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Learning, Sharing, and Teaching => Investor Alley => Topic started by: mohawkbrah on August 05, 2016, 05:42:52 AM

Title: why is deflation considered a bad thing?
Post by: mohawkbrah on August 05, 2016, 05:42:52 AM
From my understanding it improves spending power. especially if wages remain stable or increase.

And also would it be an ideal world if inflation stayed 0% the same and then wages stayed the same at 0% (bar promotions etc etc)
Title: Re: why is deflation considered a bad thing?
Post by: Drifterrider on August 05, 2016, 05:59:05 AM
If the cost of goods and services drop (and continue to drop) wages will follow.  Your debt will be in then dollars (and if you are making less, you will pay a higher percentage of your wage to service the debt.  The opposite of paying then debt with inflated dollars).

If there is no inflation, there is no increase in the demand for goods and services.  No demand increase, things remain stagnant.  Now, if you are on the high end and things become stagnant you are in a better position but if you are on the low end:  no raises, no promotions because the demand has not increased.

Inflation (generally) is an indicator of economic growth. 
Title: Re: why is deflation considered a bad thing?
Post by: 2Birds1Stone on August 05, 2016, 06:13:39 AM
Yes, deflation means things are bad.

Since the world revolves around debt, slow inflation is optimal from a global economic standpoint.

If we had serious deflation you will see banks printing money to try to stimulate inflation. Otherwise the world will not be able to service it's own debt and the house of cards slowly collapses.
Title: Re: why is deflation considered a bad thing?
Post by: acroy on August 05, 2016, 06:57:02 AM
My highly contrarian view, FWIW

Deflation is bad according to the Church of Keynesian Economics. Unfortunately most of the world's decision makers are firm members of this Church, for various reasons.

A unit of money is supposed to represent a unit of work. As productivity increases, the value of the buck should increase. This is 'deflation'.

Deflation is Good. Deflation means your unit of work is more highly valued and you can purchase more with it. Or work less and purchase the same amount.

The Church of Keynesian Economics has been in a pickle for a long time. The modern world is really trying to be deflationary, but the Church members believe that deflation is the devil, and try to exorcise it with forced inflation!

So we have constant money supply manipulation, staggeringly low (artificial) interest rates, 'stimulus' etc enforced by the Church in their attempt to reverse the normal outcome of a modern economy (increased productivity/efficiency): deflation.

The constant manipulation causes massive misallocation of capital and eventually,  staggering unintended consequences. In other words, boom-bust-boom-bust.

This is the Age of the Central Banks, and they all worship at the Church of Keynesian Economics. Woe unto us when they loose control and it comes crashing down. Watch Japan.... Japan economy is trying to shrink due to demographics (as it should) while the Church attempts to force growth and inflation. Woe unto them!

Read Adam Smith, Hayek, Keynes etc for for background.
Title: Re: why is deflation considered a bad thing?
Post by: acroy on August 05, 2016, 08:53:29 AM
My highly contrarian view, FWIW

Deflation is bad according to the Church of Keynesian Economics. Unfortunately most of the world's decision makers are firm members of this Church, for various reasons.

A unit of money is supposed to represent a unit of work. As productivity increases, the value of the buck should increase. This is 'deflation'.

Deflation is Good. Deflation means your unit of work is more highly valued and you can purchase more with it. Or work less and purchase the same amount.

The Church of Keynesian Economics has been in a pickle for a long time. The modern world is really trying to be deflationary, but the Church members believe that deflation is the devil, and try to exorcise it with forced inflation!

So we have constant money supply manipulation, staggeringly low (artificial) interest rates, 'stimulus' etc enforced by the Church in their attempt to reverse the normal outcome of a modern economy (increased productivity/efficiency): deflation.

The constant manipulation causes massive misallocation of capital and eventually,  staggering unintended consequences. In other words, boom-bust-boom-bust.

This is the Age of the Central Banks, and they all worship at the Church of Keynesian Economics. Woe unto us when they loose control and it comes crashing down. Watch Japan.... Japan economy is trying to shrink due to demographics (as it should) while the Church attempts to force growth and inflation. Woe unto them!

Read Adam Smith, Hayek, Keynes etc for for background.

This seems pretty theoretical and almost religious to me.  Why should deflation or inflation be good or bad intrinsically?  When gold was the de facto currency you had inflation or deflation depending on things like how much gold was dug up.  I'm not sure why there should be "woe" unto anybody with a fiat currency that also has supply/demand characteristics driving its rate of exchange into goods and services.  What's really helpful it seems to me is to try to make whatever is used as currency be the best currency it can be--it should be a stable unit of value if possible, for instance, so that people can make long term contracts in good faith.  Rather than a "gold standard" you seem to want a more nebulous "unit of typical work" standard but it's not evident to me why that would be better or worse (it's just different).  As long as people expect a certain amount of deflation or inflation they can build that into the way they contract.  So in deflation world you'd tell a new McDonald's worker to expect their wages to go down in nominal terms every year and they'd have to be OK with that (or they'd have to get more productive in line with productivity increases in the overall economy to preserve their nominal wage). 

Rather than pronouncing "woe" I'd be trying to find practical ways to continue to enable our great companies to keep innovating and producing and evolving towards a better future... but hey I'm an optimist and I just don't see why the exchange rate of currency to goods and services needs to be the fundamental driver of whether we as humans can figure out how to be more productive and innovate.  It's like stock splits.... meh.  If I were running the central banks I'd just be trying to keep the machine marching forward and not running off the rails... not trying to impose some theory of whether inflation or deflation is better.  Just factually, deflation right now in this particular universe would cause a depression as companies (and governments) stop being able to pay their debts, which would lead to unemployment and bad stuff, so I would  be trying to avoid that...

Unless you are advocating a depression I'm not sure what your philosophical view on "Deflation is Good" and "Woe unto them!" means in practical terms.  What does it mean in practical terms?  That is, how are you responding in real life to your theory?   
Above is all written with the intention of sounding somewhat humorous and tongue in cheek.
Theoretical, yes. Religious, no. In fact, I was attempting to call attention to the fact that most of the world's economic decision makers adhere to Keynesian theory with near-religious fervor. My opinion is based on a study of the matter, using the references I listed and others. I enjoy economic theory and application.
'Woe', etc was not me calling for or asking for negative consequences; it's me lamenting the negative consequences (boom-bust cycle).

What is a good unit of currency is open for debate. I don't have an answer on that one. Many things could work. But it should be stable and not open to manipulation. I dislike gold, etc for this reason because it is too easy to manipulate.

We (mostly) are paid in $/hr, so inflation is a reduction in value of yesterday's labor. Intentional inflation (big-gov/bank, CB-driven) is in reality a devaluation of the worker's labor. Nasty.
Title: Re: why is deflation considered a bad thing?
Post by: dandarc on August 05, 2016, 09:03:41 AM
As usual, the stock-series includes a post relevant to the discussion.

http://jlcollinsnh.com/2012/12/11/stocks-part-xiv-deflation-the-ugly-escort-of-depressions/ (http://jlcollinsnh.com/2012/12/11/stocks-part-xiv-deflation-the-ugly-escort-of-depressions/)

The fundamental problem with deflation is that it encourages people to wait to buy.
Title: Re: why is deflation considered a bad thing?
Post by: acroy on August 05, 2016, 09:11:15 AM
As usual, the stock-series includes a post relevant to the discussion.

http://jlcollinsnh.com/2012/12/11/stocks-part-xiv-deflation-the-ugly-escort-of-depressions/ (http://jlcollinsnh.com/2012/12/11/stocks-part-xiv-deflation-the-ugly-escort-of-depressions/)

The fundamental problem with deflation is that it encourages people to wait to buy.
And that is only a bad thing because the Church of Keynesian Economics (CKE) pronounces that anything other than buy buy buy, burn burn churn, is a Sin.
We Mustachians know better!
Title: Re: why is deflation considered a bad thing?
Post by: acroy on August 05, 2016, 09:18:03 AM
Acroy, besides lamentations how does your outlook inform what you do with your money and how you think about investing?  I'd be interested in that.
I'm a realist. I disagree with how the system works, but that's academic. I'm a pretty typical Mustacian investor: mix of ETFs and bonds. Put those 'little green men' to work earning more little green men. I'm at FU but not FI money, 5+yrs out from RE (unless my very nice employment situation changes), so pretty aggressive investing mix.

I need one more good bust and boom, and I'm set ;)
Title: Re: why is deflation considered a bad thing?
Post by: GuitarStv on August 05, 2016, 09:51:35 AM
Is there a country in history that has functioned well for a long period of time with a deflationary economy?
Title: Re: why is deflation considered a bad thing?
Post by: Jack on August 05, 2016, 09:59:51 AM
The fundamental problem with deflation is that it encourages people to wait to buy.
And that is only a bad thing because the Church of Keynesian Economics (CKE) pronounces that anything other than buy buy buy, burn burn churn, is a Sin.
We Mustachians know better! [emphasis added]

No. Anybody who thinks that simplistically doesn't understand the difference between microeconomics and macroeconomics. "Buying" on a macroeconomic scale is not "spending," it is increasing the velocity of money (https://en.wikipedia.org/wiki/Velocity_of_money). It's "buying" labor. It's "buying" primary production (https://en.wikipedia.org/wiki/Primary_sector_of_the_economy). It's "buying" research into new technology.

