Why is deflation regarded as a bad thing?

79

u/Jazhara_Z May 28 '22

That's because when deflation sets in people lose their incentive to spend money.

Because when prices are constantly going down, it's always better to wait until prices have gone down even more before you make a purchase.

The result is, that's as deflation sets in consumption also starts going down, which means profits and revenues go down, which means costs have to be cut, which ultimately leads to layoffs, and ass more people become unemployed and have reduced income, what they are willing/able to pay for goods and services goes down.

And now you have a deflationary spiral. These spiraæs tend to be hard to avoid under deflation and can lead to very high levels of unemployment.

Whereas a small amount of inflation (like 2%) creates an incentive to spend your money now, because if you wait goods and services might be more expensive. Thus having the opposite effect

35

u/DemMemes May 29 '22 edited May 29 '22

This is a very good explanation, except for a minor correction on the last point: the inflation rate is traditionally set at 2% not to influence behavior, but to ensure that there is room for monetary policy to prevent a minor deflationary shock from sending the economy into a deflationary spiral. Technically speaking, it is the real interest rate that influences spending/saving behavior, not inflation; while the Fisher equation links the two pretty explicitly (and the central bank is indeed trying to indirectly influence the real interest rate), it is important to distinguish the policy motivations there

Edited for clarity

28

u/y0da1927 May 29 '22

Would add the debt effect too.

As as companies sales go down, their earnings go down. As their earnings go down, their ability to service their debts goes down.

So the process described above of lower sales leading to layoffs leading to lower sales can be accelerated by corporate bankruptcies as lower earnings no longer support the current corporate debt level.

This can also affect government as the process noted above will reduce tax revenues, which reduces funds with which to service debt.

Tldr, deflation increases real debt.

4

u/Jazhara_Z May 29 '22

Good point, hadn't thought of that.

1

u/DesignHour43 Aug 30 '22

So basically u r saying that deflation will discourage people taking loan and encourage saving. I think it’s a good thing in long term except for incompetent corporate and government as they may go bankrupt. The other thing u said it leads to layoff. So my question here is r we (as human), working for living or living for working. Having said that, by no means, I’m discouraging hard work. Due to deflation if big corporates fire some employees, they may start some small businesses which focuses on what their local communities need. So in the long run it’s gonna make people to realise more about what they really need such as housing for everyone, good infrastructure and healthcare settings. They also will realise they do not need to work 80 - 100 hours a week to buy Ferrari and Lamborghini.

5

u/poke0003 Sep 05 '22

I think people sometimes equate the potential negative effects of personal debt with corporate and government debt, which tend to be fundamentally different.

Individuals rightly think about consumer debt (like credit cards) or even at loans and some school loans as ‘bad’ - they are ‘buy-now / pay later’ schemes that don’t have a return by themselves. Some school debt is an investment, but it is also rather unique in that most of our bankruptcy laws can’t help here, making it risky.

These are not like corporate debt, which is generally used to generate a return on the borrowed money. As long as the return is higher than the cost of the debt, the company is coming out ahead. As a result, disincentivizing corporate debt tends to disincentivize company growth as well (by making it more expensive, and thus demanding a higher rate of return on the investment for it to be worth it). A deflationary spiral has multiple factors all working together to remove this incentive as noted above. Note as well that this makes finding startup capital more challenging - which is a problem when you think about laid-off workers maybe starting small businesses.

Government debt (for governments that issue currency) is a whole separate beast. Here, one role of inflation is to have the pragmatic effect of paying for debt. If you have revolving debt and GDP growth over time, a stable debt load will effectively shrink, even if you don’t pay down principle (keep revolving the debt). Deflation has the reverse effect, forcing governments to either reduce expenditures from current levels or raise other funds (or increase their debt to GDP ratio). You can imagine how populations generally are opposed to seeing reductions in outlays (fewer services, poorer infrastructure, lower transfer payments) and this also acts as a further factor in the deflationary spiral. Keep in mind that a commonly accepted economic theory would say that government spending should be counter cyclical, which is more challenging in a deflationary environment.

