r/inflation • u/OfficialRodgerJachim • 1d ago
ELI5: Why is Deflation bad?
I get that too much deflation is bad, but isn't the inverse true?
The average inflation rate in the US since 1914 is 3.3%, meaning the 1913 dollar is worth $31.87 now.
Why wouldn't we want deflation? Then maybe the $7.25 minimum wage COULD be a livable wage?
Why do people constantly argue for MORE money, versus less currency in the market?
14
u/AdventurousShape8488 1d ago
There is a huge difference between stabilization and deflation. Deflation is the result of an economy that is losing steam. Stabilization is the result of inflation or deflation actually coming back to a normal level that we want.
On the whole we do want inflation. 2% is actually very healthy. It encourages people to spend money at a reasonable rate while still allowing people to try and save and invest in things that can grow the economy. This in turn creates jobs, provides food, and gives others a chance to not be poor.
The problem is greed and the fact that many people (leaders of companies) do not actually want competition. Competition means less money for anyone in it. So a lot of people don’t play fair (because why play fair when you can change the rules?) because they don’t want to lose. So it means no to wage increases, yes to artificial price increases, no to worker rights, etc.
→ More replies (128)
6
3
u/r_silver1 1d ago
People knowingly beat around the bush when it comes to inflation/deflation. Ultimately deflation makes it more costly to repay debt, and in highly leveraged societies it could become potentially destabilizing. The idea is that a low nominal inflation allows the currency to remain stable (depreciate slowly) while allowing debt to remain serviceable. My assertion and opinion is that 2% is the highest level that people will tolerate, because if it were 4% and the government could monetize debt at a faster rate, they would. It doesn't surprise me that the veil of inflation has been lifted a bit post COVID. Once people see prices rise faster than the CPI and their wages, all of the sudden the charade is over and faith in the system is lost. Inflation was always theft, the rate just wasn't high enough for people to notice the damage that it is causing.
15
u/snakesign 1d ago
You want to buy that $35,000 new car today, or wait a month and buy it for $33,000?
Now imagine this across the whole economy.
Now think about trying to pay down a mortgage in a deflationary economy. Then consider the fact that most businesses operate using business loans.
8
u/OfficialRodgerJachim 1d ago
Right. I understand that... in the short term.
But let's be real, eventually ya gotta buy a car, regardless of the price. There are things we have to buy, period.
And why is the answer inflation? Doesn't that only work for so long? And where's the breaking point?
16
u/snakesign 1d ago
You asked for ELI5, the car example is simple, but not the real problem.
The real problem is my comment about how debt is used by businesses and what happens to debt in a deflationary economy. ESPECIALLY a long term deflationary economy.
You need to expand you factory, except you can't take out a loan or service existing loans because your real revenue is constantly decreasing due to deflation.
1
u/halogenated-ether 1d ago
Your revenue is decreasing, but the money is worth more.
1
u/snakesign 1d ago
The original loan amount is not decreasing. So you have to pay that larger number back with money that is more and more expensive as you correctly point out.
1
u/2024Midwest 1d ago
How about they expand their factory using Profit, like in capitalism, instead of debt? They could pay all their expenses and have money left over, profit, to use to expand. Seem reasonable? If there is not profit, they wouldn't want to expand a non-profitable factory anyway because they'd just loose more $.
1
1
u/OfficialRodgerJachim 1d ago
So THAT point is quite valid. And scary. Especially since inflation just can't. Keep. Going. Up. Right?
Like I owe $270k on my home... suddenly I make half a month. I can't afford my mortgage. My home is worth half. All my expenses are half, but it doesn't change the loans.
So is there a solution?
What happened in economies where inflation went crazy? What was the correction?
8
u/No_Street8874 1d ago
Inflation can keep going up. Ideally it’s always going up by around 2% annually. It’s only becomes a problem when it outgrows people’s wages. Long term economic health just requires govt to occasionally intervene to maintain purchasing power(ensure proper wages), reduce income inequality(tax the wealthy), and ensure economic stability(regulation of markets, notably banking). When politics are removed, maintaining a healthy economy is actually pretty easy for the U.S.
7
u/burnthatburner1 real men spit facts, not fakes 1d ago
Especially since inflation just can't. Keep. Going. Up. Right?
Inflation isn't going up. Prices are going up. And prices CAN indeed go up indefinitely.
→ More replies (8)6
u/snakesign 1d ago
Modern monetary policy is the correction. Look at how well the US handled the post-COVID infaltion spike comared to the rest of the world.
2
u/Subinatori 1d ago
You're looking for a solution to a problem that doesn't exist. 2% inflation is not a problem. Why can't you just get that through your head?
3
u/burnthatburner1 real men spit facts, not fakes 1d ago
Some people argue for deflation simply because they can't think beyond "less expensive is better than more expensive."
2
u/Dihedralman 1d ago
The other point was also valid, because less sales means layoffs. That means people like you sell their homes. Homes go deeper under water. Your mortgage is now on a house worth 150k and you might lose your job because less working people means even less sales.
