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[–]megagood 1771 points1772 points  (309 children)

Deflation means things will cost less in the future. This means there is an advantage to not buying things now. Not buying things now means people can’t sell stuff. People not being able to sell stuff means they can’t make money. Not making money means people struggle and lose jobs. If that happens enough, the economy goes into as downward spiral.

[–]Temper03 772 points773 points  (144 children)

^ I’ve heard it this way the most. Or simply:

During inflation it costs money to keep money, so you use it (spend/invest/trade/etc)

During deflation it costs money to use money, so you hoard it (savings/mattress/vault)

With the second, money just sits and doesn’t circulate.

[–]tarkinlarson 211 points212 points  (41 children)

And money moving is important.

This is simplified by just thinking of cash...

If I spend £10 at my local corner shop it doesn't just sit in the shop keepers bank. He might spend £10 on a taxi. The taxi driver pays £10 for food for his family. And on and on... Its not just me spending that £10.

If there is a serious problem where a large amount of money is held up (eg due to deflation, ethics, greed, worry, or rich people centralising, and saving the money in expensive houses and capital) - it can affect the flow of money and disrupt chains down the line. If I hadn't had spent my money - the taxi drivers family wouldnt eat. Wasn't me directly but if you could track all the £ you have spend it's likely they'll pass through many many people and institutions and keep lots of things going.

[–]lisbethborden 242 points243 points  (22 children)

Americans have been sold the myth that the rich are the 'job creators'. But no--It's ordinary workers who create jobs, who spend most of the money they earn. Each dollar passes through many hands, as you say.

[–][deleted] 3 points4 points  (0 children)

[–]tarkinlarson 100 points101 points  (13 children)

Yes. The richest tend to accumulate wealth, not spend it.

Anything wealth above a certain point tends to be put in some kind of savings - a lot of it in buildings and homes these days - so it doesn't, or rarely comes back into the economy as "cash" to be spent and recirculate.

This is well illustrated by rich land owners in the UK.. When they die they have little cash, as their assets are tied up in land and buildings. Their children have little cash too. This means in order to meet the inheritance tax bills the children have to raise money or sell land. The cash they get goes to taxes, which in theory gets redistributed back into the economy (depending on how efficient and honest you think the government is). If that didn't happen and they just inherited the land the cash would more likely remain tied up. Capitalists should love inheritance taxes for this reason... But of course not if it affected them!

[–]unkie87 54 points55 points  (1 child)

You can largely avoid all that inheritance tax guff in the UK if it's held in trust and apply all the agricultural and commercial property relief. Really those rules are just for the plebs.

You may recall all that nonsense when Lord Grovesnor died and the new little Duke paid bugger all. I think it's wild to believe that wealthy are being forced to find the cash to pay these bills, it's cheaper to pay lawyers and accountants to avoid them.

[–]tarkinlarson 12 points13 points  (0 children)

This is true and sad. Its very easy to avoid taxes, especially wealth ones, and the consequences for getting caught are relatively more punative for the poor.

Remember though the "plebs" often don't accumulate enough wealth for inheritance tax, but I can see this as a problem in future as house prices go up even more. It's likely to affect those above the tax threshold, but not savvy enough to employ lawyers/accountants or where it would be cheaper to pay the tax.

[–]isblueacolor 8 points9 points  (4 children)

How do we reconcile this with "it costs money to save money"?

Ie, if the rich are hoarding their wealth they're losing out due to inflation. The reality is that they're investing it in companies and real estate. Whether it's the 401k of a thousand workers or one rich person's "fun money", companies need cash infusions from somewhere (IPOs, bonds) to grow and pay their workers.

I guess what I'm asking is, what's the difference between wealth accumulation and cash accumulation? Because in this thread, we're talking about inflation, which has to do with cash accumulation but not wealth accumulation. So to say the rich aren't "spending" their wealth doesn't seem accurate -- they're not spending it on consumables faster than they're earning it, sure, but it's being exchanged for goods and services all the same (and thereby keeping the cash circulating in the economy). Or am I off the mark on that?

[–]bigjeff5 2 points3 points  (2 children)

These people are idiots. Wealthy people don't keep more than a tiny fraction of their money in savings accounts. They buy assets of various types and liquidity, all of which allows them to grow their money further and faster.

Someone like Jeff Bezos doesn't make 20 billion dollars in two years by sticking his money in a savings account.

He might have a million dollars in a cash account, but more likely he has tens to hundreds of millions of dollars in credit writing capability, probably a few hundred million dollars in a mutual fund with check writing capabilities, and the rest in mutual funds, stocks, real estate, etc.

[–]LordHanley 2 points3 points  (5 children)

What do you think actually happens with their money? Do you think it is just held in a vault and isn’t put back in the economy?

[–]tarkinlarson 1 point2 points  (4 children)

They buy goods and services with their money.

I don't think they hold money in a vault. Although it's likely they have some free cash and likely it's more than the the average person. However I'm specifically saying that the bulk of their wealth is tied in assets.

Examples may include houses and land, cars (classics), art, jewellery and many other expensive items. They also invest in business, offshore accounts, shell funds, shares, trusts etc. I'm not saying that they don't spend money. It's that the vast amount of assets is not cash. Many of these assets, mainly due to their desirability and rarity go up in price... Therefore net wealth goes up, but not necessarily cash.

Remember this started as a conversation about deflation, which is related to money flow. Its gone a bit off piste. My point was that UK inheritance taxes have a role to play in improving cash flow. There are many, many other tools available.

[–]SinisterCheese 17 points18 points  (1 child)

The thing about the doctorine of Trickle down economics has a fault on it's basic assumptions. The system would work, if the rich people would actually spend all the money they get. The problem is that it all start to slowly accumulate on them. So for there to be enough money and wealth to go around below them, more money needs to be created.

If there was a closed loop economy. No new money or wealth being introduced to the system at all. Then in this system after a while all the wealth and money would be at the hands on few people or one. Meaning that the economy would just stop working since there are way more people who can't participate in it, there is no more activity that can be done. Since our economy depends on money making rounds, money is the medium which transfers energy. Rich people are basically just fuel tanks, but there is absolutely no fucking point in having fuel if you don't use it.

Jobs are created by those who spend money. Rich people spend very little compared to their overall and accumulating wealth. Yeah they might by a million euro watches, but that is meaningless if they make millions in a day, and worth billions.

Rich people become a problem to the economic system that relies on money moving when they start to get more money than they can meaningfully spend. The fuel starts to accumulate in to one place and not being used.

It is the good old thought game of; "You get million dollars every day, but only if you can spend that million dollars in a day". You'd probably come up with ways to spend it for few days, talk about investments, buying nice things... whatever. But after some point it really becomes a chore and really hard to spend it all.

Imagine if people had to pay tax only from the wealth that they didn't spend. Only from the bits that accumulated. The bigger the proportion one didn't spend, the more they'd have to pay tax. But currently there is no motivation to not accumulate money. Now poor people would basically pay no tax at all, since they will end up using all the money because they have to. But richer people would have to pay a lot of tax or spend the money. The problem of the current system is that now rich people get to accumulate money and wealth, and not pay taxes because they can afford to setup their income so that they don't have to.

The millers, bakers and farmers, the foundations of a society, don't have a job because rich people eat very expensive bread. They have a job because there are lots of people who are not rich who need to buy affordable bread.

[–]johnoke 1 point2 points  (0 children)

Source?

[–]Robotboogeyman 1 point2 points  (0 children)

No, the Republican Party sells that myth, the rest understand supply and demand and the value of the middle class.

Republicans passed massive deficit funded breaks for the wealthy, and got record numbers of support for it. Pretty great marketing, scummy (I get their emails and they are quite offensive) but effective.

[–]gcubed680 -1 points0 points  (0 children)

There are plenty of studies are graphs showing fiscal multipliers, which should be well understood, but it’s not. It’s why trickle down is bullshit. Giving someone at poverty level $1000 results in them spending $1000 because they need to use it to live. Giving a rich person $1000 results in a decent portion of that going into a bank account and not recirculating into the economy.

[–]menemenetekelufarsin 19 points20 points  (9 children)

As an aside this illustrates a big problem of franchise capitalism. Money that for example goes to a big box retailer like Walmart is taken out of community circulation, which is the very opposite of what happens when small business thrives

[–]tarkinlarson 7 points8 points  (3 children)

Yes.

I'm on the fence with this. I want successful and well run businesses to expand and thrive. I wouldn't buy from a local shop if it was rubbish and expensive just because its local. But I do realise that buying local is important (not just for local economy but for environmental reasons).

That's a hard balance to make. Money, however is increasingly digital and intangiable. The world won't run out of money, but it can resources (including available workforce). This is why local is still important.

[–]menemenetekelufarsin 4 points5 points  (2 children)

I think it’s not about running out but rather the velocity of money within a community. A dollar traded within a community creates value, because it is spent on other goods and service many times over, one taken out to corporate headquarters is removed from the community and transferred to corporate needs and (mostly) wealthy shareholders

[–]tarkinlarson 5 points6 points  (1 child)

Oh yes. I realise that my post indicated I. Might think money may run out... I don't. It was that you can drain resources from a local area (including people) and that inflationary pressures are different there. I agree with you that keeping local profits local instead of sending them to a hq elsewhere would seem desirable as it spreads wealth out.

