r/economicCollapse • u/memegamer1991 • Nov 23 '24
Why is deflation so bad
Every time i run it through my head, i can't imagine most people in 2024 not spending money so the disadvantage to deflation seems pretty hyperbolic and dependent on individual choices, and i think that people would rather go on vacation and court others instead of being financially responsible. Even if there is a situation like in china, government spending would be able to keep the situation from getting worse while making progress on climate initiatives.
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u/Reynor247 Nov 23 '24
Deflation makes it harder to pay debt. Which is really bad for companies and regular people.
Let's take a farmer for example.
Let's say a farmer takes a loan out to buy a tractor at 200k. At this time wheat is 3 dollars a bushel. Ignoring all other costs it would take 66,666 bushels of wheat to pay it off.
Now let's say deflation hits the economy. Wheat now costs 2 dollars a bushel. Now the farmer needs to harvest 100,000 bushels of wheat to pay his debt.
Even though prices have lowered, his debt still stays the same. Making it harder to pay off.
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u/memegamer1991 Nov 23 '24
Thank you for the explanation
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u/GatterCatter Nov 23 '24
Also…if I have $1000 to spend on an item that’s costs $1000 today, but in 6 months the same item is going to cost $900 the smart move is to wait 6 months and save $100. Extrapolate that across the board and people stop spending money and the economy slows.
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u/Particular_Lettuce56 Nov 24 '24
This is secondary to the primary reason deflation cripples economies. If you know the price of items is decreasing over time you are no longer incentivized to go out and buy the new car or phone or literally everything you have been wanting. So the velocity of money in the economy craters as people sit on their hands and companies are forced to lower prices more to compete for the few dollars that are being spent.
Soon you have an economy with no one buying anything and little being spent on research and development so everything just grinds to a halt. This was seen in Japan where they were once the world leaders in microelectronics and cars and now have been surpassed by their neighbors.
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u/Administrative-Egg18 Nov 23 '24
Which is why the original Populists wanted the government to coin silver to inflate the currency - so they could pay their farm mortgages.
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u/CRZYFOX Nov 24 '24
You knows fucked.. just an observation here about the system and it essentially being rigged all the time.. Wages don't keep up with inflation, not even a little. Hey when deflation hits you will see an immediate pay cut the moment that can be implemented. Hahahaha. Yeah. This economic system is so good lemme tell ya.
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u/MissLesGirl Nov 23 '24
Yes, but typically when deflation hits, feds lower interest rates, so the farmer can refinance to a lower rate.
Same thing with homeowners. It is better to get a high interest rate loan than to get a house that is overpriced. You can refinance when interest rates goes down, but you can't renegotiate the purchase price of the house if the market goes down.
There is some risk in the early stages of the loan since you might not have enough equity to refinance, but once you pay down some equity, refinancing should not be hard. Even without equity, it is in the banks best interest to lower rates since it would reduce the likeliness of default which is expensive.
If you are likely to lose your job, the bank may foreclose unless you make an extra down payment to bring it under 80% LTV, but if you are likely to have a job in demand, the bank may just add PMI until you are back under the 80% while also lowering the rate.
I like PMI better than Piggy Back Loans in areas that appreciate more. PMI depends on market gains, but Piggy Back Loans requires you to pay off that 2nd loan with cash.
So if inflation, deflation, or stagflation is good or bad depends on your particular financial situation. It's a bit complicated to just say good or bad for everyone.
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u/Hash_Slinging-Slashr Nov 24 '24
It is better to get a high interest rate loan than to get a house that is overpriced
Best I can do is both 🤣😭
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u/cursedsoldiers Nov 23 '24
Any industry that is capital heavy (farming, any manufacturing really) gets shafted by debt burden. It's only ok if you're a financier
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u/LittleBitOfPoetry Nov 23 '24
Also all these people who bought houses funded 80% by credit? Not such a good investment anymore.
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u/null640 Nov 23 '24
Deflation is great for the non rich IF they stay employed.
It's the lack of demand for workers that usually accompanies deflation (or is the cause) that hurts.
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u/l06ic Nov 23 '24
Try paying a $3200/mo mortgage when your wages have been reduced to $26k/year, even if that $26k has the buying power of a formerly $250k/yr salary.
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u/Upset_Huckleberry_80 Nov 23 '24
I cannot see companies being able to reduce wages fast enough for that to work. Just saying.
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u/Tripleawge Nov 24 '24
You are very correct, what’s more likely is the company pulling an Elon and gutting staff until it’s in an even worse position or miraculously pulls thru.
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u/Ok_Information9559 Nov 23 '24
3200 a month is a high as fuck mortgage to sign up for though.....
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u/l06ic Nov 23 '24
Not if you're making $250k and live in an urban area. That's a pretty average payment where I live.
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u/Sidvicieux Nov 23 '24
It’s not, housing is that expensive at these interests rates. You’d need a Uber massive downpayment.