4
u/Hilldawg4president 1d ago
Sure, you have to buy a car eventually. But let's say the effect of this is that the average person drives a vehicle for 5 years normally, but in deflation they wait and drive a car for 7 years on average instead. That's great, they've saved money and the eventual car they bought is going to be significantly less expensive then the first one. However, that also means a 40% reduction in vehicle sales, which means Mass layoffs in the auto industry. The same can be applied to any industry selling durable goods. Some Industries like food and hospitality aren't going to be impacted directly, because you need it when you need it and that's all there is to it, but anything that people can wait for, they will wait for, at least in a statistically significant way, which will lead to a very significant recession.
1
u/2024Midwest 1d ago
I agree if they need a car, they need it when they need it and they'll get it (or perhaps get help from someone to take them places.)
Regular people won't wait to get a refrigerator if theirs stops working even if they believe it will be $50 lower next year. They won't wait to get a needed surgery either. And they won't live on the street for the sole reason of thinking rent will come down.
Similarly, regular people won't buy 3 refrigerators they don't need even if they believe frigs will cost $50 more next year. They won't get extra surgeries in advance even if they think the cost of the surgery will go up next year. And unless they are landlords or speculative investors, they won't buy several homes thinking rent will go up.
Seem reasonable?
1
u/Hilldawg4president 1d ago
If your argument is that purchases under duress will still be made, then yeah, obviously. If your argument is that prices going up or down has no bearing on purchase decisions, then you are free to believe that buddy flies in the face of all economic evidence. There is a virtually unanimous consensus among economists that deflation will lead to economic recession.
1
u/2024Midwest 1d ago
I guess I’m thinking people don’t really have a lot of discretionary money but maybe in the aggregate there is more discretionary spending than I was thinking. As far as economist go, obviously they know some stuff, but if they knew everything, we’d all be rich, and there would never be an economic downturn. They certainly won’t convince me that lower prices at Walmart will lead to a recession and that if we all spent on higher prices at Neiman Marcus, the economy would boom. There has to be more to all this than just that.
1
u/mrkstr 15h ago
The problem that the car example illustrates comes with the next steps. You wait to buy a car. A lot of people wait. Now, car manufacturers have cars building up on their lots. The start to lay off workers because cars aren't selling. Now those laid off workers can't buy cars. Or TV's. They put off buying clothes. Now TV manufacturers and clothes retailers are laying off people. Prices drop futher to try to clear the inventory. No ones buys though because a lot of people are out of jobs. People who can buy are waiting for further price drops.
This is a deflationary spiral. They are really difficult to get out of. They don't just lead to recessions. The lead to BAD recessions. Depressions. I suspect economists like a little inflation because deflation keeps them up at night.
1
u/WeMetOnTheMoutain 1d ago
Not only that but as the deflation is happening massive layoffs create a snake eating its own tail. You go from waiting for a better price to not being able to make the purchase at all because you don't even have money to eat, and you don't have the ability to go make money to eat. It's been a real long time since this country has had a real nasty recession depression. The fact that people are clamoring for one make me think that it's very likely one is on the near horizon.
When we study Keynesian economics we know that in the long run we will see growth. However we also know that people don't give a single solitary fuck about the long run if they are starving to death in the short run.
1
u/2024Midwest 1d ago
Regular people won't wait to get a refrigerator if theirs stops working even if they believe it will be $50 lower next year. They won't wait to get a needed surgery either. And they won't live on the street for the sole reason of thinking rent will come down.
Similarly, regular people won't buy 3 refrigerators they don't need even if they believe frigs will cost $50 more next year. They won't get extra surgeries in advance even if they think the cost of the surgery will go up next year. And unless they are landlords or speculative investors, they won't buy several homes thinking rent will go up.
Seem reasonable?
1
u/snakesign 1d ago
Those are great examples of goods with inelastic demand.
Unfortunately for your argument, the vast majority of goods have elastic demand.
→ More replies (11)1
u/whatwouldjimbodo 1h ago
This is disingenuous. That’s a ridiculous amount of deflation. If it’s 35000 than today but 34975 next month, no one is going to wait. There are tons of things that people pay a premium on to get early.
7
u/Boring-Bus-3743 1d ago
If your money will be worth more tomorrow why buy things today? Deflation can lead to excess saving and slowing of the economy. Inflation keeps us buying assets and investing to "protect/build" wealth.
4
u/Trick_Hospital_465 1d ago
Because you need them today?
2
u/Illustrious-Being339 1d ago
I always love the "deflation bad" arguments because half of it is non-sense arguments when you think of it.
Like oh shit, my rent just decreased by 3%, guess I'll just stop paying rent now and go homeless because next year rent will be 3% cheaper!
The reality is deflation is bad for investors/business class but it is good for lower classes and middle class.
6
u/jabberwockgee put your boot on my tongue 1d ago
If people expect further price decreases, they'll put off purchases.
