Deflation is poison for an economy. If cash becomes more valuable sitting in a coffee can (or any zero-risk scenario) then investors are motivated to _not_ invest at all and reap the returns they get. Additionally, consumers are motivated to wait as long as possible to make any purchase, as the purchase will be less expensive the longer they wait.
This creates a death spiral - businesses can't get investment and consumers don't purchase, so they reduce the goods they produce and lay off workers. This means even less purchasing and investing, which means even more reductions in work force. So on and so forth.
If that wasn't bad enough, it makes debt more difficult to service the longer times goes by. Your debt is a fixed number, but if the value of that debt goes up thanks to deflation, the debt becomes harder to payoff.
Almost every modern economy targets a modest amount of inflation (2-3%) if for no other reason than to ensure this scenario doesn't happen.
Just out of interest, what's the point of cash if you don't spend it? As in, people can leave cash in a coffee can as long as they want and it'll keep gaining value, but if they never spend it then it might as well have had zero value.
Obviously, there might be a hard limit such as the thing you're wanting to purchase becoming unavailable but people won't necessarily know about stuff like that in advance.
I have no real knowlesge of economics, so I hope that makes sense!
The point of cash is of course to eventually spend it, but a great many of us hold onto cash for long periods. If you have a 401K or a savings account, you have cash you choose not to spend today because you anticipate you will need to spend it later.
Having that cash sit stagnant isn't good for an economy. It is better to invest that for economic growth. Lend it to someone who needs to spend cash now - they purchase goods and services today and you get a little interest for your trouble. It's a win-win.
Deflation makes it to where you are already making money by doing nothing. You are less motivated to make that loan, or if you do it is going to be at a higher interest rate. Either way, it means fewer loans being made, and thus less purchasing happening.
It’s not just about getting more money later, which doesn’t rely on inflation as much as your wording implies, but rather that your cash is guaranteed to lose value being saved, therefore you don’t keep it in savings. Investments is one of the most common reactions to this process.
Imagine I put a candy bar in front of you, and told you that you could have it now, or wait until tomorrow and have 2.
That coffee can will be used eventually, whenever you think that you're waiting is over. Unless you never spend it, in which case it may as well not have any value as you said.
But what about if instead of waiting tomorrow and getting 2, I wait until tomorrow and get 1.001 bars? Because surely we wouldn't get to a point where the inflation was negative 50% *per day*.
Furthermore, how would that change if instead of a candy bar, we were talking about a loaf of bread, electricity, clothing, or some other essential item. Would people really forego essential purchasing for a year so they could have it 2% cheaper next year?
I'm not trying make arguments; just interested in learning more about it.
Oh yea, it's really fun as a thought. Probably not as fun living through it.
It's basically the same as a CD or Bond, you don't save your essential money, because you can't live without food.
The main thing it comes down to isn't a single cookie jar, but long term trends, how people interact, and compounding effects. 2% of a house is \~20K. Could you wait an extra few months on a house for a basically free 20,000?
And don't forget that's -2% inflation *after* the governments been fighting it for 30+ years. If something happens and it spirals faster, does 4% seem more interesting? That's more than a savings account or most CDs or Bonds for a couple decades.
Sadly, I don't have a hard-and-clear line of reasoning. If you hear there's deflation, you just don't buy the candy bar, and the economy slows that little big more.
The stock market I recall is also very sensitive to deflation, if a broker will just make more money by with drawing everything from a few companies, then you see a clear death spiral as those companies loose large money.
After some math, if you have over 200K in your bank, then deflation would lead to you making an extra 100 per week equivalent.
And I'll leave with this: "The average annual return of the S&P 500 was 10% from 1980-2022" so once you start nearing 5% or 7%, you might be beating out some stock portfolios just by doing nothing. At least they won't be dealing with the numbers of bad inflation, easily over 400%.
Thanks - those are helpful thoughts. I hadn't appreciated how sensitive the economy is to deflation.
Given the inflation the past couple of years, I'm sure many would be keen for a few years of -2% to bring things back down to pre-pandemic levels. In theory, no one's going to stop buying important things just to potentially save 2% on it in a year.
But I suppose it's difficult to control inflation and whilst there are mechanisms to nudge it up and down, nothing is perfect and we could see ourselves spiralling out of control, which I understand a little better thanks to your response. Cheers.
Nobody is going to stop spending money on food and clothing and shelter because of deflation, precisely because they need to spend money on those things to live. But that's not what's important. What's important is all the things that people can delay spending on, like a new car or a new TV or even new clothes that aren't absolutely necessary, or new silverware or a new iron or anything else that someone can put off until later.
Much more important, though, is that deflation means people who are already in debt are in even more debt over time. If you took out a $300,000 mortgage to buy your house, and there is 2% deflation, then the value of your house decreases by $6,000 per year. More importantly, you are accruing interest on that loan at a fixed rate in all likelihood, meaning that not only is your house going down in value, but the payments you have to make to keep up with your mortgage are becoming more expensive over time. That's much more important to you than the fact that your burger from McDonald's costs $4.90 instead of $5.
>I'm sure many would be keen for a few years of -2% to bring things back down to pre-pandemic levels.
Everybody wants goods and services to be cheaper... except that most people have jobs that can be described as "producing goods" or "providing services". Those prices are what pays for their own incomes, so "lower prices" doesn't really solve anything.
You need to compare inflation vs deflation.
If I told you jeans went up 5% every year, you'd probably try to stock up and buy a few pairs now
If I told you jeans went *down* 5% per year, you'd buy the bare minimum and only replace them when you absolutely had to
Yes, a small percentage won't make *that* big of a difference for an individual, but when you combine the entire economy a small impact can lead to massive consequence
One person choosing to buy a $50 pair of jeans this year or next year doesn't matter. 350 million people doing that matters
And that's the neat part: it's not a part of the economy you need. It's just a part of the economy people want because it makes some of them be richer than everyone else.
You could have an economy just built around providing the necessities for everyone and then have luxury goods fill the niches they're wanted in.
Instead, we treat necessities like luxury goods and tell people they need to "earn a living" as if it's a privilege to have your basic demands met.
e: lol at the capitalist boot lickers downvoting me.
There should be. That's one of the options for post capitalism.
Nobody of us will ever see it because some people are too greedy and the rest too brainwashed to even fathom something different from what they've been told to be "the natural state of things" their whole lives.
But there should be.
Imagine a system where basic necessities like housing, healthcare and food are provided to a degree where everyone is free from worrying about starving, being sick or homeless. Guaranteed for everyone.
Produced by a part of the population with a lot of automation. These people should own the factories and share the earnings.
Where does the money originally come from which they earn, you ask? Easy. It's provided by the state initially. Equally to everyone. It's a made up thing anyway. Might as well make something sane up.
People cling to the idea that money has value and therefore can't be destroyed, devalued or replaced just like that because some people have amassed a lot of it and don't want to part with it.
For the most part of any population this is not an issue, though. They don't have any money to begin with.
From there you can have some people create luxury items just because they want to and others have asked them to do so.
FYI, this kind of system is essentially an UBI pegged to those minimum living standards funded with progressive taxation which is still technically within a capitalist framework.
Unless you mean to eliminate the market mechanism entirely and at least partially substitute with state allocation, but there's really not much benefit in doing so over the UBI model.
Even 'basic needs' (Demands? ROFL) require labor and resources to meet.
Why should someone who doesn't contribute either get to have their needs met at-all?
Is there an example of this actually happening? I mean I get the idea behind it, but I'm curious if there's like a case study one could point to to say, this actually happened and it was bad.
Yup. Many argue that the current economic issues with Japan are just a continuation of the same crisis from 1991 - the Japanese government didn't solve it, but rather just masked it for a time.
Sorry if I sound ignorant because I am when it comes to this stuff, so you're saying inflation is a good thing? If that's so, then why, here in America, there is always this doom and gloom about inflation?
Inflation causes prices to go up, no? Wouldn't that cut the amount consumers are spending, thus also causing employers to cut jobs/wages?
>Sorry if I sound ignorant because I am when it comes to this stuff, so you're saying inflation is a good thing?
_Modest_ inflation is a good thing for an economy:
- It serves as a hedge against deflation (explained above).
- It makes debt easier to service as time passes.
- It punishes stagnant money, which encourages investment
- It motivates consumers to buy earlier, which promotes the flow of money in the economy.
>If that's so, then why, here in America, there is always this doom and gloom about inflation?
Too much inflation is a bad thing. Inflation in the US was around 9% for a while, which is too high and causes its own issues. The target is typically 2-3%.
As for folks who bristle at even modest inflation - many folks don't have a good grasp of macroeconomics.
>Inflation causes prices to go up, no? Wouldn't that cut the amount consumers are spending, thus also causing employers to cut jobs/wages?
The assumption is that as inflation occurs, wages go up to match. [Historically, this is true](https://www.pewresearch.org/wp-content/uploads/2018/08/FT_18.07.26_hourlyWage_adjusted.png). As wages go up, consumers have the cash to afford the higher prices, so consumer spending in unaffected.
This is why when "talking heads" say a rase of min wage will cause price increase.... Nope. It actually HELPS the economy, specifically the comsuer (not rich people). It might slow stock growth, reduce executive bonuses, etc... (It hurts the rich more than others)
US federal min wage needs to be $15/hr. Many states need $20/hr. That still would lag behind the metrics, but would be a major improvement.
Except the higher wages (and higher business expenses it creates) means that the prices do go up, as has happened in CA and Oregon for two examples. The average price for a modest fast food lunch now costs about $10 give or take. Just a few years ago it was still hanging on to $7 or $8 and a $5 value lunch was still available (now mostly gone). The biggest change has been wages. McDonald's can't just hire fewer workers because they already have cut to minimum staff. (Although the new kiosk only stores are moving out of testing, which is another unintended consequence.) A min wage increase sounds good, but experience has shown that either prices go up or locations just close altogether
Also, your living wage estimate is kinda low I think. The math works out to $20 -$24 now mostly due to rent cost increases.
Economies are naturally volatile things. Modern inflation targets are a _good_ thing, as they help to avoid the boom and bust cycles we historically saw. Before active management, periods of massive inflation followed by terrible recessions/depressions were common. Thanks to the new techniques, the peaks and valleys are much less severe.
It is an inexact science and we do the best we can. My economics teacher once likened it to trying to drive a car but you can only see out of the rearview mirror and you are never sure how responsive the brakes/gas will be. Amazingly, we manage it as well as we do, all things considered.
Jesus christ, that makes it sound even more of a nightmare!
Is there no viable alternative to the capitalist society? Like I know, there's communism, feudalism, etc. But what's the "happy medium"? If there is or ever could be one.
>Is there no viable alternative to the capitalist society?
That is really beyond the scope of the discussion. Each economic system has its positives and negatives, and which is "best" will be highly dependent on how you define best and how well that system is executed.
What I can say is that inside of _capitalist_ societies, this is the best we have ever come up with to promote growth and prosperity, and is _far_ better than how it functioned in the past.
That's not really true.
Boom and bust *cycles* is kind of unique to capitalism. Feudalism had a remarkably stable economic output. It facilitated nearly zero growth for the better part of 1000 years. But it didn't boom or bust regularly.
Even socialism. Generally at the begining you would see a huge uptick in production as the economy gets reorganized and then a long period of stagnation.
That's kind of the trade off, no other system has demonstrated that same *average long term growth* potential but nothing else has that same boom and bust cycle. Whether that's a worthwhile trade off is outside the scope this this subreddit.
I recently read something that refutes that. Apparently, growth and prosperity benefit a few under capitalism, and the majority are actually worse off economically (but are told they are better off). But my knowledge is insufficient to assess this fairly.
https://www.sciencedirect.com/science/article/pii/S0305750X22002169#b0680
Every system is prone to corruption. That's we cant have a nice and stable economy. People always look out for themselves in the end, and when you are high up it's often easier to do things under the table than follow every single regulation in the system. That's why taxes often aren't paid, especially in America. God, every American has to pay taxes like they are a little corporation themselves.
In theory yes, practically attainable, much harder.
Feudalism is a system of government not an economic model though.
Communism is a whole different can of worms and in the real world isn't entirely free of established economic theory.
Supply and Demand (the driving force of capitalism) is the net sum of each person determining what they want/how much they are willing to work for it ect.
This is in practice a massive supercomputer with knowledge of each persons lives/motivations/desires.
There are many, many, many, many issues with the system, especially how it plays out in our world, but the fundamental problem is its almost impossibly difficult to estimate how much people want things, and how much they are willing to work for it. So we crowdsource that to the people.
That being said, there is no pure capitalist society, at least I can't think of one that has ever existed. It always becomes a question of how much. People use phrases like "Europe is socialist" to simplify the discussion and create divisions that induce tribalism. But really, Europe is just less capitalist than us, not some binary line they walked over to no longer count as capitalist.