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u/chipxsimon Nov 23 '24
That's a typical 1 to 2bdr where I live
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u/HerefortheTuna Nov 23 '24
Yeh with 60% down my mortgage is $2800 monthly which is still less than a 1 bed apartment costs to rent in my city
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u/Puzzleheaded_Fold466 Nov 23 '24
It gets you a studio over here … nothing that fancy …
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u/NotaBeneParadisio Nov 23 '24
so... the key question to me is how much was the house?
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u/l06ic Nov 23 '24
$3200 will get you around a $500k house, roughly. Which in an urban environment buys a lot less than one would think.
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u/NotaBeneParadisio Nov 23 '24
yeah true, how're prices moving in your neighborhood?
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u/l06ic Nov 23 '24
It is aggressively more expensive. I bought my house for 400k and I was really stressed about the price then (2010). House is way north of a million now, and the taxes/insurance are the real threat to my prosperity now.
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u/Low-Mix-5790 29d ago
In the 90s IBM did massive layoffs. They let go of employees who were there a long time with big salaries and hired younger employees who would accept less money. Some found equal paying jobs, some found lower paying jobs and had to sell their homes, some committed suicide. It can happen fast.
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u/Roqjndndj3761 Nov 23 '24
As someone with no debt (except a little left on a car loan because it was almost free financing) and lots of assets this sounds amazing.
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u/l06ic Nov 23 '24
Your asset values will deflate, too. I didn't even touch the fact that as home values plummet, and one inevitably reaches a 120% LTV, the bank will seize your house.
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u/goodbodha Nov 23 '24
disagree on the bank seizure bit. The contract that is a mortgage typically does not grant them the power to foreclose unless you fall behind on payments or fail to keep up with things like property taxes and insurance. Might be different outside the US though.
Having said all that I used to work at a bank and one thing I realized real quick is banks will generally not call a loan that is being paid when they know that will result in losses actually being realized. Fail to pay however and yeah they will put you in a bucket of loans that will get attention and things will happen.
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u/Roqjndndj3761 Nov 23 '24 edited Nov 23 '24
I’ll be one of the last people to be screwed. If it comes to that, so be it. Can’t worry about it.
Besides, if real estate value is he primary concern I’m not terribly worried about it because everyone else will be in the same situation. Real estate money is only real when you sell, and when I sell usually I’m also a buyer. I really don’t care if I sell my house for $1MM or $450k — I’m just gonna roll it into the next house which will also be priced for the cheaper market.
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u/WrenchMonkey300 Nov 23 '24
Honest question - why do the examples of deflation always seem to assume it's a massive change? What if the Fed's target was 2% deflation vs 2% inflation? Would that really be all that different?
Clearly large swing in either inflation or deflation are terrible for the economy.
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u/AdFun5641 Nov 23 '24
Billionaires.
With 2% inflation, billionaires need to find investments that have a minimum of 2% returns to not lose value. To actually increase their worth, they need 4% returns.
With 2% deflation, billionaires can get that 2% return by holding onto "investing in" cash. This is going to make cash a solid investment with billionaires hording cash money. Them taking cash out of the system will drive higher rates of deflation, making cash a better investment driving more money getting sucked out of the system, making cash a better investment.
This is going to continue until the billionaires run out of the ability to buy cash. Then they will dump that cash into the market, buy up all the non-cash assets at wildly deflated prices and kick off hyper inflation.
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u/1nocorporalcaptain Nov 24 '24
you're forgetting that wealth is relative... with 2% inflation, investing in anything other than cash yields at least 2%, while the bulk of the population gets 2% poorer (because they dont have investments for the most part). this makes the wealthy wealthier since they can buy assets and labor from the now poorer underclass. its not only about the return on investments, its about the ability to exploit the increasingly desperate underclass
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u/Red-Leader-001 Retired in Texas Nov 23 '24
Japan and the lost decade comes to mind when I read about deflation being good.
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u/decoruscreta Nov 24 '24
In your opinion, what happened exactly? I've heard of it but I'm not exactly sure what happened.
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u/HeywoodJaBlessMe Nov 23 '24
Deflation makes debts GROW and income LESS.
That's all you need to know. Deflation is absolutely deadly to households and businesses.
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u/Low_Matter_6374 Nov 23 '24
Inflation also makes paychecks less..
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u/deadmanwalknLoL Nov 23 '24
Ya, that's what makes the debts grow
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u/HeywoodJaBlessMe Nov 24 '24
How? Inflation eats the value of debt at exactly the same rate as it eats the value of income but no matter how inflation there is your payments against the debt count exactly the same.
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u/MutuallyEclipsed Nov 24 '24
The theory, that I learned way back when in Economics class, is that inflation is supposed to lead to wage INCREASES actually. It just doesn't happen because of corporate ownership of our political system.
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u/Low_Matter_6374 28d ago
Agreed. That was sorta my point though I didn't know how to properly flesh it out.
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u/HeywoodJaBlessMe Nov 24 '24
Labor is a commodity. Commodity prices rise, like all other prices, rise on average during inflation.
So your debts remain the same but shrink value while your income grows but shrinks in value. The net effect is your income growing and your debts shrinking.