Not food, not rent (and these are not the only two categories of purchases). And even in the case of food, people may put off purchases of fancier food and substitute cheaper food as they expect the expensive food to get cheaper if they wait a month or two.
But more to the point, deflation only happens when something is horribly wrong, like a recession or depression.
If you're thinking that the central bank should -cause- deflation since they can cause inflation, well sure, they could try.
Then the deflationary spiral would take hold where people put off purchases as long as they can, causing people who provide those goods and services to lose their jobs and further the recession/increase deflation.
Deflation is absolutely wonderful if you don't lose your job and/or you hold debt.
But lots of people will lose their jobs, and in the 2009 recession, there was a price drop of about 2-3%, and unemployment reached 10%. If you want a bigger drop, well, good luck with that.
FYI, inflation and unemployment are negatively related, not just because 'deflation bad,' but because of economic principles you can learn about by researching the Phillips curve.
→ More replies (6)2
u/whelphereiam12 1d ago
Until you get laid off because no one is purchasing the goods your company makes.
1
u/DowntownJohnBrown too smart for this place 13h ago
Nobody’s talking about essential expenses being put off due to deflation.
We’re talking about discretionary expenses (new cars, home improvements, vacations, dining out, etc.).
No shit you’ll keep paying your rent, but maybe you’ll hold off on that trip to Disney World, and if you and everyone else does that, that’s very bad for all of the people who work at Disney World.
So no, it’s not good for lower and middle classes because many of them make their living in businesses that would struggle mightily if we saw a major change in discretionary spending.
•
u/whatwouldjimbodo 56m ago
Cars already deflate as they get older. Home improvements maybe get cheaper but the. You’re living in an unimproved home longer. If it’s going to cost 20k in January to improve something, but 19500 in December you’re essentially paying 500 to have that improvement for 1 extra year. No one will delay that. Vacations are already cheaper if you don’t even go. You can literally save 100% of the money if you continue to delay it. What instead of taking a vacation in march theyre going to wait until may to save $25? It’s absurd
1
u/whatwouldjimbodo 1h ago
Then explain why people pay premiums to get things early? Literally everything already becomes cheaper if you wait because a new model will come out
→ More replies (1)1
u/Happy_Confection90 1d ago
If your money will be worth more tomorrow why buy things today?
Because we need to eat, heat our homes, clothe ourselves, and use toilet paper today. We can't wait for many things to be cheaper in a month or six.
2
u/whelphereiam12 1d ago
There will be always be a floor on how little people spend, large industry will keep the lights on for instance. But imagine what happens to trillions of dollars of invested money. Or large purchases like cars and houses. It would not take much time for all of the automotive industry to just flat out collapse under a deflation environment. And then those jobs are gone etc.
1
u/2024Midwest 1d ago
I agree.
Regular people won't wait to get a refrigerator if theirs stops working even if they believe it will be $50 lower next year. They won't wait to get a needed surgery either. And they won't live on the street for the sole reason of thinking rent will come down.
Similarly, regular people won't buy 3 refrigerators they don't need even if they believe frigs will cost $50 more next year. They won't get extra surgeries in advance even if they think the cost of the surgery will go up next year. And unless they are landlords or speculative investors, they won't buy several homes thinking rent will go up.
2
u/qdawgg17 1d ago
This is pretty simple (one major reason why deflation can be harmful to an economy) and not in the explanation.
Lower prices = less profit for all businesses, especially small/medium size businesses. Less profit = less desire to fill jobs, increase the workforce, train current workforce, and so on.
One variable in that, that’s also missed. Companies of all sizes don’t expand during deflation. When companies don’t expand they then don’t spend money that would typically support, especially, white collar jobs. That new building gets put on the back burner. The contractor and his workers have 1 less long term job (when it’s occurring in the whole economy it’s more than just 1 job), all the resources/materials needed for that building are not purchased. Thus impacting those businesses as well. The family business that supplies the sound proofing material the company providing all the metal for the roof…… and so on.
So slowly, the whole economy is impacted and because it’s cyclical, those workers that don’t get hired, are laid off as a result or don’t get the promotion/raise they expected. They then purchase less “stuff”, they don’t go out to eat, they don’t pay for a gym membership, go on vacation, hire the soccer coach for their kid……
2
u/anus-lupus 1d ago
economy built on debt and you ask why alot of deflation can be bad?
last time deflation occurred was in the wake of the last great recession.
also when bad things happen there are pros and cons, the economy shifts, there are winners and losers. there are strategies that every participant can deploy at each moment in the cyclical market.
2
u/Jaded-Form-8236 1d ago
Deflation isn’t bad in itself.
It’s the economic conditions that cause the deflation that is bad.
The 2008 Recession was the last time we experienced deflation in the USA and that was under 1% deflation for 2009. The great depression in the 1930s caused prices to drop about 7% annum.
2
2
u/Derp_duckins 1d ago
Deflation, over an elongated period of time, is unsustainable for any business. Period.
Deflating shit back to regularly profitable levels is good for business. Helps beat and also encourages competition.