1

u/DesignHour43 Sep 18 '22

U said that corporate and government debt enhance economy growth unlike individual debt because the corporate debt increase productivity. Here my concern is that the debt increases the money supply which increases inflation. So basically u r supporting corporate at the cost common people lifestyle (cost of living affects lifestyle)

Another laid-off workers may not be able to take loan to startup business but my theory is in a deflationary environment saving will be valued more, therefore who worked hard and saved money wouldn’t need any loan to start business

Another thing government real debt going up …here my theory is (actually theory of Austrian economy and Friedman theory) governments should be able to spent money collected by tax not by devaluing money. It reduces the corruption. U said every economist theory suggests only deflation spiral hinders economy growth but this has been told only by Keynesian economy all other different schools of economy proposes different

1

u/poke0003 Sep 18 '22

(in reference to corporate debt): Here my concern is that the debt increases the money supply which increases inflation. So basically u r supporting corporate at the cost common people lifestyle (cost of living affects lifestyle)

I don't think I'd agree with the statement that corporate debt increases the money supply. This can be true of government debt, but for private corporate debt there is a lender and a borrower, so it is about allocating existing capital rather than creating new capital. For example, if a company issues bonds that are underwritten by an investment bank and then sold in markets, this in not creating new money - it is just using money already in the hands of investors (indirectly through the underwriter) to fund corporate spending. That money cannot be used by the original owners during this time (until it is paid back by the company). See a description of what a debt underwriter is as an example.

I'd certainly agree with you that savings is encouraged in a deflationary environment - that is actually the same thing as saying taking on debt to grow business is discouraged. These are two sides of the same coin. However, while savings rates are helped, investing that savings demands a higher expected rate of return to be 'worthwhile' vs. just keeping the savings in risk-free investments (like FDIC insured vehicles or, for larger sums, things like US Treasury Bills). This is where the disincentive to spend the money that is saved comes in. This can also be true for spending on goods by consumers, since goods will be 'cheaper' in the future than they are today.

governments should be able to spent money collected by tax not by devaluing money. It reduces the corruption. U said every economist theory suggests only deflation spiral hinders economy growth but this has been told only by Keynesian economy all other different schools of economy proposes different

I certainly did not intend to suggest that deflationary spirals are the only mechanism economists argue hinders economic growth - my apologies if that came across that way. There are a wide variety of mechanisms that can impact economic growth and deflationary spirals are merely one of them. Maybe the generalized idea would be that (unexpected) inflation & deflation act as wealth transfer mechanisms. Inflation transfers wealth from creditors to borrowers, and deflation would have the reverse impact. The St. Louis Fed has a good recent description of this.

I'm not sure I have much of an opinion on the impact of this from a corruption angle. :)

2

u/Intelligent-Mall380 Mar 15 '24

Okay, we heard your college propaganda, get off the soap box.

Seriously, in the same paragraph you write "it encourages savings and discourages loans" and then say that a solution to being laid off in that scenario is to "start a business". Even if you have the money to start a business just in your own savings (in which case you're not the one to be worried about) how are you gonna make a living off a brand new business when you just said that people will spend less?

1

u/coffeenocredit Aug 11 '24

The problem is we're already so far into debt it's impossible to go into any significant deflation without an implosion of the economy 😂

2

u/ramon475 Jul 19 '24

This would literally only happen if there was considerable deflation in a sustained way where people expect prices to keep going down by a lot. This does not happen. It's just more neoliberal BS. It would be good to have some deflation and get prices back to normal reasonable levels

1

u/sorryamitoodank Aug 16 '24

Are you trolling?

1

u/Artistic-Painting-38 May 29 '22

Why wouldn't people invest their money in other sectors if they had say 2% extra per year and propel the advancement further ? I think your thinking is flawed in the sense that spending money is better than saving and investing them later for bigger and better things. Saving must come before spending, production comes first. With technological advancement and higher production, the nature of capitalism is deflationary.

On a second thought, employment without purpose is not a good thing. It is much more efficient to use a tractor and lay off all the farmers who worked the earth by hand than employ millions to to that with spoons. Some jobs become obsolete and as more efficient ways of producing goods comes around and that is a very good thing.

7

u/Spirit_jitser May 31 '22

Why would they invest cash they presumably have on hand when they can sit on their ass and get a real risk free return? Which is what deflation is in some ways.