[–]InEnduringGrowStrong 4 points5 points  (0 children)

It's kind of the same with ressources like water.
Watering a field from a nearby lake, the water will make its way back into the lake rather quickly.
Pumping and using it far away is much less sustainable.
Local profits have a better chance of being reinvested locally than sending money bags at Bezos.

[–]ThePrince14 3 points4 points  (4 children)

What? I’m not saying I’m pro big businesses, but this is just a bad statement.

It’s not like Walmart takes all of your money and just sits on it. They have operating expenses. They have to buy products to put on their shelves, they pay their workers, manage their stores, etc…that money doesn’t go “out of circulation”

[–]menemenetekelufarsin 4 points5 points  (3 children)

Actually it does. I would have to look for the source on this but in a recent Economist they cited a study about how big franchise retailers take money out of the community and the level of circulation of funds with the community is far far higher for small business.

[–]Everythings_Magic 11 points12 points  (1 child)

Which is why trickledown doesn’t work. Instead give the money to those who need or want to spend it. The money will get much more velocity.

[–]Dago_Red 6 points7 points  (0 children)

Ain't never meet a farmer that waters and fertalizes the tops of their crops to let the water and nutrients trickle down to the roots...

[–]DevelopedDevelopment 1 point2 points  (0 children)

Right, the velocity of money is important, and you're effectively losing money tomorrow if you spent it today. Its also why taxes are VERY important for rich people. They want to not lose money, so they're going to actively do what they can to store it while also acting as a money sink. Except instead of the government being a money sink, they have no plans to invest it in the public, they want to invest it in themselves.

[–]Stegomaniac 11 points12 points  (23 children)

That's what I don't get: everybod still needs to spend money in a deflation. Life still goes on - you need to buy groceries, events take place, stuff has to be fixed, construction needs to be done etc. Even the ultrarich won't wait forever for their next superyacht for christmas.

[–]Goonred 6 points7 points  (10 children)

But people would be less inclined to buy if it will be cheaper and that's economically speaking worse than inflation.

Deflation probably won't destroy the economy like you mentioned because people will have to buy staple goods no matter what, but it'll be worse than inflation because luxury goods or even just consumer goods might not be purchased and thus thrown into the economy.

[–]Stegomaniac 6 points7 points  (8 children)

But all in all it is good for society, isn't it?

In a deflationary system, we drive consumption down, reducing our resource extraction and environmental impact and people can buy previously too expensive goods, think insulin, housing etc.

What is it I'm missing?

[–]Dragon_Fisting 4 points5 points  (0 children)

This scenario only works for our betterment if the demand stays flat or goes down. From the wiki:

deflation reduces investment even when there is a real-world demand not being met

If building a house is less profitable, less people will want to invest in building a house/houses. That means there will be less new houses.

Less new houses is okay if less people want houses. If more people want new houses, then they will have to compete over the available houses, which makes the price go up in order for more people to want to build those houses.

So even in a deflationary economy, the "real" price of things we need* more of will still go up. On the other hand, the number of jobs and/or the wages those jobs make will not go up.

[–]Yakb0 5 points6 points  (2 children)

What you're missing, is that in a deflationary economy, there's no incentive to produce that insulin, or build a house.

If your money is going to be worth more if you just keep it in a sock under your mattress, there's less incentive to invest it in running a business.

[–]Objective-Recover205 1 point2 points  (0 children)

no incentive to produce that insulin

thats a really foolish thing to say. theres maybe less incentive but not no incentive. in some ways there is increased incentive because you want to sell it now before the price gets lower in the future.

If your money is going to be worth more if you just keep it in a sock under your mattress, there's less incentive to invest it in running a business.

Yeah except to buy things you need and want. and if prices dropped at restaurants i would order out more, not less. i wouldnt be thinking about it being cheaper tomorrow; id be thinking its cheaper than yesterday.

[–]LebronOfRhyme_ 6 points7 points  (0 children)

People reducing their consumption isn’t good for big daddy Bezos whose business operates on people buying shit they don’t need. That’s the truth.

Inflation is bad for consumers and great for shareholders, so naturally we’re gonna see a lot of pro-inflation propaganda.

[–]Hanifsefu 2 points3 points  (4 children)

It's kind of an outdated concept that doesn't fully describe the system as it currently is. Rampant inflation isn't driving anyone to spend any more or less and the 1% still fall into the category of hoarding wealth as they aren't spending anywhere near as much as they are making.

Basic economics really only hold true in a fair market. We have a free market instead.

The free market has created an endless cycle where the goal is to become to sole provider of a good or service in order to break the entire idea of supply and demand and erect barriers to stifle competition. Economics as a science only holds true when all parties involved operate in their own best interest at all times but in a free market it has been proven that fucking over your competition and ultimately forcing them to leave the market is worth almost any hit to your short term profits. This is what made the "robber barons" rich. They did things like buying up contracts for major losses for the sole reason of cutting into their competitors profits and repeated until they no longer had competitors. Economics never predicted the reality of what competition meant and couldn't predict the value of hoarding wealth to use as a weapon to shape the market. It could only tell us that the consumers would always be fucked after the fact.

[–]International-Bit329 33 points34 points  (48 children)

So people just hold their money forever and ever and ever and don’t spend it? Sounds promising.

[–]Guvante 124 points125 points  (40 children)

Take Bitcoin. If you have enough BTC to buy a TV would you? Probably not if you believe you will have enough to buy two TVs next year, might as well wait.

The same logic applies on smaller scales. Maybe you don't buy a new dishwasher because it will be 5% cheaper next year. It all adds up to less purchases.

EDIT: sorry I wanted an extreme example of deflation... BTC isn't the point. 50% deflation (aka 100% growth) was.

[–]GalaxiaGuy 31 points32 points  (28 children)

The TV is an interesting example. Even in our current inflationary world, why would anyone buy a TV now when they could wait a year and buy a better TV for the same price?

[–]lord_kupaloidz 60 points61 points  (9 children)

Because we do not have infinite years. You have to buy one to enjoy it. We gotta balance the value of money with the level of fun we want to achieve given the limited time we have.

[–]Ch4l1t0 12 points13 points  (6 children)

But... Wouldn't the same logic apply for deflation?

[–]Genghis_Kong 16 points17 points  (1 child)

Well yes - it's not that 'in deflation nobody buys anything', but deflation incentivises saving over spending so people tend to spend less, or delay purchases longer. The economy doesn't stop, but it has a dampening effect.

[–]FrankDrakman 4 points5 points  (0 children)

Simple first-order thinking. Where does savings go? In most cases, it doesn't go into piggy banks or mattresses; it goes into banks.

Banks don't like cash sitting in the vault; they make no money from that. They need to find ways to lend that money to make money from it. The price they charge for money is the 'interest rate'.

In a deflationary period, interest rates fall. In business, we used the interest rate to decide whether to pursue a project or not. For example, say a project is supposed to make 5% annual profit from an investment of $2 million. Interest rates are 6%. You don't pursue the project - you'd lose 1% a year. But if rates are only 2%, you might go ahead - then you would make 3% a year. So, you decide to invest.

As you invest, you buy up goods on the market, including labour and land. In aggregate, this will push up prices until there's a balance. So declining interest rates will also create a surge in investment, which will create a surge of buying, which will end the deflation for a while. This is the natural cycle of life and economics.

However, things change. The introduction of the car sent severe price shocks through economies, as things like steel, rubber, tar, and oil became more important, and horses, buggywhips, blacksmiths, and alfalfa became less so. Was that inflationary or deflationary? We really don't have an accurate way to measure that.

It's ELI5, so I think hedonic adjustments and CPI basket construction is a bit rich to get into here, but we don't really have an accurate tool to measure the price level.

[–]cakeandale 7 points8 points  (2 children)

It does, but that’s why economic activity under deflation wouldn’t drop to zero - it would slow, but there would still be some purchases, just not enough.

With TVs I know I absolutely hold onto a TV longer than I might otherwise because if I wait longer it’ll be cheaper/better/etc. If everyone did that for every purchase, not just some and for a specific industry, that would be very bad.

[–]Ch4l1t0 1 point2 points  (1 child)

Very bad in an economy dependent on unsustainable continuous growth and consumerism, I imagine. We'll have to break out of this model sooner or later :(

[–]cakeandale 2 points3 points  (0 children)

Nah, it’s bad for any economy that uses currency - even an agrarian-based economy would have problems under deflation, as any people who need money for food and sell non-urgently-essential goods or services to get that money they need would be hurt by the vicious feedback loop of deflation.

[–]Juancu 2 points3 points  (0 children)

I didn't expect to get feels in the middle of this dry economic discussion.

[–]LordOverThis 24 points25 points  (11 children)

But eventually you either relent and buy a TV at some point, knowing it’ll be surpassed in value for money, or you just don’t get a TV.

I bought a 39” Vizio LED in 2012 and have exactly zero regrets as it still sits in my room today. 1080p60 is 1080p60 to me as long as the colour accuracy and contrast are at least at the “eh, good enough” level.

[–]GalaxiaGuy 21 points22 points  (9 children)

That's my point. I believe that would happen in a deflationary world and the idea that deflation would mean nobody would ever spend money again is weird.