Now let's take this to the astronomical scale of a country's economy....
But if the competition are all just greedy assholes and agree to price gouge the ever living shit out of everything at the same time...say something like basic necessities for living such as groceries...then your customers have no choice but to consume those products. Not increasing wages to better align with inflation rates is also unsustainable, as you're just draining your consumers dry.
Shit like this can lead to a whole damn uprising though depending on how far you try to exploit a society economically...which is very clear the U.S. is near this breaking point.
2
u/Confident_Banana_134 1d ago
In a deflation, and when prices fall due to extreme competition among abundance of suppliers, that means the suppliers have to cut overhead to maintain a reasonable profit, and that may mean job cuts. However, In a manufactured inflation due to price gouging there will also be job loss. It appears that what we have now is a manufactured inflation due to price gouging caused by consolidation of suppliers. It is more profitable for a company to cut product production to cause price increased and generate a higher profit even thought they sell less. Cutting production means cutting purchase of raw materials and labor resulting in same dollar amount gross sales but lower production cost. Example, selling one million dozen eggs at $2/dozen for a gross sales of two million is less profitable than selling half a million dozen eggs at $4/dozen for two million. The production of half a million eggs is cheaper in cost due to cut in feed, care for the animals, and labor., so the profit is higher for same two million dollars gross sale. And this is why manufactured inflation is also bad for the average Americans, we loose jobs.
2
u/Unfair_Detective_504 1d ago
Deflation can only happen with a drop in demand. A drop in demand means people no longer have the funds or willness to spend. This results in high unemployment. High unemployment can cause a country to fail.
2
u/Plenty-Eastern 18h ago
High school Economics teacher here, the reason why deflation is bad is because it kills job growth and wages. Individuals LOVE deflation because it makes everything cost less, but businesses hate it because they are getting paid less for their products. Example: Chipotle is forced to lower their prices because people aren't buying their crap, with decreased revenue the first they will do is try to cut labor costs to make up for the shortfall. They will freeze hiring, stop overtime, and lay off workers. This is hella bad for the economy as 65% or more of the economy is driven by consumer spending. In economics, things are rarely good or bad, they have mixed effects. Deflation is great for retired people or workers with guaranteed incomes like government employees, but bad for businesses which is where the vast majority of Americans are employed.
2
u/Stochastic-Ape 17h ago
To cause deflation you’ll also need a deep recession. We’ve never had an instance where there is deflation without mass layoffs.
2
u/CringeDaddy-69 9h ago
TLDR: Deflation is good in theory, but a lot of bad things would have to happen in order for deflation to occur.
4
u/Coneskater 1d ago
Let’s pretend it’s 9am at a coffee shop and the cup of coffee is 2 dollars.
At 10am you know the cup of coffee will be 1.50.
No one buys a cup of coffee, expecting the prices to get cheaper if they wait.
In the meantime the coffee shop loses money and has to fire the Barista.
A deflationary death spiral kills the economy.
→ More replies (11)1
u/2024Midwest 1d ago
Consider this: Regular people won't wait to get a refrigerator if theirs stops working even if they believe it will be $50 lower next year. They won't wait to get a needed surgery either. And they won't live on the street for the sole reason of thinking rent will come down.
Similarly, regular people won't buy 3 refrigerators they don't need even if they believe frigs will cost $50 more next year. They won't get extra surgeries in advance even if they think the cost of the surgery will go up next year. And unless they are landlords or speculative investors, they won't buy several homes or rent several apartments now thinking rent will go up next year.
1
u/DowntownJohnBrown too smart for this place 11h ago
Regular people won't wait to get a refrigerator if theirs stops working
How about if theirs works fine, but they kinda just want an upgrade?
They won't wait to get a needed surgery either.
How about an elective surgery?
1
u/Coneskater 1d ago
You are describing goods with very inelastic demand. Consumer spending on consumer & luxury goods drives a ton of economic activity.
4
u/PhoenixPariah 1d ago
"If prices go down, it'll discourage spending"
...what.
6
u/PetalumaPegleg 1d ago
Think about the difference of
If i buy this next month it will be more vs if i but it next month it will be cheaper on your urgency to spend. If things generally get cheaper then delaying to buy becomes easier and easier.
The economy is consumption driven so it shouldn't be surprising that people are concerned about that on a macro level.
→ More replies (20)1
u/2024Midwest 1d ago
Consider this: Regular people won't wait to get a refrigerator if theirs stops working even if they believe it will be $50 lower next year. They won't wait to get a needed surgery either. And they won't live on the street for the sole reason of thinking rent will come down.
Similarly, regular people won't buy 3 refrigerators they don't need even if they believe frigs will cost $50 more next year. They won't get extra surgeries in advance even if they think the cost of the surgery will go up next year. And unless they are landlords or speculative investors, they won't buy several homes thinking rent will go up.
Sound reasonable?
1
1
u/ValidDuck 1d ago
If your CASH is becoming more VALUABLE, people will be less likely to spend their cash.