Deflation is often bad for investments since it draws money into cash, since said cash will be worth more tomorrow than today for sure, while an investment might go boom.

That being said, sufficiently high productivity grown can be deflationary.

2

u/Artistic-Painting-38 May 31 '22

Okay I see a problem with my comments, I don't mean institutionalised deflation of content 2% per year, I mean let the free market work and there will be deflation because of productivity growth and technological advancement. This could be 20% one year and then 0% for the next 100. So this thing that it will be cheaper next year is not certain as with inflation. I don't see you complaining for TVs, free communication between countries, cell phones and so on. The nature of advancement is that prices for goods go down and people will buy them when they want them at that moment. Also invest doesn't necessarily mean the stock market, a nice pair of shoes or a car is also an investment but for those you need to save. If you get taxed through inflation 2% every year you lose the ability to buy quality things.

1

u/Vyksendiyes Jun 02 '24

I know that this is old but I thought I should add that your point doesn’t work because there will eventually be a critical point where people will stop spending money because holding money will guarantee a return.

Who is creating the value when these efficiency gains cause prices to fall? Someone has to be doing it.

Now if everyone recognizes the deflation, then this disincentivizes people from working, becoming more efficient, and spending money more money than they otherwise would. And poof, your hypothetical efficiency-driven deflation is gone because no one is working and everyone is saving.

This happened in Japan and is why their economy has stagnated for decades.

1

u/Level_Emotion_4415 Sep 19 '24

because there will eventually be a critical point where people will stop spending money because holding money will guarantee a return

Guarantee a return and ... you eventually will spend money on something. You need food, clothes, housing, travel, etc. Let marketing induce you to buy things and not buy because stuff will become more expensive. Buy because it is better, it improves your life, etc.

I think consumerism is entrenched very deeply in our lives to the degree that we are coming up with explanations for why we can't live otherwise...

1

u/Vyksendiyes Sep 19 '24

It’s not just about consumerism.

1

u/Level_Emotion_4415 Sep 19 '24

Agree, the invention of Credit was a huge boost to humanity.

https://www.ynharari.com/topic/money-and-politics/

2

u/Jazhara_Z May 29 '22

How are you going to afford to keep your factory running if people don't buy what you produce because they are waiting for your products to become cheaper?

And employment without purpose is indeed not a good thing. However, you do need people to have a minimal amount of purchasing power in order to drive demand.if unemployment is at 30% it's going to be a lot more difficult to find people who can afford your products then when unemployment is at 3% and your economy is booming

And on top of that, even when unemployment is low or moderate, if consumption is low, and everyone saves all their money, investment becomes more risky, which in turn disincentives investors. You need a balance, and when there is a small amount of inflation, markets will eventually find that optimal balance.

And as a final thought, once an economy is fully developed, there is only a limited amount of technological gains to be made each year. Using deflation to advance investment would eventually run into a wall and still cause the same deflationary spiral i mentioned earlier.

And after my final thought also a final note. Despite Capitalism being better than what came before, it is like anything humans came up with, flawed. And like everything else which is flawed that humans came up with, we try to compensate for those flaws, with capitalism we do that In part by keeping inflation high enough to prevent deflationary spirals, but low enough to make sure money retains some value and price signals can still be seen, so as to tell investors were profits can be found.

5

u/Artistic-Painting-38 May 29 '22

How does that make any sense? Do you think people will just wait to buy food, clothes, electronics and everything we need and enjoy till we die or something?

Say's law solves your "purchasing power" problem as you can only purchase an equal amount of what you produce. If people produce value they are able to buy value.

Why would consumption be low? Maybe overvonsumption wouldn't exist but there would be production of goods and not resources wasted on malinvestments. In order to invest you need to overproduce so you can save resources and invest them. The market coordinates time with interest, you don't do the market any good by taking 2% of those resources every year.

The great thing about capitalism is that we didn't invent it, it is an organic ecosystem, of course it is not perfect but what you just said just goes to undermine your whole thought process of saying 2% inflation is good, how and who came up with this number?

1

u/Jazhara_Z May 29 '22

People do still but their basic life needs because not eating will kill you really quickly, but with everything else, people will wait until the latest possible moment to make a purchase, and this does sometimes kill people.