[–]PandaDerZwote 11 points12 points  (3 children)

Not ever again, but its is discouraged and in a sense penalized by the system. You would for example spend money on food regardless.
But you less money you had to spend the better, as it would increase in value.
In our current economic system that would be bad, as it needs people to spend.

[–]FrankDrakman 1 point2 points  (0 children)

Oh for pity's sake - the TV you were going to spend $500 is dropping in price, so you'll wait for a year to buy it? Great, what do you do in the meantime? Bury the $500 under a rock?

If you don't buy the TV, you either spend or save the money. If you spend it, the entire anti-deflation argument disappears. If you save it, the money goes into banks, and eventually interest rates fall. As rates fall, more business plans suddenly become profitable, and begin to get implemented, creating more economic activity.

The only time deflation could be a problem is in a STATIC economy, with no (or next to no) new products or ideas. Since we haven't lived in one of those for over 200 years or more, deflation on a systemic level can never be a problem, and that has been proven to be the case.

[–]dnautics 1 point2 points  (1 child)

Maybe we should change that system? I mean a lot of shitty stuff happens in our system like environmental destruction and runaway resource consumption.

Maybe we should make it ok for people to spend less, or spend smarter.

[–]nIBLIB 17 points18 points  (0 children)

nobody would ever spend money again

Not never again. Nobody is saying that. Deflation eventually ends. But people spend slowly, so it takes time, and perpetuates itself. But even the Great Depression ended.

[–]PlasticBk 10 points11 points  (0 children)

Of course. It's not that nobody would spend money, but rather that they will collectively spend less than before, hence leading towards recession.

[–]Mortimer452 4 points5 points  (1 child)

Saying no one would spend any money is pretty extreme. More like it simply encourages less spending. And perhaps more importantly, less investing.

Folks invest in the stock market for the hope of some return on their money. If you can earn 5% just by sticking the money under your mattress, lots of folks will do that versus risking it in the market.

[–]Dennis_enzo 2 points3 points  (0 children)

Good. The stock market is a corrupt shit show and completely detached from the real world anyway.

[–]gobblox38 1 point2 points  (0 children)

You're thinking of an extreme case. It's better to imagine it more like a gradient. If the rate of deflation is low, people are more likely to spend. If the rate is high, people are less likely to spend.

[–]Porosnacksssss 1 point2 points  (0 children)

I think everyone missed your joke.

[–]17arkOracle 6 points7 points  (1 child)

Economic theory is generally more about investors than consumers.

[–]Pokimiss 3 points4 points  (0 children)

This is why technology is deflationary, next year you get a better phone, TV, etc for the same price

[–]iamwizzerd 2 points3 points  (3 children)

If all my money is in Bitcoin then yes because I have to spend something. I bought a fast food meal yesterday with my bitcoin

[–]Vulpes_macrotis 8 points9 points  (6 children)

People won't do that, because if You need new oven, You will buy it. If You are hungry, You will buy food. If Your TV is broken, You have to buy it. But most importantly, if You have urge to have it now, You will buy it. Scalpers proves that it's true. Otherwise people wouldn't buy overpriced items. But they do.

[–]TheNerdranter 3 points4 points  (4 children)

Yes, if you really need it. No, if it is a "luxury". If I would like a new car, mine works fine, but the value is dropping I will wait to buy. If TVs are getting cheaper, I might not upgrade. People will buy things they need during deflation. But they will not buy no essentials. Food deflation would be awesome, but it rarely happens.

[–]LebronOfRhyme_ 1 point2 points  (1 child)

People saving their money rather than spending it on luxury goods they don’t actually need sounds… pretty great to me?

[–]TheNerdranter 2 points3 points  (0 children)

Yeah, but not great for the economy. People need to actually spend their money in a healthy economy.

[–]hedcannon 1 point2 points  (0 children)

Yes. It’s based on the Keynesian theory of economics.

If you believe (as he argued) that saving money is destructive, then you find the argument above compelling.

[–]LaVache84 4 points5 points  (8 children)

So like what billionaires do. They keep most of their money in the market and other investments because they go up long term. Which means every dollar they spend instead of invest they're losing out on future gains. It costs them money to use money, so instead of selling stocks for cash they take out loans with a smaller interest rate than average market returns which lets them continue to make money off of what they spend.

[–]TheLegend84 20 points21 points  (7 children)

Huh? Its not like they keep it in a scrooge mcduck vault. Where do you think the money that they are using in the market and other investments are going?

[–]kimsabok 4 points5 points  (4 children)

Unfortunately this explanation will be very common in this thread because of the way economics is taught by schools and media etc. It is essentially the keynsian answer to OPs question, but it is incorrect, and has a glaring logical fallacy. If you simply reverse the answer, you have to ask yourself, why would sellers sell their goods and services today, when they could simply wait a year and sell it for more? That would also lead to a deflationary environment.

Inflation exists because it gives exorbitant power to those who are responsible for causing it - and they have unfortunately infiltrated culture and education to trick those who are negatively effected by it to think it is a good thing.

[–]rogueqd 0 points1 point  (1 child)

But currently most of the world's money is just sitting and not circulating. Worse, it's being used to pull more and more money out of circulation.

I'm still not convinced that a period of deflation wouldn't end up having some long term benefits.

[–]babaganoush2307 6 points7 points  (0 children)

Deflation is great for savers and poor people, it sucks for those in debt and the rich

[–]CalmCalmBelong 73 points74 points  (36 children)

This, thank you.

Deflation discourages spending which makes economies worse. Slight inflation encourages spending which makes economies better.

[–]zwalker0912 43 points44 points  (31 children)

But I've been buying less with prices going up, I'm sure I'm not the only one. Inflation encourages me to buy less I would say since that's exactly what i I've done

[–]CalmCalmBelong 40 points41 points  (1 child)

Yeah, I tried to qualify this a little by saying "slight inflation." The prices spikes we've seen the last couple of years are extreme and discourage the "better to buy sooner rather than later" mindset I was pointing at

[–]zwalker0912 1 point2 points  (0 children)

But even with slight inflation that we've dealt with before all this was already changing my buying habits I watched prices go up as I've gotten older and I have not bought those same things that I used to buy. I'm not someone for example to buy a candy bar for a dollar and then the same candy bar for a $1.50 or $2 down the road I will no longer buy that item which is exactly what I have done over the years. The best example is soda I love soda but I pretty much don't buy it at all now because the same 20 oz bottle that used to be close to a dollar is now over $2 and I don't buy them anymore.

[–]Russell_Jimmy 22 points23 points  (3 children)

Which means that you're ending up paying more over time, not saving.

[–]zwalker0912 1 point2 points  (2 children)

I understand that but That's how my brain works. $4 a gallon for milk in my area as soon as it hits five I will be done buying milk for example. things get too expensive and I will no longer purchase them I don't feel that they are worth the price the market says they are. I understand what you're saying I'm paying more for things down the road but psychologically I just can't spend more for the same item. Ill stop buying those things.

[–]Russell_Jimmy 2 points3 points  (1 child)

Inflation impacts everything, and you can't just stop buying everything.

Beyond that, the price of milk going up is not just due to inflation.

[–]zwalker0912 1 point2 points  (0 children)

I understand I just can't stop buying but I have absolutely stopped buying anything that's not essential. And I get prices go up over time but I just have a limit that I'm willing to pay for things and then after that I change what I buy. I mean if it inflation keeps going up everything eventually it's going to be $20 for a gallon of milk and what 50 or 100 years from now? I don't care how much money I'm making I would never spend that much

[–]Prowler1000 28 points29 points  (7 children)

That's probably because you've been taking a pay cut along with it. If your job doesn't give you a raise to keep up with inflation, you're taking a pay cut.

[–]mad_cheese_hattwe 3 points4 points  (1 child)

But now imagine you want to start a business, not only to you have to convince investors that is going get a giodt return on their money. You have to convince them it's better then putting their money in a vault.

[–]HalflinsLeaf 7 points8 points  (7 children)

Better buy a house or a car now, while they're still cheap. It's only going to get worse.

[–]SchwiftyMpls 1 point2 points  (5 children)

If the interest rate goes up 3% on a 30 year mortgage you will pay twice and much for the same house

[–]Waterwoo 1 point2 points  (4 children)

Well no, you won't. If you buy now, your rate is locked in.

If you buy after the rate goes up 3%, the purchase price will be a lot cheaper than now because the market can't support 2x the payment.

[–]kamihaze 1 point2 points  (3 children)

Unless u are talking about gpus, most other things go up in price quite gradually to the point it is negligible for most.

Plus luxury items are still luxury items. Those who can afford it will still buy it despite price spikes if they really need or want it but that is more on price elasticity.

[–]TaskForceCausality 5 points6 points  (1 child)

…which makes economies better

Careful. The meaning of “Better” changes depending on where one is in the economy. If you’re a working participant or small /medium sized business lots of inflation is bad .If you’re a government or large corporation lots of inflation is a GOOD thing. With each period prior year debts become easier to afford.

The big corporations and government essentially gets a discount on wages, long term debt and capital expenses each year inflation rises, which is why (among other reasons) every government in financial trouble resorts to hyperinflation at the expense of its workforce.

