Why is Deflation Considered Bad?

[WickedLester]

If inflation is too much money chasing too few goods, is the converse, deflation, too little money chasing too many goods much of a muchness in that consumer and business behaviour would just adjust without anyone being tangibly better or worse off? The only effect I can think of is on growth, but what good is growth without an increase in productivity?

[Boots]

The theory is, if prices are falling, consumers realise that if they wait the things they want to buy will be cheaper. They rationally decide to stop buying anything and everything except for the essentials. The economy stops working.

That, is why economies tend to aim for a modest level of inflation, for fear of undershooting.

[WickedLester]

I'm not sure it would make much difference to my consumption and even if it did could that be a good thing anyway given that we're being encouraged to conserve the Earth's resources? It could cause us to make things last longer and go back to make do and mend. Were things so much worse when we did?

If I wanted to enter into the realm of conspiracy does more people consuming more result in more wealth in the hands of the capitalist elite?

[MuddyBoots]

The theory is, if prices are falling, consumers realise that if they wait the things they want to buy will be cheaper. They rationally decide to stop buying anything and everything except for the essentials. The economy stops working.

That, is why economies tend to aim for a modest level of inflation, for fear of undershooting.

That sounds reasonable for general inflation as measured by RPI or CPI. Considering that interest rates are used as the medicine to adjust the economy up or down and we can't go below zero if there's a bad recession or depression, which is when deflation is more likely.

But deflation does happen, and is allowed to happen, in specific markets as a regular part of economic cycles, like a 'correction'. The stock market is an example, oil or antiques. House prices is an interesting one, as many people (especially first time buyers) would argue they are overpriced and the market is too restricted and want a correction - until they become owners and don't want deflation to cause negative equity.

[Lootman]

Inflation can be reduced by high interest rates, if a government has the spine and stomach to do that.

It follows that the cure for deflation is lower interest rates. But then what if you lower them to zero and deflation persists, like just a few years ago? Then you are in a bind as you cannot really lower interest rates below zero without some very strange things happening. Like for example lenders paying me to borrow from them.

So deflation can be harder to defeat. And governments like inflation because it reduces the real value of their debt.

[Urbandreamer]

In fact deflation is the natural state.

Consider just about anything, but let us pick grain.
You scrape a slot in the ground and sow the seed.
Well that worked.
Now you USE an ox or horse to scrape the slot. You produce more grain cheaper!
You harvest the grain and find it hard and time consuming. So you develop dwarf grain (this happened long ago).
Then with dwarf grain you develop horse drawn machines that reap the grain.
Then threshing machines.

etc.

Everything is getting cheaper to make and sell.
MONEY or what we think that it is, is the problem.
Ok, I'm well into Austrian economics by now.

So, let's consider the price of a burger over the last 10 years.
There is something called the BigMac index that looks at the price in terms of "money".
https://en.wikipedia.org/wiki/Big_Mac_Index
I.E
https://www.economist.com/big-mac-index
Well, there are issues. You know like QE and bail outs.so lets consider a Big Mac in something that has a constrained issuance.

http://pricedingold.com/big-mac-prices/

Has deflation EVER been recorded as producing a problem?

Oh, one last BigMac index.
https://inflationchart.com/bigmac-in-btc/?logarithmic=1

[dealtn]

If inflation is too much money chasing too few goods, is the converse, deflation, too little money chasing too many goods much of a muchness in that consumer and business behaviour would just adjust without anyone being tangibly better or worse off? The only effect I can think of is on growth, but what good is growth without an increase in productivity?

Its human nature that the adjustment process (and inbuilt mechanisms) work more efficiently in the price rising direction.

Think that companies (suppliers of goods) are able much more easily to hold wages, or to let them rise, but below the rate of inflation, as a way to attempt to reduce their relative goods or services prices to stimulate relative demand, or to maintain (create) margin when input prices are rising. Now consider how much more difficult that is to do by cutting wages when prices are falling. What workers (unions) are happy for real wages to rise through a fall of 5% nominal wages if prices are falling 10%, for instance?

Similar effects happen when demand is delayed with falling prices. With inflation you get the "better buy now before prices go up" but in deflation it becomes (to an extent) "don't buy now it will be cheaper next week". Although in practice falling prices are good (think how much cheaper computers are now than 10, 20, 50 years ago), this can lead to persistent extended demand shocks, which cyclically lead to prolonged unemployment etc.

