Discussion in 'Economics' started by GlobalFinancier, Jul 7, 2006.

  1. They say when deflation occurs, people hoard money.
    Not true, new electronic products inevitably get cheaper, yet people buy and buy and buy. You can wait a few years to see a new movie on TV for free, why see it now and pay the money? :confused: So what is the real impact of deflation?I think its lower corporate profits leading to lower stock market leading to lower consumer confidence etc etc? Or lower corporate profits leading to layoffs etc.
    Somehow I cannot accept the fact that people will anticipate prices getting cheaper--- since 1)they cannot anticipate that prices will get cheaper 2)people usually spend anyways on new stuff, which may get a 90% discount in a few months/years. I think it has more to do with the corporate/confidence.
    I know I wasn't too clear on this, hard to express and I'm not well versed in economics.
  2. It's true that electronics have deflationary pricing, but they are not a true example of deflation in an economic sense. True deflation affects wages so that people's income drops too. And when people know that they won't be earning as many dollars in the future as they are now, they do hoard money. In a debt-laden economy, deflation can get very nasty as people are forced to make constant-dollar monthly payments with their decreasing incomes.

    I've always thought it very interesting when some parts of an economy are inflating (e.g. oil and healthcare) and some parts are deflating (e.g. technology). It makes it hard for a central bank to really manage an economy.
  3. Inflation nor deflation would be bad if everyone adjusted one to one at the very same time...

    The biggest reason for deflation being bad is a very simple one...


    If the big banks fail...then the economy truly fails...

    However what is truly interesting is that the paper fails...but the asset is there...still standing in the morning ...just as it was standing the day before....

    In other words...deflation and inflation wreak havoc on legal agreements about value...

    A building may stand for 300 years ...being basically the same...however the loan papers and the buy sell prices varied in accordance with the countries and individuals legally attached to them by legal paper...


    Deflation is a no way out scenario for the holding bank....whereas inflation provides a way out for the holding bank...

    Thus in severe deflation failures are guaranteed to occur...whereas in inflation...the banks have a way out...

    However...the asset itself did not change...

    Thus deflation and inflation damages are with respect to prices and legal agreements..

    And at some price...the asset works well in the changing economic circumstances...
  4. bauschj


    There's less of a deflation problem with electronics, and being the first kid on the block to own that widget. A severe source of deflation was the change in price of the full featured laptop from $8,000 in 1996 to $1100. in 2002. Even more severe is the photo industry where the cost per megapixel has plummeted. A $1600 4 megapixel camera in 2000 is less that $200 now. Just look at the exploding interest in big screen TV's, if your vision has sufficient periphery. All of these widgets have created huge market growth.

    I'm in agreement about problems in the deflation the housing industry. During the 'free' money periods following the market peak of 2000, mortgage payments went down 33% as rates fell from 8% to less that 4%. This caused an artificial increase in house values, which are typically based on the buyer's ability to pay. In addition to the buyer's improved income, he now had the better loan rate to propel him to debt. The converse must follow now that the rates are increasing. He will be reluctant to buy a new home if he believes that house prices are over inflated. This 'sticker shock' is also reinforced with the rising rate, although tempered somewhat by INFLATION in the interest rate. (Buy before it gets worse) If there is a pause in the FED cycle.

    With house prices falling, banks are less likely to grant second loans that would otherwise bolster the stock market.

    On the other hand, house deflation with it's corresponding soft market means more money that starters can put in the equities market, in saving for the house down payment. After all, who hoards cash in their mattress anymore?

  5. It depends on what causes it. Deflation because of higher productivity which makes things cheaper and results in increased demand is good. Deflation due to less demand, less spending is bad because it increases unemployment which in turn decreases demand more, etc.

  6. Electronics are not in deflation. They are goberned by Moore´s law. So eventhough the price per transistor does go exponentially down it is only due to the fact that the cost per transistor also went exponentially down... due to growing scaled economies. So income is not reduced but rather increased.

    The problem with deflation is as stated above when people expect to receive lower wages for their work in the future. So, as you perceive that your future income is going to be less than your current income, then you don´t want to adquire debt. So the demand for money goes down and the price of money {interest rates} has to go down as well to incite people to borrow money. They problem is that the price of money can only go down so far... once you´ve reach 0% interest and things don´t pick up, you have yourself a real problem... demand wont go up wven with free money! {the problem that´s been haunting japan for the last decade} You have very few tools for increasing monetary demand in this scenario.

    The problem increases as we follow into the spiral of deflation, since there´s not much money in the market then people wont pay much for pretty much anything that´s not really necesary {it could even lead to a Giffen paradox scenario} and the markets react by offering everything much cheaper, but we land ourselves in the same problem in the goods market as we have in the monetary market. Things start selling below cost, and companies start going broke, people get laid off and that increases the labor supply further reducing the salaries of workers in the remaining companies and causing more deflationary expectations to further reduce monetary demand and aggravate the problem.

    One way to fight deflation is to increase goverment spending, perhaps by a war, this would give money to companies involved in the war effort, force them to hire many workers, combine this by the fact that the army recluits much of the work force, reducing labor supply and increasing the value of labor.
    And perhaps, just perhaps you put yourself into good old inflation again... it´s actually quite simple {in theory} but you need to be specially carefull not to over do it....

    you might really screw things up from there...
  7. The dictionary definition of deflation is:

    "A persistent decrease in the level of consumer prices or a persistent increase in the purchasing power of money because of a reduction in available currency and credit."

    Be careful not to confuse cause and effect.

    So, has there been an artificial increase of credit/lending via homemortgaging (plus ? 0 downpayment, 40 year mortgages), and if so, does that amount pose a threat to the US economy ?

    " The psychological aspect of deflation and depression cannot be overstated. When the social mood trend changes from optimism to pessimism, creditors, debtors, producers and consumers change their primary orientation from expansion to conservation." elliott link.
    Have to say that for me at least there was a very noticeable mood change in 2000 re computers — the Nasdaq, a large disinterest seemed to occur overnight.

    Chapter 11 staved-off the previous depression threat by creating a 'second chance' law, however the change of the US 'consumer' bankkruptcy law is not the case — not only does it not guarantee getting blood from a stone, it prevents re-starts until the debt is paid off.

    What of the US debt, or rather, the holders of the US debt ?

    A Lucas Bar Count of 76 — 1930 + 76 = 2006 (Dow, SP, Nasdaq, Ftse all on 7 H-H), time to start chewing nails ?
  9. mizer


    Can you explain this more?
  10. This is an economic pipe-dream.

    von Mises in his book "Human action" was perhaps the first to give a fully sensible explanation for the above phenomena and how these are caused by the way people act in those circumstances.
    #10     Jul 10, 2006