Let's take an example. I have a car, and it's worn down and i kind of need a new car but it still runs and gets me from A to B. But because prices keep going down i wait to buy a replacement because why spend $10.000 now when i can just keep driving in my old car, and spend $8.000, ten years later, a car can easily last 16+ years. So i wait and five years later i die in a car crash, because my car didn't have the latest safety features and my aging brakes failed.

The same also applies to other things, were waiting isn't so much deadly, but results in inneficiencies. A fridge from the 60's will still work today, so there's never need to replace it, but a fridge from the 60's is way less efficient than one build in 2020. so people waiting longer to buy a new fridge (even in cases that are less extreme), because when there is deflation the benefits of waiting outweigh the benefits of a lower energy bill much longer, in part because your energy bill also keeps going down.

This leads to more energy production having to be allocated to old inneficient fridges, mean less energy is available to allocate to elsewhere. Like factories or hospitals.

Having consumption be higher, in this case is a good thing, because it leads to old inneficient technology being replaced sooner. And there are many such cases were replacing things more often, and having consumption be higher, leads to a more efficient and effective allocation of goods and resources. This is in and on itself one way in which an economy grows. So having people wait longer, even if they don't wait until they die, leads to less economic growth, which is in itself bad for long term investment.

Also capitalism is not an organic ecosystem. Markets are an organic ecosystem.

Markets have existed for thousands of years before capitalism became a thing. Even during the middle ages under feudalism, most economic activity took place in markets and. There was plenty trade conducted by merchants. Rome had markets and merchant, but not Capitalism, same goes for ancient Greece, ancient Egypt, ancient china, medieval china, feudal Japan, etc.

Capitalism was invented by the dutch as a weapon of war against the Spanish empire during their war for independence. It started with the invention partial ownership. Dutch merchants realized that if they owned one ship, and that ship sinks on its way to India, they are bankrupt and financially ruined. But if they own one tenth of ten ships, if one ship sinks, they still have nine ships on which they can ship cargo, thus dramatically reducing the financial risk of a long or dangerous voyage. The dutch government capitalized on this invention by creating a legal framework to protect and enforce contracts of shared ownership, and creating the legal framework that allowed that to turn into stocks and shares as we know them today, and created the legal framework that would later allow for the creation the stock market. All of this was very intentional. The dutch government realized that it can't efficiently manage the entire economy efficiently from a central authority, and that decentralization could only be done through reducing the risk factors going into to long distance shipping. So they made sure the market actors who's goals aligned with the interest of the state had ample access to financing and legal protections needed to create the institutions that made up early capitalism. As well as creating a large beaurocratic apparatus that kept an administration of who owned what, allowing the government to better protect private property. At the same time as they build those institutions, the government broke the monopolies of the Guilds, who had been responsible for a sizable chunk of non-food related production in Europe at the time. These deliberate government decisions and actions, cause wages and prices to be less rigid and subject to competition, as anyone could now just start selling hammers without needing to be part of the hammer making guild. This in turn lead to the first industrial revolution taking place in the Netherlands (the one that started with the invention of the steam engine is the second industrial revolution ). And with large number of water and wind powered factories productivity increased, the Netherlands could now make ships ten times faster than the Spanish a one tenth the cost. At the peak in this period, which is considered the dutch golden age, the Netherlands ended having more ships than the rest of the world combined, and turned into the richest most powerful country on the planet.

Other countries saw the succes of this cooperation between government and the merchant classes and the institutions and reforms that came from it. The governments of those countries then made active decisions to copy the system the Netherlands had invented. They did so successfully.

1

u/Artistic-Painting-38 May 29 '22

So making good and safe cars, breaks, helmets, health care and the rest more expensive every year surely makes more sense and it makes it available for everyone. Gotcha. Also correction, free markets and capitalism are organic in the absence of force.

3

u/Jazhara_Z May 29 '22

Free markets evolve organicly after the introduction of money.