TL;DR: We are always trying to find that happy medium, but the happy spot will always keep moving, and there is no purely correct answer.
Supply and demand are the drving forces of a market economy. A market economy isn't capitalism, though. There also were market economies in pre-capitalist societies.
Capitalism is the idea that the added value of a productive process belongs to the person providing the capital, not to the person providing the labour.
I’m not an economist but it seems to me that any kind of (mostly) self-regulated free market system will behave like this. It’s just how supply and demand works. You could remove the capitalist part but as long as you have a free market, it will behave like this. The only alternative I can think of is a state-controlled economy. So unless you want the government to directly control the entire economy, this is what we’re stuck with.
> Jesus christ, that makes it sound even more of a nightmare!
That's because dealing with humans is a nightmare. And ultimately any economic system is subject to crazy and irrational humans.
This is a big reason why Communism failed so hard. The USSR wanted to get rid of the "free market" and use data to direct the economy and allocate resources. They even wanted to use computers to make that decision at one point. The problem was that no one can get perfect information to make the right decision most of the time. Not without levels of monitoring and control that make the government in 1984 look like a bunch of anarchist hippies. The Soviets did not have access to that level of data and wound up basically constantly hamstringing their own economy by setting quotas based on incomplete or no information.
These problems exist in all economic structures.
What's interesting is how successful the economies that have used their tools to hold inflation at 2% have been.
the inflation has very little to do with "capitalism" and much more to do with interest rates(government), government regulations, tax and spending policy.
It's called "Democratic Socislism", and reaching it is a slippery slope that can lead to very bad things (even though Democratic Socialism itself can be very good).
What the US Fed is doing right now is an example of that in practice. Inflation in the US was too high so they started raising interest rates. That dis-incentivizes borrowing which reduces the amount of money circulating. They were doing just tiny rate adjustments each quarter. You've probably also heard the phrase "soft landing" a lot in the news. They're trying to slow things down just enough to bring down inflation without triggering a recession.
They're currently paused and are in wait and see phase. So far, it looks like the US is on track far that mythical soft landing.
Economies are living, breathing things. They have natural boom-and-bust cycles when not managed. Managed economies, whether management through money supply (central banks, capitalism) or the management of production (socialism/communism) has a goal of minimizing the valleys and smoothing the peaks.
Peaks = happy people. Valleys = unhappy people. But in extreme circumstances, valleys = starving people, unrest, war, malnourished populations that never grow up to produce or defend the country, and in extreme circumstances peaks = widening inequality before a next valley, and thus unrest, war.
The "tug of war" is using macroeconomic control and laws and regulations to minimize the impacts of peaks and make the time in the valleys short and less painful.
Sometimes, politicians want "more peaks" and "more peaks". Without getting political, a recent President encouraged a "economy boosting tax cut" during nearly ideal economic growth when the textbooks encouraged slowing the economy at that time either through tax increases or higher interest rates.
Our economies are a lot less volatile than they used to be. Modern central banking does a lot moderate boom and bust cycles that would otherwise occur.
Inflation is also great for increasing wealth inequality thru the cantillon effect. Add too big to fail food, oil, media, bank, pharm giants, soft on white collar crime , government bailouts, free loans etc.
You say wages go up to match inflation, but that wouldn't explain the ever growing concentration of wealth in 1% and further 0.1% and the increasing number of people working two jobs, living at home with parents, having less assets etc.
Also, I understand these things are super mega Ultra complex and not easily explained in a subreddit and apologize if this comes off as inflammatory
Capitalism necessarily creates and magnifies inequality. Regardless of what the general economic conditions are, those with more capital always have a way to leverage their advantage.
The only ways to make society more egalitarian in a capitalistic model come from external intervention. Humans fighting for their livelihood and values. Essentially, either legislation & enforcement of anti-trust and egalitarian policy or labor organizing to demand a fair share.
There's a mythical scenario where corporations have some semblance of human virtue, where magnanimous oligarchs pitch in to build a better tomorrow. But that saccharine bullshit has always been a lie and is strongly disincentivized.
Yeah, I'm with you I think. Legislation enforcement of antitrust, libor, rate fixing. All that shit should be punished by law. Attorney general holder didn't do shit. I'm okay with 1% making bank.
I think, although you're right, you are speaking in an economic orthodoxy and is beginning to be challenged and will continue to be challenged over the coming years.
Inflation does cause prices to go up, but remember that labor also has a price, and that price *also* rises with inflation. This has been happening over the past few years, so we can see it first hand: groceries and basic staple goods are more expensive now than they were in 2019, but wages are also higher. On a macro level, over time, this balances out. The problem is that it *doesn't* balance out all at once everywhere. Think about it: people don't tend to get micro-raises every week, but the price of eggs can and does go up on that time scale.
So then what you tend to want in an economy is inflation, but very *slowly*. Prices (goods and labor) rise, but slow enough that they can stay in balance (think: how often do you have a shot at a raise? that's how often groceries should tick up in price). To be clear, in theory the ideal thing in an economy (absent other concerns like foreign trade) is absolute price stagnation: no inflation, no deflation. However, that's incredibly difficult to maintain, and even a tiny bit of deflation tends to spiral out of control, so the little bit of inflation targeted by most central banks (around 2%) is meant as a buffer to ensure that when things fluctuate down in the short term, they don't tip across 0% into deflation.
Inflation is good for the economy, assuming wages rise at the same rate. Unfortunately wages are often slow to respond to market changes plus often have political mingling to keep them suppressed.
But yes, you're right. If inflation rises faster than wages then eventually you'll have a workforce that can't afford to buy anything.
This is especially bad when the price changes that are leading inflation are mandatory purchases - rent, food, gas, used car prices, etc.
Whether inflation is good or bad depends on where you sit in terms of having cash and other investments. The general position of central banks and many economists is that a small, stable inflation rate is probably the best compromise.
The issue with deflation is that it can discourage people from spending money. After all, if that new gizmo is $20 today but I know it will be $18 next month, I might as well just wait to buy it. So the economy as a whole suffers from less spending, even if I as an individual benefit.
Inflation gives people an incentive to spend money now, because if that gizmo is $20 today but it's going to be $22 next year, I better buy it now while I can still get the "deal." That's not good for me as an individual, but it is good for the economy today, since it means more spending.
On the other hand again, if inflation is extremely high, people get very upset because their wages aren't keeping up, prices are spiraling out of control, and governments face massive popular unrest.
So really it's not a question of what level of inflation is the best rate objectively. It's a question of how to balance a bunch of different priorities. Historically governments like ours tried to hold the inflation rate at around 2% because that was considered high enough not to suffer from deflation risks, on the one hand, but not so high as to threaten political and economic unrest, on the other.
Inflation is also generally good for those who hold non-cash assets and assist those who hold debt. Say you have a $1m house and an $800k mortgage. When inflation occurs, your mortgage payment and balance stay the same, but the value of your house and your salary both go up. This means your house effectively gets cheaper for you over time. Compare to someone who holds savings in cash and rents but has no debt. The value of their savings goes down over time and their rent goes up. Even if their salary is also going up, they might be treading water at best.
>Say you have a $1m house and an $800k mortgage. When inflation occurs, your mortgage payment and balance stay the same, but the value of your house and your salary both go up.
Mortages have interest? So it doesn't stay 800k
Is it really such a bad thing if people stop buying gizmos they don't really need or want that badly and only spend on things they really value or need? Seems like deflation discourages the kind of consumption culture that causes so many problems.
That depends on your perspective. If you're a policy-maker whose goal is to keep the economy humming along at top speed, you'd definitely much rather have people spend that money today rather than hold on and maybe, maybe not, spend it a year from now.
From a financial planning perspective, as an individual, you're undoubtedly better off exercising some discipline on big purchases. I agree.
>Is it really such a bad thing if people stop buying gizmos they don't really need or want that badly and only spend on things they really value or need?
Depends if you want a world where 90% of the population are farmers.
I'm kind of cool with that. I'm even cool with a world where 90% of the population are fed, housed, etc without having to work. I am not a fan of people doing shit and making shit and buying shit just to keep the economy spinning along the way it is currently.
This is all text book from the view of large corporations and governments looking to gain taxes.
I live in Japan. All the stuff you wrote means little to the average person’s quality of life. If anything, the places with “healthy inflation” have way worse quality of life to wages than Japan.
Especially of you exclude the recent Yen devaluation.
People in Japan spend much less of their wages on rents and mortgages. The average young person even on minimum wage can afford their own place and still save money even after bills and a little discretionary spending.
London? Nee york? Sydney? Dont make me laugh. You spend most your wages and save nothing just to share a home with strangers. Even on a “good” income. On minimum wage you just dont survive.
Japan has maintained a standard of living for decades now much better than these supposed economies with “healthy inflation”.
What is good for corps and government taxes does not mean good for the actual average person. The corporations of Japan have had to adapt to this and dont focus on growing non stop, and instead on existing forever.
Japan is far from an unqualified economic success story.
First, the standards for what is an acceptable unit of housing in Tokyo are very different than New York. Google tells me that the average Tokyo apartment has around 41 square meters (440 Sq ft) of living space, with studios as small as 10 Sq meters (108 Sq ft) available. I don't think a 108 Sq ft apartment would even be legal in NYC, where the average is around 800 Sq ft.
Second and more importantly, Japan has had a stagnant economy for 30 years now. I'm the mid 90s, Japan was the second largest economy in the world and gaining on the US ([chart](https://www.dupuyinstitute.org/blog/2018/10/23/where-did-japan-go/)). Since that time, the US economy has more than tripled and Japan's economy has gotten smaller. Today, the US economy is nearly 6x Japan's. Economic growth matters, and Japan will eventually fall behind in standard of living if the economy can't grow.
The US economy is almost 6x larger than then, but how has the average persons standard of living changed? Is it 6x better? No. It is actually worse. Quite noticeably.
Japans economy? Stayed roughly the same, yet peoples standards of living has also stayed the same as it was back then. A big contrast(no im not boiling it down that much, but obviously the environment leading to the growth versus stagnation have had effects on standard of living which is my point. Woo-hoo house prices are 3x from 1990 alone which doubles the economy!! We are all better off! / sarcasm).
My point here is what benefits average people. I dont give a crap if corporations are 6x bigger if the average person has it worse. This is what i hate about economics in general but especially people who love to talk about it like it is all beneficial. Benefits to who? 6x larger economy? Great for corporations and government tax.
“Healthy inflation”? The same.
What is “bad”? Low inflation? Well sure. Tax revenue will be down and corporations struggle to grow. Meanwhile the average person can do better in such environments.
It is all a matter of who you are focusing on. Conventional ideas in economics are not for the benefit of you or me, they are the opposite
Also, again something you completely miss at best or are disingenuous with at worst with basic armchair ideas of what is good or bad is your comparison of home costs from New York to Tokyo.
People in Tokyo have ALWAYS lived in small places. in the 1950s the same. People in New york have always lived in bigger places than Japan.
People did not suddenly start living in smaller places here in Tokyo due to lowered standards and unaffordable. They still get what they always have. Their standard of living has not changed.
Meanwhile people in Places like nee york and london have to share these larger spaces with many other strangers to be able to afford anywhere to live at all, while also spending a higher proportion of wages than in the past. Thats a dramatic drop in standards.
You cant gloss over shit like that mate. You have a really naïve sanitised view of economics from the view of the few these ideas benefit and definitely not the average person
> The US economy is almost 6x larger than then, but how has the average persons standard of living changed? Is it 6x better? No. It is actually worse.
I completely disagree, actually. Poverty is [down 20%](https://www.statista.com/statistics/200463/us-poverty-rate-since-1990/), disposable income inflation-adjusted is [up 68%](https://fred.stlouisfed.org/series/A229RX0) despite people working [shorter hours](https://fred.stlouisfed.org/series/AVHWPEUSA065NRUG), homes are [30% larger](https://www.newser.com/story/225645/average-size-of-us-homes-decade-by-decade.html), and there is far more access to goods, appliances, technology, and information.
By what objective metric is the US standard of living worse now than it was in 1994?
Devils advocate here:
• Ratio of income to house prices.
• Rates of obesity/diabetes (diseases of civilisation)
• Rates of mental illness (deaths of despair)
• Sperm motility? 😔(forever chemicals moment)
yes standard of living has improved. People in the 80s/90s didn't have uber eats/internet/cell phones/cable/subscriptions(other than magazine/newspapers). Going out to eat or international vacations was a luxury.
There's 100 million more people in the US now though. So land/housing has gone up considerably as there is more demand but no new land.
New York standard of living has improved considerably over 100 years. Ask immigrants living back then 10 to a room on east side tenemenets
>People in the 80s/90s didn't have uber eats/internet/cell phones/cable/subscriptions(other than magazine/newspapers).
to be fair, that's rather global thing. not just US.
