Is deflation truly that bad for an economy?

[thaaanos]

Not all things follow a linear path, you argue that deflation is a simple transition from inflation while we argue that there is a phase change involved. I think that your argument of linear transition doesn hold, as agents in a deflationary environment alter their behaviour substantiantly. That is you cannot draw analogies between inflationary equilibriuoms and deflationary. Phase change is never symmetrical

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[freeyourmind]

I think some reality check is urgently needed. You insist that deflation mirrors inflation, and I take crazy numbers for an example. Okay, you have 3% inflation and a real interest rate of 2%, not something that you would call crazy, right? What will the real interest rate then be for the deflation of the same 3% according to your logic?

You cannot have 3% deflation and only 2% real interest rate in steady state, long term.

Because the *source* of deflation is also the *source* of real interest, namely economic expansion ("more goods chasing the same amount of gold").

The ONLY way to obtain a stronger deflation rate than the economic expansion rate (in steady state, long term) is when money is DESTROYED systematically.  If gold is regularly dumped in the ocean or sent in deep space or so.  If bitcoins become un-spendable (hehe!). 

On the other hand, upward, inflation wise, there is no limit.  You could print so much money that you get 80% inflation if you want to, as a matter of speaking.

What I meant with "deflation mirrors inflation" is for those sets of numbers that make sense.  Of course inflation can be made arbitrarily big, while deflation not.  But *for those sets of numbers that are possible* the two mirror situations are dual.  There are indeed number combinations of inflation possible, that are not possible with deflation.  But that's not the point.  For those that are both possible, they are mirrors of each other.

Look at it this way: I could say, in some or other mechanical problem, that "the mass increase is a mirror to the mass decrease".  But then of course, a mass increase is always possible, and, as you cannot get a negative mass, the mass decrease is limited to the original mass.

I don't think the only way to increase the deflation rate is to destroy money.  It would be more based on the velocity of money and the volume of money changing hands in the form of transactions.  Even with a high money supply where no money is being destroyed, if there aren't many transactions happening (perhaps because the interest rate is high and people are encouraged to save rather than consume) it may theoretically cause deflation as sellers of goods/services would need to lower prices to sell non-essentials assuming elastic demand.

Also, it would be possible for the deflation rate to be very large; it's just that the stimulus-addicted government wouldn't think to do it.  Theoretically speaking, imagine if interest rates went to 30% tomorrow.  It would be sort of like hyper-deflation.  Spending and consumption would drop so significantly, that prices would need to fall to sell non-essential products, which would slow down retail, then slow down manufacturing, and wages would need to fall along with higher unemployment.  Realistically, this wouldn't happen though, but it is in the spectrum of possibilities.

[Erdogan]

I think some reality check is urgently needed. You insist that deflation mirrors inflation, and I take crazy numbers for an example. Okay, you have 3% inflation and a real interest rate of 2%, not something that you would call crazy, right? What will the real interest rate then be for the deflation of the same 3% according to your logic?

You cannot have 3% deflation and only 2% real interest rate in steady state, long term.

Because the *source* of deflation is also the *source* of real interest, namely economic expansion ("more goods chasing the same amount of gold").

The ONLY way to obtain a stronger deflation rate than the economic expansion rate (in steady state, long term) is when money is DESTROYED systematically.  If gold is regularly dumped in the ocean or sent in deep space or so.  If bitcoins become un-spendable (hehe!). 

On the other hand, upward, inflation wise, there is no limit.  You could print so much money that you get 80% inflation if you want to, as a matter of speaking.

What I meant with "deflation mirrors inflation" is for those sets of numbers that make sense.  Of course inflation can be made arbitrarily big, while deflation not.  But *for those sets of numbers that are possible* the two mirror situations are dual.  There are indeed number combinations of inflation possible, that are not possible with deflation.  But that's not the point.  For those that are both possible, they are mirrors of each other.

Look at it this way: I could say, in some or other mechanical problem, that "the mass increase is a mirror to the mass decrease".  But then of course, a mass increase is always possible, and, as you cannot get a negative mass, the mass decrease is limited to the original mass.