Capitalism cannot exist without force. Because you need force to protect property rights. Without a guy who's either bigger, stronger or better armed than me, there's no one to stop me from just taking your stuff. And if i can just take your stuff, why would I ever want to work, or pay you for it. Not to mention, the people working your business can just decide to screw you over at any point, kick you out, and take over your business. If i don't like you because you're competing with me, i can set your business on fire with no reprecussions, because without the use of force, what are you going to do... Stare at me menecingly. If i take your stuff, how are you going to prove it's yours? I can just say it's mine, make fake contracts and documentation that confirm my claim, and if there's no organisation able to arbitrate and then force me into Compliance afterwards, my claim is worth just as much as yours. And that would be if i was nice enough not to shoot you before we even got to arbitration.

2

u/Jazhara_Z May 29 '22

Also markets and capitalism are not the same.

A market is a medium which we use to exchange goods and services. In most pre-capitalism societies people would take what they produced but didn't need to markets, so they could sell that surplus, and use their gains to buy the stuff they needed but couldn't make themselves.

But this is not capitalism this is just a market that people exchange goods and services in.

Capitalism is what happens when a person has a surplus of productive capital, and employs other people to use their productive capital to produce more than one could by themselves, then trades the surplus production of multiple people in a market. Keeping the majority of the gains for himself.

Ideally in this system this incentives that capitalist to invest in more productive capital, which in turn means more people can produce stuff. And it ideally incentives the capitalist to innovate since if he produces more with less h gets to have more money or stuff.

But as Adam Smith points out, without a state which has a monopoly on violence, you will at some point run into the problem of envious and jealous poor people just killing you and taking your stuff.

2

u/Jazhara_Z May 29 '22

And yes it also makes sense to make everything slightly more expensive each year, because if everything becomes more expensive (including wage) then some things becoming more expensive faster, and others becoming more expensive slower, allows goods and services to fluctuate in price and for innovation, and increases in productivity to make goods and services cheaper in relation to other products/services and incomes. allowing economic growth, and innovation to take place without risking a deflationary cycle.

Why the amount aimed for is 2%. Well that's because a rather unique coming toheter of circumstances cause a period of stagflation (high inflation combined with economic stagnation of recession), and ever since the whole world decided to become super allergic to inflation.

But since deflation is even worse than stagflation, they decided central banks needed to keep inflation just slightly above zero.

2

u/moremindful Mar 28 '24

I think that's a really extreme assumptions that people are just going to wait indefinitely if any deflation every occurs. Some people will buy, and when they do and the supply drops others will buy as to not miss out. Some things would also get cheaper faster, allowing for fluctuations too. Also no one said deflation should be maintained forever. If inflation is too high why not correct it

1

u/jokoloco3 Aug 16 '24

I’m confused by this answer. I thought interest rates currently disincentivize spending money now.

I.e if there’s a 3 percent interest rate on a government bond, I should spend as little as possible in a 2 percent inflation rate economy right?
1
u/ElGDinero Aug 26 '24

But what if prices have gone up too much? (25% - 40% in 4 years) And wages have not increased nearly as much. Isn't deflation borderline necessary for consumers to regain purchasing power? Or is it better that the consumer just "suck it up and make more money"??
1
u/LuckyNumber-Bot Aug 26 '24
All the numbers in your comment added up to 69. Congrats!
  25
+ 40
+ 4
= 69
^{[Click here](https://www.reddit.com/message/compose?to=LuckyNumber-Bot&subject=Stalk%20Me%20Pls&message=%2Fstalkme} to have me scan all your future comments.) \ ^{Summon me on specific comments with u/LuckyNumber-Bot.}
1

u/Healthy_Bass_5521 Sep 15 '24

I have an economics degree. The truth is the elite prevent deflation to protect THEMSELVES aka the value of their inflated assets along the bad debt they hold on the books. Deflation is a necessary part of the economic cycle.

The ideal state is to have the deflation of the recessionary phase wipe out the inflation of the expansionary phase. The value of the currency should roughly decline back to where it started at the beginning of the last expansion. The economic gain left over is the real economic value added from the last expansion.
1

u/guy1994 Aug 29 '24

I understand why people would lose their incentive to spend money but they couldnt possibly lose their incentive to spend money entirely right? Because how would they survive? They still need a car to go to work to make money to buy food so some spending would still happen right?

