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  1. #1

    Default What's wrong with a little deflation?

    I've been hearing on the news that deflation is a greater risk to the economy than hyperinflation.

    I believe the basic idea is that people will spend less overall because everything will be cheaper in a little while. So this means less consumption overall, which leads to leads to further drops in price or drops in production. Drops in production, lead to unemployment, and further drop in demand. Essentially, the economy contracts, and keeps doing so.

    This is problematic. But is it not inevitable?

    Also, we see this phenomenon in electronics all the time. The computer, TV, whatever, you buy today will be either loads cheaper later than it will be today (or you'll be able to get a much better product for the same money). This phenomenon was even true during the dot-com BOOM of the 90s. Nevertheless, despite the fact that electronics prices were coming down exponentially, the industry was booming in the 90s.

    How was that possible? Can we not replicate that formula for the rest of the economy?

    The way I see it, semiconductors get cheaper to make at an exponential rate due to advances in manufacturing technology. So cannot suppliers of other goods, find technological tricks to make their stuff cheaper at a rapid rate?

    Maybe it will be business investment and consumption that pulls us out of the deflationary risk. It would be about time they did their part, instead of consumers.

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  2. #2
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    Deflation is bad for the average American consumer, because they owe. The real value of their debts increases, and they can't pay it off, bad news.

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    Lallygag Moderator Geoff's Avatar
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    Quote Originally Posted by Jack Flak View Post
    Deflation is bad for the average American consumer, because they owe. The real value of their debts increases, and they can't pay it off, bad news.
    I suppose the problem here is that even if a central bank sets the interest rate at zero, the banks will always charge something to consumers, continuing the widening of what is owed, and what it is worth. At least with inflation, the scales are the same side of zero.

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    Senior Member ArbiterDewey's Avatar
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    Quote Originally Posted by ygolo View Post
    The way I see it, semiconductors get cheaper to make at an exponential rate due to advances in manufacturing technology. So cannot suppliers of other goods, find technological tricks to make their stuff cheaper at a rapid rate?
    No. To find some technological trick or advance would ultimately hurt the economy. If the trick could be used on a wider scale (more than one business) it would be scrapped immediately, because the overall effect would be more product (say via better robot) produced more efficiently, but a large-scale lay-off to cover price of upgrade as well as a lighter demand for human assistance. Multiplied by X businesses = Lots of unhappy unemployed people + further drop in economy.

    lol...I hate capitalism. Especially in extreme examples like these.

    On the other hand, suppliers (assuming the US is in question here) would just increase the price of materials, LOL.

    Do note: I'm talking out of my asshole here. Some parts may be relevant/true, but most of the others requires information I don't have to judge this accurately and/or say anything relevant/true.
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    Senior Member miked277's Avatar
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    pathwise dependent FDG's Avatar
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    Quote Originally Posted by ArbiterDewey View Post
    No. To find some technological trick or advance would ultimately hurt the economy. If the trick could be used on a wider scale (more than one business) it would be scrapped immediately, because the overall effect would be more product (say via better robot) produced more efficiently, but a large-scale lay-off to cover price of upgrade as well as a lighter demand for human assistance. Multiplied by X businesses = Lots of unhappy unemployed people + further drop in economy.
    You're forgetting the basis of the capitalist economy: competition. If the technological trick could make a business sell something more cheaply than its competitors, then he will use it to raise profits (I'm of course supposing that the "trick" results in a lowering of costs). Then - unless large economies of scale were present, in which case we'd enter a monopolistic regimen - the competitors would be forced to adopt the same technological advance, lest perishing. This is the reason why neoclassical economic theory predicts that the more a market is near the idea of perfect competition, the more the margin of profit will be lower.
    A result similar to the one that follows from your reasoning can be considered for a sector of the economy with some (<10) state-owned enterprises.
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  7. #7

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    Quote Originally Posted by miked277 View Post
    I like these articles.

    From the first one, to illustrate my point further:
    So far we have only looked at part of the equation, the supply of money. But what happens if the quantity of goods available increases? What if instead of having ten items we build ten more? We now have twenty items and only $10. 00 so once again each item is worth 50ó.

    This form of deflation is the good type. Everyone assumes that deflation is bad because the last major deflation that we had was during the "Great Depression" so deflation and Depression are synonymous in many peoples minds. In actuality if prices go down because the goods can be manufactured more cheaply this ends up increasing everyone's wealth.

