Econ Forum: Isn't deflation a good thing?

that's the problem.

 

Please elucidate.

 

They have been talking a lot on TV lately about if there is or isn't a housing bubble. Since home prices have never decreased year over year for the entire country post WW II, how would a nationwide decrease in home prices start. I am not an economist, but have been trying to determine what might cause prices to decline. I am trying to equate this with stocks. If a lot of sellers swamp the market, the market goes down due to too much supply and no demand, so how would this happen in the housing market? Well, if interest rates keep rising, nobody is going to want to purchase a home, but will that cause people to sell their homes? I wouldn't think so. So what I think would have to happen to cause a decrease in home prices would be a rash of foreclosed homes coming onto the market all at once. This would mean banks would be competing against each other to sell foreclosed homes to recoup loan losses, and if there weren't a lot of buyers (because the economy is REALLY bad at that time) then that would force prices down until buyers finally stepped in. Does this theory make sense? I hope this doesn't ever happen, it would really be a traumatizing experience for everybody if property values started deflating. If property values started deflating, is there a way to short your house to lock in the gain

 

Deflation that is being feared now is bad. Prices paid for products mean less profit margins which means that jobs will be cut. IMO, it doesn't relate to people waiting to buy products because they think it will get cheaper.

 

Before the 1910s, when (1) The Federal Reserve was created and (2) Governments worldwide debased their currencies, deflation was a fairly common occurence. It wasn't as painful as it would be now, because debt was kept in check by the gold standard.

The gold standard also helped cycles of deflation and inflation to be self-correcting - the "lower prices = lower profit margins = job cuts" did not last long enough to be a big problem.

If deflation hit developed economies in the next few years, it would result in spiralling debt defaults.

Pre 1914, debt levels were more sensible, and deflation wasn't feared.

 

Foreclosures are not a necessary condition for a decrease in house prices, just as "margin calls" are not a necessary condition for declines in stock prices.

What could cause a decline in real estate is profit taking.

However, foreclosures are a possibility if interest rates continue to rise.

Falling property prices would not be "a traumatizing experience for everybody", especially those who are yet to purchase a house.

You can hedge against falling property prices by shorting homebuilders, mortgage related companies, banks, REITs, bonds.

 

From Trader Vic's book "Crashmaker"
http://www.crashmaker.com/
Review of the book here http://www.fgmr.com/crashmkr.htm

“...The Fed’s real purpose— its hidden agenda— is to facilitate government spending through inflation. To avoid imposing politically intolerable levels of taxation to pay for the spending that returns them to office election after election, politicians rely on the Fed to confiscate wealth from the public through inflation. Inflation’s a hidden tax, and lessens the cost of borrowing by enabling the government to pay its debts in depreciated currency.”

After a sip of water, Dominic continued. “For the system to work, however, implementation of its inflationary policy must be unpredictable— and therefore surreptitious and deceitful. Thus, the Fed’s an economic stealth bomber.” The audience laughed. “That may appear to be an extreme metaphor,” Dominic responded to the reaction. “Nevertheless, it’s accepted wisdom on Wall Street. Why? Let me introduce two key terms: forecasting and discounting.”

“If the market can forecast what the Federal Reserve intends to do, then it can discount— in layman’s terms, preempt, frustrate, or even nullify— the Fed’s actions. For example, if the market knows the Fed will increase the supply of money a month from today, producers will start today to raise prices of goods and services in anticipation of the increases in their suppliers’ prices, and in consumers’ incomes, that they expect will follow growth of the money supply. The Fed, on the other hand, would like any price increases to come well after the spurt in the supply of money, because the ability of its inflationary policy to stimulate the economy depends on a lag. So, when the market forecasts and discounts the Fed’s actions, they lose their effectiveness. Conversely, when the Fed deceives the market, the more likely the Fed will achieve its desires. This explains why the Fed asserts political independence from Congress and the Treasury, why it refuses to operate according to fixed rules, and why it makes its decisions in secret— because the Federal Reserve’s ability to deceive depends on its power; and its power depends on its ability to deceive.”

 

Aren't you glad that folks around here who really have a grasp on economic issues finally have a special forum to discuss them? Me to.

Now, how can we get them to participate, and blow off the morons who have been dominating this thread?

What the fuck do you mean is deflation good or bad?

Let's start with the fact that everything you own, everything, would be worth less. Not much of a problem you say? Well, what about the things that you have pledged against loans? The lender will get a little nervous. No problem? It might be when everyone else is squeezed, and lenders really get nervous.

