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View Full Version : Deflation, why is it bad?


ExXB
26th May 2014, 10:26
From the NYT

http://www.nytimes.com/2014/05/27/business/international/president-of-ecb-warns-of-euro-zone-deflation.html?partner=rss&emc=rss

This article suggests that deflation is a bad thing, but from my point of view reducing prices would be a good thing.

Can any economist type enlighten me?

Fox3WheresMyBanana
26th May 2014, 10:33
deflation benefits savers; Governments are borrowers.

papabravowhiskey
26th May 2014, 10:38
People stop buying anything other than distress purchases and essentials. If you know that something will be cheaper next year, you will want to hold off on a purchase as long as possible.
Japan had a decade of economic doldrums because of deflation.

PBW

sitigeltfel
26th May 2014, 10:48
It can damage your tyres and wheel rims as well as affecting handling.

Hempy
26th May 2014, 10:48
It also forces businesses to close because whilst their goods cost less, their profit is less yet their labour costs stay the same. Eventually equilibrium demands lower wages.

G-CPTN
26th May 2014, 10:54
People stop buying anything other than distress purchases and essentials. If you know that something will be cheaper next year, you will want to hold off on a purchase as long as possible.
Back in the 1960s I was interested in buying a pocket-sized electronic organiser.
For weeks I researched the available models and discovered that subsequent models were not only superior, but also cheaper!
The result was that I waited and waited and never did buy one . . .

cattletruck
26th May 2014, 11:29
Does this mean they take money out of circulation?

If it stops the crazy runs of printing more money to solve problems of a financial nature then it is a good sign.

vulcanised
26th May 2014, 11:44
It's bad when your inflatable friend lets you down.

Ancient Observer
26th May 2014, 12:03
Deflation.

Being a Liverpool fan when Man City win the league.

Being a Manure fan for the past season.

Being a Liverpool fan at Anfield in May 89.

Being the Derby manager.

ExXB
26th May 2014, 13:47
People stop buying anything other than distress purchases and essentials. If you know that something will be cheaper next year, you will want to hold off on a purchase as long as possible.
Japan had a decade of economic doldrums because of deflation.
In our case we buy things when we need them. In this land of 'no-inflation' (at least according to those guys paying my pension) I've watched prices slowly creep upwards. It's about time that prices slowly creep downwards.

Do consumers really behave this way? I thought it was all impulse purchases.

It also forces businesses to close because whilst their goods cost less, their profit is less yet their labour costs stay the same. Eventually equilibrium demands lower wages.Lower wages, and bonuses, at the top would be a very good thing. The last couple of years I worked we stopped serving the customer and related only to the CEO's next board meeting. Long term planning was 6 weeks at best.

I can see why governments and businesses would see deflation as a bad thing, but to me it would appear to be very good.

onetrack
26th May 2014, 13:56
Deflation leads to a serious drop in asset values in housing, land, commercial buildings and other assets, that are normally expected to at least hold their value or to steadily rise in value.

Liabilities (manufactured goods, aircraft, vehicles, machinery and plant) normally lose value - but the loss in value of liabilities increases during a deflationary period.

Borrowers who borrow heavily lose out badly in a period of deflation, because they still have to pay back the set amount of borrowings agreed on - but their assets (usually the ones they borrowed money to purchase) have decreased in value.

Most house purchasers who still have a sizeable mortgage end up considerably worse off as they continue to pay substantial sums off a house that has decreased in value.

Banks come under pressure as borrowers fail to repay their loans in a period of deflation, as businesses come under pressure to reduce the prices they charge.
Many businesses start to fail because they are getting reduced profits on reduced prices - but a lot of their costs are fixed.
Banks then start to fail as they can't cope with a deluge of bad debts.

In Japan, in the late 1990's, the Japanese Govt forced the amalgamation of a lot of banks to prevent bank failures. The price of land and property in Japan reached astronomical heights with a land and property bubble, up until about 1997, when the bubble collapsed.
Japanese banks were left with huge property debts that they had little option but to refinance over a much longer term.

Japan today, is one of the most heavily-indebted nations in the world - but the debt is to Japanese banks for internal borrowings - that many Japanese and Japanese companies and corporations are still paying off, from the explosive-growth years of the 1980's and early 1990's.