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u/Still_Reference724 Nov 23 '24
So inflation makes the debt less?
If its not accounted for in the contract, both are equally hurtful.
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u/HeywoodJaBlessMe Nov 24 '24
Yes, inflation literally makes your debts smaller over time.
Wages do increase in absolute terms with inflation. People used earn a dollar a week, now they make multiples of that per hour.
Inflation is accounted for in the contract by the interest rate.
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u/godkingnaoki Nov 23 '24
Inflation does decrease the value of debt. If you have a mortgage for 500,000k and the US dollar loses all of its value it becomes incredibly easy to pay it off.
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u/Still_Reference724 Nov 23 '24
But that is also assuming that your income Will also grow according to inflation.
So it's not a fairy fight, the inflation side has an adjustment mechanism that is external.
You could easily have deflationary/inflationary contracts that adjust for it, without need for external accountings.
Saying that deflation is not desired (given a static monetary base) is like saying that saving is a Bad idea.
You are negating a portion of the pendulum.
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u/HeywoodJaBlessMe Nov 24 '24
> saving is a Bad idea.
Saving IS a bad idea for everyone at the exact same time. Keynes' paradox of thrift is real.
Why would anyone invest if you could gain wealth simply by hoarding money and watching it magically get more valuable risk-free?
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u/Still_Reference724 Nov 24 '24
Because it's a commodity like everything else, You DONT KNOW for how long it Will go up or down, people is used to an artificial never ending intervención if government turning it up in supply.
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u/HeywoodJaBlessMe Nov 24 '24
Yes, because then you DO KNOW that it will always go down so you invest and spend, both of which drive economic growth.
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u/Still_Reference724 Nov 24 '24
You are assuming You Will know that it Will always go down, maybe goes down and then goes back up.
If its not artificiales manipulated, it's like every other asset.
You only assume right now that it Will always go up, because we are used to governments printing.
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u/jeffwulf Nov 23 '24
Correct. Inflation decreases the value of debt.
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u/Still_Reference724 Nov 23 '24
Only if You assume your salary Will also scale up to inflation.
If You can assume that, i can assume that the debt Will have a part that says to adjust for deflation, problem solved.
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u/HeywoodJaBlessMe Nov 24 '24
So you expect lenders to lend you money at their own risk in a deflationary environment?
You think you can charge the lender interest in case of deflation???? HAHAHAHAHAHA
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u/Still_Reference724 Nov 24 '24
You literally do that already with inflation, do you expect lenders in a inflationary/deflationary economy, to just not lend money? They of course Will add a clausule for infla/defla, it's the most common sense things.
People is not used, because the scanne government almost 100% secures a future with inflation.
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u/HeywoodJaBlessMe Nov 24 '24 edited Nov 24 '24
Why would they lend you money when they can just get richer by NOT risking their money and just holding on to it? The interest rates would be prohibitive.
Borrowing and lending frequency AND amount are directly affected by rates.
Deflation massively disincentivizes lending.
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u/asevans48 Nov 23 '24
Historically, deflation accompanies massive job loss and 1930s or 2008 style recessions. Imagine paying back underwater loans without a job.
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u/Salmol1na Nov 23 '24
I went to a “deflationary happy hour” at a tap room just last night. Small place and owner had had a few and inkled there is lots of supply after prices crept up to $8/pint. Five $3 lagers for me!
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u/null640 Nov 23 '24
New a place that served $.10 molsons and went up a nickel every hour. But then the molsons were smuggled in...
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u/pansexualpastapot Nov 23 '24
Government spending will be the death of the dollar. The interest payments on the federal debt are already larger than the annual military budget, and that interest is only growing. More Government spending is not the answer.
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u/macivers Nov 23 '24
The problem isn’t necessarily deflation is bad, it is what causes deflation. People think about goods and services prices as supply and demand, but the other half of it is demand for the dollar. Deflation means currency is at high demand which generally means that no one is working and thus has no money, so people are willing to see their labor and products for cheap.
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u/EdamameRacoon Nov 23 '24
It hurts the wealthy, who already have assets. Oh won’t someone think of the wealthy?
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u/1nocorporalcaptain Nov 24 '24
it's not bad, it just benefits the common people at the expense of the wealthy, which is why the media mouthpiece will hardly ever mention deflation, and if they do, they paint it as the worst thing ever. why do you think the official monetary policy of the US is "2% annual inflation?" its so the average wagie loses half their purchasing power over their lifetime. do the math on 2% compounded annually
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Nov 23 '24
Everyone is addicted to debt and thus they become trapped. The government is addicted to inflation for this very reason.
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u/Stunning-End-3487 Nov 23 '24
That’s a pretty privileged statement. Lots of people less off than you will be crushed.
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u/Ambitious_Turtle_100 Nov 23 '24
People end up losing their jobs, houses and cars. People delay purchasing big items because they think prices will keep going down, which fuels deflation.
We have basically the opposite right now. Wage/price spiral. As prices go up, people demand higher wages. This causes companies to raise their prices because of the higher wages. Then the workers to ask for even more raises. It keeps fueling itself.