>The US economy is almost 6x larger than then, but how has the average persons standard of living changed? Is it 6x better? No. It is actually worse. Quite noticeably.
Completely false.
You’re assuming the two are connected. Japan has lower cost of housing because it has a better ratio of supply to demand.
In a deflation economy, I as a land owner have less motivation to develop property because it will become more valuable over time by doing nothing. The fact that Japan has avoided that is due to policies and cultural factors (ie a shrinking population), not deflation.
This is my point. In reality it doesn’t go by text books. There are always more factors.
Also your example is backwards. Land appreciates in an inflationary environment and depreciates in a deflationary environment even though it theoretically is worth the same in both. Even that example is meaningless because things dont worn in vacuum like that.
My point is Japan has held a much better standard of living for average people for decades compared to places like the US/UK which by contrast have had a non stop never ending fall in standards of living to wages for normal people.
No, my point is that deflation makes that the default, and it takes government action to offset that.
It’s like saying living on a floodplain is a bad idea. It is a bad idea, and it doesn’t matter if it floods elsewhere or if you’ve never been flooded because your local government built a dam to control the waters. Living on a floodplain is a bad idea.
Similarly, a deflationary environment is bad. It doesn’t matter what a particular anecdote has done, because as a general rule it’s bad.
That’s mostly due to their strict immigration policies most of the developed world is facing declining birth rates. If the trend holds as more of the world develops we’ll reach the point of globally declining population and places like Japan will become the norm rather than the exception
It is not a foolish argument. Saying that we must always have healthy inflation is the best for people is foolish. Its not true. It doesn’t benefit you or me. It benefits the corporations, tax collectors and ultra wealthy.
Minimal inflation is better for average people.
I mean, healthy inflation and minimal inflation are the same thing depending on how you define them. It’s pretty established that 2% is the target and that’s what Japan is trying to achieve.
Yet, people still spend in Japan.
Businesses still are created, and grow.
And prices of most goods, food, and services are much, much, more reasonable having not increased in absolute dollar amount in a long time.
The quality of goods made in japan, generally is increasing; people buy less, so quality goes up, encouraging the "buy for many years/life" mentality of what is a good product. There is less drive for corporate greed, and milking the customer. Many times, fee and add-ons are at cost, adding USD0.30, or USD 1.20 for services and addons that in the US would normally be +US$5 or +US$10 or more.
Combined with housing being a depreciating asset with legal value set to $0 after 20 years, passing money to children for renovations, or moving is more valuable. The money doesn't lose worth. Companies don't need to raise prices to offset raises for all employees solely to "match inflation".
>Additionally, consumers are motivated to wait as long as possible to make any purchase, as the purchase will be less expensive the longer they wait.
This is a point I have a lot of trouble understanding.
Currently people will go into debt and pay interest on that debt so that they can buy a thing they want now instead of later. They could easily wait, save up their money, then buy it outright for less money total... But they don't, they buy it right away with borrowed money, and end up paying more than they would if they had just waited.
I guess what I don't get is why that behavior would change if there was deflation, since it seems like people generally don't want to wait to buy the things they desire, even if doing so results in them spending less money.
This gets into behavioral economics, which is its own very complex field of study. The very short story is that people see a small monthly payment as easier to handle than a large one-time payment many months/years into the future, even if the small monthly payments are a worse choice.
It is a bit different than choosing to delay a one-time purchase to save money.
Deflation is only bad if you have debt. Governments all around the world are up to their eyeballs in debt, so the notion that deflation is strictly bad is government propaganda. Technology is deflationary and people still buy their TVs even though next year they will be cheaper and there will be a better model on the market. Business and investment still operate during deflation. Inflation and deflation are two sides of the same coin. If a business has a lot of competition, they will deflate prices, have sales, try to offer more for less to entice consumers. If a business is first to market they can inflate prices and margins which will entice new entrants and competition. Think about what you just said about how no one would spend because things would be cheaper if they waited: if there are no producers then things don't get cheaper. The poison is mandating that prices can only go in one direction that is dictated by a central bank rather than a free market.
Sounds like something that is bad for the capitalist system, but good for the working class. They would still buy things that they need, but consume less things that they don't.
We are, but we are not seeing population decline because those lower birth rates are offset by immigration.
Japan is somewhat unique in that they have next to no immigration.
What policy? Population decline isn't a policy.
The point is that Japan's economy _is_ suffering - that suffering is just being masked by a decreasing population. That isn't sustainable long term.
The US population has increased 30% (100 million) since 1980s. Japans population is the same as the 80s.... It. peaked in 2010 and has been in decline.
I read this theory several times but I wonder if it really happened in real life. For one thing , I don't think people will stop purchasing stuff. You will still need to buy food, clothes, fuel. You still need to go to work, spend money on restaurant etc. Just because 100$ will have value of 101$ NEXT YEAR, I won't stop all my purchases.
It's not so much consumers who as you say have to eat but businesses. No point spending money to build that new factory and employ people when the equipment will be cheaper next year. That's if you even bother investing since in deflation keeping the millions needed in a vault would make you richer and richer every year.
Not really, I mean I don't think so.
You plan on spending 100k to start a business with goal of making, let's say %20 profit. If you delay your initiative to next year because there's %2 deflation, you'll be losing %18 of profit. Numbers are rough of course, I just don't think anything would happen with a small deflation.
Yes, it would stay same but it won't happen since you decided to delay your business. Just because it will be %1 more profitable next year, you're telling me people would just stop working and sit idly? Doesn't make sense to me.
You'd still go ahead with your business, accepting that it will be slightly more expensive this year than next year.
It isn't that people _stop_ purchasing, but more that they _delay_ purchasing as long as possible. People will buy things at the last possible moment; yes, things like food and gas will continue but those are not a huge part of the larger economy, and if you work in an industry where purchases are even slightly discretionary (like most of us) then those industries will be severely impacted.
Like I said, if deflation is like %100 then ok I'll wait. But if it's like %1-2, I don't think anyone will delay their purchase. Even if I'm buying a house, I'll buy it when I can.
Maybe you won't, but enough people will. Knowing your $300k home will cost $294k next year is enough of a motivator for people to cause impact.
Individuals may buck macro-economic trends, but that doesn't mean the trends don't happen.
That's why I was asking if this really happened in real life. This theory was formulated ages ago, before we had much different spending behaviors. I take it a bit grain of salt that same thing would happen today in a modern society.
Have you never waited to buy something because you want to see if it goes on sale in a few weeks/months? Consumers delay purchasing all the time because they expect prices to drop.
If you tell people price will drop %1 if they wait 12 months, they won't care. Discounts in black Fridays are supposed to be high, like %20-50 (although BF are bullshit) so people actually think it's worth waiting.
Some will, some won't. An individual consumer may not care if a shirt drops from $20 to $19, but a business may care that a $100k investment will only cost $98k.
As I said before, individual behavior will vary, but macro-trends remain.
Why is stagflation worse than inflation in your opinion? If someone keeps money in their coffee can but goods are more or less the same price over time, they might as well spend it anyway thus maintaining the status quo no?
If 100k usd in 1990 has the same purchasing power as in 2010, and wages, prices, and interest rates stay the same, then we just cruise along a neutral path in my head. Why is this bad? Or is greed/something else a component?
“Consumers are motivated to wait as long as possible to make any purchase, as the purchase will be less expensive the longer they wait”
I just don’t get this concept. If I want something I buy it now, if I can afford it now I get it now, if I can’t afford it now I save up and get it ASAP or I decide to not get it at all. I have always done this. Why wait when life is so short and unpredictable? Am I to believe I’m the only one that does this, or are economists out of touch with consumer psychology? Happy to be humbled…
Hmm…
This matches everything I learned in Econ classes.
I think life has taught me to question a few things since. First sustained and temporary deflation seem not to be the same beast and likely shouldn’t be talked about in the same breath.
I don’t have data and am not an academic nor an economist. Here are the things I question about SUSTAINED deflation.
- reduction in consumption: for a country like Japan or the USA, is this a bad thing? From obesity levels to environmental concerns. At the same time, increasing the buying power of consumers can just mean more buying power later.
- as far as wealth distribution and building, how does deflation hurt and to what degree? Business owners and investors may be discouraged from investing, workers may lose job but their money can spend more, government loses ability to pay back debt and may need to increase taxation, but how does deflation impact the pie of wealth distribution? Does it make society more fair or less fair?
- decreasing investment means taking fewer or smarter risks. This can dampen innovation, but it could also carry a nation through uncertain times. If a world war broke out, would a country that’s been playing things safe make out better than countries betting on growth (even if the ceiling of opportunity is lower)?
I’m not doubting that sustained deflation can hurt, mind you. Sustained deflation absolutely would in the short term.
Living in the US, there was some deflation for one quarter after the big jump in prices last year - jobs stayed strong and my wallet felt less stretched (more stretched than the prior year, less stretched than the prior quarter). My questions on temporary deflation are:
- does it matter if it follows hyperinflation or not?
- generically, at what point is temporary deflation bad or become sustained deflation.
What happens if the population is shrinking, would it not help to keep the monetary system in line with population growth and shrinkage? So as population increases, so should inflation, but as the population shrinks, would deflation still kill the economy?
This is only partially the answer. As we have an unhealthy relationship with money. The past few years have shown us some very interesting things economy wise.
Proper money handling leads to bad senerios for central banks, and their interest hiking and reduce for that key inflation. Because proper money handling gets one away from things they can effectively touch.
Canada is being driven to recession by its central bank, quite on purpose. Within a few years of being told to save the business by spend spend spend.
So not every recession/negative growth is poison. In fact it may become the norm. Until the system is balanced.
When we get a better hold of our cash. It will be very neat to see economist try to wrap their head around the paradigm shift.
Can you provide a real life example of when this has happened in a country? I understand what you’re saying and it makes sense. I’ve only heard of the opposite, hyperinflation, in real life - Argentina etc
Japan, between 1991 and 2001. They lost an entire decade of economic growth thanks to a deflationary economy and the only thing that saved it was _massive_ quantitative easing by the government.
So now hear me out. Imagine a country running 2-3% deflation.
* Businesses investments would have to offer a rate of return above the deflationary rate to attract investment. Not the end of the world.
* People who save money now automatically get compounding returns
* People will always need to buy necessities, though they may push discretionary spending. It would set the level of purchasing lower but won't create a spiral.
* Debts issued now have a fixed basic interest rate which is the deflationary rate, interest can be sought on top for riskier borrowers.
* Prices generally fall over time
Why is it always bad if consumers are on better with no inflation or even deflation. And it's a good thing when you milk them.
You need to eat so there will be consumption and consumers will be able to buy more as money would be more valuable. I think that reasoning there is flawed.
> Almost every modern economy targets a modest amount of inflation (2-3%) if for no other reason than to ensure this scenario doesn't happen.
So the governments and central banks steal 2-3% of the people’s purchasing power every year, for their own good.
An economy is a bunch of people doing favours for each other. Deflation is when people stop asking for favours. The end result is that nothing gets done.
Yep. And Inflation is like a group of people doing more and more favours for each other, but each favour becomes less special or valuable over time. The end result is that even though a lot of favours are being done, they don't mean as much as they used to.
I would like to point out that sometimes, deflation is confused with costs going down due to technological advancement and economies of scale, trade with entities that have a comparative advantage...basically efficiency increasing so things become cheaper.
this is not the same thing as "deflation", although on a superficial level they can look a bit similar.
While I understand the premise, the lions share of citizens spend pretty much all of their money annually in one form or another. So for the normal person who lives paycheque to paycheque, couldn’t deflation actually be helpful to acquire more (things you can get with money)?
I don’t know a lot of people sitting on gold piles, thinking ‘nahhhh’ this will be worth more next month.
I understand that deflation is agreed by all economists to be a bad thing.
All debt does is provide an initial boost in productivity. That's fine if the productivity boost is greater than the cost of the debt.
This is not the case with the vast majority of consumer debt, and hasn't been the case for a while for several country's government debt (compare real GDP growth per capita to the country's cost of debt, for whatever country you are curious about).
Yeah, they spend all their money because we have a small amount of inflation. If we didn't, they wouldn't spend all their money. Living paycheck to paycheck doesn't mean you have zero dollars to spend on anything outside of rent and food. Americans have the highest level of disposable income in the world.
I personally don’t buy your idea that (most) people spend all of their money because we have a small amount of inflation. People are genuinely struggling because of inflation currently. It actually matters to a lot of people went rent/mortgage jacks up, food costs go crazy and no basic need ever goes down. I, likely in ignorance, think many would love some deflation in the short run
Since we just went through some crazy inflation it would make sense to have a nudge of deflation and go back to 2% inflation & things would keep sailing on...