In short - you don't want to hear or see about deflation if you own any amount of assets, and have borrowings against them.
If you own very little and have no borrowings, you'll rejoice at the new low prices for everything in a period of deflation - provided you have income to pay for them. :)

acbus1
26th May 2014, 14:54
Governments in debt (i.e. all of them) are rescued by low interest rates and inflation. The debt is cheap to hold and diminishes in real terms with time.

Governments can prevent deflation by simply printing money. Since the gold standard was abolished, all it takes is a few keystrokes on a computer keyboard and (usually a heck of a lot of) bonds magically appear from nowhere.

Problem then is preventing hyperinflation. It's not easy to judge when to stop printing money - inflation doesn't stop until well after you turn off the tap. History shows that Governments/central banks are hopeless at recognising the 'stop printing' signals.

The flip side is deflation, which can all to easily become an accelerating downward spiral in prices and output etc.

Basically.

G-CPTN
26th May 2014, 15:53
I lived through the inflationary 1970s.

In some respects it was good - cost-of-living wage increases exceeded merit rises and the cost of the mortgage repayments got easier and easier whilst the value of the property rose ever higher and higher.

I bought a new car, having borrowed money from my parents, and paid off the loan within a year.

Shaggy Sheep Driver
26th May 2014, 16:02
I inflation helps borrowers and hurts savers. That's why the government (big borrowers thanks to Gordon) are pretending the inflation rate is about 2.5% and stable, when everyone knows from their rising bills it's more like 7% and rising.

er340790
26th May 2014, 17:15
Already covered to some degree, but in a nutshell.

* Lower Spending (Deflationary Expectations). People will defer buying things today if they expect things to be cheaper tomorrow. This in itself can accelerate deflation as vendors cut prices today to match those lower future expectations.

* Increase in Debt load. Loans and mortgages become harder to pay off as the value of the debt rises. E.g. If real wages follow prices downwards, but your loan is fixed, you are contributing more of your net pay to service it.

These things are not intrinsically bad, they are just bad for Govts who trumpet ever-increasing GDP and disposable incomes. :bored:

Economics Rule 101: "You can never make yourself richer by borrowing more."

Mr Optimistic
26th May 2014, 18:41
For business, stock holdings become less valuable with time but you paid a higher price and the price you can charge for finished products goes down. So you don't want to hold stock, there's no incentive to increase output, costs including wages must come down and supply goes down accordingly.

onetrack
27th May 2014, 02:51
Japan is an interesting case to examine, as regards deflation. The Japanese Govt continually stimulates the Japanese economy (which is very largely based around manufacturing) by initiating huge infrastructure projects.
The Japs have built some massive projects - tunnels, bridges linking the islands, railways, and huge LNG projects.

By initiating these projects, the Japanese Govt stimulates their manufacturing industries that then turn out huge amounts of plant and equipment, vehicles, steel, and manufactured materials needed for those projects.

A lot of manufactured Japanese equipment is used for only a short time, then sold off to other countries where demand for good low hr equipment is high.
This then creates more manufacturing demand for replacement goods.

These huge infrastructure projects are good in one respect - where they create long-term security in the supply of energy and raw materials, or produce improvements in productivity.

However, the Japanese are still wrestling with the huge elephant in the cupboard, of the unrealised losses from their property bubble that destroyed a vast amount of economic value.

Japanese interest rates are some of the lowest in the world (as low as 0.1%), and carry traders and many banks in other countries are making a killing by borrowing in Japanese yen at extremely low rates and then lending to the likes of (unsecured) credit card users in developed countries at high rates of interest (as I speak, many CC's in Australia still have interest rates of 17% to 20%).

However, the major beneficiaries in this financial trade are the carry traders and the overseas banks, not the Japanese economy.

With exceptionally low interest rates, Govt treasurers and economists are struggling with ideas of what to do next, to stimulate moribund economies. Interest rates have been used as a "throttle lever" to control inflation and excessive demand, or to stimulate slowing economies, in the past.

This worked well when interest rates hovered between the low single digits and high double digits - but it leaves treasurers and economists grasping for economic levers to pull, when interest rates fall to very low levels and economies still refuse to respond with growth, due to deflation.

The Japanese have yet to figure out how to deal with their astronomical internal debt levels, currently at 200% of GDP.
A couple of sizeable earthquakes have also damaged their economy, with an increased need for energy imports in the wake of the loss of the Fukushima nuclear plant.