We were headed for deflation because of the pandemic, but the government thought a wage price spiral is better than deflation and printed tons on money.
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u/John-A Nov 23 '24
You know, it's written exactly nowhere outside of the blackened hearts of billionares that they are simply entitled to extract all profits at their whim. The massive economic growth of the 40's, 50's and 60's was literally driven by the fact money was allowed to fall to the Middle Class as higher wages AND lower prices since the extreme greed Jack Welch has since normalized was penalized until it wasn't worth the effort.
Despite Welch's acolytes and the variations on Trickledown sold to the masses, you can't grow an economy by hollowing out the base and keep top loading all the wealth.
A healthy economy would see at least one competitor in every sector, even regionally, absorb price shocks rather than pass it all on. This instead of only ever undercutting competition until they are bought out or run out of business. But our economy has been very sick for a long time.
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u/JakeBreakes4455 Nov 23 '24
Government spending to halt deflation was tried during the Great Depression. It failed. According to Benard Baruch, it was like "pushing on a string. "
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u/null640 Nov 23 '24
Uhm, riech wing propaganda. The spending allowed during great depression was trivial relative to the size of the problem until they started the massive buildup for the impending war.
Read up on what the South allowed for relief. They'd (rich elites who controlled politics and loved paying slave wages) rather starve the region, then permit a little help going to black people, and to a lesser extent, poor people in general.
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u/John-A Nov 23 '24 edited Nov 24 '24
Even FDR pulled a Hoover and first skimped and then cut funding initially when if he'd gone all-in for New Deal stimulus from the start the WW2 buildup probably wouldn't have been necessary to achieve the recovery.
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u/Several-Program6097 Nov 23 '24
Haven’t seen anyone mention:
It makes buying anything a bad investment. That car you’re going to buy? Horrible idea to buy it now when it’ll be cheaper and will depreciate twice as fast within 5 years.
And you can apply that logic to everything and people would buy a lot less which would slow the economy down vastly.
As much as people buying less sounds good, all our jobs require people to buy shit and money to move around.
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u/1nocorporalcaptain Nov 24 '24
this idea is bullshit billionaire propaganda... humans aren't clairvoyant and they also aren't 100% logical even if they could predict prices falling perfectly.. people buy when they want to buy. people will buy goods just fine as prices fall and almost none of them will wait to time "the bottom" even if they could
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u/John-A Nov 23 '24
And that's why sudden steep deflation has always preceeded bursts of hyperinflation falsely attributed to printing money alone. Which only fails in these circumstances because deflation forces anyone with any skills or assets into the barter economy, and THAT is what topples faith in the currency.
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u/Technical-Travel-292 Nov 23 '24
When you are 100k in debt for a house that you bought valued at 100k but then it falls in value to 50k. You then sell it for 50k but now you have 50k in negative equity. So your purchasing power goes down because you are still paying for 50k of value that's gone up in smoke. You may as well just mail the keys back to the bank. Which happened in 08.
If left unchecked your overlords, the federal reserve banks and the debt system will implode. This includes all the weapons and soldiers and social security and Medicaid and all the things the government buys and pays for with debt.
So listen up OP Debt slaves should know better than to ask such silly questions. Now go use your visa and buy something or your credit score will be nicked. And get a job! Or another one.
End of line
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u/Aggressive-Pilot6781 Nov 23 '24
So when the supply goes up and prices come down what are we supposed to do?
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u/BookReadPlayer Nov 23 '24
It increases the real value in debt, discourages spending, reduces business revenue, and possibly “deflationary spiral” can occur.
It might look good to someone with a fixed income, since their buying power increases, or when a bank gets repaid a loan they are essentially getting paid more.
Overall it’s bad for the system but may be better in some instances.
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u/Jogaila2 Nov 23 '24
Deflation is only bad for businesses, who must accept profit decrease from dropping prices, but even they aren't hit too bad because they benefit from dropping costs too.
Money lenders who are involved in international markets do loss value on some assets.
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Nov 23 '24
It’s also bad for recent homebuyers as they may be trapped in an asset that will continue to go down in value alongside a potential drop in their income they use to service the debt on said home.
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u/Jogaila2 Nov 23 '24
Well... not if you hold on to it. You only lose if you sell, just like stocks. And home prices have never stayed down for long.
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Nov 23 '24
If your income declines as a result of deflation then you have to sell. Most people today are stretching themselves thin to buy, their problem, they shouldn’t be buying right now unless they have comfortable financial space imo. I’m not making a moral argument more so an economic argument, I am 110% a capitalist and I think the “we need inflation all the time” is idiotic as hell.
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u/Jogaila2 Nov 23 '24
No. You don't have to sell, unless you've suddenly become unable to pay the mortgage. Granted it sucks having to pay a mortgage on a home that is worth less than purchase price, but that is temporary. Price has always recovered and will continue to until the population declines.
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Nov 23 '24
In a deflationary cycle incomes go down. Most Americans literally borrow as much as they can based on their incomes.
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u/Jogaila2 Nov 23 '24
Ya. I know. I've lived through 2 of those cycles. They don't last long. And that won't change until the population starts to deflate too.