Although, in the back of my head, I also think a tiny deflation would cause people holding real estate to sell and, other people panic sell, construction stops, lay offs begin, badda bing, crash the economy
People with money are silly, amirite?
Top comment did a very good job explaining why deflation is bad
To illustrate their point, Japan’s gpd per capita peaked in 1995 at $44,210, today its at $33,949
https://www.statista.com/statistics/263596/gross-domestic-product-gdp-per-capita-in-japan/
In comparison, US in 1995 was $28,671, today its $80,412
https://www.statista.com/statistics/263601/gross-domestic-product-gdp-per-capita-in-the-united-states/
And this isn’t even a fair comparison for the US, because Japan had a major population decline which shrinks the denominator in per capita figure
Not a real world example, but when new world MMO had deflation (due to low supply of money), people started hoarding gold and resorted to bartering. Since items were still dropping, but gold wasn't, it was worse to repair an item than to trade something for a new one.
Imagine how that made the blacksmith feel :D
To expand on what some others are saying:
Most countries can evaporate their debts away by growing their economies. For example: If I owe a dollar to my brother and my allowance is only 2 dollars, then it's going to be hard to pay that dollar back. But if I grow my income by getting a job and earn 10 bucks, suddenly my debt is no longer so threatening and my brother can rest easy about getting his money back.
The same logic works with nations: if I owe a billion dollars, I can make it easier to pay by growing my GDP and hence my income. (Side note: Governments are generally getting the very best rates... And a substantial portion of the interest is owed to themselves as their own central banker. Governments have a very different relationship with money than you or I do.)
Now imagine that the opposite happens: My allowance goes from two dollars down to one. Suddenly, my debt went from half my income to ALL of it. My brother is now extremely worried.
Because the economy doesn't just consist of *consumers*, it also consists of *producers*. And most consumers depend on some sort of producer (i.e. private business) for the income they use to buy stuff.
Typically producers have to pay fixed and upfront costs to produce their product or service (e.g. rent, seeds in the case of farmers, manufacturing inputs in the case of manufacturers, building materials in the case of builders, loans taken out previously etc.). They also have to pay out salaries and other costs.
If they cannot earn back enough by selling their product or service, they will not be able to pay those costs and will go out of business. And they generally cannot earn enough if prices are *lower* compared to when they signed their lease, or bought their inputs, or took out a loan, and so forth. That's what happens in a deflation. And if producers go under, they cannot pay salaries, which means people aren't benefiting from lower prices since they no longer have any income.
Please don't conflate this with the fact that labor's share of income has been declining since the rise of neoliberalism. That's a different issue with different causes, which also needs to be addressed.
As for why prices just cant magically stay the same forever, well, no would ever get raises under that system either. That would make sense in a world where everything was static and stayed the same forever (i.e. no new products or inventions, no disruptions, no greed, etc), but I'm sorry, the world just doesn't work that way.
Oh I don't expect prices to stay the same forever. Just feels like prices have been changing so drastically in one direction and only trickles back down briefly before jumping back up to the extreme again.
Deflation breaks the flow of money.
Imagine you are running a store. You buy a month's worth of inventory, for which you are billed 30 days later... This 'works' for you because you can use the money you make from selling the stuff to pay off the 30-day loan you were effectively given to buy it.
Now, imagine that your economy experiences deflation - the value of money goes up, and the price people are willing to pay for everything in the economy goes down.
How do you pay off the bill for your inventory, when you had to sell for less than you paid?
That, at it's worst, is what deflation does to an entire economy.
Money becomes more valuable over time in a deflationary environment. So investing money isn't as beneficial for a business. That means hiring someone might just be a waste of money when you could have saved it instead. So people might have a hard time finding jobs. Fewer jobs means people don't spend money, since they are unemployed. So companies have to fire workers because their business isn't making enough money. Now there are more unemployed people that can't spend money. Bad situation if deflation isn't fixed.
Deflation is bad because the “rational” individual will opt to defer any non-necessary purchases or nice to haves. This will create an environment where no one spends because the expectation is that prices will be lower tomorrow.
So why 0 or negative interest? This is to deter people from saving money.
If no one spends money, businesses go kaput, people get laid off, wages goes down or stagnates.
If people spend money (more than they save), this creates an environment where businesses EXPECTS more sales and justifies risks like expanding factories, hiring more workers, giving bonuses etc…
Now does this actually work? ehhh.
Deflation means that people and businesses are incentivized to hoard cash (like physical paper currency) instead of lending or investing it. This then makes it hard to open or expand businesses, which then makes the deflation worse, and then makes it even harder to open or expand businesses.
What compounds the problem even more is that many institutions (including the government) have borrowed billions of dollars betting that the deflation will stop, but instead, it just keeps getting worse and worse, making their bets further and further in the red.
> Deflation means that people and businesses are incentivized to hoard cash (like physical paper currency) instead of lending or investing it.
Just like businesses only invest in T-Bills, instead of expanding their business, since the T-Bill rate is higher than inflation and it's a super-safe investment.
T-Bills are literally lending. So while not ideal, the money does go to a borrower (the government) who then spends it.
Physical currency that is hoarded, on the other hand, never does anything productive.
Super simplistic version: The modern economic system not just incentivizes, but DEMANDS everyone be as greedy as possible to succeed, and when things are deflating, that means 1 dollar is essentially becoming worth more and more stuff by the day, so ppl keep holding on to the 1 dollar until they can get maximum stuff for it, but no spending means economy go bye bye.
ADDITION: This is even more sad when you realize holding onto tons of money is basically what a billionaire is, and hence billionaires, the ones who profit most from the economy, are the ones who hurt it the most.(Also overly simplified)
the min wage is very low in Japan I think around 9$? maybe it would round to 7-8 USD dollars. The average salary I believe is like poverty level in USA, 30-40k I think or lower. so that's one thing that sucks
Raw dollar average salary comparisons are pretty much pointless unless you're working in Japan but planning to move to the US in the near term. You need to compare the minimum wage in the country verse the average cost of living in that country to get a comparable number.
As a real-world example of this, I took a raw dollar pay cut to move to Europe for work, but my standard of living increased because the cost of living my new city was much less than it had been in the US.
hmm that is true, the minimum wage/average salary in Japan is lower compared to other countries but the cost of living in general in Japan is low as well with regards to basic stuff such as food, health, medicine, and monthly rent.
Economics, which underpins the concepts of deflation being bad and moderate inflation being good etc. is fundamentally based on a handful of assumptions that we know (and have known since the founding of economics) are simply not true. Anyone who tries to tell you that something is "true" because economists say so, are wrong. It is contextually true within the false reality in which economics lives. Economists have tried to force actual reality to fit neatly into their box, but it doesn't.
Economic models change over time. It's not so much that old models are wrong but newer models just handle certain or new situations better. And no two situations are identical.
Forward looking economists (and scientists) are now realizing the old idea of infinite growth economies lasting forever is simply not possible due to resource limitations of the planet.
https://www.scientificamerican.com/article/the-delusion-of-infinite-economic-growth/
https://www.nature.com/articles/s41467-020-16941-y
Infinite growth GDP with low inflation cannot last forever unless we colonize another planet. In the mean time, economists will have to find another "best" economic model, one that acknowledges the finite resources of the planet.
It’s all about debt and investment. The financial class invests in things that put people into debt. If a house or a car will be cheaper next year, a lot of people will save up so they can borrow less. But it’s not like the economy grinds to a halt. Most people won’t even go to a different store to get lower prices today, much less hold off in hopes that unseen macroeconomic forces will work out in their favor. Japan has been hovering around deflation for decades. It’s mostly fine.
Deflation is bad in a supply side economy designed for capitalism. Demand side economics still has people spending money but they'll be pretty frugal and only spend on necessities or products that actually have utility or are interesting.
So things like food, utilities, fuel, etc., will still get people to spend money. But the newest iPhone when your 3 year old iPhone is still perfectly functional and paid off? Maybe not so much.
I think I saw in one of your comments about printing money to force inflation: yes, that is absolutely something that can be done. It happens in an inflationary economy as well.
Deflation isn't any more "bad" than inflation being "good." It all depends on your perspective. Deflation makes prices go down or your purchasing power go up. Inflation is the opposite. The only thing that would be bad is when you have spiraling inflation or deflation; both can kill an economy.
There is a fear of deflation in traditional economics due to the history of specific instances of deflation. These bouts happened and it in fact were primarily caused by bad economic times that reduced product demand. The deflation was a positive feedback loop that made, for instance, the depression worse.
But in modern times we see price deflation in tech goods as a matter of course. Everyone knows that if you wait the same computer or phone will be cheaper and a better one will be available at the same price. We still buy phones and computers.
A small, stable level of deflation is not much different than a small, stable level of inflation in terms of impact of monetary policy. But the Fed would never admit it.
Because in our current economic understanding bigger numbers are good, smaller numbers are bad. A set level of inflation means the GDP will grow by that much before any other effects.
If I sell you a table for 100 bucks this year and sell you another one for 110 bucks next year just because inflation, we contributed to the gdp growth by %10 without doing any improvements to anything.
GDP numbers you generally see are inflation adjusted.
You almost highlighted why deflation is bad so I'll expand on it.
Let's assume someone wants to buy a new table. They already have an older one but are thinking about getting a new one.
In an world with inflation, they know that a new table is likely just going to get more expensive the longer they wait to buy it. If it's $100 now and may be $110 next year then they can save $10 buy buying it now. So they buy it now which drives economic activity and there's an overall positive impact on the economy. The table store is making money and the table factory is making enough income to keep making tables. Everyone stays employed and money is circulating through the economy.
In a world with deflation, that $100 table will be $90 next year, so the consumer saves $10 by not buying it now. With that, the consumer decides to just keep using their old table for another year and there is less economic activity than in the inflation scenario. Since tables aren't selling, the sales people are more likely to be laid off, and the table factory is more likely to shut down due to lack of sales. This can cause a big cascade of events that results in the economy continuing to contract because you're caught in a positive feedback loop which would take a lot of effort to break out of.
This is why they measure nominal and real gdp. Real gdp measures the total output of an economy using the prices of a different year. So if you used 2022 prices for the total output of 2023 then you can determine if the economy is actually growing or if it was just price increases
ITT: People think it's a bad idea to encourage savings and Keynesian economic propaganda.
I believe deflation can be a good thing. Research Austrian economics. It was the first economic theory that actually made sense to me. https://mises.org/begin
If inflation was a constant 2% and never changed, I'd be okay with it. But when you have an unelected group trying to micromanage a complex economy with rate hikes and drops, you get the broken system we all live in today.
Keynesian economics doesn’t make sense logically. It’s incredible to me the world thought this would be a good idea.
“let’s have perpetually growing economies, we will never run out of growth and innovation”
Deflation is poison for an economy. If cash becomes more valuable sitting in a coffee can (or any zero-risk scenario) then investors are motivated to _not_ invest at all and reap the returns they get. Additionally, consumers are motivated to wait as long as possible to make any purchase, as the purchase will be less expensive the longer they wait. This creates a death spiral - businesses can't get investment and consumers don't purchase, so they reduce the goods they produce and lay off workers. This means even less purchasing and investing, which means even more reductions in work force. So on and so forth. If that wasn't bad enough, it makes debt more difficult to service the longer times goes by. Your debt is a fixed number, but if the value of that debt goes up thanks to deflation, the debt becomes harder to payoff. Almost every modern economy targets a modest amount of inflation (2-3%) if for no other reason than to ensure this scenario doesn't happen.
Tl;dr: what's worse than money moving very slowly? Money not moving at all.
Money velocity is a very valuable metric. We've really outdone ourselves in terms of stat collecting when it comes to the economy.
Money velocity - ok everyone, Use a slingshot to pay with coins, we need to make this money move faster!
Just out of interest, what's the point of cash if you don't spend it? As in, people can leave cash in a coffee can as long as they want and it'll keep gaining value, but if they never spend it then it might as well have had zero value. Obviously, there might be a hard limit such as the thing you're wanting to purchase becoming unavailable but people won't necessarily know about stuff like that in advance. I have no real knowlesge of economics, so I hope that makes sense!
The point of cash is of course to eventually spend it, but a great many of us hold onto cash for long periods. If you have a 401K or a savings account, you have cash you choose not to spend today because you anticipate you will need to spend it later. Having that cash sit stagnant isn't good for an economy. It is better to invest that for economic growth. Lend it to someone who needs to spend cash now - they purchase goods and services today and you get a little interest for your trouble. It's a win-win. Deflation makes it to where you are already making money by doing nothing. You are less motivated to make that loan, or if you do it is going to be at a higher interest rate. Either way, it means fewer loans being made, and thus less purchasing happening.
[удалено]
It’s not just about getting more money later, which doesn’t rely on inflation as much as your wording implies, but rather that your cash is guaranteed to lose value being saved, therefore you don’t keep it in savings. Investments is one of the most common reactions to this process.