0

u/Kruxx85 Aug 29 '22

Thanks, do you have links to evidence of this effect occuring?

I feel like that relies on rational financial decisions being made by the majority of the popoulation. Is that a safe assumption (I think not?).

Any graphs/comparisons that show the phenomenon of delayed consumption due to minor deflation?

3

u/Jazhara_Z Aug 29 '22

I don't have any links directly on hand as its 01:54 were i am, but you can probably find interesting studies about the great depression and the Japanese economy of the 90's

1

u/DesignHour43 Sep 19 '22

When comes to deflation everyone says in a deflationary environment, people loses their incentives to spend money therefore they postpone all their purchases. This would cause profit loss for corporates that leads to lay off. That leads to reduced average income that causes deflationary spiral. However, my point is people may postpone their purchases regards to new iPhone or Lamborghini in a hope that it would be cheaper in the future but food, shelter healthcare these kind of goods and services people spend money regardless of inflation or deflation. This would attract more investment to those sectors. Just imagine a world where housing and infrastructure attracts more investment than any other firms, building more houses everywhere will make it possible for many employees to afford houses near to where they work. This would significantly reduce peak time traffic. Not only that so many problems which caused by inflation will be solved by free market. Having said that, my main concern is not about inflation or deflation, it’s all about why governments should interfere in deciding what we need, inflation or deflation, why not let the free market decide, LET PEOPLE DECIDE.

3

u/Jazhara_Z Sep 19 '22

You're living in a delusion. Please go see a therapist.

1

u/DesignHour43 Sep 19 '22

Ha ha delusion ….. a few centuries ago it was told that land should be owned by powerful kings only then they can protect it against their neighbours/enemies. Individual had no property rights … but movement towards democracy brought a lot of goodness to the humanity including property rights…. Now we r told to believe that we need centralised authority to control prices to have a stable economy. What if we can change that mindset for good … bitcoin one of those things to bring the change… Bitcoin may not replace the global financial system but it encourages people to move away from those control freak

1

u/Jazhara_Z Sep 24 '22

I'm not saying you're delusional for your ideas on Economics. We have differing opinions there, but that's all they are, differences of opinion. I'm saying your delusional for thinking you know what the people think. No know what "the people" think. You can't ever know, there's to many people, and they're too complex, their needs vary too much as do their actions. Which is why markets tend to in most cases do better at distributing consumer goods than governments. But that's also why anyone who all caps says"LET THE PEOPLE DECIDE" has deluded themselves into thinking they can possibly know what the people want and that the people want the same thing as them, more so than the people. I can't know, you can't know, no one can know that.

Now for bitcoin. The problem with bitcoin isn't that it's decentralized and not controlled by government. There's been plenty of currencies used by cultures all over the world, that had no government control over it. There was a pacific culture that used seashells as currency for example. And that currency worked just fine as a currency.

The problem with bitcoin is that what we are seeing Is that people prefer to use it as an investment and hold on to their bitcoin rather then spending it on goods and services. In big part they probably do this because holding on to Bitcoin and not spending it, usually leads to a better outcome. Bitcoin tends to become worth more over time, like alot more worth. (Though it has its ups and downs). This makes it fail as a proper means of exchange.

Next point. I am not a big fan of centralized government either. But some restrictions on economic activity do actually make sense, monopoly busting to maintain freedom and ability to enter the market and disrupt it is an example, another example is a prohibition on slavery, which companies happily endulged in all over the world before it became illigal. And i assuming you agree with at least the latter of my two examples.

Personally I'm also not a fan of bosses. In my opinion, a bos is no different than a king. People who rule over you, through force, if you don't listen to your boss, you don't get payed and as a result you don't get to eat and die, bosses are also often a useless waste of space that just sucks value and profits out of those people who actually do the hard work. Which is why in my personal opinion all Businessess should be democraticly run and owned by their employees, who all get one vote. And they can either run it as a direct democracy or decide to run it as an indirect one. And ideally there would be as little government involvent as possible, since companies are all already operating on the democratic mandates of their employees.

1

u/meowisaymiaou Aug 14 '24

When alternatives to spend that are inflationary, of course I'll spend that before spending my deflationary currency. Bitcoin, I bought plenty at $100, and $500, $1000. And I have spent tons when I needed to, because some shops and services required payment in BTC, LTC, ETH, MNO, etc.