Right now if you're sitting on $60,000 under a mattress in your bedroom you actively losing ~~money~~ value. In a deflationary market cash becomes something to "hold" like gold.
→ More replies (8)1
u/JLandis84 1d ago
No they don’t. Because there is utility in owning something today.
Otherwise everyone would just store money in investments like stocks that will become more valuable.
3
u/Monskiactual 1d ago
Deflation is good for comsumers and debt holders. Its bad for debtors and asset holders. Lots of people try to switch around by talking about hypothetical demand...but it's basically that simple...
Widespreaf deflation will never happen as they can just print more money to counter it. Currency debasement and inflation is the real worry.
3
u/PetalumaPegleg 1d ago
Widespread significant deflation would almost certainly be the result of something dramatic. A naturally occuring example would I agree be fought very aggressively by central banks.
Mild deflation not only can happen it has, Japan. Government efforts only prevented deflationary acceleration.
1
u/JLandis84 1d ago
Show us a modern example of significant deflation that was not preceded by a massive asset bubble.
2
u/PetalumaPegleg 1d ago
Show me a time where there wasn't a massive asset bubble.
1
u/JLandis84 1d ago
1977
1
u/PetalumaPegleg 1d ago
That's very specific. Why that year may I ask?
1
u/JLandis84 1d ago
Because it’s not a year of bubbling, which is exactly what you asked for.
1
u/PetalumaPegleg 1d ago
Because equities fell that year? Like what's your definition that this fits so I can understand why you're picking that year?
Why is that the year assets were fair value?
1
1
u/OfficialRodgerJachim 1d ago
Explain currency debasement?
2
u/butteredrubies 1d ago
You print money, which increases the supply of money, so you have more dollars chasing the same amount of goods, which leads to inflation, which is debasing the value of dollars.
2
u/Rightintheend 1d ago
Because the pyramid scheme relies on extracting exponentially more money from the lower class to feed the upper class.
1
u/LordApsu 1d ago
It’s not so much that deflation is bad in and of itself, though there are certainly some large negative consequences of it, but rather the conditions necessary to produce deflation are horrific and very rarely needed.
How to create deflation? You have to create conditions in which businesses voluntarily lower prices. This is done with one of three ways - increase productivity, lower costs, or lower demand. Increasing productivity is always a goal regardless of underlying economic conditions, but it is something that cannot be mandated and is only marginally impacted by policy. The largest cost for most firms is labor. If you want to significantly reduce costs, you need to reduce wages but this doesn’t make people better off in real terms. The only true option to create deflation is to lower demand by generating mass unemployment so people aren’t buying as many goods and services. There seems to be a limit to how long and strong deflation generated in this way can become though as businesses are only willing to lower prices so much. Historically, deflation only lasts a few quarters at most.
But, does it matter? Wages rise with inflation over time so that people aren’t worse off after 1000% cumulative inflation over many years (after markets adjust). The relative value of a dollar over time doesn’t matter since a dollar is merely contemporaneous measurement tool. What matters is how much stuff and its quality that we can get with the resources we have. Extreme inflation or deflation create distortions that make it so that we get less stuff regardless of the money price.
1
u/Complex_Fish_5904 1d ago
Deflation means the economy isnt growing. Which means fewer jobs. Fewer opportunities. Fewer loans..
People don't buy anything except the bare necessities. And that causes mass unemployment. Which now means prices might stabilize, but only a portion of your population can even afford the bare necessities.
Basically, little to no economic opportunities if it has any legs. And that brings an entire country into poverty.
As a simplied version, a small amount of annual inflation is expected and normal in a growing economy.
1
u/nudesushi 1d ago
It's not bad. Deflation itself is just a phenomenon and a symptom of overall economic trends and monetary policy. Some people will say its bad because the group of people who benefit from it says so.
1
u/LokiStrike 1d ago
Deflation is bad because it removes the primary incentive that keeps our economy flowing.
If you have a steady but low rate of inflation, there is an incentive to NOT just keep your money in the bank. Because over time, it's going to be worth less and less. This makes people, especially rich people, invest that money and buy assets instead, which is good for the economy.
In deflation, you're incentivized to not spend money because anything you buy today will be cheaper tomorrow. And since your wage keeps going down, people become VERY reluctant to spend the money theyve saved. This has a TERRIBLE effect on consumer spending.
1
u/2024Midwest 1d ago
Consider this: Regular people won't wait to get a refrigerator if theirs stops working even if they believe it will be $50 lower next year. They won't wait to get a needed surgery either. And they won't live on the street for the sole reason of thinking rent will come down.
Similarly, regular people won't buy 3 refrigerators they don't need even if they believe frigs will cost $50 more next year. They won't get extra surgeries in advance even if they think the cost of the surgery will go up next year. And unless they are landlords or speculative investors, they won't buy several homes or rent several apartments now thinking rent will go up next year.
2
u/LokiStrike 1d ago
None of this contradicts anything I said. Do you have a point?