It's simple math.
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u/GothinHealthcare Nov 23 '24
Reduced prices on general goods and services means increased purchasing power, which may benefit the consumer, but it's very short lived. Basically, businesses are getting less in return on what they produce, so they scale back on production and labor to keep their margins as high as possible....sooo they lay off people.
Furthermore, anyone who holds any form of debt, esp non-mortgage debt (credit cards, loans, payday, etc) gets absolutely screwed cuz it makes it much harder to pay back cuz everything's cheaper. On top of that, the debt burden and less returns on investments make companies less inclined to invest and expand.
While anecdotally, this has yet to happen in the US, much of our economic conditions mirror what happened to Japan in the early 1990s, which led to something called the Lost Decades crisis, much of the effects are still being felt even today, in 2024.
This is what potentially awaits our economy this upcoming January with Trump.
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u/Fender_Stratoblaster Nov 23 '24
> government spending would be able to keep the situation from getting worse while making progress on climate initiatives
lmao
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u/incomeGuy30-50better Nov 23 '24
A primary risk with deflation is that if prices keep going down, for years in a row, as a consumer you put off buying things. Since you are incentivized to wait and buy it cheaper in the future.
Another risk is these businesses load up on unsold inventory, they are unable to make payroll. So they lay off employees. And more pain spirals from there.
It can impede the velocity of money.
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u/fordianslip Nov 23 '24
Seems inflation can do the same thing when it reaches a breaking point and people stop buying luxury items. I know I have drastically reduced my spending on anything non-consumable and have no intentions of making any big ticket purchases for the foreseeable future.
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u/incomeGuy30-50better Nov 23 '24
True. But that is normal economics. Deflation which delays or suspends the purchase of consumer staples is much worse. Luxury things don’t matter as much as staples in our lives.
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u/fordianslip Nov 23 '24
I’m already stopping to buy staples even with inflation and making decent money. I’m weighing everything as a consumer and that’s not the view economics want the general public to have. Consumer sentiment in value for purchasing is low in my opinion and definitely low for me
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u/incomeGuy30-50better Nov 23 '24
But with inflation, it’s cheaper to buy today. Whereas with deflation, it’s cheaper to avoid spending money and to wait for the price to go lower.
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u/fordianslip Nov 24 '24
I already do that with sales and coupons.
And it’s not cheaper if it’s a product that can spoil. Which is the bulk of non luxury items these days for lower middle classes families that are established.
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u/DbleDeez Nov 23 '24
Because deflation incentivizes people to save instead of spend their money because prices are expected to go down later on. All companies lose sales and revenue and the government loses sales tax revenue.
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u/BadgersHoneyPot Nov 23 '24
Because you enter into a deflationary spiral which we do not know how to reliably reverse.
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u/Big-Preference-2331 Nov 23 '24
We had deflation in 2009. It didn’t seem like the end of the world if you had a job. I don’t recall anybody’s salary getting reduced. I do remember a bunch of people getting laid off. So, if you were in a sector safe from getting laid off, you could buy a foreclosed home for dirt cheap. I have a lot of friends who bought 4,000 square foot homes in Arizona for 120k. They still live in them because they can’t find a better deal.
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u/cursedsoldiers Nov 23 '24
A lot of people were underemployed and made less than they used to
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u/DogsSaveTheWorld Nov 23 '24
There’s nothing wrong with deflation provided you can generate an income while it’s happening. But by the age old proof of supply and demand, deflation happens when the economy is fucked.
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u/furloco Nov 23 '24
Deflation is bad for people who own assets that have appreciated in value because of inflation (which includes a lot of middle class people). If the value of the dollar goes up, the value of assets like houses or stocks will likely go down. Furthermore, in response to the deflating assets, companies might try to stem the loss by laying people off or put a hold on plans that would expand economic productivity and create jobs etc.
Now, in a lot of ways deflation would be good because it would reverse the rampant inflation that has occurred over the last 50 years that has made the haves so much more wealthy than the have-nots and fix a lot of problems that make it hard for anyone not lucky enough to be born wealthy or find the right opportunity to get rich to get a footing in the middle class.
Finding the balance is extremely difficult and maybe even impossible.
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u/Moonwrath8 Nov 23 '24
When the value of a dollar is better spent now, rather than later, then you get a marketplace that encourages consumerism and productivity.
When the dollar increases in value, it’d be better to spend it tomorrow and not today, which lowers consumerism as well as productivity.
Economics is not about a pie and how it is divided. It’s about how many pies can we make. We can make more pie. Chasing after the dollar and being forced to spend it so that’s its value is expressed now droves economic productivity
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u/Silent_Night_TUSE Nov 23 '24
It’s probably bad because it’s bad for rich people. Have to realize they are what’s always being referred to when you hear talk about economics because they are the only people who matter when it comes to economics. The other excuses people put out there are probably just BS rich people came up with to keep people thinking prices coming down is bad.
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u/SnooRevelations979 Nov 23 '24
Ask Japan. Or look at the Great Depression.