Any item in inventory will now be worth less. Both items paid for as well as pledged.

And here's the fun one none of you seem to realize: your work will be worth less. Yes boys and girls, the value of your services will command less and less as more and more of you compete for fewer and fewer jobs.

No problemo, I don't work, I trade, you say. Well your stocks will be worth less, and fewer and fewer other traders will want to trade with you.

But don't worry, deflation will not likely be your problem. You see, you keep electing morons like George Bush and his friends who will stave off deflation with inflation. How will they do that? defect spending. Pumping imaginary dollars into the economy to hide the loss in real value. Now this is not much of a problem unless and until the rest of the world catches on. Then it's a problem.

Other countries might not want your increasingly worthless dollars for their worthwhile goods and services. Never happen, you say? That's because you pay more attention to basketball star rape cases, and not enough to what others are saying. Things like maybe oil should be priced in Euroes instead of dollars.

Good God, would someone please put this forum out of it's misery!

 

Good God, would someone please put this forum out of it's misery! [/B][/QUOTE]

If you bold something and call others morons, at the very least try to write properly. "its" misery not "it's" misery. Good god, would someone tell John Q to get a clue

Now, onto the real issue at stake, is inflation/deflation good or bad, it is neither and it is both. The real rate of inflation year over year is probably on average 3-5%. Yes, you heard me right, 3-5% on average over the last 100 years. Has this been really bad? Not really, we've lived and survived.

Now, in places such as Russia or Brazil where the rates are or have been 10 times this, then we have a problem; a major problem. People lose faith, companies lay off workers, lenders are afraid to lend, currencies dwindle into oblivion as the intrinsic value of the paper rises above face value (scary stuff like that).
Inflation is not worse than deflation but there are more tools AGAINST inflation than tools against DEFLATION.

DEFLATION is mainly a consumer problem.
INFLATION is more of a government problem.

Why do I say this? Because you (read governments) can force people not to spend but you can't force them TO spend. In Japan, people are quite happy with their propensity to save and therefore do not feel compelled to buy a lot of products. If they do decide to buy, they wait and wait as prices fall. Who wants to buy a falling knife?

In the opposite scenario, when prices rise sharply, people want to spend as fast as possible, driving prices even higher.

Bear Markets, Bull Markets, pure market psychology.

 

Overall IMO its a good thing on the macro level, its a natural phenomena, things/goods in general should be getting cheaper as we get more and more effiecient at making them.

However, on a micro level, there are definitely different ways to see it. It's really a no win argument depending on whether you are debtor or creditor.

I offer up this article below which pretty much mirrors my thoughts on the subject.

The Blessings of Deflation

by Llewellyn H. Rockwell, Jr.

Posted May 30, 2003

Let's say you set out on a Saturday shopping trip, drive up to the mall, and see a sign that says "50% off everything!" That's great news, right?

Or let's say you are in the market for a new car, and the sticker shock you experience is that cars are cheaper than they used to be. Amazing and wonderful!

Or let's say you are paying for your daughter's college education and find that you have set aside more money than is necessary because the price of tuition and books is lower than you expected. Glory be!

Or let's look at it from the point of view of business. You are a manufacturer and your main expense is steel parts. After many years, even decades, of rising prices for ball bearings and other machine parts, your costs suddenly decline. The cost of replacing assets is dramatically reduced. That leaves more for investment, marketing, paying employees, and enticing investors with dividends. It is a win-win situation for everyone.

So far, "deflation" seems like a glorious thing. But wait, says conventional wisdom. Consumers and businesses may benefit, sure, but what about sellers? They always desire the highest price possible for their products. If Dell had its way, every computer would cost $1 million, and they would certainly charge that if they could sell the same number of computers at this price as versus $1 thousand. By the same token, consumers want to pay exactly $0 for what they buy. It is the interplay between these two ideal worlds that yields the market price.

If businesses have been required by virtue of competitive pressure to sell at ever lower prices, how can they make a buck? By becoming more efficient. Anyone who has ever worked in a business knows that efficiency is something that businesses do when they have to. A monopolist is facing no competition (think of a government toll road) and so can charge high prices and maintain awful inefficiencies year after year. A business in a competitive environment cannot.

The computer industry itself provides the best illustration. Prices have plummeted even as sales have soared. Computer makers and retailers have profited handsomely. And this is not a unique case. The same has happened to appliances, which have gone down in price dramatically over the years even as sales have risen higher and higher. Why? Because the companies have gotten better and better at doing what they do, and have thereby been able to make profits even in the face of continual price declines.