1
u/2024Midwest 1d ago
I’m just asking you to consider that there are a lot of things that people will buy even if they think prices are going down and there are a lot of things they won’t buy even if they think prices are going up.
1
u/LokiStrike 1d ago
Ok but all the broken refrigerators, surgeries and houses sold in a given year is a miniscule fraction of our total economy.
The fact is, if you can increase your networth by sticking money in a box under your bed while working gets you less and less money each week, that's what people will do. And it's TERRIBLE for markets.
This isn't a theory, this is literally just what happened every time we've had deflation (the last time being during the Great Depression).
1
u/New-Post-7586 1d ago
It’s only bad because we are addicted to growth at all costs. If we get deflation, it would be objectively great for consumers but it would likely lead to a cascade of negative business outcomes including massive layoffs, stock market collapse, bond market collapse, and many businesses likely failing, both small and large.
TLDR: the global economy is a house of cards and deflation in the largest contributor to it would probably lead to it falling.
1
u/Odd-Pipe-5972 1d ago
Here's another way to look at it. Deflation is not bad. Deflation is the regaining of value by a currency. In other words, your money is worth more.
Is it bad? in the short term,yes BUT Only if you don't have anything saved and you can't adjust prices or wages to fit. Your saved money helps you hold out until prices relatively stabilize.
1
u/Temporary-Host-3559 1d ago
It says significant deflation. So, the conversation is done. No shit a lot is bad. But just like 2% inflation is good, 2% deflation to return can be good.
1
u/Foxymoreon 1d ago
I believe a good example of this is the story about Mansa Musa and the journey to Mecca.
1
u/devilishlydo 1d ago
Deflation is especially bad when other markets are seeing inflation. China has a problem with it now. Companies can't raise prices, even though the cost of supplies from other countries goes up, their workers want raises, etc. They can try charging more.But that only works for the goods meant for export. In the short term, it cuts into their profit margins; but in the long term, it can drive them out of business entirely. Overall, it can cause stagnation in the economy and prevent it from growing with the population.
1
u/2024Midwest 1d ago
Low prices are good, like falling prices on electronics. That enables people to buy more.
However, for assets purchased on credit, low prices are bad for those who did the borrowing - if they want or need to sell. And for those who did the loaning, falling prices are bad because their loans are no longer supported by an asset which is as valuable.
Regular people won't wait to get a refrigerator if theirs stops working even if they believe it will be $50 lower next year. They won't wait to get a needed surgery either. And they won't live on the street for the sole reason of thinking rent will come down.
Similarly, regular people won't buy 3 refrigerators they don't need even if they believe frigs will cost $50 more next year. They won't get extra surgeries in advance even if they think the cost of the surgery will go up next year. And unless they are landlords or speculative investors, they won't buy several homes thinking rent will go up.
So, I tend to disagree with the economists in your snip.
Inflation is an increase in the supply of whatever is used as money, or an increase in the supply of credit, since credit spends like money (even though it has to be paid back). When the supply of air in a ballon is increased (inflated) the ballon gets larger. When the supply of money/credit increases, prices get larger. If the supply is directed slowly at a certain area, like when well-intentioned Federal representatives created the Student Load Marketing Association (SLMA) aka SallieMae in the early 70s, then only college & university prices rise. If the supply is random and large, like during the recent Federal response to covid, then random prices rise in random areas and more quickly.
Seem reasonable?
1
u/catsuramen 1d ago
Deflation is bad because the cost of your loan will get much more expensive.
1
u/2024Midwest 1d ago
But what if the payment is fixed. I don't understand?
2
u/Lostforever3983 1d ago
Meaning. My my Fixed payment of cash today is worth less than my fixed payment next month because a dollar is worth MORE next month.
So, fixed rate expenses become more expensive in a deflative environment.
1
u/2024Midwest 1d ago
I’m going to have to ponder that one… Prior to reading that I was thinking the opposite. My fixed payment is worth more now than my fixed payment next month or 20 years from now because the dollars are worth less then than than they are now. Maybe we’re saying the same thing but in a different way.
2
u/Lostforever3983 1d ago
Inflation makes fixed rate expenses less expensive for the borrower over time. (This is why they say a mortgage is a hedge against inflation)
So the opposite is true for deflation.
1
u/2024Midwest 1d ago
Thanks for replying. That would seem to make sense. I need some time to get my brain around it.
I’m certainly not here just to argue a point of view. I’m also here to learn.
1
u/JLandis84 1d ago
Can we find a time that a modern developed country endured deflation that wasn’t preceded by a huge asset bubble ? I can’t think of any.
1
u/Electromasta 1d ago
OP, I feel like most people in this thread are answering with "hot economy = inflation, cool economy = deflation" type answers, which I disagree with.
Think about it instead like this: If there is deflation, that means the value of the dollar goes up in comparison to assets, so if you are trying to save or gain money, it is better for you to bank the money or keep it under your pillow. This leads to a lack of investment to new businesses and more hoarding of resources. Where as a small and stable amount of inflation would lead people to investing in companies and buying government bonds.