Deflation, in contrast, reduces the velocity of money and thus reduces production and investment.
Title: Re: why is deflation considered a bad thing?
Post by: acroy on August 05, 2016, 10:16:56 AM
The fundamental problem with deflation is that it encourages people to wait to buy.
And that is only a bad thing because the Church of Keynesian Economics (CKE) pronounces that anything other than buy buy buy, burn burn churn, is a Sin.
We Mustachians know better! [emphasis added]

No. Anybody who thinks that simplistically doesn't understand the difference between microeconomics and macroeconomics. "Buying" on a macroeconomic scale is not "spending," it is increasing the velocity of money (https://en.wikipedia.org/wiki/Velocity_of_money). It's "buying" labor. It's "buying" primary production (https://en.wikipedia.org/wiki/Primary_sector_of_the_economy). It's "buying" research into new technology.

Deflation, in contrast, reduces the velocity of money and thus reduces production and investment.
To clarify, my comment about Mustachians was to point out our ability to delay or avoid purchasing things altogether.

Mises and I disagree with you re: micro/macro. See the criticism in the Wiki you linked. A person who disparages simple economic theory does not understand that macroeconomics is merely a summation of many microeconomic transactions.
Title: Re: why is deflation considered a bad thing?
Post by: TheAnonOne on August 05, 2016, 10:42:27 AM
The fundamental problem with deflation is that it encourages people to wait to buy.
And that is only a bad thing because the Church of Keynesian Economics (CKE) pronounces that anything other than buy buy buy, burn burn churn, is a Sin.
We Mustachians know better! [emphasis added]

No. Anybody who thinks that simplistically doesn't understand the difference between microeconomics and macroeconomics. "Buying" on a macroeconomic scale is not "spending," it is increasing the velocity of money (https://en.wikipedia.org/wiki/Velocity_of_money). It's "buying" labor. It's "buying" primary production (https://en.wikipedia.org/wiki/Primary_sector_of_the_economy). It's "buying" research into new technology.

Deflation, in contrast, reduces the velocity of money and thus reduces production and investment.
To clarify, my comment about Mustachians was to point out our ability to delay or avoid purchasing things altogether.

Mises and I disagree with you re: micro/macro. See the criticism in the Wiki you linked. A person who disparages simple economic theory does not understand that macroeconomics is merely a summation of many microeconomic transactions.

As someone who is planning on living on income generated from the market, be it bonds, RE, or stocks. Deflation is bad in all of those cases. It's a mental exercise mainly because central banks wouldn't let deflation happen for very long.

It's really only good, if you have a literal pile of cash at your house/bank.
Title: Re: why is deflation considered a bad thing?
Post by: acroy on August 05, 2016, 10:45:51 AM
Is there a country in history that has functioned well for a long period of time with a deflationary economy?
Sure, 1800's were largely deflationary
(http://monevator.monevator.netdna-cdn.com/wp-content/uploads/2013/08/UK-inflation-history-graph.jpg)
(http://www.whatamimissinghere.com/wp-content/uploads/2012/03/Inflation-in-the-United-States-Since-1800.jpg)
Title: Re: why is deflation considered a bad thing?
Post by: GuitarStv on August 05, 2016, 11:01:43 AM
Didn't something pretty bad happen to the US economy during the 1800s?
Title: Re: why is deflation considered a bad thing?
Post by: acroy on August 05, 2016, 11:05:03 AM
As someone who is planning on living on income generated from the market, be it bonds, RE, or stocks. Deflation is bad in all of those cases. It's a mental exercise mainly because central banks wouldn't let deflation happen for very long.

It's really only good, if you have a literal pile of cash at your house/bank.
Not really. See here as an example.
https://mises.org/blog/deflation-always-good-economy
I am not a member of Church of Keynesian Economics. I used to be, but something stank, so I started reading non-Church materials. My opinions are very contrarian from the currently accepted norm.
Title: Re: why is deflation considered a bad thing?
Post by: acroy on August 05, 2016, 11:23:26 AM
Didn't something pretty bad happen to the US economy during the 1800s?
Probably, do you have something in mind?
GDP/capita went up by roughly a factor of 4.5 1800-1900 in a largely deflationary period. Then it went up by another factor of 9 in 1900-2000. I know for sure bad things happened in that century.
(https://www.globalfinancialdata.com/Databases/Graphs/USAREALPCGDP.png)

Industrial Index went from about 0 to 1000+ over the same time period
(http://4.bp.blogspot.com/-aVgRa8Fhe6M/U5Xuiw3O_TI/AAAAAAAAAY4/czaury1UN5Y/s1600/industrialindex18001914.png)

Possibly deflation is not the all-consuming demon it is made out to be.
Title: Re: why is deflation considered a bad thing?
Post by: Jack on August 05, 2016, 11:38:40 AM
A person who disparages simple economic theory does not understand that macroeconomics is merely a summation of many microeconomic transactions.

Well, that's because it's not!

If Mustachianism in the form of avoiding buying things is good for individuals, and whatever is good for each individual is good for the economy as a whole, then Mars has a better economy than anywhere on Earth because there are no transactions occurring there!

Not really. See here as an example.
https://mises.org/blog/deflation-always-good-economy
I am not a member of Church of Keynesian Economics. I used to be, but something stank, so I started reading non-Church materials. My opinions are very contrarian from the currently accepted norm.

That article starts out pretending to prove that deflation isn't bad, but then abandons that topic to rant about inflation instead.

The fact that high inflation is bad does not imply deflation is good -- it's entirely possible for both to be bad.
Title: Re: why is deflation considered a bad thing?
Post by: GuitarStv on August 05, 2016, 11:55:37 AM
Didn't something pretty bad happen to the US economy during the 1800s?
Probably, do you have something in mind?

The great depression?
Title: Re: why is deflation considered a bad thing?
Post by: acroy on August 05, 2016, 12:25:46 PM
A person who disparages simple economic theory does not understand that macroeconomics is merely a summation of many microeconomic transactions.
Well, that's because it's not!
Yes it is, by definition! Now we're yelling at each other! yell yell yell!
Micro: Individual activity
Macro: Sum total of activity
CKE: I feel like I'm taking crazy pills.

If Mustachianism in the form of avoiding buying things is good for individuals, and whatever is good for each individual is good for the economy as a whole, then Mars has a better economy than anywhere on Earth because there are no transactions occurring there!
Mustacianism is all about not being a 'consumer sucka', anti-consumerism if you will, and therefor does not fit with standard economic theory.

That article starts out pretending to prove that deflation isn't bad, but then abandons that topic to rant about inflation instead.
Final paragraph I thought was pretty clear.
"With the expansion of real wealth for a constant stock of money, we will have a fall in prices. Note whether prices fall on account of the liquidation of non-productive activities or on account of real-wealth expansion, it is always good news. In the first case, it indicates that more funding is now available for wealth generation, while in the second case, it indicates that more wealth is actually being generated."

We've wandered pretty far from practical reality here.  Just because deflation could hypothetically be good by some questionable standard in some hypothetical world doesn't have any bearing on the practical considerations of what we here want today and over the next severa decades so we can all get on with being FIRE'd!  IMHO when we ask whether deflation is good or bad that should be tethered to some practical definition of what would be good or bad in teh world we live in.  By a standard like that actual deflation of any significance over the next ten or twenty years would be very very bad for pretty much everyone on thsi forum unless someone is sitting on 100% cash.
OK. I can debate further, it'd be fun. I hope this thread has been useful to OP.
Title: Re: why is deflation considered a bad thing?
Post by: arebelspy on August 21, 2016, 08:33:46 AM
Didn't something pretty bad happen to the US economy during the 1800s?
Probably, do you have something in mind?

The great depression?

Is there another "Great Depression" besides the one in the 1930s? One from the 1800s?
Title: Re: why is deflation considered a bad thing?
Post by: DavidAnnArbor on August 21, 2016, 08:49:50 AM
Yes there were several panics in the late 1800's that devastated the economy.
Title: Re: why is deflation considered a bad thing?
Post by: arebelspy on August 21, 2016, 09:10:43 AM
Yes there were several panics in the late 1800's that devastated the economy.

Yes, there was plenty of bad things that happened economically in the 1800s.  It was a full century long.