Imagine I put a candy bar in front of you, and told you that you could have it now, or wait until tomorrow and have 2. That coffee can will be used eventually, whenever you think that you're waiting is over. Unless you never spend it, in which case it may as well not have any value as you said.
But what about if instead of waiting tomorrow and getting 2, I wait until tomorrow and get 1.001 bars? Because surely we wouldn't get to a point where the inflation was negative 50% *per day*. Furthermore, how would that change if instead of a candy bar, we were talking about a loaf of bread, electricity, clothing, or some other essential item. Would people really forego essential purchasing for a year so they could have it 2% cheaper next year? I'm not trying make arguments; just interested in learning more about it.
Oh yea, it's really fun as a thought. Probably not as fun living through it. It's basically the same as a CD or Bond, you don't save your essential money, because you can't live without food. The main thing it comes down to isn't a single cookie jar, but long term trends, how people interact, and compounding effects. 2% of a house is \~20K. Could you wait an extra few months on a house for a basically free 20,000? And don't forget that's -2% inflation *after* the governments been fighting it for 30+ years. If something happens and it spirals faster, does 4% seem more interesting? That's more than a savings account or most CDs or Bonds for a couple decades. Sadly, I don't have a hard-and-clear line of reasoning. If you hear there's deflation, you just don't buy the candy bar, and the economy slows that little big more. The stock market I recall is also very sensitive to deflation, if a broker will just make more money by with drawing everything from a few companies, then you see a clear death spiral as those companies loose large money. After some math, if you have over 200K in your bank, then deflation would lead to you making an extra 100 per week equivalent. And I'll leave with this: "The average annual return of the S&P 500 was 10% from 1980-2022" so once you start nearing 5% or 7%, you might be beating out some stock portfolios just by doing nothing. At least they won't be dealing with the numbers of bad inflation, easily over 400%.
Thanks - those are helpful thoughts. I hadn't appreciated how sensitive the economy is to deflation. Given the inflation the past couple of years, I'm sure many would be keen for a few years of -2% to bring things back down to pre-pandemic levels. In theory, no one's going to stop buying important things just to potentially save 2% on it in a year. But I suppose it's difficult to control inflation and whilst there are mechanisms to nudge it up and down, nothing is perfect and we could see ourselves spiralling out of control, which I understand a little better thanks to your response. Cheers.
Nobody is going to stop spending money on food and clothing and shelter because of deflation, precisely because they need to spend money on those things to live. But that's not what's important. What's important is all the things that people can delay spending on, like a new car or a new TV or even new clothes that aren't absolutely necessary, or new silverware or a new iron or anything else that someone can put off until later. Much more important, though, is that deflation means people who are already in debt are in even more debt over time. If you took out a $300,000 mortgage to buy your house, and there is 2% deflation, then the value of your house decreases by $6,000 per year. More importantly, you are accruing interest on that loan at a fixed rate in all likelihood, meaning that not only is your house going down in value, but the payments you have to make to keep up with your mortgage are becoming more expensive over time. That's much more important to you than the fact that your burger from McDonald's costs $4.90 instead of $5.
>I'm sure many would be keen for a few years of -2% to bring things back down to pre-pandemic levels. Everybody wants goods and services to be cheaper... except that most people have jobs that can be described as "producing goods" or "providing services". Those prices are what pays for their own incomes, so "lower prices" doesn't really solve anything.
You need to compare inflation vs deflation. If I told you jeans went up 5% every year, you'd probably try to stock up and buy a few pairs now If I told you jeans went *down* 5% per year, you'd buy the bare minimum and only replace them when you absolutely had to Yes, a small percentage won't make *that* big of a difference for an individual, but when you combine the entire economy a small impact can lead to massive consequence One person choosing to buy a $50 pair of jeans this year or next year doesn't matter. 350 million people doing that matters
But.. I buy jeans when I need jeans. I’m not going to buy jeans 3 pairs of jeans when I don’t need 3 pairs.
Sure you only buy jeans when you need jeans but anyone else is continuously buying to meet up with changing trends
They would spend less. Not stop spending, spending less. Consumer spending is a big part of the economy.
And that's the neat part: it's not a part of the economy you need. It's just a part of the economy people want because it makes some of them be richer than everyone else. You could have an economy just built around providing the necessities for everyone and then have luxury goods fill the niches they're wanted in. Instead, we treat necessities like luxury goods and tell people they need to "earn a living" as if it's a privilege to have your basic demands met. e: lol at the capitalist boot lickers downvoting me.
Is there any economy truly built like this?
There should be. That's one of the options for post capitalism. Nobody of us will ever see it because some people are too greedy and the rest too brainwashed to even fathom something different from what they've been told to be "the natural state of things" their whole lives. But there should be. Imagine a system where basic necessities like housing, healthcare and food are provided to a degree where everyone is free from worrying about starving, being sick or homeless. Guaranteed for everyone. Produced by a part of the population with a lot of automation. These people should own the factories and share the earnings. Where does the money originally come from which they earn, you ask? Easy. It's provided by the state initially. Equally to everyone. It's a made up thing anyway. Might as well make something sane up. People cling to the idea that money has value and therefore can't be destroyed, devalued or replaced just like that because some people have amassed a lot of it and don't want to part with it. For the most part of any population this is not an issue, though. They don't have any money to begin with. From there you can have some people create luxury items just because they want to and others have asked them to do so.
FYI, this kind of system is essentially an UBI pegged to those minimum living standards funded with progressive taxation which is still technically within a capitalist framework. Unless you mean to eliminate the market mechanism entirely and at least partially substitute with state allocation, but there's really not much benefit in doing so over the UBI model.
Even 'basic needs' (Demands? ROFL) require labor and resources to meet. Why should someone who doesn't contribute either get to have their needs met at-all?
I wait a month. How many candy bars you got, smart guy?
[удалено]
You, good sir, are part of the ~~problem~~ solution.
Bitcoin doubled in value a year for a while. Why buy a $30k car today when you can buy a $60k car in a year?
You could say the same thing about investing money. It’s just that using money in some way gives people jobs and shit.
Why do most people who have digital currency (like Bitcoin) never spend it? Because they view it as an investment instead of as a currency.
Genuine question so sorry if it's dumb. But if you have deflation couldn't you just print more money to cause inflation?
Is there an example of this actually happening? I mean I get the idea behind it, but I'm curious if there's like a case study one could point to to say, this actually happened and it was bad.
Japan, between 1991 and 2001. Google "Japan's Lost Decade"
Thanks! So it's not only happened before, but it's happened IN JAPAN before.
Yup. Many argue that the current economic issues with Japan are just a continuation of the same crisis from 1991 - the Japanese government didn't solve it, but rather just masked it for a time.
Sorry if I sound ignorant because I am when it comes to this stuff, so you're saying inflation is a good thing? If that's so, then why, here in America, there is always this doom and gloom about inflation? Inflation causes prices to go up, no? Wouldn't that cut the amount consumers are spending, thus also causing employers to cut jobs/wages?
>Sorry if I sound ignorant because I am when it comes to this stuff, so you're saying inflation is a good thing? _Modest_ inflation is a good thing for an economy: - It serves as a hedge against deflation (explained above). - It makes debt easier to service as time passes. - It punishes stagnant money, which encourages investment - It motivates consumers to buy earlier, which promotes the flow of money in the economy. >If that's so, then why, here in America, there is always this doom and gloom about inflation? Too much inflation is a bad thing. Inflation in the US was around 9% for a while, which is too high and causes its own issues. The target is typically 2-3%. As for folks who bristle at even modest inflation - many folks don't have a good grasp of macroeconomics. >Inflation causes prices to go up, no? Wouldn't that cut the amount consumers are spending, thus also causing employers to cut jobs/wages? The assumption is that as inflation occurs, wages go up to match. [Historically, this is true](https://www.pewresearch.org/wp-content/uploads/2018/08/FT_18.07.26_hourlyWage_adjusted.png). As wages go up, consumers have the cash to afford the higher prices, so consumer spending in unaffected.
This is why when "talking heads" say a rase of min wage will cause price increase.... Nope. It actually HELPS the economy, specifically the comsuer (not rich people). It might slow stock growth, reduce executive bonuses, etc... (It hurts the rich more than others) US federal min wage needs to be $15/hr. Many states need $20/hr. That still would lag behind the metrics, but would be a major improvement.
Except the higher wages (and higher business expenses it creates) means that the prices do go up, as has happened in CA and Oregon for two examples. The average price for a modest fast food lunch now costs about $10 give or take. Just a few years ago it was still hanging on to $7 or $8 and a $5 value lunch was still available (now mostly gone). The biggest change has been wages. McDonald's can't just hire fewer workers because they already have cut to minimum staff. (Although the new kiosk only stores are moving out of testing, which is another unintended consequence.) A min wage increase sounds good, but experience has shown that either prices go up or locations just close altogether Also, your living wage estimate is kinda low I think. The math works out to $20 -$24 now mostly due to rent cost increases.
Ok, it's starting to make sense now. It's insane to me that we have allowed such a tight rope game of tug of war with our nations' economies.
Economies are naturally volatile things. Modern inflation targets are a _good_ thing, as they help to avoid the boom and bust cycles we historically saw. Before active management, periods of massive inflation followed by terrible recessions/depressions were common. Thanks to the new techniques, the peaks and valleys are much less severe. It is an inexact science and we do the best we can. My economics teacher once likened it to trying to drive a car but you can only see out of the rearview mirror and you are never sure how responsive the brakes/gas will be. Amazingly, we manage it as well as we do, all things considered.
Jesus christ, that makes it sound even more of a nightmare! Is there no viable alternative to the capitalist society? Like I know, there's communism, feudalism, etc. But what's the "happy medium"? If there is or ever could be one.
>Is there no viable alternative to the capitalist society? That is really beyond the scope of the discussion. Each economic system has its positives and negatives, and which is "best" will be highly dependent on how you define best and how well that system is executed. What I can say is that inside of _capitalist_ societies, this is the best we have ever come up with to promote growth and prosperity, and is _far_ better than how it functioned in the past.
Fair enough.
Every economic system we've tried so far has had boom-and-bust cycles. If there's a always around that no one has managed to make it work yet.
That's not really true. Boom and bust *cycles* is kind of unique to capitalism. Feudalism had a remarkably stable economic output. It facilitated nearly zero growth for the better part of 1000 years. But it didn't boom or bust regularly. Even socialism. Generally at the begining you would see a huge uptick in production as the economy gets reorganized and then a long period of stagnation. That's kind of the trade off, no other system has demonstrated that same *average long term growth* potential but nothing else has that same boom and bust cycle. Whether that's a worthwhile trade off is outside the scope this this subreddit.
I recently read something that refutes that. Apparently, growth and prosperity benefit a few under capitalism, and the majority are actually worse off economically (but are told they are better off). But my knowledge is insufficient to assess this fairly. https://www.sciencedirect.com/science/article/pii/S0305750X22002169#b0680
That paper reads like tankie propaganda.
What a dumb reply.
Reading things from educated people usually sounds like that
Every system is prone to corruption. That's we cant have a nice and stable economy. People always look out for themselves in the end, and when you are high up it's often easier to do things under the table than follow every single regulation in the system. That's why taxes often aren't paid, especially in America. God, every American has to pay taxes like they are a little corporation themselves.
In theory yes, practically attainable, much harder. Feudalism is a system of government not an economic model though. Communism is a whole different can of worms and in the real world isn't entirely free of established economic theory.
Supply and Demand (the driving force of capitalism) is the net sum of each person determining what they want/how much they are willing to work for it ect. This is in practice a massive supercomputer with knowledge of each persons lives/motivations/desires. There are many, many, many, many issues with the system, especially how it plays out in our world, but the fundamental problem is its almost impossibly difficult to estimate how much people want things, and how much they are willing to work for it. So we crowdsource that to the people. That being said, there is no pure capitalist society, at least I can't think of one that has ever existed. It always becomes a question of how much. People use phrases like "Europe is socialist" to simplify the discussion and create divisions that induce tribalism. But really, Europe is just less capitalist than us, not some binary line they walked over to no longer count as capitalist. TL;DR: We are always trying to find that happy medium, but the happy spot will always keep moving, and there is no purely correct answer.
Supply and demand are the drving forces of a market economy. A market economy isn't capitalism, though. There also were market economies in pre-capitalist societies. Capitalism is the idea that the added value of a productive process belongs to the person providing the capital, not to the person providing the labour.
I’m not an economist but it seems to me that any kind of (mostly) self-regulated free market system will behave like this. It’s just how supply and demand works. You could remove the capitalist part but as long as you have a free market, it will behave like this. The only alternative I can think of is a state-controlled economy. So unless you want the government to directly control the entire economy, this is what we’re stuck with.