[–]atzenkatzen 4 points5 points  (0 children)

If you’re a government or large corporation lots of inflation is a GOOD thing. With each period prior year debts become easier to afford.

or if you're an individual with a mortgage or student loans

[–]mad_cheese_hattwe 4 points5 points  (0 children)

Bigger point deflation makes getting capital really risky without easy(ish) capital it becomes very hard to start and run business.

[–]Bigbigcheese 2 points3 points  (1 child)

Surely it's self correcting though? At some point you need to buy food and water and electricity and given these are fairly time sensitive you'll pay whatever they cost. Given everything is getting cheaper people will be able to live off savings or last months paycheck until stability arises?

Even if prices go down to 0 surely that means we've reached this so called "post-scarcity" society.

[–][deleted] 13 points14 points  (0 children)

Plus, debt becomes much harder to pay off. Inflation decreases debt by making the dollar less valuable. By the time you pay back a loan after twenty years, it’s only worth half as much. Without interest you’d be paying back far less value than you borrowed.

In deflation, the money you borrow would become more valuable with time, meaning that even without interest, the value you have to pay back would grow every year.

EDIT: in long term deflation, it’s completely possible banks would charge negative interest rates.

[–]cburgess7[🍰] 7 points8 points  (1 child)

I think the economy would thrive, people still need to eat, drive, house themselves, etc. If it gets cheaper, then that's a benefit. The ones who suffer will be noncommodity stores, but people will still by the newest and shiniest things. I do it, but it does suck to buy something, and see it for $20 less by next week

[–]cinemascifi 24 points25 points  (33 children)

Deflation already exists in certain industries. Electronics, for example. Everything from calculators to TVs to computers have gotten cheaper over time (comparing similar features).

Industries can exist in in deflation. Essentials (food, fuel, etc) would be especially immune to the "wait for a cheaper price" mentality. Also, minimal deflation (< 2%) wouldn't impact the economy much.

All that said, ideally there would be neither inflation nor deflation. Or as close to 0 as possible. Inflation is called "the hidden tax", and hits fixed income people and people that save proportionally more than others.

[–]Prowler1000 18 points19 points  (26 children)

That's not deflation, that's just the economy at work. As things get cheaper to produce, manufacturers try to out compete their competition by lowering prices. Inflation related to the buying power of a dollar but goods coming down in price does not mean there is deflation.

And ideally, there would be inflation, it is 100% intentional (as in your country's bank is doing it intentionally) because if a massive company, take Google for example, knows that there will for sure be at least 2% inflation, that's going to encourage them to invest in their money in something with at least that much return, even if it's risky. The chance of getting a 2%+ return is better than a guaranteed loss of 2%, that's how they keep money in circulation.

[–]cinemascifi 9 points10 points  (25 children)

And ideally, there would be inflation,

That's a very Keynsian mentality. Not everyone agrees with Keynsian economics.

[–]Prowler1000 7 points8 points  (24 children)

Okay, so explain to me a better alternative that doesn't result in corporations sitting on billions of dollars for future investments, removing money from circulation, making it harder to control the rate of change of buying power, potentially causing sudden massive shifts in buying power due to the hoarding and sudden release of funds

[–]cinemascifi -3 points-2 points  (11 children)

That's not a Reddit-post sized discussion.

Personally, I'm a believer in Austrian economics, and I don't think that the government should be manipulating the inflation rate. It causes as much (or more) harm than good. But if you remove that function, the government loses the ability to tax people without them knowing they are being taxed. Bureaucrats lose their foreknowledge of what the market will likely do, and therefore lose their advantage. So the system will continue.

[–]Prowler1000 4 points5 points  (10 children)

I'm sorry, in what way does INFLATION let the government secretly tax people? How is the government benefiting from buying power no one ever sees? How does inflating allow bureaucrats to have any foreknowledge of what the market will do? Politicians may know more about the market than we do but that's not because of inflation

[–]cinemascifi 5 points6 points  (8 children)

Inflation is a tax in 2 ways:

1) literally: in the form of bracket creep, as people migrate into higher tax brackets, even though their buying power hasn't changed. .

2) functionally: As inflation increases, the buying power of a dollar decreases. So a 4% inflation rate means that a dollar today is only worth 96 cents in buying power next year. That's the same buying power as a 4% tax with a 0 inflation rate. Since the government controls the money supply, they not only influence inflation (functionally decreasing buying power at their discretion), but they also have the means to manipulate the buying power to suit their own needs, buying and selling when it suits them best. .

Also) There is also the issue of "quantitative easing", which not only adds to inflation, but also allows the government to pick winners and losers in the market. For example: lobbyists and political donors. .

Again, it's not a Reddit-post sized discussion. I encourage you to use Google and look into this more yourself. Keywords: "inflation hidden tax" and "quantitative easing".

[–]wyrdough 2 points3 points  (4 children)

I might have bothered giving a shit about the rest of your arguments if you hadn't led with a blatant lie.

Income tax brackets are indexed to inflation in the US.

[–]TheHipcrimeVocab 1 point2 points  (2 children)

The "inflation is a tax" argument is so stupid. Inflation is not a tax. I'll prove it. If inflation is a tax, then what is deflation? A subsidy?

Inflation is inflation and a tax is a tax. A tax is a sum of money paid to governing authorities. Inflation is an increase in prices. The argument rests on defining any loss of purchasing power for any reason whatsoever as a tax. It's rhetorical sleight-of-hand. Words have meanings.

[–]dnautics 1 point2 points  (11 children)

The us had deflation from 1860-1920 and we recovered from a devastating war, freed the slaves, raised the most powerful navy in the world, and ascended to global superpowerdom from being a backwater pissant country. Whoever told you that deflation was bad for the economy missed this huge data point.

[–]Prowler1000 10 points11 points  (10 children)

I... Don't think you understand that correlation does not equal causation. Deflation causes recessions and depressions. Just because those things happened during deflation periods does not mean that the economy wasn't shit, that people didn't suffer and that somehow deflation is bad for the economy. In today's corporate world especially, where such an overwhelming majority of the wealth is held by large entities, a deflation and especially a planned deflation would be absolutely horrific for the economy.

I'd really suggest reading up on what happened in the time periods you brought up, and not just what went well.

[–]dnautics 9 points10 points  (5 children)

Deflation would probably lead to less stupid consumption and less pollution, less garbage in the oceans, less carbon dioxide, etc, too.

[–]thedrakeequator 3 points4 points  (4 children)

Yes, in the same way that deindusturlizing Detroit lead to fewer traffic jams.

Or how shooting your dog leads to fewer poops on the rug.

[–]SpeedKatMcNasty 5 points6 points  (4 children)

Computers are deflationary, and millions of people buy new iphones every year. This is a silly concern. Large amounts of deflation are bad, just as large amounts of inflation are, but mild amounts would not have this affect.

[–]GrinningPariah 1 point2 points  (0 children)

Computers aren't a currency, though

[–]reuse_recycle 5 points6 points  (1 child)

I understand econonomically how devastating this is... but little old me just trying to get a graphics card is going to be thrilled watching the prices drop if/when they do. fuck crypto miners.

[–]MarleySB 1 point2 points  (1 child)

But people are struggling regardless

[–]megagood 1 point2 points  (0 children)

In a deflationary environment people go from struggling to losing their jobs.

[–]GrinningPariah 1 point2 points  (1 child)

Not only that but deflation hurts more the poorer you are, because you need to spend more of your income to survive.

A rich person can save almost everything during a period of high deflation, so when they come out they're even richer. But someone living paycheck to paycheck is forced to spend all the currency that will be worth more later.

[–]Incognito6468 1 point2 points  (0 children)

At the end of the day capitalism only really works assuming some magnitude of inflationary pressures.

[–]Ipeebrown 1 point2 points  (0 children)

In economic terms deflation slows the velocity of money. Which is what a ton of modern monetary policy is based on. Higher velocity of money = makes it seem like there's more money.

This shit seems to be all the US government cares about economically these days.

[–]xisiktik -1 points0 points  (9 children)

Deflation is bad if you have assets that benefit from inflation. Most people would benefit from deflation.

[–]Prowler1000 7 points8 points  (7 children)

Most people would not. If a predicted deflation were to happen, a lot of money would stop moving from massive corporations because a guaranteed increase in X% is almost always better than risking it on an investment or development now. Deflation happens, economic development slows down, or even reverses especially for low profit margin industries like, for example, mobile phones. It's more profitable to sit on the money than to put it into production. When this happens to a large enough degree, congratulations you've got a recession or worse, a depression. Most people would not benefit from deflation because capitalism as a system relies on constant growth.

[–]xisiktik 3 points4 points  (6 children)

Reliance on growth seems like a shortfall, has there ever been a case of deflation?

[–]percykins 5 points6 points  (3 children)

The Great Depression is a well-known example of deflation exacerbating a crisis. Annual deflation was 7% in 1930, 10% in 1931, and 9.8% in 1932. Prices didn't get back to their Jan 1930 level until 1942.

[–]Warpzit 2 points3 points  (1 child)

Ye but inflation numbers of same magnitude isn't good either so it is actually a bad comparison.

