What you are describing is economic contraction, it seems. I undeterstand that deflation often comes along with contraction. But there are many examples in history with economic expansion accompanied with negative inflation rates (Industrial Revolution, 1920's in a few countries)
Originally Posted by ptgatsby
Also, for my firm, for my own self interest, wouldn't I want to produce things with less man-power? and wouldn't I want to target markets with inelastic demand?
People will always need to eat. They will always need some amount of heat and energy. We can conserve to some extent, but at some point we cannot demand less. Though we can always look for these things at lower costs.
There are two questions then:
1) What ends this cycle of contraction during a deflationary period?
2) Why doesn't the "good" deflation also create an economic contraction?
Can you imagine another mode of the economy where people only produce goods with inelastic demand at cheaper and cheaper prices? or goods for what is necessary to make advances of this sort at cheaper and cheaper prices? The economy is increasing in real GDP terms, but deflation is still there and it doesn't matter what happens to the nominal GDP.
Consider the example from 1869-1896, Real GDP grew 4% per annum while price changed -1.8% per annum. This was the direct result of technology (The Industrial revolution).
The particular rental examples make sense to me, and the basic incentives to not borrow or lend make sense in that context (and presumably this is the reason for continued monetary deflation). I had taken these sort of decisions for granted. But I don't believe that all investments are equal.
Technology is a very different sort if thing. We are actually changing the production rate in a sustainable manner with technology. One can even imagine a state of the world where technology provides for all needs/wants without anyone needing to do work--one distopian vesion is given in "The Matrix."
This is a completely made up example, but I don't know why something similar couldn't happen.
Lets say I am a custom widget packager and it costs me $0.20 per widget to package right now. At -2% inflation, it will cost me $0.196 per widget next year, $0.192 the following year, $0.188 the year after that.
Lets say I'm selling the widget packaging service at $0.60 per widget right now. Assuming the same -2% inflation, I will get paid $0.588 per widget next year, $0.576 the next year, and $0.565 the year after that
Assume, I package 100000 units each year, and I have an cash account that pays 3% nominal interest.
Let's examine two senarios in terms of what we can do with $3000.
Scenario 1: We just keep it (and our profits) in a cash account. After the 4 years described we have ~$166K in 4-year-from-now-dollars.
Scenario 2: We upgrade to a modern packager droping the cost by a factor of 10 by using all $3000.
It now costs me $0.02 per widget to package right now. At -2% inflation, it will cost me $0.0196 per widget next year, $0.0192 the following year, $0.0188 the year after that.
Let's make the senario a little more bleak by saying that my lay-offs, as well as others makes the price inflation -8% per year. Then the widget packaging service will pay $0.60 per widget right now, $0.552 per widget next year, $0.508 the next year, and $0.467 the year after that
In this senario we only have our profits go into our cash account. We will end up with ~$215K in 4-years-from-now-dollars.
So despite the deflation, the investment still makes sense. From the perspective of a firm, investments can still make sense if they are good enough.
It's weird, I know I am arguing a minority position among economists (minority among both liberals and conservatives), but I am trying to wrap my mind around the Neo-Keynsian view that seems to prevail. I think the hard-currency vs. central banking discussion you and Laterelus had is germain to my misunderstanding, but I don't even have a vague idea how it fits in.