Despite Japan's huge and longstanding current account surplus, they still have a long way to go, to effectively address their massive debt levels from their asset bubble of the late 1980's and early 1990's that is still impacting seriously on their economy and effectively creating stagnation in their economy.

Economic history of Japan - Wikipedia, the free encyclopedia (http://en.wikipedia.org/wiki/Economic_history_of_Japan)

Japan public debt - Wikipedia, the free encyclopedia (http://en.wikipedia.org/wiki/Japan_public_debt)

BenThere
27th May 2014, 04:56
The US, too, is in the same conundrum.

After the financial crisis of 2008, the central bank injected massive liquidity into the banking system, and the government engaged in equally massive deficit spending.

We've been in a depression (and real deflation) since then, which was masked to pretend that the economy was growing, unemployment was stabilized, assets were safe, and all is well. All lies.

The difference between today and the 1930's is that the value of the dollar has been kept fairly constant, the gold has not yet been confiscated, and the general public is not as sharp. The collapse has so far been forestalled. But it's going to be increasingly difficult to avoid it. If interest rates rise even to normal levels, the US treasury will have extreme difficulty servicing the additional debt it has accumulated without runaway inflation.

Many fine mansions were built in the 1930 by very cheap labor, low and depressed material costs, and extremely cheap land. Those who had cash profited handsomely. Those who had no cash or debt suffered.

SINGAPURCANAC
27th May 2014, 06:40
economy for us,doomies ;)
air ticket 100$ between point A i B
Price include all costs plus profit for investors/owners .
Such as,
30$ -for fuel
30 $-for crew and associated workers (managers, chief pilot nad his secretary will also receive some amount of money from that portion of price )
15 $ for maintenance
5 $ for ATC
5 $ insurance & bank costs, exchange rates and similar
5$ for marketing and advertizing
5$ seller commision
5$ everything else, that is not mentioned.

Than due to billion of possible raesons, price for ticket droped to 95 $
Somewhere we have to reduce,
fuel? no
salary? yes and no
atc? yes but only 1 $ ......

Than we will focus on ATC charges,for further deflation understanding,

with 5 $ from each ticket ,we may keep system working without profit (under CRCO pay scheme profit is not allowed ;) )
when atc received 4$,especially on longerterm conditions, we will reduce investment and most probably new hiring.
Always remeber, someone's daughter works for ATC system supply industry, without new investment they are out of bussines (with all consequencies that follow )
and , someone's son waiting for job ATc, that will never come,because, incomes reduced, workers are afraid, work more for less, that is always good option for managers and for capital owners.

any similarity with economic crisis and rise profit for capitalists and mangers are purely coincidentaly. :E:E:E

return to normal mode, deflation means, lack of need for someone's work and knowledge, and that is something that we don't want, obviously.

ORAC
27th May 2014, 07:25
Inflation and deflation are not opposites. In the worst case you end up with stagflation (http://en.wikipedia.org/wiki/Stagflation).... :sad::sad:

Metro man
27th May 2014, 09:51
People don't buy things because prices keep going down, just like a Dutch auction. If people aren't buying, sellers further reduce prices which encourages buyers to hold off even longer.

Little gets sold therefore less production is required. Jobs are lost, people have less money to spend further depressing prices. And so the downward spiral continues.

A small amount of inflation keeps things ticking over

ExXB
27th May 2014, 10:07
People don't buy things because prices keep going down, just like a Dutch auction.

But is that really true? It isn't in my case, we buy stuff when we need it. If we see it on sale we may buy earlier than we would have, and if it happens to be on sale when we want it, so much the better but we don't put off purchases waiting for it to be on sale or at a lower price.

Am I really an exception, or is this 'rule' an assumption, perhaps based on Japanese consumers?

Gibon2
27th May 2014, 14:25
People don't buy things because prices keep going down, just like a Dutch auction.
But is that really true? It isn't in my case, we buy stuff when we need it. If we see it on sale we may buy earlier than we would have, and if it happens to be on sale when we want it, so much the better but we don't put off purchases waiting for it to be on sale or at a lower price.

I also wonder if it is true, and wonder about distinguishing cause from effect. Do people not buy things because prices keep going down, or do prices keep going down because people are not buying things?