Thus we see that there is no radical disconnect between the interest of consumers (who always want lower prices) and overall economic health. What's good for consumers is good for everyone. You can only marvel at the many economists and commentators who try to convince the public that deflation is a very scary thing. In doing so, they enjoy the cachet associated with generating a counterintuitive conclusion, but in this case, it is simply wrong. The first intuition that bargains are a great thing is precisely the right one. In discerning economic theory, sometimes common sense turns out to be all you need.

And yet, many experts still say we should "worry about falling prices" because they represent a "destructive force" (according to Martin Wolk at MSNBC, for example). He explains as follows: "As prices keep going down, money grows more valuable. . . ." So far so good!

But he goes on to say that this is actually a bad thing because it creates "an enormous disincentive for consumers and businesses to spend money. Economic activity slows, unemployment rises and demand continues to decline." Well, but that presumes that consumers have something to gain by forever stocking up on dollars and never buying anything, which is absurd. It's true that falling prices create incentives to save, but so long as the preference of consumers is to save instead of spend, that can only prepare the way for a future of economic growth. Consumers save for a reason, namely, to spend later.

Wolk's next point concerns the implications of deflation for debt. Deflation makes it "far more difficult to pay back existing loans." It's true that loans are paid back in dollars that are more valuable than the ones borrowed. But that is part of the risk one takes when deciding to borrow in the first place. If we all had perfect foresight, our behavior would change substantially. But that is no case for pressing the pause button on economic affairs. What deflation does is provide a disincentive to borrow and an incentive to use current savings for purposes of investment. It means a reward for well-capitalized companies and individuals—a good thing all around.

Now we get to the crux of the matter: the Great Depression. The assumption is that falling prices somehow caused the economy to crumble. In fact, it was the after-effects of the boom combined with massive government intervention that caused the depression. The only silver lining in the entire period of the 1930s was precisely the falling prices that made the dollar count for more. Falling prices (a falling cost of living) are what Murray Rothbard has described as the "great advantage" of recessions. If you can imagine the Great Depression without falling prices, you have conjured up an image that is far worse than the reality.

Ask yourself whether during economic downturns, you want your money to grow or shrink in value? If your future job security is in doubt, do you want to pay more or less for goods? If your savings are meager, do you want them to have more or less purchasing power in the future? If you answer these questions rationally, you can see that deflation is wonderful for everyone, and the saving grace of a period of economic contraction. Throughout the 19th century, prices fell in periods of economic growth, which is precisely what one might expect. This is all to the good.

As Rothbard has said, "rather than a problem to be dreaded and combatted, falling prices through increased production is a wonderful long-run tendency of untrammelled capitalism. The trend of the Industrial Revolution in the West was falling prices, which spread an increased standard of living to every person; falling costs, which maintained general profitability of business; and stable monetary wage rates—which reflected steadily increasing real wages in terms of purchasing power. This is a process to be hailed and welcomed rather than to be stamped out."

If we must have recessions, make them deflationary recessions. What's far worse is the phenomenon of the inflationary recession that Keynesians are always trying to foist upon us. For the same reason that deflation is a good thing, rising prices during a recession are the worst possible thing, because they provide a disincentive to save and invest for the future. They encourage present consumption and thereby gut the capital base necessary for future growth. They prolong suffering in every way.

Thus can we see that the widely-approved prescription to prevent deflation, namely inflation, is the worst possible path. But this is precisely what the Fed has endorsed as a matter of policy. It is hardly surprising that the central planners managing our lives would adopt the exact policy that will make us so much worse off.

Fortunately, the free market contains mechanisms that can work around attempts by the Fed to inflate. It could be that the banks have a hard time foisting new money on people and instead work to protect their balance sheets. Businesses too, stung by economic contraction, might avoid going further into debt, no matter how cheaply they may be able to borrow. In this case, prices could fall whether the Fed wants them to or not.

In economics, it is a good rule that what is good for individuals and families is also good for the economy. Everyone wants a bargain, which is to say a low price. Sadly, in our present age of inflation, lower prices mostly affect specific products and sectors. May the joy we take in falling prices for electronics be expanded to anything and everything we buy. Let the commentators fret and worry about what their fallacious macroeconomic models tell them. The rest of us can sit back and watch our standard of living rise and rise.

Sadly, I doubt we will see any deflation. Even based on the last ten years of data, overall price increases are still the norm.

In fact, since 1913 and the founding of the Fed, the dollar has lost 95 percent of its value. It is far more likely that this robbery will continue rather than for our lost purchasing power to be restored to its rightful owners: you and me.

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