuff now, that you will only use in your production 2 years from now.  That cost is financial (I had a long discussion about this in the previous posts), and that cost is also one of storage, and risk of it getting stolen or degraded.  Nobody buys expensive electronic components now to be soldered on a board 2 years from now.  

There is also a lot of empirical evidence that people DO NOT POSTPONE buying articles because their price depreciates over time.

You will postpone production until there is demand, otherwise your output will sit in your warehouse, not in your distributor's
Either you buffer input or output you lose money, if you buffer neither you increase latency insert unknowns and lose contracts add to that the of capital underutilization. That is a lose-lose scenario for a producer. Multiply that across the supply chain and feel free to rage when the iphone you prepaid last year got delayed again.

Anyway the problem is that in a demand driven economy little innovation happens against an investment driven economy.
See the soviet-US comparison

Depreciation from obsolescence is not the same as monetary appreciation.
Iphone 4 depreciates against iphone 5 etc, latest iphone doesnot depreciate against the dollar, and similar other fast iterating products

If you need empirical data look no further than the bitcoin miners producers that trade in bitcoins, this forum is full of customer satisfaction stories

[dinofelis]

You will postpone production until there is demand, otherwise your output will sit in your warehouse, not in your distributor's

Yes, apple postponed the production of his first i-phone until there was demand for it.  Then they piled up a million of i-phone 2 in their warehouse.

[twiifm]

"a little inflation is good" for the financial sector.  That's all.

Which is a HUGE part of the economy!!!

[twiifm]

You will postpone production until there is demand, otherwise your output will sit in your warehouse, not in your distributor's

Yes, apple postponed the production of his first i-phone until there was demand for it.  Then they piled up a million of i-phone 2 in their warehouse.

As a matter of fact Apple had supply chain delays for iPhone 5 in 2012 and it took beating for 2 Quarters

[thaaanos]

You will postpone production until there is demand, otherwise your output will sit in your warehouse, not in your distributor's

Yes, apple postponed the production of his first i-phone until there was demand for it.  Then they piled up a million of i-phone 2 in their warehouse.

Thats my point, apple was allowed to forward thinking, because of investor friendly environment, if apple had waited for a demand to trigger production they would never make it. Now if iphone is of any actual practical use is another story

[dinofelis]

Thats my point, apple was allowed to forward thinking, because of investor friendly environment, if apple had waited for a demand to trigger production they would never make it. Now if iphone is of any actual practical use is another story

There is absolutely no indication that Apple could not do so in a deflationary environment.  Because exactly things like i-phones indicate that people do not postpone their acquisition, even if the same item gets much cheaper one year later.  The i-phone 4S got much cheaper one year after it got released, but people were standing in a queue to be able to buy it, the first day, at full price.  When the i-phone 5 got out, the same happened.  And the same happened when the i-phone 6 came out.

If people were going to postpone their demand because items become cheaper, then nobody would ever stand in a queue before an Apple shop the day when a new version of an i-phone comes out, wouldn't they ?

So, no, people do not postpone their demand because of mild deflation.  As such, in mild deflation, companies can still have ideas, bring out new products, generate (or not) demand for it, in exactly the same way as under mild inflation.

Under mild inflation, business have to pay higher interest on their loans than under mild deflation.  But "money doesn't get cheaper".  The price of money (the real interest rate) is determined by offer and demand.

For businesses, there is no real difference between an environment that is mildly inflationary or mildly deflationary.

[dinofelis]

Which is a HUGE part of the economy!!!

It is a huge parasite on the economy, yes.  Their true added value is essentially zilch, and they can appropriate them a lot of production, through seigniorage that goes with monetary inflation.

[dinofelis]

Depreciation from obsolescence is not the same as monetary appreciation.

It is.  You have the situation where you have an object A that you can acquire for X NOW or for X - Y LATER.  The anti-deflation proponent's claim is that if such a situation presents itself, people will postpone their acquisition.  You would be crazy to buy A now for X, if you can buy it next year for X - Y, no ?  That's the argument, isn't it ?

Well, empirical evidence shows that that is not true.  People queue to buy A at price X NOW, and they don't buy it a lot one year later at price X - Y.  Some people do, but most don't.

Iphone 4 depreciates against iphone 5 etc, latest iphone doesnot depreciate against the dollar, and similar other fast iterating products

That is not the point.  And even that is not true.  For the i-phone, it may be the case.  But for personal computers, the "state of the art" latest machine has been dropping in price for decades.  My very first personal computer, I bought it beginning of the eighties for the (non-inflation corrected !) sum of about 6000 Euro (it weren't Euros back then).  My second personal computer was a Mac-plus, which I bought for 3000 Euro.
In 2000 I bought a PC for 1200 Euro.  I recently bought a good laptop for 800 Euro.

[GreenStox]

What do you mean by "underlying money instrument", I don't quite understand. Could you give an example of such an instrument? if the business begins suffering losses, they won't miraculously turn into profits, even if the "underlying money instrument" gets more valuable.

The currency itself. Economics is all about relativity.

You lose profit because the prices go down for whatever you produce or service out.

But you also lose expenses, because your raw materials, cost of labour, electricity, and wages of your workers go down.

And they all go down the same % point, so this relative decline makes you at status quo, and you didnt lost anything after all.

=========

And the same for the consumer, yes his wages go down, but the prices of the stuff around him also goes down, so its only an illusion that you lose money , when infact you didnt gain nor loose anything.

In fact since the competition is now tigher than evenr you get alot of quality stuff that never existed before in an inflationary-minimum wage based economy.

You also dont need a pension system in this world. Becaue you put 20$ away today and find yourself with 1m$ by the time you get old.

========

This completely eliminates the need for central bank & government leftist -marxist welfare bullshit, and makes the economy 999999999x more efficient.

[ffe]

And they all go down the same % point, so this relative decline makes you at status quo, and you didnt lost anything after all.

=========

And the same for the consumer, yes his wages go down, but the prices of the stuff around him also goes down, so its only an illusion that you lose money , when infact you didnt gain nor loose anything.

Where is the story of sticky wages in this? The one main reason for loss of real output and increase in unemployment during an economic shock and it doesn't show up anywhere in your narrative.

It's never "the same % point" and salaries never drop as fast as they need to, not for the currently employed, so they lose their jobs.

[twiifm]

Which is a HUGE part of the economy!!!

It is a huge parasite on the economy, yes.  Their true added value is essentially zilch, and they can appropriate them a lot of production, through seigniorage that goes with monetary inflation.

Umm,  production requires credit if you are big business.  Without finance production would massively slow down.

In a mildly deflationary enviroment cost of borrowing is too expensive. People wont afford to buy big ticket things like houses or cars if they had to pay cash.