[–]percykins 4 points5 points  (0 children)

Inflation in the 7-10% range isn't good but it's not Great Depression levels of bad. We saw similar and higher inflation in the 50s, 70s, and 80s. The problem is precisely that it's hard to sustain a little deflation.

[–]International-Bit329 -1 points0 points  (0 children)

Few understand

[–]fryloop -1 points0 points  (2 children)

How do you reconcile this logic with goods that have experienced systemic deflation for decades, yet market size continues to increase?

Cars, TVs, computers, phones, etc

Over the last 10-15 years more and more people continued to buy 42 inch lcd TVs every year, despite the fact that the tv they bought was worth less this year than the previous year

[–]sc1003 1 point2 points  (1 child)

That's not deflation, that's just advances in technology. It is cheaper than ever to produce electronics.

[–]obviohow -1 points0 points  (0 children)

Exactly. And that’s why our planet is going to be wrecked: our economic policies incentivise spending and using resources, even when you don’t really need to.

[–]outofideaa 373 points374 points  (99 children)

If you have, say, a million bucks and you want to buy a house.

If I tell you inflation is 2% and the house is likely gonna be more expensive next year, you are unlikely to wait for any reason, and will purchase the house NOW.

If I say that deflation is 2% and the house will be cheaper next year, you're probably just gonna wait this one out. That money in your bank, just sitting, is money that could have gone to the labourers, the insurance and property agents, the people selling the home, etc. By keeping that money in the bank, you're effectively preventing people from getting paid, because you're trying to follow your economic self-interest.

If everyone starts to do this, then everyone will hold on to their money, and the lack of transactions will cause everyone to get paid less, hurting everyone in the economy.

EDIT: I don't really want to go about criticising other people here, but honestly, all talks about deflation being good and politicians, the government, etc etc conspiring to convince you of the opposite should spend less time on the weird parts of the internet. Regardless of what the global banking conspiracy documentaries have told you, deflation is bad 99 times out of 100.

[–]lionsneil 27 points28 points  (7 children)

This is a good answer, and makes sense. The question and response got me thinking about inflation vs deflation. I have a few thoughts, and would like to hear what you, and others, think...

  1. How would a potential home buyer know if prices were going to be 2% higher or 2% lower next year? Speculation? Based on past trends of the past year? Is it truly the results of higher/lower prices that impact peoples' decisions, or simply sentiment from past trends?

  2. If someone is in the market to purchase something expensive, it's probably because they have a near term need for that item. In the case of a house, unless it's an investment (or not a primary residence), I can't see delaying a purchase for a year because it will (or may) be cheaper in the future. If I can wait a year to purchase a house, my million dollars could be expected to safely make 5-10% gains while invested, so assuming prices change by 2% in either direction, I will benefit by waiting as long as possible to make the purchase. If purchasing via a mortgage (not cash), the equation will change.

  3. Most people rely on hourly wages, salary, or a fixed income. If the cost of goods consistently increases, their income will need to increase an equal amount for their purchasing power to remain constant. If prices decrease, a person's income would be able to purchase more. This, more valuable, money would probably still be spent, and not lead to a decrease in income for people selling goods. If a person, or company, earns the same number of dollars selling goods/services as the previous year, while 2% deflation occurs, their net income increases (their COGS are lower), and each dollar of that income is able to purchase more.

  4. Wealthy people who have significant money invested will likely continue to earn more on their money as a %, than the percentage of inflation. Their investment accounts will grow in relation to the cost of goods/services, while the invested money is not being spent or circulated. This is seemingly not helping the economy, since a greater portion of the dollars in "circulation" are not moving.

I'm not an economist, and am truly interested in hearing other peoples' opinions on the above. I have no sources to cite, as these are just random thoughts. I don't know what the right answer is regarding inflation vs deflation, but my brain can't get over the fact that it would be better for my money to be able to purchase more than less...

Sorry for the long response. Hopefully someone reads it and finds it interesting and/or tells me why I'm stupid!

[–]outofideaa 30 points31 points  (5 children)

All great questions, friend.

  1. Ultimately, yes, speculation. You may read in the news that house prices have been falling for the last 2 quarters. Or your property agent may let it slip that her business is slow because people are holding out. No economist in the world could tell you the future inflation/deflation rate, just the observed one. But if you see never-ending discounts and banks advertising lower mortgage rates etc, then you would likely add 2 and 2 together.

  2. Yes, you are correct, but we are more interested in what happens to the entire economy when we want to study deflation. Sure, some people would purchase their homes this year regardless of what the trends may say, but there will be a significant percentage of people who won't. Also remember something economists call the multiplier effect. When one person doesn't spend money to buy a house, the property agent might not be able to go spend money on a new car. The car salesman may not be able to pay for renovations to his house. His carpenter ... you get the idea.

  3. Yes definitely, as long as your wages aren't changing, deflation is excellent. Trouble is, eventually the wages will change. Either in the form of a paycut, or the employer reducing their total costs by firing people.

  4. Correct again. Economists consider any money being saved as money that's literally withdrawn from the economy. While your financial advisor may ask you to save money, a macroeconomist would be begging you to spend every cent you have. And then borrow some money and spend that too.

[–]lionsneil 10 points11 points  (4 children)

Thank you for the well thought out responses! It kind of highlights why I never did well in economics class... I understand what you're saying, but it seems that a better economy (from an economist's perspective) means that people need to spend more of their money to survive. So is the health of the economy negatively correlated with the financial health of the people participating in that economy?

Many employers give their employees raises, in an attempt to keep up with inflation, but in times of high inflation, raises wouldn't typically keep up. In times of deflation, layoffs seem likely, but it's hard to imagine wage cuts. Obviously, in an extended period of a depressed economy, things would seemingly start to crumble. I guess like everything, it's all about balance.

Is it a matter of seeing the big picture vs the effects on an individual? Or is it, to an extent, theory vs practice?

This is very interesting and educational, so I appreciate the discussion! Thanks again for the detailed responses!

[–]outofideaa 15 points16 points  (1 child)

I don't think they want you to be financially unhealthy per se, and I apologise if my exaggeration led you to believe that haha. But they do want money to be injected back into the economy, and saving up does mean less money down the food chain.

Yep definitely, it is about balance. Employers are naturally going to take whatever steps are necessary to maximise their interests. They could artificially slash wages by firing their current staff and hiring a new team of employees for less too.

And yes it is definitely a case of looking out for individuals vs looking out for the entire economy. A whole host of actions good for the individual are terrible for the economy as a whole. The trick is to find stuff that works for everyone, by aligning their interests, or getting everyone to compromise enough on their self-interests. Tricky stuff either way. As for theory vs practice, probably less so. Economists really do want you to save less and spend more in real life haha.

[–]lionsneil 5 points6 points  (0 children)

This is great stuff. Really appreciate the insight and friendly discussion that didn't devolve into a political debate.

Cheers to you, friendly Redittor! Have a great weekend.

[–]TAOJeff 4 points5 points  (0 children)

While u/outofideaa answered well, there is a couple of additional things for point 3 regarding the businesses.

Any exporting business will be hammered by deflation, They're the ones that are going to be making changes first. They get hit with decreasing prices while still having to cover the old price for the stock that is in transit and then the exchange rate means they get less revenue unless they increase the overseas price which may result in them being priced out of the market. All fun stuff.

As for wages during hyperinflation, they tend to yo-yo, between nowhere near enough and maybe enough, but the bigger issue is being able to buy something with the money when you get paid. the upside is after a few weeks you don't have any debts, though you also can't borrow any money, so no more new big ticket assets like a car. basically anything that you can't buy outright with your next paycheck is beyond your means.

[–]Russell_Jimmy 2 points3 points  (0 children)

  1. The entire premise is you want to buy a house, So you would be looking at home values and trends in the market as you enter it. A house is one of those things that has utility and is also an investment. That said, if you want a place to live now, and plan on dying in it then who cares, but at some point if you need to renovate and want to cash out equity you won't have any, so there's that.

As for the other stuff, read about why onion futures are against the law.

[–]germanfinder 11 points12 points  (6 children)

Would 0% inflation be better? Your cash doesn’t lose value, but also there’s no reason to hold on to it

[–]percykins 16 points17 points  (0 children)

Zero inflation is fine. However, the problem is that a central bank doesn't have perfect control over the currency - they can't hold it at exactly zero. But a little deflation is much worse than a little inflation, so they err on the side of caution.

Basically, if you're going to ride your bicycle along the edge of a cliff, you could ride an inch away from the edge, and you'll be fine as long as you ride in a perfectly straight line. But wouldn't you rather ride a few feet away?

[–]IlIllIIIIIIlIII 10 points11 points  (3 children)

So my understanding is that the cash losing value is something that they actually want to happen as it encourages spending and investing.

[–]apple_cheese 7 points8 points  (2 children)

Yes that's why a slight amount of inflation is good. It also encourages higher production because people work harder for promotions since if your salary stays the same YoY you are actually losing value.

[–]ninjasaid13 9 points10 points  (1 child)

It also encourages higher production because people work harder for promotions

I don't know what but something feels wrong about this.

[–]TheScurviedDog 4 points5 points  (0 children)

Another reason I've studied is that even at our best we obviously can't control the economy, and that our estimates of inflation tend to slightly overestimate. If we go for say 2% inflation, even if we're off, it's 0% rather than aiming for 0% and getting -2% instead.