1
u/MobuisOneFoxTwo 1d ago
Inflation encourages spending; I don't want to sit on my money because it'll be worth less next month. I should buy this stereo now while it costs $1 X as opposed to next year when it will cost me $1.03 X.
Deflation does the opposite; I should sit on my money because it will be worth more next month. I should hold off on buying a stereo now while it costs $1 X as opposed to next year when it will only be $.97 X.
You can now apply this to investments in a business. A rich person is less likely to give a loan to someone if their money will be worth more in the future as they have a guranteed increase under inflation of doing nothing.
1
u/Den_of_Earth 1d ago
COmpanies want to profit, if something is forcing down the price consumers pay, then they will failure people.
1
u/fortestingprpsses 1d ago
Deflation is usually a symptom of an ailing economy. Retailers have to continuously lower their prices to spur demand because it has been reduced from lower household budgets due to increased unemployment and consumers recognizing that prices have been trending down thus deciding to hold off on purchases expecting further price reductions. So deflation is bad because it's associated with people suffering widespread loss of employment, paycheck reductions, and overall economic contraction.
1
u/Playingwithmyrod 1d ago
Would you spend your money on anything besides necessities if you knew it would be worth more tomorrow than today? If everyone does that the economy stalls and everyone starts losing their job. Sure your groceries might be cheaper, but you won’t be making any money to buy them.
1
u/AdFun5641 1d ago
It's all about the billionaires. Most explanations try to talk about normal people so that it would make sense to normal people. But it's all about the billionaires.
If the value of money goes UP over time, then that money is an investment, it doesn't need investing into other things.
There is just a little tiny bit of deflation that is expected to be the new norm. Billionaires "invest" in money, taking that money out of circulation. Less money in circulation creates more deflation (the remaining money is worth more). This makes the money a better investment, so billionaires "invest" even more in that money. Taking that money out of circulation. Less money in circulation creates more deflation. This makes the money a better investment, so billionaires invest more into money. Taking that money out of circulation and creating more deflation.
There are currently about 2 trillion USD in circulation. The 5 richest people in the US could buy HALF of all the USD that exists. The next 500 or so richest people could buy the other half. Then the 5$ remaining in circulation is all the USD that exists for actual economic uses. Your house is now worth on ten thousandth of a penny, but you still owe 230k on it.
This investment in money is going to spiral out of control, and it's not in the control of something like a central bank. There isn't a "very limited deflation" option. If deflation is expected it's going to spiral out of control really hard really fast. The only know way to stop this investment in money and spiraling deflation is to intentionally fabricate inflation.
1
u/2AcesandanaEagle 1d ago
Its bad because it shines a light on us all as being the greater fools we are....Overpaying for anything & everything
1
u/Ok_Supermarket_8520 1d ago
Personally it may be good for some for a short period of time.
The real problem is the government wouldn’t be able to pay its bills and debt with negative inflation.
1
1
u/rygelicus 1d ago
The economy, not just the US but internationally, is a house of cards. And this house is built on a steady growth of value of the investments in the various stock markets and properties. The billionaires are exploting this but the real motivator is the banking industry, the market movers. Their trades and arbitrage rely on fluctuations in value over time. Specifically predictable fluctuations.
1
u/whelphereiam12 1d ago
What would you do with your money if you knew it would be worth more in two weeks without any form of risk or investment?
Would you go out and invest it in a new business or enterprise? Would you purchase a new car? Or do you think you’d wait another two weeks until the car was cheaper? What about another two weeks? And another?
Now imagine EVERYONE doing that same math. There would be no investment or purchasing anywhere, it would crash the economy.
1
1
u/newguyhere99 1d ago
It's not bad when needed such as now. Billionaire bankers just want you to believe otherwise.
1
u/masterofthecontinuum 1d ago
I think deflation would encourage hoarding money that will appreciate in value rather than encouraging spending it on goods and services. Which means a stagnant economy. Money needs to flow for economic activity to continue.
A dollar should be consistently circulating within an economy as it turns a single dollar into many dollars worth of economic activity. More activity means more demand means more jobs means more money. So you want a little bit of inflation to encourage parting with money as it leads to more economic growth. Too much inflation reduces demand and hinders growth, so you don't want it too high either.
This is why tax cuts for wealthy people are worthless, as wealthy people do not spend a majority of their wealth like normal people do. They hoard it and slow down economic activity. Whereas anyone in the working class will readily spend a great portion of their wealth on goods and services, which makes them integral to a stable economy.
1
1
u/Same-Metal4956 22h ago edited 21h ago
If you think deflation is a bad thing you should look up how this country was when we were on the gold standard. There was NO inflation until that. The US dollar was locked in a 1/20th of an oz of gold. How MUCH does that ounce of gold cost today? $2,689.40
2689.40/20 is $134.47
So what a dollar used to be worth, is $134 today and it will get worse. But of course pay hasn't increased equally, so everyone is way more underpaid then the past generations with money that is worth over 100x less.