    This is exactly what happened in the late 1990s , with cheap productivity available from former Communist countries the quantity of goods is increased while the money supply increased at a slower rate.
    So here's my point. We seem to have a deflationary threat due to shrinking credit (which sets of the bad kind of deflation). Instead of trying to delay the inevitable with bail-out after bail-out and price subsidies, why not encourage "smarter" production? That is, feed off of the bad deflation to create good deflation?

    If worker wages and company profits can be kept relatively flat compared to the drop in prices for goods, then we are actually doing well. The numbers (nominal profit, nominal wages, nominal prices) may all be going down, but real value is being created if the prices are coming down faster than wages and profits.

    We've relied on the consumers to pull us out of prior recessions, but I think it is the corporations that need to pull us out of this one. That is with much more focus on making things that consumer WILL buy more efficiently, instead of trying to PERSUADE consumers to buy more. This will mean increased real demand in technology and R&D, and the supplies needed, which then creates a positive feedback for real growth in the economy while bringing down nominal prices.

    In short, if the right incentives are placed, I think deflation could be good for innovation. It will be in corporate self-interest to invest in technology, since those who do it earliest in this climate will be the earliest to take profits.

    Accept the past. Live for the present. Look forward to the future.
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    "[A] scientist looking at nonscientific problems is just as dumb as the next guy." Richard Feynman
    "[P]etabytes of [] data is not the same thing as understanding emergent mechanisms and structures." Jim Crutchfield

  8. #8
    Order Now! pure_mercury's Avatar
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    Quote Originally Posted by ygolo View Post
    I like these articles.

    From the first one, to illustrate my point further:


    So here's my point. We seem to have a deflationary threat due to shrinking credit (which sets of the bad kind of deflation). Instead of trying to delay the inevitable with bail-out after bail-out and price subsidies, why not encourage "smarter" production? That is, feed off of the bad deflation to create good deflation?

    If worker wages and company profits can be kept relatively flat compared to the drop in prices for goods, then we are actually doing well. The numbers (nominal profit, nominal wages, nominal prices) may all be going down, but real value is being created if the prices are coming down faster than wages and profits.

    We've relied on the consumers to pull us out of prior recessions, but I think it is the corporations that need to pull us out of this one. That is with much more focus on making things that consumer WILL buy more efficiently, instead of trying to PERSUADE consumers to buy more. This will mean increased real demand in technology and R&D, and the supplies needed, which then creates a positive feedback for real growth in the economy while bringing down nominal prices.

    In short, if the right incentives are placed, I think deflation could be good for innovation. It will be in corporate self-interest to invest in technology, since those who do it earliest in this climate will be the earliest to take profits.

    The classic Buckleyite example is the man making a marginal income, i.e., the guy just making ends meet. If we have inflation over the rate of economic growth (as many people seem to feel is fine), then the marginal income suddenly becomes submarginal. The same amount of money has less purchasing power. If we have deflation, however, but wages/salaries remain constant, then voila! People are actually better off. We are seeing it in one sector with transportation costs right now. Hopefully, it spreads to food soon.
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    Senior Member ptgatsby's Avatar
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    Quote Originally Posted by ygolo View Post
    That is, feed off of the bad deflation to create good deflation?
    How? Every effect I can think of monetary deflation provides a negative incentive for capital investment, efficiencies and so forth.

    As far as "better off when prices drop". Wages are sticky, prices are not. The natural outcome is unemployment.

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    Senior Member Lateralus's Avatar
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    Quote Originally Posted by ptgatsby View Post
    How? Every effect I can think of monetary deflation provides a negative incentive for capital investment, efficiencies and so forth.

    As far as "better off when prices drop". Wages are sticky, prices are not. The natural outcome is unemployment.
    There's a lot of wage fixing going on; minimum wage laws, unions, etc. Many employers simply don't have the freedom to adjust wages they way they have to adjust prices.

    That said, industries where employee pay is allowed to vary will have fewer jobs lost. The appraisal firm where I worked adjusted pay downward in late 2007. The appraisers didn't like it, but they understood, and thankfully no government or union officials came in and said "No, you can't do that". The alternatives would have been to fire half of the office or to go out of business.
    "We grow up thinking that´╗┐ beliefs are something to be proud of, but they're really nothing but opinions one refuses to reconsider. Beliefs are´╗┐ easy. The stronger your beliefs are, the less open you are to growth and wisdom, because "strength of belief" is only the intensity with which you resist questioning yourself. As soon as you are proud of´╗┐ a belief, as soon as you think it adds something to who you are, then you've made it a part of your ego."

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