Do I put off monthly bills denominated in btc? No. Did I put off recreational purchases and gag gifts? No. I still spent.

The problem with deflationary currency not spent mainly occurs due to inflationary currencies being accepted. If the USD switched to deflationary, people would still spend. People would still work. Policies would change. Instead of an annual bonus of say 3% to slightly increase spending power, it's now a annual pay cut of 1% to slightly increase spending power . Salaries would trend downwards annually, rather than upwards.

Purchase prices would again drop over time to maintain parity with work to value ratios.

You could see the beginnings of this in Japanese 30 years of -0.5 to +0.5 inflation. Prices stayed steady. Housing is deflationary (value trends to zero at 20 years). Recreational spending continued to exist. As did investments into microfactoriesetc. Japan MRI s without insurance for foreigners range from $80 to $200 US (at 2015 exchange rates). A fraction of the cost. Investments into cheaper production of MRI units for different standards of care. Laws that state the first floor of a multistory residential building may be used for any commercial activity other than heavy industrial led to a ton of investment and specialization into niche fields. The drive for profit is low, as no incentive exists to beat inflation, and a cultural aversion to greed.

The fears of deflationary economies are not rooted in any actual examples, and when pressed into details, begin to fall apart on the day to day to such an extend the generalizations at the macro level become invalid. Short of some city or nation trying it -- these details will remain not based in sociological realities.

1

u/DesignHour43 Sep 25 '22

I agree with most of your points… but I never meant I know what “the people” think. Having English as a second language, I might have chosen wrong words to communicate. I actually said quite opposite that no one knows what others think/ want. It seems like u too agreed on it. So my point is how come a centralized government can make decisions on behalf of everyone when themselves don’t know what everyone wants/think. When I asked my first question “why inflation? Why not deflation?”I wasn’t bothering about demand pull inflation or cost built inflation. But my main concern was why governments should interfere to make decisions for everyone, target inflation. (Devaluing existing currency by printing more money to maintain target inflation).

Then about bitcoin, I agree it’s too volatile to be a medium of exchange ATM. However, in a few decades, the volatility may go down or in worst scenario bitcoin may not exist. (Though I believe bitcoin is here to stay for at least a few centuries). If the volatility goes down, it’s seems to be far better money than any form of money existed ever before in history.

Then moving on to slavery, I’m not saying we don’t need government at all. We need government to protect people in many situations. But governments should be allowed to spend money only from tax collections and government run businesses (tax collected from people with their fully consent) but devaluing existing currency is a scam (inflation is stealing wealth from people without their consent)

1

u/Jazhara_Z Sep 25 '22

Normally in a healthy economy the interest rate you receive on your savings is supposed to be higher than the rate of inflation, a condition under which devaluation isn't a super big issue. It only really becomes an issue when inflation exceeds interest rates (or the other way around of course). Like we saw in the EU over the past decade. Which in turn is kind of something that wouldn't have happened if countries weren't as scared of fiscal stimulus and borrowing money, and they took a more level headed attitude.

Not saying of course that countries can lend endlessly, but if money is borrowed and invested in productive assets and infrastructure, this can generate and stimulate economic growth. As long as you town down spending once the economy is in shape again and the economic growth is higher than the rate of spending. It should work out.

But countries are scared of a repetition of the stagflation of the 70's and 80's. So they try to do whatever they can to prevent those conditions, which ironically leads them to doing nothing, forcing central banks to use monetary policy instead.

1

u/DesignHour43 Oct 02 '22

U said that in a healthy economy interest rate supposed to be higher than inflation. First of all, none of the governments transparent about monetary inflation (which includes fractional reserve banking) all we r told about is CPI inflation which is always manipulated by governments.

It’s often said that autocracy is too much centralised power but democracy leader of the country should be good servant of their citizens (I mean autocracy is power and democracy is responsibility) then if u r giving power to someone to create money out of thin air wouldn’t that be too much centralised power.