I'm curious about what GuitarStv had in mind, especially what he referred to as "the great depression."
Title: Re: why is deflation considered a bad thing?
Post by: DavidAnnArbor on August 21, 2016, 09:44:24 AM
If we live in a deflationary world, where prices are going down, then the value of existing debt (mortgages, car loans) goes up. To pay that debt down with declining incomes means there is less spending on other services/goods. Those sitting on cash may be wealthier, but they don't have to spend down that wealth - it's optional. The net result of both groups (debtors and those sitting on cash) is contractionary, hence a declining economy and a declining stock market. And the value of our index funds will go down, and early retirement dreams will disintegrate. There is massive unemployment so efforts to save money become thwarted.

If people expect deflation then spending and borrowing is inhibited because you have to repay back in dollars that are worth more. Less spending leads to depression which leads back to deflation and now you have a trap you can't get out of.

The gold standard enforces a deflationary world, and expansion in the economy is prevented by making the monetary supply inflexible in the face of a recession when expansion of money supply is needed.

Here's a quote from journalist Matt O'Brien:
When we peg the dollar to gold we have to raise interest rates when gold is scarce, regardless of the state of the economy. This policy inflexibility was the major cause of the Great Depression, as governments were forced to tighten policy at the worst possible moment. It's no coincidence that the sooner a country abandoned the gold standard, the sooner it began recovering.

http://www.theatlantic.com/business/archive/2012/08/why-the-gold-standard-is-the-worlds-worst-economic-idea-in-2-charts/261552/
Title: Re: why is deflation considered a bad thing?
Post by: DavidAnnArbor on August 21, 2016, 09:51:41 AM
Yes there were several panics in the late 1800's that devastated the economy.

Yes, there was plenty of bad things that happened economically in the 1800s.  It was a full century long.

I'm curious about what GuitarStv had in mind, especially what he referred to as "the great depression."

"There were a number of nasty prolonged slumps under the gold standard. In particular the Panic of 1893 was associated with a double-dip recession that left industrial production depressed and unemployment high for more than 5 years."
http://krugman.blogs.nytimes.com/2011/01/30/recessions-under-the-gold-standard/


 

Title: Re: why is deflation considered a bad thing?
Post by: arebelspy on August 21, 2016, 09:52:19 AM
"There were a number of nasty prolonged slumps under the gold standard. In particular the Panic of 1893 was associated with a double-dip recession that left industrial production depressed and unemployment high for more than 5 years."
http://krugman.blogs.nytimes.com/2011/01/30/recessions-under-the-gold-standard/

Yes, there was plenty of bad things that happened economically in the 1800s.  It was a full century long.

I'm curious about what GuitarStv had in mind, especially what he referred to as "the great depression."
Title: Re: why is deflation considered a bad thing?
Post by: DavidAnnArbor on August 21, 2016, 10:28:34 AM
"There were a number of nasty prolonged slumps under the gold standard. In particular the Panic of 1893 was associated with a double-dip recession that left industrial production depressed and unemployment high for more than 5 years."
http://krugman.blogs.nytimes.com/2011/01/30/recessions-under-the-gold-standard/

Yes, there was plenty of bad things that happened economically in the 1800s.  It was a full century long.

I'm curious about what GuitarStv had in mind, especially what he referred to as "the great depression."

And now we have intellectual deflation
Title: Re: why is deflation considered a bad thing?
Post by: GuitarStv on August 21, 2016, 10:33:17 AM
"There were a number of nasty prolonged slumps under the gold standard. In particular the Panic of 1893 was associated with a double-dip recession that left industrial production depressed and unemployment high for more than 5 years."
http://krugman.blogs.nytimes.com/2011/01/30/recessions-under-the-gold-standard/

Yes, there was plenty of bad things that happened economically in the 1800s.  It was a full century long.

I'm curious about what GuitarStv had in mind, especially what he referred to as "the great depression."

Sadly, there was no amazing point to be made.  I have to confess mixing up my dates on that one.  :P
Title: why is deflation considered a bad thing?
Post by: Seppia on August 21, 2016, 10:47:07 AM
With all of Europe adopting very strong austerity measures as a reaction to the financial crisis and almost half of American economists pushing the in the same direction (unsuccessfully, thankfully for the USA) I would argue the "church of Keynesian doctrine" has been fairly weak and unsuccessful lately.
In downturns, basic IS-LM Keynesian policy calls for a positive delta G (increased public spending), we (I'm in Europe) have been doing the opposite with disastrous results for a good 8 years now.

If we have an issue today I would argue it's that people forgot the basic truths of Keynesian theory, not the opposite.
Title: Re: why is deflation considered a bad thing?
Post by: Travis on August 21, 2016, 10:53:05 AM
"There were a number of nasty prolonged slumps under the gold standard. In particular the Panic of 1893 was associated with a double-dip recession that left industrial production depressed and unemployment high for more than 5 years."
http://krugman.blogs.nytimes.com/2011/01/30/recessions-under-the-gold-standard/

Yes, there was plenty of bad things that happened economically in the 1800s.  It was a full century long.

I'm curious about what GuitarStv had in mind, especially what he referred to as "the great depression."

Sadly, there was no amazing point to be made.  I have to confess mixing up my dates on that one.  :P

The decades after the Civil War saw a number of rapid boom/busts as the bar graph above indicates.  I believe the 1893 one really got the ball rolling on creating an institution that would stabilize our currency (it was also a high period of debating on a federal income tax).  If memory serves, that particular recession/depression had to bailed out by J.P. Morgan personally.  The latter half of the 19th century was overall a massive boom for US industry, but the big monopolies were the drivers of that.
Title: Re: why is deflation considered a bad thing?
Post by: mrpercentage on August 21, 2016, 01:01:49 PM
I think it signals the loss of jobs or quality jobs. Less money is available to be spent (without being borrowed) so things go down in value and money becomes more valuable because there is less of it. I maintain my stance that zero inflation is ideal but the government has gotten way too comfortable always inflating out of their irresponsible spending and has greatly enjoyed everyone's retirement paying for the governments spending without approval. Best tax ever

The irony is that inflation is only good for deminishing debt. AKA devaluing bonds so they jack up rates to make it worth letting them borrow even more money. Unless you mean today because now we pay them to do that in many nations. Please oh please spend more money government so you can tax us even more! I want a safe way to get rich at everyone's expense!

I fat fingered the hell out of that. Had to edit five or six times lol
Title: Re: why is deflation considered a bad thing?
Post by: nobodyspecial on August 21, 2016, 01:33:12 PM
Zero inflation is the real goal of most economies. But because it's hard to hit exactly they have an official target of 2%.
It's easy to keep small positive inflation in control with small rises in the interest rate.

The problem with deflation is that it is very difficult to stop, all you can do is drop interest rates. Once they get low, or even zero, they stop having any effect and you get stuck in a deflation spiral. Which Japan, and now Europe, show is very difficult to get out of.

The current European situation can be blamed on the austerity measures which are due to Germany's paranoia that inflation causes Nazis. Ironically it was deflation in the 1930s that led to their rise to power, the hyperinflation had been fixed by then. 
Title: Re: why is deflation considered a bad thing?
Post by: Classical_Liberal on August 21, 2016, 02:04:33 PM
With all of Europe adopting very strong austerity measures as a reaction to the financial crisis and almost half of American economists pushing the in the same direction (unsuccessfully, thankfully for the USA) I would argue the "church of Keynesian doctrine" has been fairly weak and unsuccessful lately.
In downturns, basic IS-LM Keynesian policy calls for a positive delta G (increased public spending), we (I'm in Europe) have been doing the opposite with disastrous results for a good 8 years now.

If we have an issue today I would argue it's that people forgot the basic truths of Keynesian theory, not the opposite.

This is very insightful and has given me much food for thought, perhaps once it's digested I will post my thoughts.


Zero inflation is the real goal of most economies. But because it's hard to hit exactly they have an official target of 2%.
It's easy to keep small positive inflation in control with small rises in the interest rate.

The problem with deflation is that it is very difficult to stop, all you can do is drop interest rates. Once they get low, or even zero, they stop having any effect and you get stuck in a deflation spiral. Which Japan, and now Europe, show is very difficult to get out of.

The current European situation can be blamed on the austerity measures which are due to Germany's paranoia that inflation causes Nazis. Ironically it was deflation in the 1930s that led to their rise to power, the hyperinflation had been fixed by then. 



Another worry that Western Europe may have, that we lack in the US, is low to zero population growth. This is probably worsened with somewhat xenophobic immigration policies.  They may be worried (maybe rightfully, look at Japan) that Keynesian theory will fail as growth is stagnated due to legitimate lack of need (ie reduced consumption, no new infrastructure required, etc).  Additionally, Western European social nets for the older population are arguably large, which further worries those who favor decreased spending and debt reduction.  It's difficult to increase tax revenues from growth to cover such expenses when the population isn't expanding to stimulate that growth.
Title: Re: why is deflation considered a bad thing?
Post by: nobodyspecial on August 21, 2016, 02:23:38 PM
Europe needs 50-100M new people fortunately it can probably get the immigrants to do this.
A few right wing idiots aside it can probably manage to do this easier than the USA, and certainly Japan.