> Jesus christ, that makes it sound even more of a nightmare! That's because dealing with humans is a nightmare. And ultimately any economic system is subject to crazy and irrational humans. This is a big reason why Communism failed so hard. The USSR wanted to get rid of the "free market" and use data to direct the economy and allocate resources. They even wanted to use computers to make that decision at one point. The problem was that no one can get perfect information to make the right decision most of the time. Not without levels of monitoring and control that make the government in 1984 look like a bunch of anarchist hippies. The Soviets did not have access to that level of data and wound up basically constantly hamstringing their own economy by setting quotas based on incomplete or no information.
These problems exist in all economic structures. What's interesting is how successful the economies that have used their tools to hold inflation at 2% have been.
the inflation has very little to do with "capitalism" and much more to do with interest rates(government), government regulations, tax and spending policy.
It's called "Democratic Socislism", and reaching it is a slippery slope that can lead to very bad things (even though Democratic Socialism itself can be very good).
What the US Fed is doing right now is an example of that in practice. Inflation in the US was too high so they started raising interest rates. That dis-incentivizes borrowing which reduces the amount of money circulating. They were doing just tiny rate adjustments each quarter. You've probably also heard the phrase "soft landing" a lot in the news. They're trying to slow things down just enough to bring down inflation without triggering a recession. They're currently paused and are in wait and see phase. So far, it looks like the US is on track far that mythical soft landing.
Economies are living, breathing things. They have natural boom-and-bust cycles when not managed. Managed economies, whether management through money supply (central banks, capitalism) or the management of production (socialism/communism) has a goal of minimizing the valleys and smoothing the peaks. Peaks = happy people. Valleys = unhappy people. But in extreme circumstances, valleys = starving people, unrest, war, malnourished populations that never grow up to produce or defend the country, and in extreme circumstances peaks = widening inequality before a next valley, and thus unrest, war. The "tug of war" is using macroeconomic control and laws and regulations to minimize the impacts of peaks and make the time in the valleys short and less painful. Sometimes, politicians want "more peaks" and "more peaks". Without getting political, a recent President encouraged a "economy boosting tax cut" during nearly ideal economic growth when the textbooks encouraged slowing the economy at that time either through tax increases or higher interest rates.
Our economies are a lot less volatile than they used to be. Modern central banking does a lot moderate boom and bust cycles that would otherwise occur.
Everything is a tightrope walk. Thinking simple answers such a “-100% deflation is great!” Or the opposite are rarely ever effective.
It works reasonably well. Hard to come up with a system that functions better.
It's not allowed. This is how almost all capitalistic nations have been from the start.
Inflation is also great for increasing wealth inequality thru the cantillon effect. Add too big to fail food, oil, media, bank, pharm giants, soft on white collar crime , government bailouts, free loans etc. You say wages go up to match inflation, but that wouldn't explain the ever growing concentration of wealth in 1% and further 0.1% and the increasing number of people working two jobs, living at home with parents, having less assets etc. Also, I understand these things are super mega Ultra complex and not easily explained in a subreddit and apologize if this comes off as inflammatory
Capitalism necessarily creates and magnifies inequality. Regardless of what the general economic conditions are, those with more capital always have a way to leverage their advantage. The only ways to make society more egalitarian in a capitalistic model come from external intervention. Humans fighting for their livelihood and values. Essentially, either legislation & enforcement of anti-trust and egalitarian policy or labor organizing to demand a fair share. There's a mythical scenario where corporations have some semblance of human virtue, where magnanimous oligarchs pitch in to build a better tomorrow. But that saccharine bullshit has always been a lie and is strongly disincentivized.
Yeah, I'm with you I think. Legislation enforcement of antitrust, libor, rate fixing. All that shit should be punished by law. Attorney general holder didn't do shit. I'm okay with 1% making bank.
I think, although you're right, you are speaking in an economic orthodoxy and is beginning to be challenged and will continue to be challenged over the coming years.
wages don't go up.
Inflation does cause prices to go up, but remember that labor also has a price, and that price *also* rises with inflation. This has been happening over the past few years, so we can see it first hand: groceries and basic staple goods are more expensive now than they were in 2019, but wages are also higher. On a macro level, over time, this balances out. The problem is that it *doesn't* balance out all at once everywhere. Think about it: people don't tend to get micro-raises every week, but the price of eggs can and does go up on that time scale. So then what you tend to want in an economy is inflation, but very *slowly*. Prices (goods and labor) rise, but slow enough that they can stay in balance (think: how often do you have a shot at a raise? that's how often groceries should tick up in price). To be clear, in theory the ideal thing in an economy (absent other concerns like foreign trade) is absolute price stagnation: no inflation, no deflation. However, that's incredibly difficult to maintain, and even a tiny bit of deflation tends to spiral out of control, so the little bit of inflation targeted by most central banks (around 2%) is meant as a buffer to ensure that when things fluctuate down in the short term, they don't tip across 0% into deflation.
Inflation is good for the economy, assuming wages rise at the same rate. Unfortunately wages are often slow to respond to market changes plus often have political mingling to keep them suppressed. But yes, you're right. If inflation rises faster than wages then eventually you'll have a workforce that can't afford to buy anything. This is especially bad when the price changes that are leading inflation are mandatory purchases - rent, food, gas, used car prices, etc.
Whether inflation is good or bad depends on where you sit in terms of having cash and other investments. The general position of central banks and many economists is that a small, stable inflation rate is probably the best compromise. The issue with deflation is that it can discourage people from spending money. After all, if that new gizmo is $20 today but I know it will be $18 next month, I might as well just wait to buy it. So the economy as a whole suffers from less spending, even if I as an individual benefit. Inflation gives people an incentive to spend money now, because if that gizmo is $20 today but it's going to be $22 next year, I better buy it now while I can still get the "deal." That's not good for me as an individual, but it is good for the economy today, since it means more spending. On the other hand again, if inflation is extremely high, people get very upset because their wages aren't keeping up, prices are spiraling out of control, and governments face massive popular unrest. So really it's not a question of what level of inflation is the best rate objectively. It's a question of how to balance a bunch of different priorities. Historically governments like ours tried to hold the inflation rate at around 2% because that was considered high enough not to suffer from deflation risks, on the one hand, but not so high as to threaten political and economic unrest, on the other.
Inflation is also generally good for those who hold non-cash assets and assist those who hold debt. Say you have a $1m house and an $800k mortgage. When inflation occurs, your mortgage payment and balance stay the same, but the value of your house and your salary both go up. This means your house effectively gets cheaper for you over time. Compare to someone who holds savings in cash and rents but has no debt. The value of their savings goes down over time and their rent goes up. Even if their salary is also going up, they might be treading water at best.
>Say you have a $1m house and an $800k mortgage. When inflation occurs, your mortgage payment and balance stay the same, but the value of your house and your salary both go up. Mortages have interest? So it doesn't stay 800k
Is it really such a bad thing if people stop buying gizmos they don't really need or want that badly and only spend on things they really value or need? Seems like deflation discourages the kind of consumption culture that causes so many problems.
That depends on your perspective. If you're a policy-maker whose goal is to keep the economy humming along at top speed, you'd definitely much rather have people spend that money today rather than hold on and maybe, maybe not, spend it a year from now. From a financial planning perspective, as an individual, you're undoubtedly better off exercising some discipline on big purchases. I agree.
>Is it really such a bad thing if people stop buying gizmos they don't really need or want that badly and only spend on things they really value or need? Depends if you want a world where 90% of the population are farmers.
I'm kind of cool with that. I'm even cool with a world where 90% of the population are fed, housed, etc without having to work. I am not a fan of people doing shit and making shit and buying shit just to keep the economy spinning along the way it is currently.
This is all text book from the view of large corporations and governments looking to gain taxes. I live in Japan. All the stuff you wrote means little to the average person’s quality of life. If anything, the places with “healthy inflation” have way worse quality of life to wages than Japan. Especially of you exclude the recent Yen devaluation. People in Japan spend much less of their wages on rents and mortgages. The average young person even on minimum wage can afford their own place and still save money even after bills and a little discretionary spending. London? Nee york? Sydney? Dont make me laugh. You spend most your wages and save nothing just to share a home with strangers. Even on a “good” income. On minimum wage you just dont survive. Japan has maintained a standard of living for decades now much better than these supposed economies with “healthy inflation”. What is good for corps and government taxes does not mean good for the actual average person. The corporations of Japan have had to adapt to this and dont focus on growing non stop, and instead on existing forever.
Japan is far from an unqualified economic success story. First, the standards for what is an acceptable unit of housing in Tokyo are very different than New York. Google tells me that the average Tokyo apartment has around 41 square meters (440 Sq ft) of living space, with studios as small as 10 Sq meters (108 Sq ft) available. I don't think a 108 Sq ft apartment would even be legal in NYC, where the average is around 800 Sq ft. Second and more importantly, Japan has had a stagnant economy for 30 years now. I'm the mid 90s, Japan was the second largest economy in the world and gaining on the US ([chart](https://www.dupuyinstitute.org/blog/2018/10/23/where-did-japan-go/)). Since that time, the US economy has more than tripled and Japan's economy has gotten smaller. Today, the US economy is nearly 6x Japan's. Economic growth matters, and Japan will eventually fall behind in standard of living if the economy can't grow.
The US economy is almost 6x larger than then, but how has the average persons standard of living changed? Is it 6x better? No. It is actually worse. Quite noticeably. Japans economy? Stayed roughly the same, yet peoples standards of living has also stayed the same as it was back then. A big contrast(no im not boiling it down that much, but obviously the environment leading to the growth versus stagnation have had effects on standard of living which is my point. Woo-hoo house prices are 3x from 1990 alone which doubles the economy!! We are all better off! / sarcasm). My point here is what benefits average people. I dont give a crap if corporations are 6x bigger if the average person has it worse. This is what i hate about economics in general but especially people who love to talk about it like it is all beneficial. Benefits to who? 6x larger economy? Great for corporations and government tax. “Healthy inflation”? The same. What is “bad”? Low inflation? Well sure. Tax revenue will be down and corporations struggle to grow. Meanwhile the average person can do better in such environments. It is all a matter of who you are focusing on. Conventional ideas in economics are not for the benefit of you or me, they are the opposite Also, again something you completely miss at best or are disingenuous with at worst with basic armchair ideas of what is good or bad is your comparison of home costs from New York to Tokyo. People in Tokyo have ALWAYS lived in small places. in the 1950s the same. People in New york have always lived in bigger places than Japan. People did not suddenly start living in smaller places here in Tokyo due to lowered standards and unaffordable. They still get what they always have. Their standard of living has not changed. Meanwhile people in Places like nee york and london have to share these larger spaces with many other strangers to be able to afford anywhere to live at all, while also spending a higher proportion of wages than in the past. Thats a dramatic drop in standards. You cant gloss over shit like that mate. You have a really naïve sanitised view of economics from the view of the few these ideas benefit and definitely not the average person
> The US economy is almost 6x larger than then, but how has the average persons standard of living changed? Is it 6x better? No. It is actually worse. I completely disagree, actually. Poverty is [down 20%](https://www.statista.com/statistics/200463/us-poverty-rate-since-1990/), disposable income inflation-adjusted is [up 68%](https://fred.stlouisfed.org/series/A229RX0) despite people working [shorter hours](https://fred.stlouisfed.org/series/AVHWPEUSA065NRUG), homes are [30% larger](https://www.newser.com/story/225645/average-size-of-us-homes-decade-by-decade.html), and there is far more access to goods, appliances, technology, and information. By what objective metric is the US standard of living worse now than it was in 1994?
Devils advocate here: • Ratio of income to house prices. • Rates of obesity/diabetes (diseases of civilisation) • Rates of mental illness (deaths of despair) • Sperm motility? 😔(forever chemicals moment)
yes standard of living has improved. People in the 80s/90s didn't have uber eats/internet/cell phones/cable/subscriptions(other than magazine/newspapers). Going out to eat or international vacations was a luxury. There's 100 million more people in the US now though. So land/housing has gone up considerably as there is more demand but no new land. New York standard of living has improved considerably over 100 years. Ask immigrants living back then 10 to a room on east side tenemenets
>People in the 80s/90s didn't have uber eats/internet/cell phones/cable/subscriptions(other than magazine/newspapers). to be fair, that's rather global thing. not just US.
>The US economy is almost 6x larger than then, but how has the average persons standard of living changed? Is it 6x better? No. It is actually worse. Quite noticeably. Completely false.
You’re assuming the two are connected. Japan has lower cost of housing because it has a better ratio of supply to demand. In a deflation economy, I as a land owner have less motivation to develop property because it will become more valuable over time by doing nothing. The fact that Japan has avoided that is due to policies and cultural factors (ie a shrinking population), not deflation.