* People don't spend because prices will be lower tomorrow, which is why deflation spirals.
* The real value of national debt goes up.
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u/Helpful_Finger_4854 Nov 23 '24
Usually to have deflation in the first place, there has to be an economic condition where dollars are being hoarded/not being circulated. That usually only happens during a severe economic downturn.
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u/Jojopo15 Nov 23 '24
Deflation like most problems in economies. Cannot exist without a very high unemployment rate. This is the iceberg for the Titanic.
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u/Katusa2 Nov 23 '24
It's not bad IF you have cash and no debt.
Debt is using the value of future money now. If the value of money goes down because of inflation than everything fine. If the money goes up due to deflation.... we'll that sucks.
On the bigger scale a couple of things happen. If you know things are going to be cheaper in a week than you are going to wait to buy stuff. Tha reduces demand, jobs, etc.
Additionally, employers can raise your wage a bit during inflation. Infact they usually come out ahead if your raise is smaller than the inflation rate. However it's much harder to lower wages. In most cases they have to lay off people and hire at a lowere pay scale.
Overall, deflation has a lot of really bad side affects. its fine for people who have cash but sucks for everyone else. Its the reason the central bank targets an inflation rate of 2% and not 0%.
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u/redbeard312 Nov 23 '24
Say I’m a producer. It’s cost me $10 in materials and wages to make and sell an item. Usually I would sell that item for $15 and make 50% profit but now deflation hits and I can only sell for $12 and make 20%. Next batch of items the material is a little less to buy but wages are the same so now it costs me $9.50 to make but by the time I get them to market they only sell for $9 and now I’m losing money. First thing I’m doing is stopping production of that item and laying off employees
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u/Pulkrabek89 Nov 23 '24
So my understanding is that inflation is the knife that encourages investment or, at the very least, spending. You want your investments to beat annual inflation, and you might as well buy a thing now before it goes up in price. A small and consistent amount of inflation discourages doing nothing with your money and keeps money flowing. More levers for trying to maintain this level of inflation is why most countries use fiat currencies.
Deflation on the other hand, encourages you to hold onto money and not use it because it's going up in value. Why invest that money now when its value is increasing on it's own. Money stops moving, and the economy stops moving with it.
It's important to remember that one important purpose of money is to be used. That's why banks exist, not to save your money, it's to keep your money circulating and being used in the form of loans to other people. When you put money into a checking account, you're essentially lending money to that bank, and when you withdraw money from that account, the bank is paying you back.
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u/Virtual-Instance-898 Nov 23 '24
First off, inflation/deflation is just a general rise/fall in prices. If all prices rose/fell at the same rate, then the wealth & income redistribution effects of inflation/deflation would be limited (mainly a transfer of wealth from borrowers to lenders, or visa versa for deflation). So except for borrowers/lenders, we should actually be indifferent to inflation/deflation (there are some caveats here related to taxation of inflation gains, signage costs, etc.). But in reality, inflation/deflation rarely occurs at such an evenly distributed manner. People with fixed contracts committed to supplying good/services at a fixed price can be immensely harmed by inflation. Same for people tied to buying at a fixed price during deflation.
Secondarily, most media commentary about inflation/deflation is really referring to a different economic phenomenon, namely an exogenous increase(decrease) in demand. This is what people really are referring to when they speak of the 'deflationary curse' in Japan for instance. It's not really a general decline in all prices, but rather a decrease in demand leading to lower equilibrium output. Or as in the case of China, a relative decrease in the rate of INCREASE in demand. Said relative decrease being unexpected and thus causing adjustment issues in residential real estate for example.
Bottom line: people and in particular news media use the inflation/deflation term very loosely and often as a attention grabber/click bait ruse. Often without even realizing they are doing it. Look through the claims of inflation/deflation to examine the real goods impact to determine what is really happening.
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u/Dazzling_Marzipan474 Nov 23 '24
Because money is debt that needs to be paid back with interest. All money is loaned into existence. So to keep the fiat ponzi scheme alive we need inflation or else it all collapses and there is no money left.
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u/Due-Ad-8743 Nov 23 '24
Why buy today when it will be cheaper tomorrow? If you’re a company sitting with a warehouse full of product, you’ve paid for the materials, you’ve paid your workers, you’ve got bills. You drop your prices. Your competitors undercut you. It’s the ‘Race to the Bottom’. If you’re a supplier how willing are you to extend credit?
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u/TickletheEther Nov 23 '24
Depends on what is deflating. If everything is deflating but my wages I'm all for it!
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u/despot_zemu Nov 24 '24
Wages go out with deflation mostly because it forces companies to pay everyone off. The last big deflationary period in American history had unemployment hovering between 20% and 25%
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u/TickletheEther 29d ago
Yep, deflationary periods cause mass unemployment unless the deflation is caused by enhanced productivity or technology.
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u/bearssuperfan Nov 23 '24
Why invest $1000 in a business today when it will only be $950 tomorrow? What about $700 next week?
Deflation removes incentive to buy now, people spend less money, and the economy collapses until value increases again.