I don't think the only way to increase the deflation rate is to destroy money.  It would be more based on the velocity of money and the volume of money changing hands in the form of transactions.  Even with a high money supply where no money is being destroyed, if there aren't many transactions happening (perhaps because the interest rate is high and people are encouraged to save rather than consume) it may theoretically cause deflation as sellers of goods/services would need to lower prices to sell non-essentials assuming elastic demand.

Also, it would be possible for the deflation rate to be very large; it's just that the stimulus-addicted government wouldn't think to do it.  Theoretically speaking, imagine if interest rates went to 30% tomorrow.  It would be sort of like hyper-deflation.  Spending and consumption would drop so significantly, that prices would need to fall to sell non-essential products, which would slow down retail, then slow down manufacturing, and wages would need to fall along with higher unemployment.  Realistically, this wouldn't happen though, but it is in the spectrum of possibilities.

Imagine what happens if Greece defaults on government bonds. What will people around the world think of government bonds in general, when they understand that their pensions are basically government bonds? There could be a violent contraction of credit, thus general price deflation. On the other hand, they could just blame it on one bad government, their own might be okay. Impossible to know.

[freeyourmind]

Imagine what happens if Greece defaults on government bonds. What will people around the world think of government bonds in general, when they understand that their pensions are basically government bonds? There could be a violent contraction of credit, thus general price deflation. On the other hand, they could just blame it on one bad government, their own might be okay. Impossible to know.

Given the financial state of Greece, I'd assume that the bond yields would have somewhat adjusted (increased) given the higher level of risk?

I haven't been keeping a very close eye on Greece's situation lately.  Since they don't have their own monetary policy, who is the main lender? ECB?

[aso118]

Imagine what happens if Greece defaults on government bonds. What will people around the world think of government bonds in general, when they understand that their pensions are basically government bonds? There could be a violent contraction of credit, thus general price deflation. On the other hand, they could just blame it on one bad government, their own might be okay. Impossible to know.

Given the financial state of Greece, I'd assume that the bond yields would have somewhat adjusted (increased) given the higher level of risk?
I haven't been keeping a very close eye on Greece's situation lately.  Since they don't have their own monetary policy, who is the main lender? ECB?

The increase has been more than a slight adjustment. Greek bond yields have continuously increased since Sep-2014. I wonder how much higher they can go.

Sep-14 : 5.9%
Oct-14: 7.3%
Nov-14: 8.1%
Dec-14: 8.4%
Jan-15: 9.5%
Feb-15: 9.7%
Mar-15: 10.5%


http://www.ecb.europa.eu/stats/money/long/html/index.en.html

[freeyourmind]

Imagine what happens if Greece defaults on government bonds. What will people around the world think of government bonds in general, when they understand that their pensions are basically government bonds? There could be a violent contraction of credit, thus general price deflation. On the other hand, they could just blame it on one bad government, their own might be okay. Impossible to know.

Given the financial state of Greece, I'd assume that the bond yields would have somewhat adjusted (increased) given the higher level of risk?
I haven't been keeping a very close eye on Greece's situation lately.  Since they don't have their own monetary policy, who is the main lender? ECB?

The increase has been more than a slight adjustment. Greek bond yields have continuously increased since Sep-2014. I wonder how much higher they can go.

Sep-14 : 5.9%
Oct-14: 7.3%
Nov-14: 8.1%
Dec-14: 8.4%
Jan-15: 9.5%
Feb-15: 9.7%
Mar-15: 10.5%


http://www.ecb.europa.eu/stats/money/long/html/index.en.html

Thanks for the info.  That's pretty crazy for government bonds lol.  So for people already holding bonds, with that type of increase to yields, the price would have already dropped significantly.  New bondholders should understand the risk and be compensated with a higher yield.

Any insight into who the main bondholders are that would suffer from a default?  Greek citizens or foreign investment?

[manselr]

I think the system is devised SO that you are a debt slave from day one, regardless of whether you're an idiot or not. How many people are able to pay, in full, for their house, car, education, and healthcare? Please tell us how you save(d) for these things with rampant inflation.