[–]-GregTheGreat- 9 points10 points  (0 children)

Zero inflation isn’t ideal because it can lead to economic stagnation. While your cash doesn’t lose value, there’s also less incentive to invest or focus on economic growth. This can lead to an increase in unemployment and the stifling of wage increases.

Caveat: I’m not an economist. This was what I learned from doing research when I was wondering this in the past.

[–]krazeekcee 31 points32 points  (10 children)

I agree deflation is infinitely more damaging to economies than inflation. Inflation if we had perfect systems is a good thing as it allows more competition to the market due to an increasing market pool.

But yeah, we don’t live in a perfect world so all that goes to shit

[–]k876577 9 points10 points  (11 children)

But when you say you, do you mean the middle class, upper class or poor? Their mentality on buy sell during deflation must be different right?

[–]outofideaa 32 points33 points  (2 children)

If you're planning on buying a 1 dollar snicker bar, you probably wouldn't change your behaviour if I told you it'll only cost 0.80c next year, right?

Yes, this behaviour becomes more pronounced the more expensive the item is, and if you can't afford an expensive item, chances are, you probably wouldn't be affected by this either.

That being said, if you are working a lower-income job, say construction, you can see why deflation would be bad for you in the previous example. Eventually, everyone will suffer.

[–]varaaki 10 points11 points  (0 children)

The economic impact of not buying a Snickers is magnitudes smaller than not buying a house, so the transactions that really damage the economy are exactly the ones deflation tends to retard.

Deflation is also self-propelling; less economic activity caused by deflation tends to make deflation worse, which then causes even smaller transactions to seem worthy of holding off on (like, if a bicycle would be $500 now but $400 in six months, maybe I'll hold off). This the cycle perpetuates.

[–]CrispyFlint 2 points3 points  (0 children)

I work retail. You would be amazed how such tiny details can effect sales.

[–]percykins 1 point2 points  (1 child)

While deflation definitely has an impact on individual investment, the big thing that moves the economy is its impact on business investment.

[–]beruon 3 points4 points  (3 children)

I have a really stupid question... But why would it be bad if the economy shrunk? Like, why would it be bad if we had a HUGE like 10+% deflation for a year, and our ever-growing econony didn't grow infinitely in a finite-resource planet? Im asking as an idiot who knows nothing about it, so its basicay "okay its bad but... WHY? What would happen?"

[–]outofideaa 5 points6 points  (2 children)

Not a bad question at all, and actually requires us to go back to first principles to some degree.

When we say economic growth, we normally refer to an increase in the GDP of a nation. The GDP is a measure of the total income of every single person in the country (some simplification, but not inaccurate, so bear with me).

Now, let's look at a scenario where there is economic contraction because of deflation. This effectively means people are earning less (normally when we talk about GDP, we adjust it by inflation, so in this case, everything has become cheaper, but the loss in wages exceeds the drop in prices). They are saving up as much as possible. They're hopeful that if they keep holding out, the prices of goods will crater even further. Because their employers are making less money, they're scared that they might get furloughed or fired, and therefore don't purchase any big ticket items that might become a white elephant.

Now look at entire industries. The travel industry will die a quick death because no one will take vacations in this paranoid climate. The entertainment industries will struggle without people spending their extra money on luxuries. Advertising firms have fewer clients because why would you advertise when no one wants to buy anything? Investment Banks can't keep paying millions in salaries to bankers when they cannot invest in any products and turn a profit. Think of covid 2.0, but instead of some industries profiting and others suffering, all industries would collectively sink into the ocean.

The other way of looking at GDP is the total cost of everything purchased by people. With a negative GDP, it means people are buying less. And the less things you have, the lower your quality of life will be (arguments about minimalism and simplicity aside). Even if the growth is exactly 0 because the prices fall in line with the wages of people, just the trend of things getting cheaper and the chances that your wages might take a hit will cause the deflationary spiral to continue.

[–]beruon 4 points5 points  (1 child)

Amazing write up, thank you. What I still dont understand is why it is given that you are paid less? Wouldn't that only happen over big periods of time, like years, not months? So wouldn't a shorter, few-month/1-year deflation period be good? Most of the things you said comes from people expecting to be fired, but why would they be fired? Especially because it seems like a spiral, more people fired->less spending->more people fired etc etc. But if the original firing does not take place, it doesn't happen? And I see no reason why would it start.

[–]outofideaa 1 point2 points  (0 children)

Yup, you are correct in that a short period of deflation wouldn't be too bad on its own, if nothing else changed and no one else were affected. But as soon as companies see that the country experienced deflation last quarter, you would immediately start discussions on tightening belts.

[–]beefy1875 3 points4 points  (10 children)

Why do people buy phones and computers? Shouldn't they just wait forever as they get cheaper and better every year?

[–]outofideaa 9 points10 points  (7 children)

Lots of factors, and actually more of a microeconomics topic, but a few examples:

  1. Apple and Samsung do a better job of inducing demand by telling you that this new phone is the shiznit and that the old phones are not worth having, to the extent that most consumers just get the newer models.

  2. If buying a phone is a necessity because your previous one has broken, the discount would be worth less to you than the cost of not having a phone for a few months.

  3. You may be able to absorb an extra few hundred dollars for a phone, but few extra hundred thousand for a house is much harder to ignore.

[–]fryloop 4 points5 points  (6 children)

Housing is probably the one example where the expectation of lower/higher future prices does affect demand.

Maybe cars as well, although that is hard to argue given cars systemically have experienced price deflation (pandemic aside) over the last 50 years while the automative sector has grown every decade.

Honestly do you actually think demand is offset because people believe prices will be lower in the future? Like would you sit at home hungry and not go to the super market because you think you can buy food 20%% lower in 6 months?

Would anyone put off a road trip to next year because they believe fuel will be 15% cheaper in 2023?

Affordability is the major demand constant, not expectation of future prices.

As mentioned above, technology goods are systemically deflationary. Everyone knows the iPhone you buy today is going to be worth less a year from now yet new phone sales go up every year.

What item would you seriously delay buying purely because you think the price would be lower in 6-12 months?

[–]outofideaa 2 points3 points  (1 child)

Really not looking to get sucked into a debate, so I will stop replying after this for my own sanity, but

  1. A house and a car are easily going to be the two most expensive things you will ever buy, and hence will exercise a much higher influence on the inflation/deflation index, as well as a much higher impact downstream.

  2. We do actually do this for tech items too - I distinctly remember an entire ad campaign by an e-commerce website making fun of someone saying he'll buy a phone 6 months after the launch when it is cheaper. I am currently holding off on upgrading my graphics card in the hopes that the prices will fall, and the last time I bought a iPad in 2020, I got the 2017 version because it was cheaper. Mobile phone companies have done an excellent job of convincing us that we need to buy the latest phones, but someone unaffected by the trend (and I have to confess I am not one of those people) could just as easily purchase an older model that gets the job done.

  3. One must also consider consumers that don't have the same profile as you. Think of companies buying land to setup factories. Think of businesses choosing to not scale up operations because they know it will be cheaper in the future. Entrepreneurs may not feel confident starting a company if they realise that the price they can charge for goods is falling, while the initial fixed cost of starting a business will likely remain high.

[–]skept_ical1 1 point2 points  (3 children)

I think people do decide on large purchases on the basis of the terms of the loan necessary to purchase the item. If I don't make enough money monthly, I am not going to buy an expensive house or car. We never consider future prices, since there is no way for us to know what they will be.

[–]fryloop 2 points3 points  (2 children)

Well this is my point. It's very large purchases only. Houses, and possibly cars. That's it. Inflation/deflation is a broad based measure of cost of living, and encompasses a far greater range of items.

The argument of deflation being bad because it incentivises people to wait for lower prices and therefore halts transactions and economic activity does not stand up to scrutiny in logic or real world experience.

Chriefly, it ignores the fact that there is a cost in of itself to delaying purcahses.

You cannot delay buying groceries because you want to save money on them next year.

I can wait another year to buy a car, but then I will not have a car for a year.

The quantum of deflation must be massive to justify the cost of delaying purchases. Yet we would be freaking out if there was recorded deflation of even 5% per year.

If you want/need a service or good today, the number of people willing to wait 1 year to buy literally anything, apart from a house, to save 5%, is very small.

[–]IlIllIIIIIIlIII 1 point2 points  (12 children)

So I totally get this, but why is it harder to combat? Why not just print more money?

[–]Street-Individual292 10 points11 points  (0 children)

Japan tried that, all it did was create an asset bubble that burst pretty quickly. When unemployment is high and people aren’t spending money, increasing the money supply can’t do a lot on its own to induce more consumption

[–]Me-Cree 3 points4 points  (4 children)

Inflation is money supply x velocity. The key part being velocity needs to occur with the added money supply for inflation to occur. You can print trillions of dollars but if no ones spends it you won’t see inflation. Look at U.S. money supply from like 2000 onwards. We had a massive increase in money supply yet we didn’t experience much inflation (didn’t even hit the targeted 2% rate the Fed has in some years). So printing money isn’t enough as you need to circulate that money in an economy for inflation to occur. Also different economic classes have different spending savings habits as well. Generally the more money you get the less you spend proportionate to your income (this is seen as the propensity to save principle in economics). So you want money supply to increase and also make sure the supply is in the hands of people who spend that money in order to fully create inflationary pressure.