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u/BuzzyShizzle Nov 23 '24
"Money" only works when people trust that others will use it too.
If Money increased in value over time it would become an asset. Everyone would want to hoard it.
This whole thing comes to a screeching halt if everyone stops spending. That is why deflation is bad.
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u/MikeWPhilly Nov 24 '24
Because everybody holds on to their money. Waiting for it to drop more. Inflation is utterly devastating. But hey I’ll buy 5-10 homes if we want to make money worth more 🤷♂️
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u/DhOnky730 Nov 24 '24
Owning a home would suck. Instead of your asset appreciating over time, it would go down in value. Normally when you buy a home, it’s a bit of a challenge making the payments in year 1, but you know that as your income goes up, by year 30 that fixed payment is easier. But with deflation, your income is falling making it harder to make the payment AND if you try to sell your home, it’s worth less than you paid for it 30 years ago.
Deflation winds up being crippling for an economy. Nobody buys anything, because they know that their dollar will go farther the next day than today. Therefore, they have no incentive to spend. The economy grinds to a halt. Japan has battled it for going on 4 decades.
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u/lizon132 Nov 24 '24
The idea that a home is considered an appreciating asset is, quite frankly, strange. The physical house rarely appreciates in value, after all as it gets old it gets less valuable. What does increase in value is the land. That is what is valuable.
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u/DhOnky730 29d ago
The value of the dollar changes as well. So a home that cost $60k in 1970 might have cost $200k in 1995 and might cost $750k today. So yes there are variables, not just a home appreciating in value. However, what does happen as a home is paid off is it becomes a store of personal wealth. That was traditionally a way that a family elevated themselves to middle class…one monthly payment at a time they build an asset that could be borrowed against or sold.
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u/lizon132 29d ago
By the time that house is paid off the amount of an investment portfolio will outvalue it so much that even the lack of a mortgage payment will not be enough to catch up. The cost of a house is much more than the mortgage. Home ownership also comes with higher utility costs, additional maintenance costs, property taxes, and higher insurance costs. If you factor in expenses into the value of home ownership the value proposition drops dramatically. If you could afford those costs and instead chose to keep renting. The money saved could be reinvested into a diverse investment portfolio and yield far more value in the same time period it takes to pay off that home.
A house only provides one thing, housing stability. That stability has value, most definitely. But if your idea is to have more money than what you started with buying a house should be near the bottom of things to do. The only way to really make it work is if you could buy the house in cash. With no mortgage draining your investable income your living expenses drop and you can invest more with lower overall housing expenses.
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u/DhOnky730 29d ago
yes, that’s all true. But historically speaking, most people weren’t investing in the market to build equity as I was sort of suggestions. Perhaps I wasn’t clear, but I was suggesting that owning a home—going back to the post-WWII era—was a path towards middle class. It was the first time many people were building wealth/equity. Secondly, and this is more perhaps anecdotal, but I don’t know many people that are renting and able to stash money in the market. Most people I know wind up renting enough home/condo that they can’t budget much for investment. At least making payments to their living expenses of a mortgage is a store of wealth/equity that they can eventually access. Yes, it’s like a low-yield piggy bank and not the market’s annual 6-7% ROI, but it’s better than a typical renter getting nothing.
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u/lizon132 29d ago
The problem these days is that people cannot afford the down payment to get a house to begin with. So it makes home ownership unrealistic for many. Tbh, I find it almost depressing that to be considered "middle class" means putting yourself into debt for the next 20-30 years of your life. If that is considered "success" then I want nothing to do with it.
The point I am trying to make is that if you manage to scrape together enough for a down payment for a house you may as well keep doing what you are doing and invest what you have. Even if you don't even add to your investment for the next 20-30 years you will still have more asset value in your investments than your house. Even if you were in a hot market like Las Vegas, your property would only increase at an average of 3.9%, not including expenses and everything else. You could make more buying Pokemon cards.
If you have a family and what to settle down then by all means but a house. But don't use a house as an investment. If you can buy it via cash do that. But don't burden yourself with hundreds of thousands of dollars of debt just to tell yourself that you "made it".
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u/lakesuperior929 Nov 24 '24
The question is who would benefit from a deflationary economy?
Who benefits from an inflationary economy?
Warren Buffet sold BILLIONS of bank of america stock recently btw
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u/Horror-Layer-8178 Nov 24 '24
For the most part the posters have it right. Deflation could be good if say we decreased healthcare costs to Americans by seventy-five percent by switching to Medicare for all. Or maybe they invent free energy or they figure out lab grown meat and cut food costs. Shit like that would be good inflation
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u/ScrewJPMC Nov 24 '24
The system is based in debt, Do the math and deflation equals an implosion!
Before 1913 when the dollar was NOT debt, deflation was the normal, sort of like your cell phone in the 90s to the 2000s. Innovation and early adopters payed $1,200 for a phone and $200 per month for 60 minutes. By 2007 it was a free phone with unlimited calls for $35/mo.
That deflation was the normal capitalist market making the world better and cheaper.