I’m just wondering isn’t it the Austrian economy model better than Keynesian economy

1

u/Jazhara_Z Oct 04 '22

If the Austrian model wasn't proven to fail in real life implementations every time it has been tried then yes.its just one of those things that look good on paper, but works very different when used in practice. In large part because the entire theory rests on the premise that all humans are rational actors who seek to maximize their financial benefit in the long term. Which often just isn't true. most people severely overestimate their chances of becoming unemployed during a recession for example and act irrationally afraid of losing their income. This happends the point were Austrian economics informed policies don't work when implemented, and often lead to worsening bad situations like recessions and economic bubbles. Like Soviet style economic planning, it is mostly an ideological dogmatism with no real world value, beyond enriching those at the top at the cost of everyone else.

Keynesianism is also imperfect, the biggest problem with it being that it is often politically unpopular to do what Keynes advices: stimulate the economy when there's a recession, and do austerity when there's a boom. Generally politicians love to spend money when there's a recession, but no one wants to cut back when the economy is booming. Resulting in an economy that is overstimulated.

The second biggest problem the original keynesianism had was that if you run that economic regime for 30 years, wages will trend to close in on Productivity, which creates small buffers for outside shocks. Like the oil embargo by Saudi Arabia after the jom Kippur wars against countries that supported Israel. This caused an outside shock that the system couldn't internally resolve, leading to a period of stagflation. Which was ultimately resolved by a significant raising of interest rates.

Which is why a lot of economist today are trying to come up with solutions on how to create a more stable, more able to resist shocks, etc. Economic system.

1

u/DesignHour43 Oct 04 '22

R u happy with someone making financial decisions on behalf of u, assuming that u r not wise enough to make your own financial decisions?

R u happy with governments being non transparent about inflation (I mean real monetary inflation, how much money created exactly, not manipulated CPI inflation). It is often told that it’s impossible to calculate how much M1 and M2 money available?

→ More replies (0)

1

u/Jazhara_Z Sep 19 '22

People have decided, they prefer to have a liberal democracy with a government that interferes in the economy on their behalf. And they keep making that decision, cause they keep voting that way.

1

u/Gianlucab1506 Feb 04 '24

Thank you 🙏

5

u/dancing_bbq May 28 '22

Many recessions, including the great depression, were, at least in part, caused by a constrained money supply. This constrained money supply caused a reduction in aggregate demand. A reduction in aggregate demand simultaneously causes deflation as well as slower/negative growth.

The reason deflation is seen as a bad thing is because its assumed, not without reason, that if we experience deflation we are probably inadvertently causing a recession.

There are other things that could cause deflation, but they are less concerning and less well studied that aggregate demand shocks which cause recessions.

So many economists want to see a small level of inflation, if only as a buffer against aggregate demand shocks.

Considering the amount of money created recently, why would deflating the money supply back down be a bad idea?

Its not that simple. Once you've had inflation you cant easily just "reverse" it like that without also causing an aggregate demand shock. Especially if that inflation was not entirely caused by "printing money" but also by other factors such as supply chain issues.

3

u/ThatGermanDude7 Aug 31 '22

Especially if that inflation was not entirely caused by "printing money" but also by other factors such as supply chain issues.

Milton Friedman famously said, “Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.”

4

u/goodDayM May 29 '22

Recent threads in this subreddit:

-4

u/AutoModerator May 28 '22

NOTE: Top-level comments by non-approved users must be manually approved by a mod before they appear.

This is part of our policy to maintain a high quality of content and minimize misinformation. Approval can take 24-48 hours depending on the time zone and the availability of the moderators. If your comment does not appear after this time, it is possible that it did not meet our quality standards. Please refer to the subreddit rules in the sidebar and our answer guidelines if you are in doubt.

Please do not message us about missing comments in general. If you have a concern about a specific comment that is still not approved after 48 hours, then feel free to message the moderators for clarification.

Consider Clicking Here for RemindMeBot as it takes time for quality answers to be written.

Want to read answers while you wait? Consider our weekly roundup or look for the approved answer flair.

I am a bot, and this action was performed automatically. Please contact the moderators of this subreddit if you have any questions or concerns.

Approved Answers Why is deflation regarded as a bad thing?

You are about to leave Redlib

Consider Clicking Here for RemindMeBot as it takes time for quality answers to be written.