Author Topic: why is deflation considered a bad thing?  (Read 15950 times)

mohawkbrah

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why is deflation considered a bad thing?
« 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)

Drifterrider

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Re: why is deflation considered a bad thing?
« Reply #1 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. 

2Birds1Stone

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Re: why is deflation considered a bad thing?
« Reply #2 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.

acroy

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Re: why is deflation considered a bad thing?
« Reply #3 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.

acroy

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Re: why is deflation considered a bad thing?
« Reply #4 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.
« Last Edit: August 05, 2016, 08:55:35 AM by acroy »

dandarc

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Re: why is deflation considered a bad thing?
« Reply #5 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/

The fundamental problem with deflation is that it encourages people to wait to buy.

acroy

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Re: why is deflation considered a bad thing?
« Reply #6 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/

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!

acroy

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Re: why is deflation considered a bad thing?
« Reply #7 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 ;)

GuitarStv

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Re: why is deflation considered a bad thing?
« Reply #8 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?

Jack

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Re: why is deflation considered a bad thing?
« Reply #9 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. It's "buying" labor. It's "buying" primary production. It's "buying" research into new technology.

Deflation, in contrast, reduces the velocity of money and thus reduces production and investment.

acroy

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Re: why is deflation considered a bad thing?
« Reply #10 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. It's "buying" labor. It's "buying" primary production. 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.

TheAnonOne

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Re: why is deflation considered a bad thing?
« Reply #11 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. It's "buying" labor. It's "buying" primary production. 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.

acroy

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Re: why is deflation considered a bad thing?
« Reply #12 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



GuitarStv

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Re: why is deflation considered a bad thing?
« Reply #13 on: August 05, 2016, 11:01:43 AM »
Didn't something pretty bad happen to the US economy during the 1800s?

acroy

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Re: why is deflation considered a bad thing?
« Reply #14 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.

acroy

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Re: why is deflation considered a bad thing?
« Reply #15 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.


Industrial Index went from about 0 to 1000+ over the same time period


Possibly deflation is not the all-consuming demon it is made out to be.

Jack

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Re: why is deflation considered a bad thing?
« Reply #16 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.

GuitarStv

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Re: why is deflation considered a bad thing?
« Reply #17 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?

acroy

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Re: why is deflation considered a bad thing?
« Reply #18 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.

arebelspy

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Re: why is deflation considered a bad thing?
« Reply #19 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?
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DavidAnnArbor

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Re: why is deflation considered a bad thing?
« Reply #20 on: August 21, 2016, 08:49:50 AM »
Yes there were several panics in the late 1800's that devastated the economy.

arebelspy

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Re: why is deflation considered a bad thing?
« Reply #21 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."
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DavidAnnArbor

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Re: why is deflation considered a bad thing?
« Reply #22 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/

DavidAnnArbor

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Re: why is deflation considered a bad thing?
« Reply #23 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/


 


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Re: why is deflation considered a bad thing?
« Reply #24 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."
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DavidAnnArbor

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Re: why is deflation considered a bad thing?
« Reply #25 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

GuitarStv

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Re: why is deflation considered a bad thing?
« Reply #26 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

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why is deflation considered a bad thing?
« Reply #27 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.

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Re: why is deflation considered a bad thing?
« Reply #28 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.

mrpercentage

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Re: why is deflation considered a bad thing?
« Reply #29 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
« Last Edit: August 21, 2016, 01:15:21 PM by mrpercentage »

nobodyspecial

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Re: why is deflation considered a bad thing?
« Reply #30 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. 

Classical_Liberal

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Re: why is deflation considered a bad thing?
« Reply #31 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.

nobodyspecial

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Re: why is deflation considered a bad thing?
« Reply #32 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.

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Re: why is deflation considered a bad thing?
« Reply #33 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.

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Re: why is deflation considered a bad thing?
« Reply #34 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
« Last Edit: August 21, 2016, 04:14:01 PM by waltworks »

nobodyspecial

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Re: why is deflation considered a bad thing?
« Reply #35 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.

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Re: why is deflation considered a bad thing?
« Reply #36 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.

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Re: why is deflation considered a bad thing?
« Reply #37 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. 

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Re: why is deflation considered a bad thing?
« Reply #38 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.
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Re: why is deflation considered a bad thing?
« Reply #39 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. 

arebelspy

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Re: why is deflation considered a bad thing?
« Reply #40 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.
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mrpercentage

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Re: why is deflation considered a bad thing?
« Reply #41 on: August 21, 2016, 07:10:17 PM »
You cant live off cream without lots of milk.


mr_orange

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Re: why is deflation considered a bad thing?
« Reply #42 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. 

arebelspy

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Re: why is deflation considered a bad thing?
« Reply #43 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.
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mrpercentage

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Re: why is deflation considered a bad thing?
« Reply #44 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.

waltworks

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Re: why is deflation considered a bad thing?
« Reply #45 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

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Re: why is deflation considered a bad thing?
« Reply #46 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.
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Re: why is deflation considered a bad thing?
« Reply #47 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


mr_orange

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Re: why is deflation considered a bad thing?
« Reply #48 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. 

arebelspy

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Re: why is deflation considered a bad thing?
« Reply #49 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.
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