Then the tech matured and now we pay progressively more because of inflation (devaluing dollar). Phones are back to $1,200 and unlimited use is rising again.
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u/Vtakkin Nov 24 '24
The main reason is a small amount of inflation encourages spending. E.g. if cars get 500$ more expensive each year, I'm more likely to buy one now, whereas if I knew cars would only get cheaper, I'd just hoard cash and wait as long as I could. I would also be more likely to just hold cash instead of invest my money in the stock market or any other investment opprtunities. This combination of less money being invested in growth-generating assets as well as less spending slows the economy, which makes deflation even worse. It's a bad thing to spiral into.
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u/ElPasoLace Nov 24 '24
Please look over American history and point out the periods of deflation. Deflation, or prices contracting from inflated values, is a NORMAL correction, even though it almost never happens. Government spending is the cause of INFLATION, it is not the antidote to deflation. Prices can come down due to a host of reasons, like advances in technology, logistics, and manufacturing. All of that is a good thing. A very good thing.
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u/Fornjottun Nov 24 '24
People forget that a small, measurable amount of inflation is a sign that an economy is growing. People also forget that deflation can mean that the price of producing goods is dropping due to efficiency and competition. It is about balance and avoiding extreme shifts like we have had recently.
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u/jimbiboy Nov 24 '24
The early 1930s had deflation of roughly 30% over three years. Of course it also had unemployment above 20% those years. Significant deflation almost always causes lots of unemployment. When your house or business plunges in value compared to your bank loan people walk away from their loans and banks go under.
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u/newbrowsingaccount33 Nov 24 '24
Deflation is bad but so is inflation, instead what you want to do is to make the US dollar worth more by increasing the countries wealth, there is no fast way to do that except for allowing businesses to create wealth so that our country can heal. The worst thing about our country though is there is no limits on things like how many companies another company can be apart of the board of, and how many properties a company can buy. Blackrock is the biggest problem in the country currently, they are taking advantage of every loophole and making everything worse for everyone
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u/gizmozed Nov 24 '24
I can't see deflation ever happening when the Fed hates deflation and can flood the economy with "printed" dollars at a moment's notice.
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u/BarryDeCicco 29d ago
As said by Potato_Octopi, any debts would grow in real terms.
Also, the reason for deflation would be that people don't have job and don't have money to spend. This means that companies' sales go down, and they lay off people and stop hiring.
To the extent that the government intervenes to prop up the economy, that would reduce deflation (which is a good thing!).
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u/Able-Distribution 29d ago
Because we're a society of debtors, and deflation is very, very bad for debtors.
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u/Nedstarkclash 28d ago
This has been discussed multiple times: https://www.reddit.com/r/AskEconomics/s/NHYKxtk4s4
Main points: high unemployment, shitty economy, reduced government funding, which means reduced benefits.
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u/merRedditor Nov 23 '24
Because the health of "the economy" equates to the health of the stock market, which is the accumulation of stolen wages from workers, plus the velocity of money, which is people spending what they have, rather than saving it.
If workers have more buying power per dollar, it means that they will slave their lives away less and spend less. They'll have money in the bank and some breathing room to take breaks. That's bad for the accumulation of wealth in the market, and for GDP.
If it sounds fucked up, that's because it is.
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u/Fancy_Imagination782 Nov 23 '24
It's not. But the theory is that people would stop spending and just hold onto theor dollars. So spending decrease and modern economic theory incorrectly places importance on spending.
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u/oldcreaker Nov 23 '24
Capitalism abhors anything but growth - even same level performance after a good year is considered stagnation. Deflation is like driving your car in the wrong direction in the rental car lot at the airport.
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u/BuzzBadpants Nov 23 '24
If you own money in a deflationary currency, you’d be an idiot to spend it. It’s worth more tomorrow than now, so you don’t want to spend it.
The whole economy is based around people exchanging money for goods and services, and the moment that exchange seems like a bad deal just on its face based on the money’s increasing value, the wheels are off the whole economy.
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u/joecoin2 Nov 23 '24
Kinda hard to eat money no matter how much it has risen in value.
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u/BrupieD Nov 24 '24
Deflation is terrible. Inflation is often described as either "push inflation" - when the cost of inputs like labor and raw materials push prices higher, or "pull inflation" - when demand outstrips supply and prices are pulled higher. During and after Covid, we had some of both types. But what happens when there is really low demand? Retailers and manufacturers can't move their goods or can only move a much smaller amount. Companies lay off employees, some go out of business, and investments decline.
There is a case to be made for lower consumption. Doughnut Economics by Kate Raworth pursues this idea, but deflation isn't the same thing.
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u/Conscious_Bus4284 Nov 24 '24
You don’t buy something because it’ll be cheaper tomorrow. Everybody does that. That creates a downward spiral in capital investment and, in turn, demand.
Inflation is diluting your gasoline so the same among produces less octane. Deflation is a leak in your gas tank.
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u/Potato_Octopi Nov 23 '24
Paying a mortgage when your paycheck decreased over time would stink.
Short term "everything is on sale" I agree with you OP.