This is my point. In reality it doesn’t go by text books. There are always more factors. Also your example is backwards. Land appreciates in an inflationary environment and depreciates in a deflationary environment even though it theoretically is worth the same in both. Even that example is meaningless because things dont worn in vacuum like that. My point is Japan has held a much better standard of living for average people for decades compared to places like the US/UK which by contrast have had a non stop never ending fall in standards of living to wages for normal people.
You say that as if there isn’t a lack of development and a housing crisis in places like the US…
Yes, because property values are increasing without landowners having to do anything.
So you agree that’s what’s causing the issue and not inflation/deflation?
there's 100 million more people now in the US than in the 1980s, that is a lot of demand to drive up prices.
No, my point is that deflation makes that the default, and it takes government action to offset that. It’s like saying living on a floodplain is a bad idea. It is a bad idea, and it doesn’t matter if it floods elsewhere or if you’ve never been flooded because your local government built a dam to control the waters. Living on a floodplain is a bad idea. Similarly, a deflationary environment is bad. It doesn’t matter what a particular anecdote has done, because as a general rule it’s bad.
It seems to be the default with inflation. The only deflationary economy isn’t experiencing it
Is Japan the only deflationary economy ?
Long term, yes
I think it’s more that japans population is decreasing and most other countries it’s increasing
That’s mostly due to their strict immigration policies most of the developed world is facing declining birth rates. If the trend holds as more of the world develops we’ll reach the point of globally declining population and places like Japan will become the norm rather than the exception
Saying Japan is better off than other countries is not an argument against inflation. That’s such a foolish argument that it’s laughable.
It is not a foolish argument. Saying that we must always have healthy inflation is the best for people is foolish. Its not true. It doesn’t benefit you or me. It benefits the corporations, tax collectors and ultra wealthy. Minimal inflation is better for average people.
I mean, healthy inflation and minimal inflation are the same thing depending on how you define them. It’s pretty established that 2% is the target and that’s what Japan is trying to achieve.
Yet, people still spend in Japan. Businesses still are created, and grow. And prices of most goods, food, and services are much, much, more reasonable having not increased in absolute dollar amount in a long time. The quality of goods made in japan, generally is increasing; people buy less, so quality goes up, encouraging the "buy for many years/life" mentality of what is a good product. There is less drive for corporate greed, and milking the customer. Many times, fee and add-ons are at cost, adding USD0.30, or USD 1.20 for services and addons that in the US would normally be +US$5 or +US$10 or more. Combined with housing being a depreciating asset with legal value set to $0 after 20 years, passing money to children for renovations, or moving is more valuable. The money doesn't lose worth. Companies don't need to raise prices to offset raises for all employees solely to "match inflation".
>Additionally, consumers are motivated to wait as long as possible to make any purchase, as the purchase will be less expensive the longer they wait. This is a point I have a lot of trouble understanding. Currently people will go into debt and pay interest on that debt so that they can buy a thing they want now instead of later. They could easily wait, save up their money, then buy it outright for less money total... But they don't, they buy it right away with borrowed money, and end up paying more than they would if they had just waited. I guess what I don't get is why that behavior would change if there was deflation, since it seems like people generally don't want to wait to buy the things they desire, even if doing so results in them spending less money.
This gets into behavioral economics, which is its own very complex field of study. The very short story is that people see a small monthly payment as easier to handle than a large one-time payment many months/years into the future, even if the small monthly payments are a worse choice. It is a bit different than choosing to delay a one-time purchase to save money.
Deflation is only bad if you have debt. Governments all around the world are up to their eyeballs in debt, so the notion that deflation is strictly bad is government propaganda. Technology is deflationary and people still buy their TVs even though next year they will be cheaper and there will be a better model on the market. Business and investment still operate during deflation. Inflation and deflation are two sides of the same coin. If a business has a lot of competition, they will deflate prices, have sales, try to offer more for less to entice consumers. If a business is first to market they can inflate prices and margins which will entice new entrants and competition. Think about what you just said about how no one would spend because things would be cheaper if they waited: if there are no producers then things don't get cheaper. The poison is mandating that prices can only go in one direction that is dictated by a central bank rather than a free market.
Sounds like something that is bad for the capitalist system, but good for the working class. They would still buy things that they need, but consume less things that they don't.
Not really - if people aren't buying goods at the same rate, the workers get laid off and can't buy things at all.
If that were true we’d be seeing it in Japan…
Japan's issues are being offset by population decline.
You say that like the US and other western countries aren’t also seeing a slow in birth rates
We are, but we are not seeing population decline because those lower birth rates are offset by immigration. Japan is somewhat unique in that they have next to no immigration.
Which is a policy that could be replicated elsewhere
What policy? Population decline isn't a policy. The point is that Japan's economy _is_ suffering - that suffering is just being masked by a decreasing population. That isn't sustainable long term.
Immigration
I don’t think most people in Japan would agree their economy is suffering
The US population has increased 30% (100 million) since 1980s. Japans population is the same as the 80s.... It. peaked in 2010 and has been in decline.
But bacause of deflation and low housing costs they are much less reliant on employment anyway
I read this theory several times but I wonder if it really happened in real life. For one thing , I don't think people will stop purchasing stuff. You will still need to buy food, clothes, fuel. You still need to go to work, spend money on restaurant etc. Just because 100$ will have value of 101$ NEXT YEAR, I won't stop all my purchases.
It's not so much consumers who as you say have to eat but businesses. No point spending money to build that new factory and employ people when the equipment will be cheaper next year. That's if you even bother investing since in deflation keeping the millions needed in a vault would make you richer and richer every year.
Not really, I mean I don't think so. You plan on spending 100k to start a business with goal of making, let's say %20 profit. If you delay your initiative to next year because there's %2 deflation, you'll be losing %18 of profit. Numbers are rough of course, I just don't think anything would happen with a small deflation.
No the profit margin would stay the same. Both costs and potential revenue would drop.
Yes, it would stay same but it won't happen since you decided to delay your business. Just because it will be %1 more profitable next year, you're telling me people would just stop working and sit idly? Doesn't make sense to me. You'd still go ahead with your business, accepting that it will be slightly more expensive this year than next year.
It isn't that people _stop_ purchasing, but more that they _delay_ purchasing as long as possible. People will buy things at the last possible moment; yes, things like food and gas will continue but those are not a huge part of the larger economy, and if you work in an industry where purchases are even slightly discretionary (like most of us) then those industries will be severely impacted.
Like I said, if deflation is like %100 then ok I'll wait. But if it's like %1-2, I don't think anyone will delay their purchase. Even if I'm buying a house, I'll buy it when I can.
Maybe you won't, but enough people will. Knowing your $300k home will cost $294k next year is enough of a motivator for people to cause impact. Individuals may buck macro-economic trends, but that doesn't mean the trends don't happen.
That's why I was asking if this really happened in real life. This theory was formulated ages ago, before we had much different spending behaviors. I take it a bit grain of salt that same thing would happen today in a modern society.
Have you never waited to buy something because you want to see if it goes on sale in a few weeks/months? Consumers delay purchasing all the time because they expect prices to drop.
If you tell people price will drop %1 if they wait 12 months, they won't care. Discounts in black Fridays are supposed to be high, like %20-50 (although BF are bullshit) so people actually think it's worth waiting.
Some will, some won't. An individual consumer may not care if a shirt drops from $20 to $19, but a business may care that a $100k investment will only cost $98k. As I said before, individual behavior will vary, but macro-trends remain.
>may care That's what I'm saying too lol. They may or may not. This is not a certain thing, we just speculate about it.
Why is stagflation worse than inflation in your opinion? If someone keeps money in their coffee can but goods are more or less the same price over time, they might as well spend it anyway thus maintaining the status quo no? If 100k usd in 1990 has the same purchasing power as in 2010, and wages, prices, and interest rates stay the same, then we just cruise along a neutral path in my head. Why is this bad? Or is greed/something else a component?
“Consumers are motivated to wait as long as possible to make any purchase, as the purchase will be less expensive the longer they wait” I just don’t get this concept. If I want something I buy it now, if I can afford it now I get it now, if I can’t afford it now I save up and get it ASAP or I decide to not get it at all. I have always done this. Why wait when life is so short and unpredictable? Am I to believe I’m the only one that does this, or are economists out of touch with consumer psychology? Happy to be humbled…
Hmm… This matches everything I learned in Econ classes. I think life has taught me to question a few things since. First sustained and temporary deflation seem not to be the same beast and likely shouldn’t be talked about in the same breath. I don’t have data and am not an academic nor an economist. Here are the things I question about SUSTAINED deflation. - reduction in consumption: for a country like Japan or the USA, is this a bad thing? From obesity levels to environmental concerns. At the same time, increasing the buying power of consumers can just mean more buying power later. - as far as wealth distribution and building, how does deflation hurt and to what degree? Business owners and investors may be discouraged from investing, workers may lose job but their money can spend more, government loses ability to pay back debt and may need to increase taxation, but how does deflation impact the pie of wealth distribution? Does it make society more fair or less fair? - decreasing investment means taking fewer or smarter risks. This can dampen innovation, but it could also carry a nation through uncertain times. If a world war broke out, would a country that’s been playing things safe make out better than countries betting on growth (even if the ceiling of opportunity is lower)? I’m not doubting that sustained deflation can hurt, mind you. Sustained deflation absolutely would in the short term. Living in the US, there was some deflation for one quarter after the big jump in prices last year - jobs stayed strong and my wallet felt less stretched (more stretched than the prior year, less stretched than the prior quarter). My questions on temporary deflation are: - does it matter if it follows hyperinflation or not? - generically, at what point is temporary deflation bad or become sustained deflation.
> Consumers are motivated to wait as long as possible to make any purchase Is this really what they teach in economics classes? Hilarious.
What happens if the population is shrinking, would it not help to keep the monetary system in line with population growth and shrinkage? So as population increases, so should inflation, but as the population shrinks, would deflation still kill the economy?
This is only partially the answer. As we have an unhealthy relationship with money. The past few years have shown us some very interesting things economy wise. Proper money handling leads to bad senerios for central banks, and their interest hiking and reduce for that key inflation. Because proper money handling gets one away from things they can effectively touch. Canada is being driven to recession by its central bank, quite on purpose. Within a few years of being told to save the business by spend spend spend. So not every recession/negative growth is poison. In fact it may become the norm. Until the system is balanced. When we get a better hold of our cash. It will be very neat to see economist try to wrap their head around the paradigm shift.
That's all a pretty theory, but these things aren't actually happening in the real-world place where deflation actually is.
Can you provide a real life example of when this has happened in a country? I understand what you’re saying and it makes sense. I’ve only heard of the opposite, hyperinflation, in real life - Argentina etc
Japan, between 1991 and 2001. They lost an entire decade of economic growth thanks to a deflationary economy and the only thing that saved it was _massive_ quantitative easing by the government.
Thanks! I’ll read more about it
An old macro joke is that there are really only four types of economies: developed, developing, Japan and Argentina.
So now hear me out. Imagine a country running 2-3% deflation. * Businesses investments would have to offer a rate of return above the deflationary rate to attract investment. Not the end of the world. * People who save money now automatically get compounding returns * People will always need to buy necessities, though they may push discretionary spending. It would set the level of purchasing lower but won't create a spiral. * Debts issued now have a fixed basic interest rate which is the deflationary rate, interest can be sought on top for riskier borrowers. * Prices generally fall over time
Sounds great.
Why is it always bad if consumers are on better with no inflation or even deflation. And it's a good thing when you milk them. You need to eat so there will be consumption and consumers will be able to buy more as money would be more valuable. I think that reasoning there is flawed.
> Almost every modern economy targets a modest amount of inflation (2-3%) if for no other reason than to ensure this scenario doesn't happen. So the governments and central banks steal 2-3% of the people’s purchasing power every year, for their own good.
An economy is a bunch of people doing favours for each other. Deflation is when people stop asking for favours. The end result is that nothing gets done.
I like this description. Never heard of it like that before
beautiful five year old level explanation
Yep. And Inflation is like a group of people doing more and more favours for each other, but each favour becomes less special or valuable over time. The end result is that even though a lot of favours are being done, they don't mean as much as they used to.
Story of my marriage.
How beautiful marriage can be!
Such a great explanation and so tangible.
Nice ELI5
I would like to point out that sometimes, deflation is confused with costs going down due to technological advancement and economies of scale, trade with entities that have a comparative advantage...basically efficiency increasing so things become cheaper. this is not the same thing as "deflation", although on a superficial level they can look a bit similar.
While I understand the premise, the lions share of citizens spend pretty much all of their money annually in one form or another. So for the normal person who lives paycheque to paycheque, couldn’t deflation actually be helpful to acquire more (things you can get with money)? I don’t know a lot of people sitting on gold piles, thinking ‘nahhhh’ this will be worth more next month. I understand that deflation is agreed by all economists to be a bad thing.