Absorbing the baltics / balkans and eastern europe helped.  They already have reasonably equal treatment of women so you don't get the southern europe dip (when women can expect a career education for the first time the fertiity rate plummets) so the hope is that as they move closer to the rest of europe in prosperity their birth rate rises.

Europe does need to take roughly a UK or France population of people from the middle east/africa in the next 50years - and that might be a harder sell.
Title: Re: why is deflation considered a bad thing?
Post by: mrpercentage on August 21, 2016, 03:04:35 PM
Nah, there is no sustainability in the growth model. The whole model needs to change. I think wide spread revolt is coming because the intellectual elites seem to have no national identity and seem to think that any nation will adopt the culture and race the elites want them too. I doubt it. Bloodlines and national identity run deeper than your classroom social studies.
Title: Re: why is deflation considered a bad thing?
Post by: waltworks on August 21, 2016, 03:07:08 PM
Let's say you're Jane the chairmaker. I'm Joe the toaster maker.

Deflation is going on. So I, Joe, have some money saved up for when my chair breaks, but I know it'll be cheaper next year, so when it does, I just sit on the floor and wait.

Jane needs a new toaster, but she knows it'll be cheaper if she waits, so she sits in her chair and eats her stale bread.

Unfortunately, my boss at the toaster factory isn't selling enough toasters, even though he keeps lowering the price. So he lets me go. Jane's chair business isn't going well either, she can't seem to sell a single chair...

Do that for the whole economy, and things don't work well.

Now, there's a huge caveat, which is that we're assuming that growth/more stuff is always good. It's an important question in an era where we have the ability to wipe ourselves out/deplete our resources by just using too much stuff, at least in theory. But that's not the same debate at all.

Probably best to think of it this way: what is the economy (that is, trading goods and services with each other) FOR?
 
Even for the most die-hard hippy, there are benefits to trading with others who are better at their specialities, even if you're not talking about physical goods or using up resources (ie, hire a doctor to set your broken arm, hire a musician to entertain your friends). More of that kind of trading is usually universally considered a good thing, whether you're "keynesian" or not, because it means people are happier/healthier/enjoying life more. And if you think trading with others is good, then deflation is always going to be a bad thing, because it incentivizes NOT TRADING.

Lots of inflation is also bad. The exact level that's best is a matter of a lot of academic debate (the gold-standard people are basically arguing it should be zero, though they're pretty clearly going to end up with a deflationary scenario barring a way to make lots more gold), but there's no serious debate about deflation. It's always bad in the aggregate for a society.

-W
Title: Re: why is deflation considered a bad thing?
Post by: nobodyspecial on August 21, 2016, 04:29:23 PM
Now, there's a huge caveat, which is that we're assuming that growth/more stuff is always good. It's an important question in an era where we have the ability to wipe ourselves out/deplete our resources by just using too much stuff, at least in theory. But that's not the same debate at all.
But it's the same deflation problem. If the price of oil is constantly rising we look for alternate sources of energy or more efficient machines.
If the price is dropping we can't afford to spend on R&D now when the payoff is falling everyday, we can just keep using the old inefficent machines because when they wear out we can replace them even more cheaply.
Title: Re: why is deflation considered a bad thing?
Post by: snacky on August 21, 2016, 04:55:08 PM
Economic stability is based on a few phenomena that are assumed to be assured. One of those is economic growth over time, another is inflation. If a base economic assumption halted or reversed for a protracted time the infrastructure that keeps the economic side of life moving - the banks, governments, commerce, etc would fail. Runaway inflation can be devastating; unchecked deflation can end an economic era.

That being said, with populations growing and undeveloped areas becoming developed it's pretty close to impossible to have long term deflation. Demand will grow as a function of population growth and economic development. It will happen one day, but not today.
Title: Re: why is deflation considered a bad thing?
Post by: mr_orange on August 21, 2016, 06:13:48 PM
If we live in a deflationary world, where prices are going down, then the value of existing debt (mortgages, car loans) goes up. To pay that debt down with declining incomes means there is less spending on other services/goods. Those sitting on cash may be wealthier, but they don't have to spend down that wealth - it's optional. The net result of both groups (debtors and those sitting on cash) is contractionary, hence a declining economy and a declining stock market. And the value of our index funds will go down, and early retirement dreams will disintegrate. There is massive unemployment so efforts to save money become thwarted.

If people expect deflation then spending and borrowing is inhibited because you have to repay back in dollars that are worth more. Less spending leads to depression which leads back to deflation and now you have a trap you can't get out of.

The gold standard enforces a deflationary world, and expansion in the economy is prevented by making the monetary supply inflexible in the face of a recession when expansion of money supply is needed.

Here's a quote from journalist Matt O'Brien:
When we peg the dollar to gold we have to raise interest rates when gold is scarce, regardless of the state of the economy. This policy inflexibility was the major cause of the Great Depression, as governments were forced to tighten policy at the worst possible moment. It's no coincidence that the sooner a country abandoned the gold standard, the sooner it began recovering.

http://www.theatlantic.com/business/archive/2012/08/why-the-gold-standard-is-the-worlds-worst-economic-idea-in-2-charts/261552/

Solid post David.

Like it or not the nirvana discussed on this forum still relies on companies pumping out profits so that the index funds deliver and early retiree aspirants can bicker over whether or not a 3% SWR or a 4% SWR is needed.  The whole "secret mission" of MMM to get people to reduce spending would drive a pretty bad economy if adopted en masse. 

Deflation is not likely to be adopted by those with the levers to pull because most major economies are heavy debtors and thus repaying debt in less expensive dollars is a primary motivator. 
Title: Re: why is deflation considered a bad thing?
Post by: arebelspy on August 21, 2016, 06:39:08 PM
Like it or not the nirvana discussed on this forum still relies on companies pumping out profits so that the index funds deliver and early retiree aspirants can bicker over whether or not a 3% SWR or a 4% SWR is needed.  The whole "secret mission" of MMM to get people to reduce spending would drive a pretty bad economy if adopted en masse. 

I disagree with the value judgement.

It would be a different economy.  I don't know that it would be a bad one.
Title: Re: why is deflation considered a bad thing?
Post by: mr_orange on August 21, 2016, 06:43:55 PM
Like it or not the nirvana discussed on this forum still relies on companies pumping out profits so that the index funds deliver and early retiree aspirants can bicker over whether or not a 3% SWR or a 4% SWR is needed.  The whole "secret mission" of MMM to get people to reduce spending would drive a pretty bad economy if adopted en masse. 

I disagree with the value judgement.

It would be a different economy.  I don't know that it would be a bad one.

It would be one with severe recessions.  Like it or not consumer spending drives 70% of our GDP.  No spending means no profits means you cannot live off said profits. 

This may or may not fit with your definition of "bad," but in the real world businesses deliver value for consumers and that cozy setup is what allows people on this forum to retire early and turn their noses up at those providing the tools for this lifestyle. 
Title: Re: why is deflation considered a bad thing?
Post by: arebelspy on August 21, 2016, 06:50:30 PM
Short term there would be adjustments, yes, and some pain.  Long term I think we, and the earth, would be much better off.
Title: Re: why is deflation considered a bad thing?
Post by: mrpercentage on August 21, 2016, 07:10:17 PM
You cant live off cream without lots of milk.

(http://i820.photobucket.com/albums/zz124/azwolf25/8491125952_c2c7c854d8_z.jpg) (http://s820.photobucket.com/user/azwolf25/media/8491125952_c2c7c854d8_z.jpg.html)
Title: Re: why is deflation considered a bad thing?
Post by: mr_orange on August 21, 2016, 07:56:55 PM
Short term there would be adjustments, yes, and some pain.  Long term I think we, and the earth, would be much better off.

If you truly believe this why not sell all of the index funds that perpetuate the vicious spending cycle?  It seems rather disingenuous to benefit from companies producing profits that are primarily driven by consumer spending if your core beliefs compel you to drive a less spendthrift society.  How is it that you reconcile this dichotomy? 

I'm all for people being frugal, but the whole concept is taken to illogical extremes on this forum in my humble opinion.  To vilify spending necessarily means that one is desiring less profits via the broader economy, which implies that one would need to work longer to retire early.  It all ties together at the end of the day. 

As DavidAnnArbor points out above this line of reasoning is inherently flawed.  Businesses have to make money for the ready-made FIRE plans you have to work out.  Businesses have to make money for people to be able to put their talents in action and earn income so that a (large?) portion of it can be saved.  If people stop spending money then those that control businesses won't hire you so that you can save.  One does not have to look back very far to see the pain that a deflationary environment inflicted on society.  Check out the 60 Minutes stories of working families living in their cars and choosing between feeding their kids and medicine. 
Title: Re: why is deflation considered a bad thing?
Post by: arebelspy on August 21, 2016, 08:03:37 PM


Short term there would be adjustments, yes, and some pain.  Long term I think we, and the earth, would be much better off.