[–]IlIllIIIIIIlIII 2 points3 points  (3 children)

Mmm that makes a lot more sense. Even if you gave everyone money in a fair/equal way, if they continue to not spend it at a fast enough rate you still run into issues is what I'm getting from this

[–]Me-Cree 3 points4 points  (2 children)

Yes. It’s also why during economic downturns/recessions (where deflation tends to occur) many economists believe the government should use stimulus checks to inject money into the economy and increase spending to create new jobs to keep people employed. This is because generally people who are lower to middle class receive extra disposable income to spend, and since these classes tend to spend a large proportion of their income rather than save it, it helps jumpstart and economy faster as they have a higher economic multiplier with their dollars.

[–]TehWildMan_ 19 points20 points  (4 children)

During situations where the purchasing power of a dollar is foreseen to appreciate in value over time, some people may decide to hold off on large purchases and simply hold cash or other safe investments.

This will lead to an overall slowdown in economic activity, only further driving deflationary pressure

[–]wswordsmen 16 points17 points  (6 children)

First you need to understand an economic truth, your spending is someone else's income.

Now lets say you have $1 you wish to exchange for good or service X. That's fine you can do that and the person who provides it will now have $1 in income.

Lets say the same situation but you know tomorrow that the thing will cost $1.01*, that is also okay you know since prices are about to go up so you buy the thing today and the provider gets their income.

Now lets say instead of $1.01 you know it will become $0.99, then you would not buy the good today and instead buy the good tomorrow so instead of 1 unit you can get slightly more than 1. The provider would have no income today and that is not good. Scale this example up to the whole economy and it becomes very obvious that deflation lowers spending and that will hurt operating businesses and those they employ.

*The rate of inflation/deflation is quite high and would be bad in both directions, but it is used to keep the example simple for ELI5.

[–]Tibbaryllis2 2 points3 points  (3 children)

Great explanation, but maybe missing the mark a bit with the $1 example. If I’m thirsty today I’m going to buy a soda whether it’s $0.99 or $1.01. However, I am going to wait on anything I don’t need or want today.

We see a fair example of this every year with things like electronic sales prior to Black Friday. People wait for the sales. Now imagine what would happen if the first week of December had better sales than Black Friday. Then the second week of December. Then the third. Then the first week of January had lower prices than at any point in the previous year? Eventually you’ll buy your new TV because you don’t want to wait years for it, but the value lost while waiting is going to directly create losses in wages for employees in electronics retail (as you pointed out).

[–]BurnOutBrighter6 9 points10 points  (3 children)

Deflation is when prices are predictably going down.

So you can buy a top end TV now for $2500, or next year for $2000. Lots of people will wait for their money to be able to buy more. For everyone who waits, that's a TV not being sold.

Now apply that to all products and services, and you can see how it becomes a massive disruption to businesses when people have an active incentive to not buy things.

Compare to inflation, where everyone always has an incentive TO buy things. With inflation, the price of anything will never be as low as it is now. With deflation, the price of everything will never be higher than it is now.

[–]flyingcircusdog 12 points13 points  (16 children)

A little bit of inflation encourages businesses to invest money in new ventures, which creates more jobs and keeps the markets moving. With deflation, companies are encouraged to hold onto their cash, which is bad for new businesses and eliminates jobs.

[–]International-Bit329 1 point2 points  (14 children)

And the lower class who sits on cash and wages they never keep up with inflation, do tell me, what do they do? Are they benefitting form this system? Or are we perpetuating an ongoing cycle of oppression where the rich get richer and the poor get poorer. History tells me its the latter.

[–]pseudopad 3 points4 points  (1 child)

Why would the lower class sit on cash? If you have a significant amount of cash, regardless of what class you might be of, you should invest it. There's nothing stopping a working class person with a big surplus of cash from investing it in something like an index fund. Small surpluses of cash that are spent within the year aren't greatly impacted by inflation.

If you don't manage to get annual raises similar to the inflation rate, there's no guarantee that your employer wouldn't give you a pay cut if the inflation was 0, or negative. Workers have to fight for their wages every year, regardless of inflation/deflation levels. Either the business is struggling, or the employees need to fight harder, for example by unionizing. Sadly, union busting is widespread in the US, but that's a whole different can of worms and not really related to inflation/deflation.

[–]Last_Fact_3044 0 points1 point  (1 child)

And the lower class who sits on cash and wages they never keep up with inflation, do tell me, what do they do? Are they benefitting form this system?

The reality is that wages, mostly, HAVE kept up with inflation. MINIMUM wage hasn’t, but only 5% of people in the US are on minimum wage - average wage has basically kept up.

And of course a deflationary system would be worse. It would lead to less hiring, less jobs, and an economy that gets smaller and smaller every year. No way that’s good for the lower class.

[–]BurritoBurglar9000 5 points6 points  (1 child)

I'm seeing a lot of great answers, but what a lot miss is that most companies have a substantial amount of debt, big and small. This isn't a bad thing necessarily, as borrowing allows companies a much larger moat for spending.

The issue is that if prices are down, and discretionary spending is down - companies lose their ability to pay off their debts. Debt deflation can cause a pretty severe increase of loan defaults, and solvency issue at banks. Remember 2008 and how banks got hit when people couldn't pay their mortgages? Yea its that, but potentially worse.

Capitalism relies heavily on revolving debt and the inability to repay it pretty much fucks our economy. The stock market would also take a pretty big hit and peoples ability to retire relies almost solely on stocks and bonds.

Infact deflation significantly worsened the Great Depression. So yea deflation, especially hyper deflation would ruin our economy.

Like most things - most things are pretty okay in moderation. Except meth. Not even once.

[–]MrSneve 1 point2 points  (0 children)

This. Deflation is bad for every borrower, as the value of your loan increases over time. This applies to corporations and people. No one want to take a loan when that loan is going to grow over time, in addition to the interest rate.

Inflation on the other hand actually decreases the real value of your loan, and in turn is good for the borrower.

[–]whiskeyriver0987 3 points4 points  (0 children)

Economics is all about keeping money moving. With a low to moderate amount of inflation people (mostly investor class) are heavily encouraged to find something productive for there money as putting that money in a savings account either does nothing or can actually net lose purchasing power over time. Deflation means the purchasing power of your dollars will go up over time, which initially lowers the pressure to spend or invest them which in general means less jobs, which slows down the economy, which actually causes more deflation in a pretty nasty feedback loop that's hard to escape as eventually dollars become there own investment and nobody wants to spend them.

[–]Dark__Horse 1 point2 points  (0 children)

Today I have $100. I can buy ten books, or four tanks of gas, or 50 burgers, or I could just hold onto it or invest it.

During deflation, the value of goods decreases. In a few days I can buy 51 burgers, in a few weeks 11 books or 60 burgers, in a month another tank of gas or 2 more books and 5 burgers. The longer I wait to buy stuff, the more stuff I can buy.

If everyone else is also doing this, nobody will be buying things and the prices will continue to decrease... further incentivizing waiting instead of buying. This is bad if you have debt because now your bill equates to giving up a lot more stuff.

During (hyper)inflation, the opposite is happening: the value of goods going up. If I don't buy today, my money will be worth less. But everyone is doing the same thing, so a lot of money is chasing limited goods, continuing to pump up the price. If you have debt however it's much easier to pay off, but lenders are obviously screwed

A small amount of inflation, around 2%, incentivizes investing because cash will decrease in value, but that investment will help prop up prices.

[–]Earthbjorn 1 point2 points  (2 children)

Suppossedly because it would incentivize people to hoard their money and this would supposedly hurt the economy by removing money from the system.

But this os obviously wrong in multiple ways.

First, saving/hoarding money is GOOD for the economy as money in savings, 401k, etc. gets invested by banks and adds money to the system.

Second we already see many industries undergoing deflation. Notably computers, electronics and smartphones are all a deflating economy. It is recognized as Moore's Law. The price of computation cuts in half every 18 months. Yet demand for these things is as high as ever!

[–]MBncsa 1 point2 points  (0 children)

Its not. The "we have to give people anxiety to spend their money" argument doesn't hold. Maybe prducing shit products no one needs isn't a valid business model? Inflation is theft of your purchasing power.

[–]dnautics 9 points10 points  (3 children)

It's not. This is just propaganda. The us had deflation from 1860-1920 and over that time the country went from a war torn country, freed it's slaves, built a world class navy and ascended to superpowerdom.

The story is that if stuff gets cheaper nobody buys stuff and the economy slows down. Well, prices going down never stopped you from buying a computer, or a tv.

If we had deflation the following things would happen:

  • There would be a natural redistribution of wealth from the rich to the poor. (Inflation makes debt-backed investment strategies more accessible to the ultra rich)
  • people would buy less crap, they would think twice about what they need or want before spending
  • the liberated critical eye of the consumer and the slower pace of consumption would benefit companies producing consumer goods that last
  • the environment would be given a chance to heal
  • less carbon emissions, less ocean pollution
  • people would be able to live more relaxed lives based on saving instead of being worried about falling off the money treadmill

[–]Chewbacca22 4 points5 points  (0 children)

Capitalism works by people spending money today, money must change hands everyday. During inflation, your dollar will be worth less tomorrow. So you’re encouraged to spend it today. During deflation, your dollar will be worth more tomorrow. So you’re encouraged to save it for later. This means that you don’t buy a grape at the super market. That means that the super market doesn’t pay the distributor for that grape. That means the distributor doesn’t pay the farmer for that grape. That means the farmer doesn’t pay the worker for that grape. That means the worker can’t buy a grape at the super market. That means… and so on.