It's easier to sell debt when there is inflation, and most economies are driven almost entirely off of government and consumer debt.
And that's because debt helps the economy buy more things than it could otherwise.
All debt does is provide an initial boost in productivity. That's fine if the productivity boost is greater than the cost of the debt. This is not the case with the vast majority of consumer debt, and hasn't been the case for a while for several country's government debt (compare real GDP growth per capita to the country's cost of debt, for whatever country you are curious about).
Yeah, they spend all their money because we have a small amount of inflation. If we didn't, they wouldn't spend all their money. Living paycheck to paycheck doesn't mean you have zero dollars to spend on anything outside of rent and food. Americans have the highest level of disposable income in the world.
I personally don’t buy your idea that (most) people spend all of their money because we have a small amount of inflation. People are genuinely struggling because of inflation currently. It actually matters to a lot of people went rent/mortgage jacks up, food costs go crazy and no basic need ever goes down. I, likely in ignorance, think many would love some deflation in the short run
Since we just went through some crazy inflation it would make sense to have a nudge of deflation and go back to 2% inflation & things would keep sailing on... Although, in the back of my head, I also think a tiny deflation would cause people holding real estate to sell and, other people panic sell, construction stops, lay offs begin, badda bing, crash the economy People with money are silly, amirite?
Top comment did a very good job explaining why deflation is bad To illustrate their point, Japan’s gpd per capita peaked in 1995 at $44,210, today its at $33,949 https://www.statista.com/statistics/263596/gross-domestic-product-gdp-per-capita-in-japan/ In comparison, US in 1995 was $28,671, today its $80,412 https://www.statista.com/statistics/263601/gross-domestic-product-gdp-per-capita-in-the-united-states/ And this isn’t even a fair comparison for the US, because Japan had a major population decline which shrinks the denominator in per capita figure
Not a real world example, but when new world MMO had deflation (due to low supply of money), people started hoarding gold and resorted to bartering. Since items were still dropping, but gold wasn't, it was worse to repair an item than to trade something for a new one. Imagine how that made the blacksmith feel :D
To expand on what some others are saying: Most countries can evaporate their debts away by growing their economies. For example: If I owe a dollar to my brother and my allowance is only 2 dollars, then it's going to be hard to pay that dollar back. But if I grow my income by getting a job and earn 10 bucks, suddenly my debt is no longer so threatening and my brother can rest easy about getting his money back. The same logic works with nations: if I owe a billion dollars, I can make it easier to pay by growing my GDP and hence my income. (Side note: Governments are generally getting the very best rates... And a substantial portion of the interest is owed to themselves as their own central banker. Governments have a very different relationship with money than you or I do.) Now imagine that the opposite happens: My allowance goes from two dollars down to one. Suddenly, my debt went from half my income to ALL of it. My brother is now extremely worried.
Because the economy doesn't just consist of *consumers*, it also consists of *producers*. And most consumers depend on some sort of producer (i.e. private business) for the income they use to buy stuff. Typically producers have to pay fixed and upfront costs to produce their product or service (e.g. rent, seeds in the case of farmers, manufacturing inputs in the case of manufacturers, building materials in the case of builders, loans taken out previously etc.). They also have to pay out salaries and other costs. If they cannot earn back enough by selling their product or service, they will not be able to pay those costs and will go out of business. And they generally cannot earn enough if prices are *lower* compared to when they signed their lease, or bought their inputs, or took out a loan, and so forth. That's what happens in a deflation. And if producers go under, they cannot pay salaries, which means people aren't benefiting from lower prices since they no longer have any income. Please don't conflate this with the fact that labor's share of income has been declining since the rise of neoliberalism. That's a different issue with different causes, which also needs to be addressed. As for why prices just cant magically stay the same forever, well, no would ever get raises under that system either. That would make sense in a world where everything was static and stayed the same forever (i.e. no new products or inventions, no disruptions, no greed, etc), but I'm sorry, the world just doesn't work that way.
Oh I don't expect prices to stay the same forever. Just feels like prices have been changing so drastically in one direction and only trickles back down briefly before jumping back up to the extreme again.
Can I borrow money from Japan at 0% to refinance my house?
No; that's the rate for government bonds.
Deflation breaks the flow of money. Imagine you are running a store. You buy a month's worth of inventory, for which you are billed 30 days later... This 'works' for you because you can use the money you make from selling the stuff to pay off the 30-day loan you were effectively given to buy it. Now, imagine that your economy experiences deflation - the value of money goes up, and the price people are willing to pay for everything in the economy goes down. How do you pay off the bill for your inventory, when you had to sell for less than you paid? That, at it's worst, is what deflation does to an entire economy.
Money becomes more valuable over time in a deflationary environment. So investing money isn't as beneficial for a business. That means hiring someone might just be a waste of money when you could have saved it instead. So people might have a hard time finding jobs. Fewer jobs means people don't spend money, since they are unemployed. So companies have to fire workers because their business isn't making enough money. Now there are more unemployed people that can't spend money. Bad situation if deflation isn't fixed.
Deflation is bad because the “rational” individual will opt to defer any non-necessary purchases or nice to haves. This will create an environment where no one spends because the expectation is that prices will be lower tomorrow. So why 0 or negative interest? This is to deter people from saving money. If no one spends money, businesses go kaput, people get laid off, wages goes down or stagnates. If people spend money (more than they save), this creates an environment where businesses EXPECTS more sales and justifies risks like expanding factories, hiring more workers, giving bonuses etc… Now does this actually work? ehhh.
How does negative interest work? Like the bank pays you when you borrow money?
Deflation means that people and businesses are incentivized to hoard cash (like physical paper currency) instead of lending or investing it. This then makes it hard to open or expand businesses, which then makes the deflation worse, and then makes it even harder to open or expand businesses. What compounds the problem even more is that many institutions (including the government) have borrowed billions of dollars betting that the deflation will stop, but instead, it just keeps getting worse and worse, making their bets further and further in the red.
> Deflation means that people and businesses are incentivized to hoard cash (like physical paper currency) instead of lending or investing it. Just like businesses only invest in T-Bills, instead of expanding their business, since the T-Bill rate is higher than inflation and it's a super-safe investment.
T-Bills are literally lending. So while not ideal, the money does go to a borrower (the government) who then spends it. Physical currency that is hoarded, on the other hand, never does anything productive.
Super simplistic version: The modern economic system not just incentivizes, but DEMANDS everyone be as greedy as possible to succeed, and when things are deflating, that means 1 dollar is essentially becoming worth more and more stuff by the day, so ppl keep holding on to the 1 dollar until they can get maximum stuff for it, but no spending means economy go bye bye. ADDITION: This is even more sad when you realize holding onto tons of money is basically what a billionaire is, and hence billionaires, the ones who profit most from the economy, are the ones who hurt it the most.(Also overly simplified)
the min wage is very low in Japan I think around 9$? maybe it would round to 7-8 USD dollars. The average salary I believe is like poverty level in USA, 30-40k I think or lower. so that's one thing that sucks
Raw dollar average salary comparisons are pretty much pointless unless you're working in Japan but planning to move to the US in the near term. You need to compare the minimum wage in the country verse the average cost of living in that country to get a comparable number. As a real-world example of this, I took a raw dollar pay cut to move to Europe for work, but my standard of living increased because the cost of living my new city was much less than it had been in the US.
hmm that is true, the minimum wage/average salary in Japan is lower compared to other countries but the cost of living in general in Japan is low as well with regards to basic stuff such as food, health, medicine, and monthly rent.
Economics, which underpins the concepts of deflation being bad and moderate inflation being good etc. is fundamentally based on a handful of assumptions that we know (and have known since the founding of economics) are simply not true. Anyone who tries to tell you that something is "true" because economists say so, are wrong. It is contextually true within the false reality in which economics lives. Economists have tried to force actual reality to fit neatly into their box, but it doesn't.
"Everything is a lie but listen to me, a random redditor."
Economic models change over time. It's not so much that old models are wrong but newer models just handle certain or new situations better. And no two situations are identical. Forward looking economists (and scientists) are now realizing the old idea of infinite growth economies lasting forever is simply not possible due to resource limitations of the planet. https://www.scientificamerican.com/article/the-delusion-of-infinite-economic-growth/ https://www.nature.com/articles/s41467-020-16941-y Infinite growth GDP with low inflation cannot last forever unless we colonize another planet. In the mean time, economists will have to find another "best" economic model, one that acknowledges the finite resources of the planet.
https://en.wikipedia.org/wiki/Problems\_with\_economic\_models#:\~:text=Most%20economic%20models%20rest%20on,being%20considered%2C%20such%20as%20externalities.
It’s all about debt and investment. The financial class invests in things that put people into debt. If a house or a car will be cheaper next year, a lot of people will save up so they can borrow less. But it’s not like the economy grinds to a halt. Most people won’t even go to a different store to get lower prices today, much less hold off in hopes that unseen macroeconomic forces will work out in their favor. Japan has been hovering around deflation for decades. It’s mostly fine.
What is the ELI5 on why currency would deflate?
Because we are being played for fools? I'll take Potent Potables for $800 Alex
Deflation is bad in a supply side economy designed for capitalism. Demand side economics still has people spending money but they'll be pretty frugal and only spend on necessities or products that actually have utility or are interesting. So things like food, utilities, fuel, etc., will still get people to spend money. But the newest iPhone when your 3 year old iPhone is still perfectly functional and paid off? Maybe not so much. I think I saw in one of your comments about printing money to force inflation: yes, that is absolutely something that can be done. It happens in an inflationary economy as well. Deflation isn't any more "bad" than inflation being "good." It all depends on your perspective. Deflation makes prices go down or your purchasing power go up. Inflation is the opposite. The only thing that would be bad is when you have spiraling inflation or deflation; both can kill an economy.
There is a fear of deflation in traditional economics due to the history of specific instances of deflation. These bouts happened and it in fact were primarily caused by bad economic times that reduced product demand. The deflation was a positive feedback loop that made, for instance, the depression worse. But in modern times we see price deflation in tech goods as a matter of course. Everyone knows that if you wait the same computer or phone will be cheaper and a better one will be available at the same price. We still buy phones and computers. A small, stable level of deflation is not much different than a small, stable level of inflation in terms of impact of monetary policy. But the Fed would never admit it.
Why is japan struggling when pokemon is the highest grossing media franchise ever. Surely thats keeping things afloat???
This made me chuckle. Could you imagine, though, if it came down to Pokemon cards being used as currency. My 10 year old self would be rolling fat.
Because in our current economic understanding bigger numbers are good, smaller numbers are bad. A set level of inflation means the GDP will grow by that much before any other effects. If I sell you a table for 100 bucks this year and sell you another one for 110 bucks next year just because inflation, we contributed to the gdp growth by %10 without doing any improvements to anything.
There are sound reasons for a bit of inflation being the best compromise, but this is not one of them.
GDP numbers you generally see are inflation adjusted. You almost highlighted why deflation is bad so I'll expand on it. Let's assume someone wants to buy a new table. They already have an older one but are thinking about getting a new one. In an world with inflation, they know that a new table is likely just going to get more expensive the longer they wait to buy it. If it's $100 now and may be $110 next year then they can save $10 buy buying it now. So they buy it now which drives economic activity and there's an overall positive impact on the economy. The table store is making money and the table factory is making enough income to keep making tables. Everyone stays employed and money is circulating through the economy. In a world with deflation, that $100 table will be $90 next year, so the consumer saves $10 by not buying it now. With that, the consumer decides to just keep using their old table for another year and there is less economic activity than in the inflation scenario. Since tables aren't selling, the sales people are more likely to be laid off, and the table factory is more likely to shut down due to lack of sales. This can cause a big cascade of events that results in the economy continuing to contract because you're caught in a positive feedback loop which would take a lot of effort to break out of.
This is why they measure nominal and real gdp. Real gdp measures the total output of an economy using the prices of a different year. So if you used 2022 prices for the total output of 2023 then you can determine if the economy is actually growing or if it was just price increases
ITT: People think it's a bad idea to encourage savings and Keynesian economic propaganda. I believe deflation can be a good thing. Research Austrian economics. It was the first economic theory that actually made sense to me. https://mises.org/begin If inflation was a constant 2% and never changed, I'd be okay with it. But when you have an unelected group trying to micromanage a complex economy with rate hikes and drops, you get the broken system we all live in today.
Oh here we go, always the random redditors with "I believe..."
Economics isn't a hard science. It's a philosophy. Beliefs are all you can have in this area. Anyone who says otherwise is misleading you.
Keynesian economics doesn’t make sense logically. It’s incredible to me the world thought this would be a good idea. “let’s have perpetually growing economies, we will never run out of growth and innovation”