If you truly believe this why not sell all of the index funds that perpetuate the vicious spending cycle?  It seems rather disingenuous to benefit from companies producing profits that are primarily driven by consumer spending if your core beliefs compel you to drive a less spendthrift society.  How is it that you reconcile this dichotomy? 

My selling my index funds would have precisely 0 effect on our economy.

But if it came down to it, I'd gladly give up the opportunity to FIRE if it meant the world shifted to a less consumeristic, wasteful place to one sustainable, healthy, and happy for everyone.

I'd be fine working until 70 if it meant a better outcome for everyone else, and the world.

Alas, that is not the case, so I'll do what I can to advocate for and donate towards causes I support which I do think can have a reasonable impact on the world. Spreading Mustachianism is just one of these.
Title: Re: why is deflation considered a bad thing?
Post by: mrpercentage on August 21, 2016, 08:10:27 PM
If only. If only more people made more money and spent less-- perhaps we would be less productive but more efficient and only work 4 hours a day. That involves personal habit and cultural change. As a man who quit smoking 9 years ago while watching many others fail, I will say its possible but highly unlikey-- unfortunately. We could preach MMM all day and its throwing matches into the everglades. Not likely to catch a spark.
Title: Re: why is deflation considered a bad thing?
Post by: waltworks on August 21, 2016, 08:16:47 PM
I think a lot of advanced countries will have to grapple with the combination of peak stuff/postindustrial economies, aging populations, and what to do about the various environmental disasters we've inflicted on ourselves in the future.

But humans are innovative and awesome and we've come this far, so I'm not that worried about it. Maybe my 4% SWR is safe not because of stock market gains, but because fusion power makes the basics of life free to everyone and we're *all* FIRE in one fell swoop.

-W
Title: Re: why is deflation considered a bad thing?
Post by: arebelspy on August 21, 2016, 08:28:50 PM
If only. If only more people made more money and spent less-- perhaps we would be less productive but more efficient and only work 4 hours a day. That involves personal habit and cultural change. As a man who quit smoking 9 years ago while watching many others fail, I will say its possible but highly unlikey-- unfortunately. We could preach MMM all day and its throwing matches into the everglades. Not likely to catch a spark.
Yep. Not anytime soon, at least.
Title: Re: why is deflation considered a bad thing?
Post by: Bicycle_B on August 21, 2016, 08:36:09 PM
Briefly returning to OP's question, another factor why deflation is considered bad is that economists believe the "right" amount of inflation has some specific benefits.

The Federal Reserve's position is to shoot for about 2% inflation.  Modest inflation of this sort allows wages to fall in bad times just enough to prevent unemployment, with the overall effect of keeping the economy out of deep slumps that it would otherwise fall into.  That's why depressions/ deep recessions were more common in the USA's (and Europe's) deflationary 1800s. In good times, companies whose wages are under pressure due to advancing tech also have time to adjust gradually and maintain employment.

http://www.economist.com/blogs/economist-explains/2015/09/economist-explains-7

Title: Re: why is deflation considered a bad thing?
Post by: mr_orange on August 21, 2016, 09:53:40 PM
But if it came down to it, I'd gladly give up the opportunity to FIRE if it meant the world shifted to a less consumeristic, wasteful place to one sustainable, healthy, and happy for everyone.

I'd be fine working until 70 if it meant a better outcome for everyone else, and the world.

Alas, that is not the case, so I'll do what I can to advocate for and donate towards causes I support which I do think can have a reasonable impact on the world. Spreading Mustachianism is just one of these.

Fair enough.  I'll take you at your word then.  As is evidenced by the hoards of posts debating stress testing of various SWRs, etc. I think you'll forgive me if I'm skeptical about a similar set of motivations from others on the forum.  How many would be willing to work those extra X years if their SWR requirements decreased to 2%?  Would they be willing to trade off 10 extra years of working if it meant that corporate earnings went down significantly?  Would they trade the ability for one of the wage earners in the house to earn a living for less consumption and thus less earnings from employers? 

It seems that you have to choose among core principles espoused on the forum.  You can desire less work, more free time, and all of the benefits implicit to this set of choices that are coupled with higher corporate profits OR you can choose to work more and have lower corporate profits.  You really can't have both.  If people work less, spend less, etc. the businesses will be less productive and produce lower profits; which, in turn, increases your stash threshold using an indexing approach. 
Title: Re: why is deflation considered a bad thing?
Post by: arebelspy on August 21, 2016, 11:06:33 PM
People wanting to know what's safe in our current world tells us nothing about the world they'd be willing to live in.

I think I'm less cynical than you. :)

And there's no choice to be made. We live in the world we do. Working longer would be pointless.
Title: Re: why is deflation considered a bad thing?
Post by: mr_orange on August 22, 2016, 10:29:30 AM
And there's no choice to be made. We live in the world we do. Working longer would be pointless.

I really think this is the point we disagree on.  My cynicism or lack thereof really isn't important. 

The world we live in would be materially different if everyone decided to stop working and businesses were less productive.  There are countless countries globally where this is the case.  The societies have all made different value judgments than ours about what is important to them.  There is certainly a choice to live in these societies instead of ours.  No harm, no foul.

What I am saying is that you can't have BOTH great corporate profits and the conditions precedent to a cozy FIRE situation AND a macro situation with everyone working less and thus less productivity and profits.  These two concepts simply can't exist together.  If people stop buying stuff and profits decrease you'll have less in earnings which will require you to work longer.  Likewise, a deflationary environment causes real borrowing to be more expensive and all the other items that were referenced above. 
Title: Re: why is deflation considered a bad thing?
Post by: Classical_Liberal on August 22, 2016, 10:40:51 AM
Fair enough.  I'll take you at your word then.  As is evidenced by the hoards of posts debating stress testing of various SWRs, etc. I think you'll forgive me if I'm skeptical about a similar set of motivations from others on the forum.  How many would be willing to work those extra X years if their SWR requirements decreased to 2%?  Would they be willing to trade off 10 extra years of working if it meant that corporate earnings went down significantly?  Would they trade the ability for one of the wage earners in the house to earn a living for less consumption and thus less earnings from employers? 

It seems that you have to choose among core principles espoused on the forum.  You can desire less work, more free time, and all of the benefits implicit to this set of choices that are coupled with higher corporate profits OR you can choose to work more and have lower corporate profits.  You really can't have both.  If people work less, spend less, etc. the businesses will be less productive and produce lower profits; which, in turn, increases your stash threshold using an indexing approach.

I agree and disagree with your assumptions. 

People on this forum consume less, work 50 hours a week and maybe another 5-10 on a side gig to save up enough capital to sustain for a lifetime.  I would agree that this type of life DOES follow your logic.  Return on capital is required for stash to maintain itself, in large part because of inflation.  However,  there is another option.  All of western society could reduce consumption (your scenario).  At this point societal norms could change and the 40-50 hour work week could become the 10-20 hour work week.  This is, in fact, is what John Maynard Keynes thought the end game would be. 

http://www.econ.yale.edu/smith/econ116a/keynes1.pdf

As the world is, it is difficult to construct a life with a 15 hour work week because the norm is 40-50.  Someone wanting to do this suffers from wage decreases, loss of benefits, loss of job security, etc.  If your implication is that everyone consumed less (say 1950's level), then FIRE is impossible... I would say, it would be more difficult in its current form.  But, instead of 10 years working 50-60 hours a week, one could shift to 35 years of 15 hours a week (maybe one week of 40 a month, or seasonal employment, etc). I'm cool with either one.  The economics of that choice, in the reality of western culture, currently favors the former. That's a societal choice, not a necessity.

This is getting off topic & I dont want to be scolded, I know there are some old threads on the forum that talk extensively about the theoretical decrease of consumption on a societal level.
Title: Re: why is deflation considered a bad thing?
Post by: Scandium on August 22, 2016, 10:57:15 AM
It seems rather disingenuous to benefit from companies producing profits that are primarily driven by consumer spending if your core beliefs compel you to drive a less spendthrift society.  How is it that you reconcile this dichotomy? 

I'm all for people being frugal, but the whole concept is taken to illogical extremes on this forum in my humble opinion.  To vilify spending necessarily means that one is desiring less profits via the broader economy, which implies that one would need to work longer to retire early.  It all ties together at the end of the day. 

I don't see the dichotomy. I prefer less spending for me, while everyone else can spend as much as they want. If fact as you point out I prefer if everyone else spend as much as possible, as this would be good for my investments (unless it's too much and the markets crash..). This isn't a cult, where the goal is to convert the whole world to our beliefs. At least not IMO. I care about me; I want to save up FU money, I want freedom to stop working. That's it. Everyone else can what whatever for all I care, which is indeed their freedom. Most middle class (and up) people in the west have this choice, so when others choose to spend wildly I assume that's what they want. It's not for me to convert them.
Title: Re: why is deflation considered a bad thing?
Post by: FIPurpose on August 22, 2016, 11:41:23 AM
I am not even a studied person as to the inner workings of inflation/deflation and macroeconomics, but I am curious.