In this fucked up system, one could argue that "idiots" actually do better, since they clamor for assets, while "smart" people try to save in a currency not meant for saving.

[freeyourmind]

I think the system is devised SO that you are a debt slave from day one, regardless of whether you're an idiot or not. How many people are able to pay, in full, for their house, car, education, and healthcare? Please tell us how you save(d) for these things with rampant inflation.

In this fucked up system, one could argue that "idiots" actually do better, since they clamor for assets, while "smart" people try to save in a currency not meant for saving.

Yeah unless you are born into wealth and inheritance, most people require debt to spread the expenses of current consumption into the future.  Those that have assets that generate passive income, are the ones that benefit from the system.  That is, they are able to make income without having to invest their own time, or investing very little time.  An example of this would be a landlord that leases land or property.

Inflation also helps those with assets, and hinders those without, widening the gap and making it more difficult for the have-nots to become part of the haves.

[sana54210]

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?

There is a fine line between inflation and deflation which is the balance of economy is the best to run the government, either to the extreme to inflation or deflation is unhealthy and can be disastrous to the government and its people, it is inevitable that a country should face both of them and rebounding to a balance for the government to run well.

[Get-Paid.com]

I think the system is devised SO that you are a debt slave from day one, regardless of whether you're an idiot or not. How many people are able to pay, in full, for their house, car, education, and healthcare? Please tell us how you save(d) for these things with rampant inflation.

In this fucked up system, one could argue that "idiots" actually do better, since they clamor for assets, while "smart" people try to save in a currency not meant for saving.

The real "smart" people are those who make lots of money and can afford paying for the things you mentioned.
Have you watched the movie "Margin Call"?
Or what about Alessio Rastani's famous Youtube video?

Alessio said "Goldman Sachs rules the world", they tell the government what to do, they control so many things and make billions of $$$ on a monthly basis.

When you study business you learn that organizations and firms are companies ranging from small to big - but institutions - these are very large organizations ... educational institutions such as universities and colleges dictate our lives when it comes to studies ... and financial institutions such as Goldman Sachs dictate our financial lives.

Is it fair? No.
But what can you do about it? If you can't beat 'em join 'em.

[twiifm]

I think the system is devised SO that you are a debt slave from day one, regardless of whether you're an idiot or not. How many people are able to pay, in full, for their house, car, education, and healthcare? Please tell us how you save(d) for these things with rampant inflation.

In this fucked up system, one could argue that "idiots" actually do better, since they clamor for assets, while "smart" people try to save in a currency not meant for saving.

The real "smart" people are those who make lots of money and can afford paying for the things you mentioned.
Have you watched the movie "Margin Call"?
Or what about Alessio Rastani's famous Youtube video?

Alessio said "Goldman Sachs rules the world", they tell the government what to do, they control so many things and make billions of $$$ on a monthly basis.

When you study business you learn that organizations and firms are companies ranging from small to big - but institutions - these are very large organizations ... educational institutions such as universities and colleges dictate our lives when it comes to studies ... and financial institutions such as Goldman Sachs dictate our financial lives.

Is it fair? No.
But what can you do about it? If you can't beat 'em join 'em.

Thats BS.  A lot of companies make a lot more money than GS.  Apple, Google, Wal Mart, Exxon, etc..

GS is not as powerful as you make them out to

[Get-Paid.com]

I think the system is devised SO that you are a debt slave from day one, regardless of whether you're an idiot or not. How many people are able to pay, in full, for their house, car, education, and healthcare? Please tell us how you save(d) for these things with rampant inflation.

In this fucked up system, one could argue that "idiots" actually do better, since they clamor for assets, while "smart" people try to save in a currency not meant for saving.

The real "smart" people are those who make lots of money and can afford paying for the things you mentioned.
Have you watched the movie "Margin Call"?
Or what about Alessio Rastani's famous Youtube video?

Alessio said "Goldman Sachs rules the world", they tell the government what to do, they control so many things and make billions of $$$ on a monthly basis.