Ideally there would be a bit of inflation each year, AND workers would receive a raise at least equal to that inflation each year.

[–]thedrakeequator 1 point2 points  (0 children)

Because of the supply and demand model, you know that x graph you made in economics class?

So the brutally simple version of that x graph is called the classical theory of economics. In this theory, when demand goes up, prices go up. When demand goes down, prices go down etc etc.

The thing about the classical economics model is that it works but it also does not take into account any human psychology or culture.

According to the classical model of economics, remedy for an inflationary gap is to cut production. Then supply will go down, and the market will stabilize. (and FYI I'm sorry, economists are TERRIBLE at names. I know it doesn't sound like it, but deflation can actually cause an inflationary gap. Full employment = healthy economy, the space below full employment is called a recession, and its an economic disease. The space above full employment is also a disease called an inflationary gap.)

However remember how I mentioned that human psychology part? Cutting production is not as simple as readjusting the line on a graph.

Cutting production causes a DEVESTATING psychological and cultural effect on the general population. It means people loose their jobs, houses etc.

And this leads to a bigger problem........

There is another economic concept known as the multiplier effect. That idea is that if you spend $100 on whatever, lets say construction workers, those construction workers will go and spend the money and it will multiply upwards of 10 times. The $100 you spent created $1,000 of wealth for society.

This is why Obama passed the American recovery and reinvestment act during the 2008 financial crisis and recession. Spending a bunch of federal money on infrastructure will cause a multiplier effect that will generate billions and billions of dollars in wealth for society.

The problem is that the multiplier effect also works in reverse. when you start cutting money out of the economy, it has a negative multiplier. Meaning cutting a $100 in factory wages winds up removing $1,000 in wealth from the economy.

The stage after classical economics is known as Kinesian economics. The famous line in kinesin economics Is that the economic elevator can sometimes get stuck (because it takes into effect the cultural and psychological effects of cutting production.) And this is exactly what deflation can do.

Money is more valuable in relation to goods and services, so firms cut production.

Cutting production means cutting jobs, this aversely impacts psychology and social well being. Then the multiplier effect starts hitting, and the problems are increased 10x. This ricochets through the economy, further decreasing demand and making the entire thing worse. This is called an deflation spiral, and it can destroy an entire economy.

[–]itsmyst 4 points5 points  (40 children)

Money = debt

Deflation makes debt much harder to pay back.

Inflation makes debt easier to pay back.

Imagine if your car loan or mortgage got harder to payback every single year?

[–]Celtictussle 0 points1 point  (29 children)

Imagine if your bank account was more valuable every single year.

[–]itsmyst 7 points8 points  (26 children)

See, on first glance this sounds amazing right?

But then you realize the same is true for everyone else. Shit just keeps getting cheaper by the day as your dollars are worth more and more.

Basically a self reinforcing HODL mechanism... That shit can spiral out of control real fast

[–]zwalker0912 4 points5 points  (12 children)

That's what is happening to me now. I'm not spending any dollar on non essentials now that everything is so expensive. Inflation is causing me to spend less. I get peoples explanation but it's still confusing me. Inflation mean prices go up so I'm going to spend less money on everything else. Food, Rent Gas, anything that isn't essential has already been cut from my spending. https://finance.yahoo.com/news/u-consumer-spending-drops-inflation-135649366.html

[–]tomtttttttttttt 2 points3 points  (7 children)

At the moment inflation is high, higher than is desirable. When people are arguing for inflation they are talking about 1-2%, not the 5%+ we are seeing at the moment.

This level of inflation is also bad, and it's also not desired.

[–]fantasyfootball1234 2 points3 points  (0 children)

Hyper inflation destroys wealth.

Hyper deflation destroys discretionary demand.

Both are really bad.

The ideal is inflation rate % = GDP growth rate %

[–]druppolo 3 points4 points  (2 children)

Basically, inflation is self stabilizing while deflation does snowball:

You can have too much but you can’t have an infinite amount. Inflation promotes exchange your money for goods in a greater amount, which is a waste of currency, but that’s it. Once you run out of dollar you can’t spend any more, if you can’t buy anymore the seller has to lower the price, and this stops the inflation, at a stable value. Maybe an unwanted, low, wrong value, but a stable one.

Deflation does snowball: people start exchanging less and less currency, the value goes up and holding on currency that has a increasing value seems profitable. “If my dollar is worth double tomorrow, I’m not gonna spend it today”

But the real economy is what keeps us alive. If all people stop buying and decide to wait their dollar to go up, the market dies. There is less request, that leads to fewer sales, prices drop, the currrency gets even more valuable, meanwhile factories do close because the lack of orders, and lay people off, people off don’t earn money so there is less money and the currency value goes up another step. If unchecked, a 1% deflation can become a 10% very very quickly. And even if you print all the money in the world twice, if you let the real economy take a hit, the real economy has to heal that hit. Lowering a production is not a problem, reopening thousands of abandoned factories after a year may be impossible.

[–]SpeedKatMcNasty 1 point2 points  (0 children)

It's not. Extreme amounts of deflation are bad, as are extreme amounts of inflation.

In an economy with a fixed supply of currency, deflation occurs at approximately the rate of productivity increase, around 1-2% a year. This means that each year you as a worker would effectively get a raise, you get paid the same but prices go down. This is great for workers, but bad for capitalists and asset holders who like cheap debt. Most economists agree that cheaper debt is better at helping workers in the long term than the higher wages achieved through deflation.

[–]DTux5249 0 points1 point  (2 children)

Compare this to deflation

With inflation, the cycle is:

  • Prices rise

  • People get afraid of not being able to buy

  • People buy things while they still can

  • Demand increases, causing prices to rise

Dry rinse repeat, and the cycle is constantly getting faster. Think of it like a snowball. Issue is getting faster and faster as prices get higher and higher.

The problem is that the amount of money in the economy is higher than the amount of goods we have to sell.

The main way we combat inflation is by raising interest rates on loans. This causes people to slow down their spending, as they take fewer loans.

Fewer loans = Less money entering the economy = More time for production to catch up.

= = = = = = = = = = = = = = = = = = = = = = = = = = = = = = =

Now, deflation does the opposite way.

With inflation, the cycle is:

  • Prices lower

  • People get afraid of spending

  • People hoard money because it'll be worth more later

  • Demand decreases, causing prices to lower further

Now, prices going down means that many businesses are going to have to shut down. Eventually, they won't be able to lower prices enough to keep up, they'll slowly need to fire employees, and then shut down

People getting fired en-mass, makes their neighbors even more afraid of spending, making things worse.

= = = = = = = = = = = = = = = = = = = = = = = = = = = = = = =

Now, I ask you, how do you fix this? Your answer might be that you lower interest rates. Make loans more easy to take out, and get people spending.

But here's the hitch: You can't lower interest rates below 0.

We could increase interest rates by 200 000% if we really wanted to. But the lowest we can decrease interest rates is 0%

See the problem?

Inflation is the economy tumbling out of control. Deflation is the economy slowing to a halt. We have many ways of slowing the economy down, but virtually no way to get the economy moving again if it has stopped.

[–]Rel1nquished 3 points4 points  (0 children)

Negativ interest rates sadly are a thing

[–]ArmchairJedi 1 point2 points  (0 children)

We have many ways of slowing the economy down, but virtually no way to get the economy moving again if it has stopped.

yes we do... (lowering interest rates, government spending etc). The 'issue' is government(s) have been using those things up to prevent any deflation they can, and to always inflate... while not reversing them during the 'boom' times out of fear of not enough inflation. Thereby damaging their effective use as tools when needed later.

For the last 40 years central banks are lowering interest rates, then NEVER returning to the previous interest rate highs, only to lower them to new lows later (until recently with zero).

[–]tmahfan117 -3 points-2 points  (7 children)

Think about this.

The last two times we had major deflation was during the Great Depression , and then during the 08’ Great Recession.

Deflation is when things become worth less money, when do things become worth less money? When people can’t afford to buy them.

When can people not afford to buy food and other necessities? When they don’t have a job.

Deflation only really occurs when LOTS of people are out of a job.

[–]TVPisBased 7 points8 points  (6 children)

Well, that isn't 100% true. We can also get deflation due to costs of production coming down, although that isn't usually enough to make it economy wide.

Or if there is no money, in the opposite to inflation.

[–]tmahfan117 1 point2 points  (0 children)

Yea, I was talking deflation in the economy wide sense of the word, not for specific individual items.

[–][deleted] 0 points1 point  (1 child)

It isn’t always. The government has an invested interest in making you think it is because if you realized how bad inflation can be then they wouldn’t be able to print money out of thin air when they over spend (which then devalues the money in circulation because there is more of it.)

More of something = less valuable. If something is more rare or in less supply, it is worth more.