In a world of stuff saturation, and some kind of stabilization between interest rates of -0.5% to 2%. I don't see how FIRE would become less possible. In fact, I would see it as a more visible path for many people. Stock markets would remain rather flat, and companies would shift to almost all dividends likely hovering between 2-3% (with a couple percent increase each year for productivity, though that would also eventually top out.)

With low long-term inflation (close to 0%), the stock market would stabilize with a low consistent return. Perhaps a 4% SWR will not be possible, but my guess for a still growing country like the USA is that is still several decades away.

I definitely agree with the poster that I hope the near future includes people working less (10-20 hours a week), but honestly, there are so many consuma suckas, I don't think anyone here has worries of people consuming bare necessities any time soon.
Title: Re: why is deflation considered a bad thing?
Post by: mr_orange on August 22, 2016, 11:52:23 AM
I don't think anything written above is inconsistent with what I have written and I do think we're off topic so I will be respectful to the OP and let people get back on topic. 
Title: Re: why is deflation considered a bad thing?
Post by: arebelspy on August 22, 2016, 05:50:26 PM
And there's no choice to be made. We live in the world we do. Working longer would be pointless.

I really think this is the point we disagree on.  My cynicism or lack thereof really isn't important. 

The world we live in would be materially different if everyone decided to stop working and businesses were less productive.

Sure.  It would be different if that was the case.  But it's not.  As I said:
And there's no choice to be made. We live in the world we do. Working longer would be pointless.

We don't live in that wonderful fantasy world where people don't waste, and consume.  We live in the real world, where they do. 

I can't choose to change the world.  If I could, I'd change it so I couldn't FIRE, but the world is a better place.

I don't necessarily even agree with the false dichotomy of them being mutually exclusive, especially with all the automation that's available nowadays--I think we can easily provide for people's needs with a minimal amount of labor, and without a ton of consumption.  But even if I did agree that they were mutually exclusive, there's not two worlds where I can choose which one to live in.  There's just this--very consumeristic--world.  So from a practical standpoint, I'll optimize my life for the world I live in.
Title: Re: why is deflation considered a bad thing?
Post by: mr_orange on August 22, 2016, 08:09:34 PM
Really?  Because from my perspective you made epic statements above over a number of postings arguing that it was "disingenuous" to espouse mustachianism and expect a decent return on your investments, that people need to "choose" between mustachianism and corporate profits, and that the economy would "tank" if enough people became mustachian.  You also said that frugality is taken to "illogical extremes" on this forum.  None of those very strongly expressed opinions are consistent with my thinking and all of them seem like they were meant to provoke a response.  I suspect I would have a number of questions about the assumptions underlying those statements if they were laid bare--as it is they are just opinions thrown out into the universe that you seemed to feel the need to share on this thread--did you have a goal in saying those things?  (Like I think you said somewhere you think I should sell my index funds because I'm no longer working for a corporation or something like that?)  So that is why I said you are laying out false dichotomies.  Maybe I misunderstood you but that's how all this came across to me.  Happy to drop it here if you'd like.  Or happy to try to understand what you were saying better.   

Most of what you wrote above is stuff you made up.  If you wish to address exact quotes from my responses I'm happy to respond.  I'm not going to get into a back and forth about stuff you manufacture that I said though. 

Less in corporate profits means you work longer because your investments won't work as hard.  Less spending means less corporate profits.  More deflation means the real cost of borrowing is higher and servicing debt is harder, which means that your debt service will consume a greater portion of your earnings.  This, in turn, means that you'll be able to save less. 

It is pretty well impossible to have a meaningful conversation about these things though because people on this forum will simply ignore basic economic principles to manufacture rules consistent with their beliefs regardless of how silly the arguments are.   So yeah, it really is a waste of time. 
Title: Re: why is deflation considered a bad thing?
Post by: arebelspy on August 22, 2016, 08:15:45 PM
Less in corporate profits means you work longer because your investments won't work as hard.  Less spending means less corporate profits.  More deflation means the real cost of borrowing is higher and servicing debt is harder, which means that your debt service will consume a greater portion of your earnings.  This, in turn, means that you'll be able to save less. 

It is pretty well impossible to have a meaningful conversation about these things though because people on this forum will simply ignore basic economic principles to manufacture rules consistent with their beliefs regardless of how silly the arguments are.   So yeah, it really is a waste of time.

You're the one ignoring my point that even if all that you post is true (and there's reasonable debate about it), it still would be a better world.  ;)

Less consumption->less corporate profits->longer work time.  Okay.  I'd be willing to work a lot longer to not see us destroy the planet.

In other words, if I could have everything change, but at a detrimental cost to me personally (working longer), I'd change it in a snap.  I can't have that, so no point in working longer.

There's no choice Mustachians have to make, because we don't like in that world.  But if, over time, the world shifts to less consumption, and one needs to work a bit longer, that'd be terrific.  :)
Title: Re: why is deflation considered a bad thing?
Post by: mr_orange on August 22, 2016, 08:26:14 PM
I don't necessarily even agree with the false dichotomy of them being mutually exclusive, especially with all the automation that's available nowadays--I think we can easily provide for people's needs with a minimal amount of labor, and without a ton of consumption.  But even if I did agree that they were mutually exclusive, there's not two worlds where I can choose which one to live in.  There's just this--very consumeristic--world.  So from a practical standpoint, I'll optimize my life for the world I live in.

If the automation was feasible then business owners would already be working feverishly to use it to streamline their operations and increase profits.  What is the true fantasy world (to use your words) is the one where magical unused automation allows people to work less and for profits to rise to afford them the ability to retire earlier.  If the technology is available and can be exploited to increase productivity absent labor it would be used.  In the current real world real people have to do real work to produce goods and services that drive profits for owners. 

I'd love to have the cake I just ate this evening too, but in the real world it doesn't work that way.  Your savings need to be invested to support projects that produce earnings so that you can afford to not work.  This requires entities (mainly consumers) to spend money.  Deflation provides incentives for people NOT to spend money and thus earnings will decrease and your FIRE plans will be more difficult to achieve. 

There is no false dichotomy.  This is the way the economy works. 
Title: Re: why is deflation considered a bad thing?
Post by: mr_orange on August 22, 2016, 08:27:49 PM
Less in corporate profits means you work longer because your investments won't work as hard.  Less spending means less corporate profits.  More deflation means the real cost of borrowing is higher and servicing debt is harder, which means that your debt service will consume a greater portion of your earnings.  This, in turn, means that you'll be able to save less. 

It is pretty well impossible to have a meaningful conversation about these things though because people on this forum will simply ignore basic economic principles to manufacture rules consistent with their beliefs regardless of how silly the arguments are.   So yeah, it really is a waste of time.

You're the one ignoring my point that even if all that you post is true (and there's reasonable debate about it), it still would be a better world.  ;)

Less consumption->less corporate profits->longer work time.  Okay.  I'd be willing to work a lot longer to not see us destroy the planet.

In other words, if I could have everything change, but at a detrimental cost to me personally (working longer), I'd change it in a snap.  I can't have that, so no point in working longer.

There's no choice Mustachians have to make, because we don't like in that world.  But if, over time, the world shifts to less consumption, and one needs to work a bit longer, that'd be terrific.  :)

Nope....didn't ignore it.  It was acknowledged above. 
Title: Re: why is deflation considered a bad thing?
Post by: mr_orange on August 23, 2016, 08:23:56 AM
Yes, invested capital needs a return on investment and the capital invested in making junk would have to be redeployed if people stopped buying plastic junk.  But a call to less consumerism among the richest portion of the world's population doesn't prima facie dictate what total corporate profits or spending would be after the "revolution".  The capital currently invested in making consumer junk could wither and die (like your scenario), could migrate to more productive fields (like providing for the basic needs of poor people in the world or producing better infrastructure), or could even become more productive if as part of this change we learn how to allocate capital better (e.g., through technology, policy, or other avenues).  Total spending is also made up of a lot more than the spending of the consumers eligible for mustachianism--it also includes businesses and governments, for examle.  I'm just doing this to unpack your first statement and show that you are making a ton of assumptions and that it is not in any way evident which scenario would go down.  The fact that you feel so sure you know what would happen kinda freaks me out.

Yes.....I am fully aware that others contribute to spending.  Hence why I referenced 70% of spending is done by consumers above.  There really is nothing to unpack.  If people stop buying stuff there are recessions.  There aren't any non-real-world assumptions.  This is the way the economy functions.  If providing for the poor or allocating capital in another fashion was somehow more profitable than the way it is currently allocated then it would ALREADY be happening.  It isn't. 

But to equate mustachianism to deflation is a giant giant leap for a number of reasons.  The first reason is the logic I go through above--you have not sufficiently proven that the wider adoption of "mustachianism" over time would decrease total worldwide spending and profits--and you will not be able to prove it because the answer to the question will depend on the policy responses to the shift and a number of other factors that involve agency.  But beyond this deflation and inflation are not just a function of spending, they depend on the supply of money and the velocity of that money, both of which are subject to forces other than consumer spending (including policy responses) so again I don't see a facile answer but multiple possibilities.  Your doomsday thinking is one possible outcome that you seem to think is a certainty. 