You also have asymmetry around economic policy. Monetary policy, as demonstrated over a large part of the 21st century, is practically limited around zero interest rates. Negative interest rates, whilst possible in the banking system, are hard to implement at the retail level (although I did have a negative mortgage rate at one point). The then alternatives of QE, are difficult to do (and subsequently unwind) without introducing distortions.

When price targetting was adopted as the norm, and correct metric, by central banks, it was no surprise that 2%(ish) was considered better than 0%, as a "low but rising" price level provided lubrication that was absent at an average of 0%, as that likely meant some prices would be falling, with the issues mentioned above.

[GoSeigen]

If inflation is too much money chasing too few goods, is the converse, deflation, too little money chasing too many goods much of a muchness in that consumer and business behaviour would just adjust without anyone being tangibly better or worse off? The only effect I can think of is on growth, but what good is growth without an increase in productivity?

Huh? Are you serious?

Practically all payments in the economy are based on fixed obligations in contractual agreements.

If prices are rising everyone has greater incomes to comfortably meet their contractual liabilities.

If prices are falling people can no longer meet their fixed obligations and they have to either 1. default/go bankrupt or 2. renegotiate their contracts with their creditors -- which in turn forces the creditors to renegotiate their contracts or default, etc etc. Highly disruptive either way, and severely so if the level of outstanding debt is high.


We've just been though a decade and a half trying to avoid this scenario. Someone really wasn't paying attention!


GS

[MuddyBoots]

Which is presumably what was happening during the prolonged period of low interest rates we've recently come out from.

And debt levels should play a part in this too; because if people, companies and governments are paying out more servicing their debts, they've less left over for the discretionary items which feeds through to the growth figures. So debt is something investors like to keep an eye on.

[scrumpyjack]

The theory is, if prices are falling, consumers realise that if they wait the things they want to buy will be cheaper. They rationally decide to stop buying anything and everything except for the essentials. The economy stops working.

That, is why economies tend to aim for a modest level of inflation, for fear of undershooting.

That is often claimed but is demonstrably wrong. For decades we have had deflation in the price of electrical goods but the volume bought has always increased. No it is convenient to devalue the national debt and confiscate private wealth by debasing the currency.

[Mike4]

And in a practical illustration, on another forum one or two people are raging about the price reductions announced by Tesla, saying had they known they would delayed buying one!

[MuddyBoots]

That is often claimed but is demonstrably wrong. For decades we have had deflation in the price of electrical goods but the volume bought has always increased. No it is convenient to devalue the national debt and confiscate private wealth by debasing the currency.

Except that technological advance means many electrical goods aren't the same as they were decades ago, people are often upgrading. There's a fair amount of planned obsolescence too when you can't replace the battery in your mobile phone for example. And I'm not sure they are much cheaper in cash terms than decades ago, But tech upgrades mean they're probably better value for money.

For goods that don't change so much like white goods - fridges, washing machines, or hoovers - we just wait till they're worn out and have to buy a new one anyway.

[88V8]

For goods that don't change so much like white goods - fridges, washing machines, or hoovers - we just wait till they're worn out and have to buy a new one anyway.

But then - other than urgent need - we wait for The Sales, when we think they will be cheaper. A mini illustration of deflation-linked behaviour.

However, price reductions due to efficiency or sneaky quality reductions, are not deflation.
Deflation is when there is a general expectation of a price downtrend.

Even that does not lead to a stoppage in consumption over an extended period because people and companies still need/want stuff, but it does slow things down and potentially puts people out of work.

Once people expect deflation, it's hard to change their mindset. In Japan, 25 years of deflation has stultified the economy.
"We need to eradicate the sticky deflationary mindset besetting households and companies....

And as GS observed, there are fixed obligations to be met which will be derailed if there is less money around.

I'm not sure it would make much difference to my consumption and even if it did could that be a good thing anyway given that we're being encouraged to conserve the Earth's resources? It could cause us to make things last longer and go back to make do and mend. Were things so much worse when we did?

For the earth as a whole it was much better when we fixed things rather than junk them, and when we had less stuff. And when there were fewer people. But a period of deflation would eventually make things even worse as stuff would be cheaper so the people that still had jobs would buy more of it.

The ideal would be stasis, but that is not feasible, even in a nominally closed economy like North Korea. If you Google their inflation rate, you might be surprised.