When you study business you learn that organizations and firms are companies ranging from small to big - but institutions - these are very large organizations ... educational institutions such as universities and colleges dictate our lives when it comes to studies ... and financial institutions such as Goldman Sachs dictate our financial lives.

Is it fair? No.
But what can you do about it? If you can't beat 'em join 'em.

Thats BS.  A lot of companies make a lot more money than GS.  Apple, Google, Wal Mart, Exxon, etc..

GS is not as powerful as you make them out to

Goldman Sachs exemplifies a financial institution that benefits from low interest rates whilst millions of people suffer from it.
Google or Apple at least have a decent value chain, they provide value for your money.

The problem with financial institutions is not those who make more than them (e.g. Google, Apple) but with the way they handle their affairs, just watch the movie "Margin Call" (based on true story) and see what I'm talking about.

[johnyj]

I think the system is devised SO that you are a debt slave from day one, regardless of whether you're an idiot or not. How many people are able to pay, in full, for their house, car, education, and healthcare? Please tell us how you save(d) for these things with rampant inflation.

In this fucked up system, one could argue that "idiots" actually do better, since they clamor for assets, while "smart" people try to save in a currency not meant for saving.

The real "smart" people are those who make lots of money and can afford paying for the things you mentioned.
Have you watched the movie "Margin Call"?
Or what about Alessio Rastani's famous Youtube video?

Alessio said "Goldman Sachs rules the world", they tell the government what to do, they control so many things and make billions of $$$ on a monthly basis.

When you study business you learn that organizations and firms are companies ranging from small to big - but institutions - these are very large organizations ... educational institutions such as universities and colleges dictate our lives when it comes to studies ... and financial institutions such as Goldman Sachs dictate our financial lives.

Is it fair? No.
But what can you do about it? If you can't beat 'em join 'em.

To defeat the evil, you must become the greater evil  

Today's system is transformed from a legit and honest system little by little

1. Use fractional reserve on gold (40%) to create partially backed fiat money
2. Over decades, slowly reduce that reserve ratio
3. Eventually remove gold backing, replacing it with debt backing
3. Increase the money supply slowly following the GDP development
4. Over decades, increase the money supply faster and faster
5. Eventually dramatically increase the money supply and increase the debt exponentially during a crisis, so that everyone is heavily debt laden

If you want to invent an alternative system, better take the same approach, do little change at a time. Most of the people are short sighted and ignorant, they will adopt to changes without question when the change takes decades to happen

[freeyourmind]

To defeat the evil, you must become the greater evil  

Today's system is transformed from a legit and honest system little by little

1. Use fractional reserve on gold (40%) to create partially backed fiat money
2. Over decades, slowly reduce that reserve ratio
3. Eventually remove gold backing, replacing it with debt backing
3. Increase the money supply slowly following the GDP development
4. Over decades, increase the money supply faster and faster
5. Eventually dramatically increase the money supply and increase the debt exponentially during a crisis, so that everyone is heavily debt laden

If you want to invent an alternative system, better take the same approach, do little change at a time. Most of the people are short sighted and ignorant, they will adopt to changes without question when the change takes decades to happen

At the same time as #3, also establish the petro dollar and global reserve currency status (significantly increasing the global demand for USD).

[GreenStox]

To defeat the evil, you must become the greater evil  

Today's system is transformed from a legit and honest system little by little

1. Use fractional reserve on gold (40%) to create partially backed fiat money
2. Over decades, slowly reduce that reserve ratio
3. Eventually remove gold backing, replacing it with debt backing
3. Increase the money supply slowly following the GDP development
4. Over decades, increase the money supply faster and faster
5. Eventually dramatically increase the money supply and increase the debt exponentially during a crisis, so that everyone is heavily debt laden

If you want to invent an alternative system, better take the same approach, do little change at a time. Most of the people are short sighted and ignorant, they will adopt to changes without question when the change takes decades to happen

At the same time as #3, also establish the petro dollar and global reserve currency status (significantly increasing the global demand for USD).

And keep a strong military in case any country questions or rebels agains the hegemony

[twiifm]

I think the system is devised SO that you are a debt slave from day one, regardless of whether you're an idiot or not. How many people are able to pay, in full, for their house, car, education, and healthcare? Please tell us how you save(d) for these things with rampant inflation.