Again, this aligns with what I have stated above.  Your only quibble here and with the paragraph that I deleted because we were in agreement are minor expectation items.  Further, there is no doomsday scenario in any of my posts.  You are making that up to support an argument of some sort that we're not really having. 

I prefer to use my imagination.  Just to use one simple example, imagine a version of helicoptor money where every citizen receives a guaranteed minimum income as a deflation fighting policy response.  That would be great for mustachians and good at fighting deflation.  Now you'd have a minimum income as a floor and it would be even more the case that the labor you choose to contribute would not be to provide for basic human necessities but in order to contribute something meaningful or make some extra money.  That's just one example of something that could happen.  Will it happen?  I don't know.  What would be the second order and third order effects (both good and bad)?  We could think about that and it could be an interesting thought experiment. 
I guess I prefer to debate things that happen in the real world.  Other economies have systems far different than ours does.  Everyone on this board either lives in those economies or has the freedom to move to them.  The fact that they don't is pretty damning to me.  They also have the ability to deploy their capital to those economies, but instead choose to park it in index funds dominated by the companies that make up popular Vanguard indices.  You see, capital has a spooky way of getting deployed to where it is used most efficiently.  People wish for their dollars to work hard in projects that are good risk-adjusted places to park it.  Again, if the scenario you're claiming was somehow feasible the money would already be deployed in this fashion.  With hundreds of countries with different economies, value structures, policy constructs, etc. the fact that capital is not currently deployed in a fashion like what you're espousing is damning evidence that it won't work. 

Further, if the capital allocation you seek aligns with "Mustachiasm" why are there not hoards of threads discussing how to account for the social value of money and how people are accepting lower returns, working longer, etc. to make the world a better place?  I see some signs of this in certain posts, but not the multi-page back and forth threads about 3% SWR versus 4% SWR where Vanguard indices dominate the discussion. 

My tendency is to want to open up the possibilities of the future with questions, not pretend I already know all the answers... why you insist that you have the right answers and that everyone on this forum is too dumb or stuck in their ways to intelligently debate with you puzzles me.

Yup....it is pretty frustrating when people make up arguments to respond to and construct straw man items instead.  Forgive me for my frustration.  This post was far better. 
Title: Re: why is deflation considered a bad thing?
Post by: mr_orange on August 23, 2016, 08:36:53 AM
Because it's a false dichotomy.  We have great companies that make great stuff, like lifesaving technologies and efficient means of transportation.  We also have dumb companies that make dumb stuff.  To hope that we get more great companies that make worthwhile stuff and less dumb companies that make junk is not disingenuous and I'm pretty surprised you would jump to questioning Arebelspy's integrity rather than asking questions first.   

Fine.  Invest in the "great companies" then and don't be lazy and invest in indices constructed largely from companies that "make dumb stuff."  I'm not questioning anyone's integrity.  I'm questioning their decision set and whether or not it really aligns with their values.  You really can't invest your money in the companies "making dumb stuff" and then berate the benefits you receive by using the profits they generate to provide for your lifestyle.  You can't have it both ways. 

In what ways?  I literally have no idea what you mean.  Do you have examples of "illogical extremes"?  I read these kinds of statements and I think "this guy is angry" but I don't get any information content from it.  Do you see that when you make an assertion like "the whole concept is taken to illogicial extremes" without any explanation of what you mean that I can't actually glean anything or evaluate for myself whether you are right or wrong?

You're free to think whatever you want to think as am I.  I have over 600 other posts you're free to review to get plenty of insight into what I mean.  There are plenty of electrons spilled over my assertion that people would be far better off investing their time in entrepreneurial pursuits, providing for society, and investing their time in this manner than there is in cutting out a $100 cable bill.  Feel free to review those posts.  I won't rehash them all here because you're too lazy to review them. 
Title: Re: why is deflation considered a bad thing?
Post by: poorboyrichman on August 23, 2016, 09:32:13 AM
The are no right or wrong ways to handle economies, there's degree's of control ranging from laissez faire based free trade to localised protectionism. Whatever ideology our society subscribes to, there are always winners and losers, in that sense there is no right or wrong, or good or bad. Just winners and losers.

If you want to protect your wealth, which by the way in monetary sense are just tokens of exchange, you need to understand each economic theory and their applications, then try to predict how the big dogs will play their next hand. It's pretty obvious what to do in a world where the top 1% manipulate most forms of wealth for their own gain, whether it is cash, bonds gold or stocks. You need to realise that monetary wealth is imaginary and begin to invest in other forms of capital, whether that be learning how to grow food, fix and make things, own and or productive businesses etc. If society collapses tomorrow as a result of the massive bust that will follow 90 or so years of Keynesian debt fuelled economics, you don't want to be the last many standing hoping that your imaginary horde of wealth will provide for you in retirement.

Be warned, the big one is coming.

Title: Re: why is deflation considered a bad thing?
Post by: Retire-Canada on August 23, 2016, 10:02:21 AM
Be warned, the big one is coming.

(https://guideimg.alibaba.com/images/shop/2016/02/08/31/south-park-they-killed-kenny-bumper-sticker_16838931.jpeg)

Thanks for the warning. I filed it in my list of doomsday apocalypse predictions under "Stock Market Zombie Apocalypse". I assume you weren't talking about "Giant Killer Asteroid". If you could tell me which decade or century this was going to happen it would be a bit more useful.
Title: Re: why is deflation considered a bad thing?
Post by: DavidAnnArbor on August 23, 2016, 11:24:47 AM
society collapses tomorrow as a result of the massive bust that will follow 90 or so years of Keynesian debt fuelled economic

I see societal collapse coming not from following Keynes inspired deficit spending, but rather from the European Union's experiment in government frugality, lowering outstanding government debt. The result of this austerity in Europe is high unemployment, poor stock markets, deflation, and recession. The societal collapse part comes in the rise of right-wing national parties in France, Austria, Hungary and other European countries.

No need to be afraid of Keynes inspired deficit spending, as long as the budget deficit doesn't go up more than the combined inflation rate and the real growth of GDP - this insures the Debt/GDP ratio is constant, sustainable, and safe.

Decarbonizing consumption to stop global warming would be ideal. Anyway, some of that spending comes from intellectual and intangible consumer goods, like music, film, games, e-books. So we can still have growing consumerism, an expanding GDP, and rising stock values.

Title: Re: why is deflation considered a bad thing?
Post by: ooeei on August 23, 2016, 12:27:28 PM
Because it's a false dichotomy.  We have great companies that make great stuff, like lifesaving technologies and efficient means of transportation.  We also have dumb companies that make dumb stuff.  To hope that we get more great companies that make worthwhile stuff and less dumb companies that make junk is not disingenuous and I'm pretty surprised you would jump to questioning Arebelspy's integrity rather than asking questions first.   

Fine.  Invest in the "great companies" then and don't be lazy and invest in indices constructed largely from companies that "make dumb stuff."  I'm not questioning anyone's integrity.  I'm questioning their decision set and whether or not it really aligns with their values.  You really can't invest your money in the companies "making dumb stuff" and then berate the benefits you receive by using the profits they generate to provide for your lifestyle.  You can't have it both ways. 


I'm not sure how you think someone can't wish people didn't buy dumb stuff, yet make money when they do.  I can work at McDonald's and say "Damn, wish this 300 lb guy would eat a salad at home occasionally instead of ordering three Big Macs for lunch every day." 

I work in oil/gas. I wish the world ran on solar power and rainbows, but it doesn't, so I don't have a problem making money from what we DO have.  I also hold broad index funds, and wish people wouldn't eat junk food as often even though I own a few companies that profit off of people eating junk food. 
Title: Re: why is deflation considered a bad thing?
Post by: mrpercentage on August 23, 2016, 06:51:41 PM
psst.. Mr Orange. I will tell you a secret. Most on here are readinging your post on a tablet that is steaming through their local internets overpriced redicu-speed supablast internet. Some have a Ferrari parked next to their yacht. No vetting here man.

I have been a serious tightwad this last couple years but now all my clothes are old and I'm tired of the cookie being 20 years away. $700 in presents this month not including new shoes and Bluetooth headphones for myself

Xbox one s, pavolok, a vintage judging gymnastics book, and every single Jack Johnson CD and the music video DVD (and it's not even pirated). 😏
And I Bought the Walking Dead Michone Series for me on 360 and I'm seriously debating buying Banks and Steelz because I love the song Giants

It feels like I punched Tyler Durdan in the face. And I liked it
Title: Re: why is deflation considered a bad thing?
Post by: Telecaster on August 23, 2016, 07:37:17 PM
"There were a number of nasty prolonged slumps under the gold standard. In particular the Panic of 1893 was associated with a double-dip recession that left industrial production depressed and unemployment high for more than 5 years."
http://krugman.blogs.nytimes.com/2011/01/30/recessions-under-the-gold-standard/

Yes, there was plenty of bad things that happened economically in the 1800s.  It was a full century long.