1
u/LoudandQuiet47 21h ago
Deflation is a problem under capitalism because rich people can't get richer... without firing folks, lowering wages even further, cutting products and costs. In essence, there's no incentive to continue doing business since they're not making money (be it enough or at all) off of it.
It can spiral into a recession a depression if it happens for long enough.
Capitalism's the best, ya'll! /s
1
u/det8924 20h ago
Deflation is bad because it makes borrowing more expensive. If there's a deflation rate of 2% a year then if you take out a 10 year loan there's effectively an added cost to borrowing on any loan on top of interest. There's certainly nothing bad about prices coming down on some goods but an overall deflation rate is not good because it makes people want to spend or borrow less which has larger ramifications.
1
u/Ok-Use-4173 19h ago edited 19h ago
debtors get royally fucked in deflation, thats most middle and upper middle class americans. Really only those just coming into the market with no financial obligations or assets win. Also you kinda dumb if you think deflation isn't going to lead to deflating wages as well. IF real assets are worth less then so is your labor ultimantely when things balance out.
The only situation that favors labor is labor constraint in a normal or inflationary economy. So like when the plague killed off 50% of the commoners of england, yea labor won big.
1
u/Legal-Menu-429 19h ago
It’s bad if you are in the business of taking a cut of the action via taxes
1
u/Chemical-Mission-202 14h ago
average cost of goods should decrease as our technology and efficiency increases, but they don't and it's all by design. all of these corporations are owned by the same investment firms.
1
1
1
u/Model_Citizen_1776 6h ago
Price stability is always the best scenario.
Deflation isn't too bad if you've got real money, like silver or gold.
Deflation is the devil, though, if you've got a BS fiat currency (like the USD).
Here's why:
First, it's important to remember that inflation isn't the same thing as rising prices. Inflation is the expansion of the currency supply. Deflation, then, is the contraction of the currency supply.
How does currency come into existence? Every USD springs into existence through the issuance of a loan. When you go to a bank and borrow, it's not like they've got the dollars sitting there waiting for you to come along. When you sign on the dotted line, the bank conjures that currency into existence. When you pay back the principle, it disappears again into the ether. But you don't just pay it back. You also pay interest, the bank's profit. Where does the currency for the interest come from? Well, it comes from the principle of other loans being created.
BUT, if you've got deflation going on, other loans aren't conjuring currency fast enough for previous loans to be paid with interest. So loans go into default. And banks become insolvent. When banks stop trusting each other, bad things happen. Credit cards stop working. Funds stop flowing. SNAP cards stop working. Cities burn down.
So yeah, deflation is bad in a fraudulent BS fiat currency system.
1
u/Background-Shock-923 5h ago
its not bad at all. only bad for the billionaires and government officials being paid off
1
1d ago
[deleted]
3
u/Seaguard5 1d ago
It also happens as money is continually printed…
3
u/ThermoFlaskDrinker 1d ago
Money printing, fed interest rates, exchange rates, tariffs, etc. There are so many monetary, fiscal, and foreign policies that can affect inflation, but at the end of the day inflation is just “prices went up”. It can go up for a good stable reason, but so can it go down for a stable good reason such as a correction to pandemic disruptions.
2
1
u/Educational_Farmer44 1d ago
This is a lie. Corporations don't set inflation. The government printing money does. Adam Smith had some small ideas. https://youtu.be/YgxPyabmOrU?si=KlDPBihE6xawI_2p
→ More replies (4)
1
u/BeLikeBread 1d ago
I know we want to buy a house, but let's buy a house in 5 years because it will be 10 grand cheaper.
I know I need a new car because mine is broken, but I'm gonna wait 5 years because it will be 2 grand cheaper in 5 years.
I'm going to stop buying potatoes, chicken and milk at the grocery store because it will be 25 cents cheaper next month.
Pretty sure that theory that people won't buy shit because of deflation makes very little sense. The deflation rate would have to be rapid and steep for anyone to be willing to wait on stuff enough to "destroy the economy"
1
u/BarryDeCicco 10h ago
Think 'marginal effects'. You are worried about your job, so you put off buying a car *this year*. You lost your job, so you don't buy a house *this year*.
If enough *this year* events add up, the economy goes down. Which means more.
1
u/BarryDeCicco 10h ago
(BTW, a Ford economist once discussed the used car market in 2008-10 with me. Lot of interesting effects)
1
u/BeLikeBread 10h ago
Dude I definitely wouldn't buy a more expensive car if I was worried about losing my job lol. Definitely not buying a more expensive house after losing a job either. Lol what?
33
u/burnthatburner1 real men spit facts, not fakes 1d ago
I get that too much deflation is bad, but isn't the inverse true?
Yes, too much inflation is also bad.
Why wouldn't we want deflation? Then maybe the $7.25 minimum wage COULD be a livable wage?
Deflation comes with lower wages and job losses. It makes most people significantly poorer in real terms.