In this fucked up system, one could argue that "idiots" actually do better, since they clamor for assets, while "smart" people try to save in a currency not meant for saving.

The real "smart" people are those who make lots of money and can afford paying for the things you mentioned.
Have you watched the movie "Margin Call"?
Or what about Alessio Rastani's famous Youtube video?

Alessio said "Goldman Sachs rules the world", they tell the government what to do, they control so many things and make billions of $$$ on a monthly basis.

When you study business you learn that organizations and firms are companies ranging from small to big - but institutions - these are very large organizations ... educational institutions such as universities and colleges dictate our lives when it comes to studies ... and financial institutions such as Goldman Sachs dictate our financial lives.

Is it fair? No.
But what can you do about it? If you can't beat 'em join 'em.

Thats BS.  A lot of companies make a lot more money than GS.  Apple, Google, Wal Mart, Exxon, etc..

GS is not as powerful as you make them out to

Goldman Sachs exemplifies a financial institution that benefits from low interest rates whilst millions of people suffer from it.
Google or Apple at least have a decent value chain, they provide value for your money.

The problem with financial institutions is not those who make more than them (e.g. Google, Apple) but with the way they handle their affairs, just watch the movie "Margin Call" (based on true story) and see what I'm talking about.

Why do millions of people suffer from low interest rates?  It's a good time to borrow money if you qualify.

Apple benefits from low interest rates as well.  They did huge buyback this year.

Investments banks provide services to investors.  With out them there would be no capital markets and capital markets are essential for Capitalism.  Apple, Google, Walmart, et al wouldn't exist without a capital market

[thaaanos]

Imagine what happens if Greece defaults on government bonds. What will people around the world think of government bonds in general, when they understand that their pensions are basically government bonds? There could be a violent contraction of credit, thus general price deflation. On the other hand, they could just blame it on one bad government, their own might be okay. Impossible to know.

Given the financial state of Greece, I'd assume that the bond yields would have somewhat adjusted (increased) given the higher level of risk?
I haven't been keeping a very close eye on Greece's situation lately.  Since they don't have their own monetary policy, who is the main lender? ECB?

The increase has been more than a slight adjustment. Greek bond yields have continuously increased since Sep-2014. I wonder how much higher they can go.

Sep-14 : 5.9%
Oct-14: 7.3%
Nov-14: 8.1%
Dec-14: 8.4%
Jan-15: 9.5%
Feb-15: 9.7%
Mar-15: 10.5%


http://www.ecb.europa.eu/stats/money/long/html/index.en.html

Thanks for the info.  That's pretty crazy for government bonds lol.  So for people already holding bonds, with that type of increase to yields, the price would have already dropped significantly.  New bondholders should understand the risk and be compensated with a higher yield.

Any insight into who the main bondholders are that would suffer from a default?  Greek citizens or foreign investment?

Private investors are no more since PSI, the bonds they hold are swaped by ecb guaranteed bonds (i think). The current debt is held by imf and other europe govs
Market access is barred some years now, so yields are decorative

[umair01]

Deflation and inflation are both bad for a country when it runs to the extreme side, it is inevitable that a country should face both inflation and deflation but it should recover and come back to a balance of not going into the either extreme, this capacity ensures that a country  runs stable and does not run into crisis.

[bobos reloaded]

If you believe that only inflation is bad, then you need to study more macroeconomics. Start from here: https://en.wikipedia.org/wiki/History_of_macroeconomic_thought

[johnyj]

If you believe that only inflation is bad, then you need to study more macroeconomics. Start from here: https://en.wikipedia.org/wiki/History_of_macroeconomic_thought

Give me the right of creating money then I don't care who is studying macroeconomics  

"In the name of economy" is the most cunning excuse I see over my life time. Economy itself consists of shows and shows of scam and chess play, it always rob those innocent participants who have no idea of how the scheme works. You can even observe plenty of these scam in a small economy like bitcoin ecosystem, not even mention the real economy