I'm curious about what GuitarStv had in mind, especially what he referred to as "the great depression."

Sadly, there was no amazing point to be made.  I have to confess mixing up my dates on that one.  :P

Actually, you might have been right anyway.  The Industrial Revolution occurred in the 1800s, so there was of wealth created and economic growth that hadn't been seen before.  But there were also a number of brutal economic recessions and they occurred much more frequently than they do today.

The lessons of the 1800s are mostly what not to do. 
Title: Re: why is deflation considered a bad thing?
Post by: aspiringnomad on August 23, 2016, 07:40:28 PM
"There were a number of nasty prolonged slumps under the gold standard. In particular the Panic of 1893 was associated with a double-dip recession that left industrial production depressed and unemployment high for more than 5 years."
http://krugman.blogs.nytimes.com/2011/01/30/recessions-under-the-gold-standard/

Yes, there was plenty of bad things that happened economically in the 1800s.  It was a full century long.

I'm curious about what GuitarStv had in mind, especially what he referred to as "the great depression."

Sadly, there was no amazing point to be made.  I have to confess mixing up my dates on that one.  :P

Actually, you might have been right anyway.  The Industrial Revolution occurred in the 1800s, so there was of wealth created and economic growth that hadn't been seen before.  But there were also a number of brutal economic recessions and they occurred much more frequently than they do today.

The lessons of the 1800s are mostly what not to do.

+1. Most of the 1800s were horribly unstable for nearly everyone in the US, including the few who could save enough to invest.
Title: Re: why is deflation considered a bad thing?
Post by: poorboyrichman on August 24, 2016, 04:03:51 AM
@lazarus_long, My post was tongue in cheek as was aimed to get people thinking about how they can protect themselves from deflationary collapse, that is avoid relying solely on financial capital, or tokens of exchange.

Sometimes I forget about the curse of knowledge (https://en.wikipedia.org/wiki/Curse_of_knowledge). Your world view is radically different to mine, primarily because we have been exposed to very different learning experiences. Your two attempts at discrediting my posts hint you make many assumptions about the economy and human society. Your assumptions may well be binding you to the dogma of human progress.

If you are truly interested in challenging your assumptions and understanding why a deflationary collapse is inevitable, PM me, and I will gladly share with you some excellent literature on the subject. Nothing I can say will lead you to change your mind, all I can do is give you the information and the means by which to search out your own conclusions.

It seems to me that most of the MMM forum would rather stick their fingers in their ears and pretend that everything is going to be ok rather than admit that human societies can decline and fall, just as has happened with every successful and prosperous civilization that came before our industrialised societies. A wise man takes the time to learn from the lessons of history.
Title: Re: why is deflation considered a bad thing?
Post by: Retire-Canada on August 24, 2016, 05:53:31 AM
It seems to me that most of the MMM forum would rather stick their fingers in their ears and pretend that everything is going to be ok rather than get depressed and deflected off course by various vague and unactionable doomsday predictions by people who have not established any credibility in the doomsday prediction field.

I fixed that for you. ^^^ ;)
Title: Re: why is deflation considered a bad thing?
Post by: arebelspy on August 25, 2016, 09:08:58 PM
It seems to me that most of the MMM forum would rather stick their fingers in their ears and pretend that everything is going to be ok rather than admit that human societies can decline and fall, just as has happened with every successful and prosperous civilization that came before our industrialised societies.

Of course that happens. 

I'm less interested in that fact than any sort of shred of evidence it'll happen in the next, oh, 50 years or so.

Say someone who was 45 in in 1970, and who said the same thing as you (all societies fall!) and acted on their assumption that the US would fall in the next 5-10 years (with increasing confidence as the Vietnam war happened, massive inflation in the 70s, then the Cold War, etc. etc. that it'll happen any day now).  And now, 46 years later, as they turn 91, they reflect back on how maybe a bit more of an optimistic outlook might have saved them.  ;)
Title: Re: why is deflation considered a bad thing?
Post by: mrpercentage on August 25, 2016, 09:42:42 PM
It seems to me that most of the MMM forum would rather stick their fingers in their ears and pretend that everything is going to be ok rather than admit that human societies can decline and fall, just as has happened with every successful and prosperous civilization that came before our industrialised societies.

Of course that happens. 

I'm less interested in that fact than any sort of shred of evidence it'll happen in the next, oh, 50 years or so.

Say someone who was 45 in in 1970, and who said the same thing as you (all societies fall!) and acted on their assumption that the US would fall in the next 5-10 years (with increasing confidence as the Vietnam war happened, massive inflation in the 70s, then the Cold War, etc. etc. that it'll happen any day now).  And now, 46 years later, as they turn 91, they reflect back on how maybe a bit more of an optimistic outlook might have saved them.  ;)

I certainly was too bearish going into this summer. So since everything is dandy, I triple-dog-dare the Fed to raise. Make it half a point 😃
Title: Re: why is deflation considered a bad thing?
Post by: Chargem on August 26, 2016, 03:03:02 AM
It seems to me that most of the MMM forum would rather stick their fingers in their ears and pretend that everything is going to be ok rather than admit that human societies can decline and fall, just as has happened with every successful and prosperous civilization that came before our industrialised societies. A wise man takes the time to learn from the lessons of history.

I have a well reasoned and meticulously thought out plan for what I am going to do if human civilisation collapses: Die. If life becomes about spending all day, with no recreation time, struggling to subsist, then I am out. As this is a very low resource plan, I am 100% prepared for your fears to come true. I am also then free to allocate my resources towards civilisation not collapsing, just in case.

This is very much my plan B, I would much rather plan A of human civilisation continuing, quality of life, life expectancy etc. continuing to improve.
Title: Re: why is deflation considered a bad thing?
Post by: GuitarStv on August 26, 2016, 06:46:25 AM
It seems to me that most of the MMM forum would rather stick their fingers in their ears and pretend that everything is going to be ok rather than admit that human societies can decline and fall, just as has happened with every successful and prosperous civilization that came before our industrialised societies. A wise man takes the time to learn from the lessons of history.

I have a well reasoned and meticulously thought out plan for what I am going to do if human civilisation collapses: Die. If life becomes about spending all day, with no recreation time, struggling to subsist, then I am out. As this is a very low resource plan, I am 100% prepared for your fears to come true. I am also then free to allocate my resources towards civilisation not collapsing, just in case.

 . . . and I for one will eat your corpse for nourishment as I beat off the other savages with your sharpened shin bone and build myself a kingdom of fear ruled by my iron fist.  Fortunately all that this plan requires is that I stay fit and bloodthirsty.  It still allows me to allocate my resources towards civilization not collapsing, just in case.

:P
Title: Re: why is deflation considered a bad thing?
Post by: mr_orange on August 26, 2016, 06:07:34 PM
What you have in common with some of the other "Cassandras" on this thread is that you predict a bunch of stuff and then don't get into specifics about why you think it is true or whether you might be wrong.  Then when challenged or questioned, you don't engage with the particular challenges and questions, instead saying "nothing I can say will lead you to change your mind". 

Funny....I really think you pulled this exact technique in a roundabout way in response to my post above.  Pot...meet kettle. 

I've been super tied up this week and just logged in after several days of inactivity.  I do share your assertion that people are unlikely to change their mind much based on random ramblings from internet posts for something as loaded as social science.  We're pretty far off topic anyway and the OP is probably quite annoyed at this point.  I'll let my second attempt to bow out of this thread be my final one. 
Title: Re: why is deflation considered a bad thing?
Post by: PizzaSteve on August 27, 2016, 08:56:51 PM
Interesting thread.

Thanks to the usual suspects for interesting dialog.

Hopefully, on topic, this is an interesting article on how deflation can impact real estate wealth creating strategies.

http://www.innovativewealth.com/inflation-monitor/deflation-how-a-mortgage-can-destroy-your-real-estate-wealth/ (http://www.innovativewealth.com/inflation-monitor/deflation-how-a-mortgage-can-destroy-your-real-estate-wealth/)

So for me, deflation is not as scary as some are posting, as I think the information about how to live well during a possible deflationary cycle would enable plenty if jobs, productive life styles and allow for 'off the books' wealth creation. In fact MMM forums is a perfect example.  Mostly free, very valuable and doesn't require a trust fund or Ivy League education to access.
Title: Re: why is deflation considered a bad thing?
Post by: nobodyspecial on August 28, 2016, 08:09:25 AM
Quote
For example, one could argue Japan has been more or less doing fine during their recent decade plus period of deflation and stock market stagnation (by traditional measures).
But Japan can be regarded as essentially a retired person.
The population is old and shrinking, their economy is essentially exports, they just don't need much consumption.
Imagine if every worker was replaced by automation - Japan would be fine

The same isn't necessarily true for other countries and can't be true for the world as a whole.