V8

[GoSeigen]

And as GS observed, there are fixed obligations to be met which will be derailed if there is less money around.

To say the least... the Great Depression is the notorious example of the mass chain-reaction of defaults and bankruptcy that happens when an uncontrolled deflation simultaneously reduces everyone's income.

GS

[1nvest]

The theory is, if prices are falling, consumers realise that if they wait the things they want to buy will be cheaper. They rationally decide to stop buying anything and everything except for the essentials. The economy stops working.

That, is why economies tend to aim for a modest level of inflation, for fear of undershooting.

I don't keep Pounds in my wallet, instead I keep stocks and gold in my ewallet. Reasonably consistently those 'notes' buy more as time passes, consumer prices become cheaper. That doesn't stop the economy, I for one wont put off buying non-essentials for that reason. I just spend using my credit card and each month a week or so before that bill payment is due I sell enough stock or gold into Pounds to cover that bill payment.

The 2% target inflation inflation is a reflection of how much CPI/RPI has been inclined to lag other asset price inflation (by a average 2%/year rate). Technology/productivity helps slow CPI, whereas other assets (house, stock, gold prices etc.) incorporate that 'growth' factor - such as more people having surplus capital.

[1nvest]

From at least 1750 (and earlier) up to WW1 the Pound was the major international trade settlement currency, and the Pound was backed by gold. Sovereign gold coins, near a quarter ounce of gold, were money, had a legal tender value of £1 (that way back in 750 was set as being a pound weight of silver). The price of gold pretty consistently ran at a little over £4/ounce in reflection of that. Inflation broadly averaged 0%. If the price of gold rose then the coins gold value became worth more than the currency value, sold as gold and you won. If the price of gold declined then you spent the coin as £1. Win/win. Borrowers had to pay real rates of return in order to secure lenders, those with surplus capital/gold deposited that gold in return for interest, in a 0% inflation world.

There were clustered periods of spikes in inflation, typically followed by a spike back down again (deflation), in around equal measure.

The change over to the US fiat currency system that followed Britain pretty much bankrupting itself in WW1 (that took until the end of WW2 to pretty much see a full transition) has been proven to be flawed. America promised it would keep the dollar aligned to gold as part of getting others to accept settling international trade in US dollars instead of gold. Instead however there's been predominately just inflation, borrowers - such as the US, discovered they can partial default by regular small amounts, export inflation onto others and providing the US the means to pay for the likes of a massive military might and/or lunar moonshots etc. President Nixon pretty much completely made the break in the late 1960's, as a means to pay down the US's high cost of its Vietnam war.

If anything inflation might be considered as the bad-thing. US largess whilst exporting inflation onto others.

The UK is being aligned to the wrong ally. Biden hates the Brits. The US treasury compulsory purchased 8000 tonnes of Americans gold in the early 1930's. In turn it issues non-redeemable gold bonds to the Fed at a $42.222/ounce rate, so at recent market price of gold levels the Fed has 50x leverage. In turn the Fed can employ leveraged gold products in order to buy/sell gold, and there's 122 times more paper gold than physical gold (122x leverage). Simply, the US can direct the price of gold to align with the US dollar using 122x leverage (Futures) of 50x leveraged gold value ($42.222/oz).

The next largest store of gold is ... in the UK. Bank of England vaults, containing around 5000 tonnes of gold. Had the UK opted to align with Russia rather than the US then we'd have seen little/no recent inflation and would have been more aligned to the majority (global population) and been in a very strong position to establish a alternative to the US dollar. But BJ, who was born in the US and considers himself to be a second Churchill dived straight into the 'US special relations' - that has induced the high costs that everyone is now enduring. America has repeatedly demonstrated its ... where behind you all the way ... to later withdraw. If/when the UK needed its support be under no illusion that the support would be subjective, even though the US might offer initial supportive words.

The 5000 tonnes of gold isn't the UK's (other than a relatively small amount), but as custodians and given there's 122x times more paper gold than physical gold, it is in a strong position. Just has to ensure that the gold remains in its custody, such as banning any gold exports from the UK other than approved amounts. When there's 122 separate claims for each single ounce of gold - who else might define how that might be resolved other than the custodian. Combine that with Russian/India/China gold and that mountain excels the entire US's gold reserve.

A return to 0% average inflation, borrowers having to pay a real rate of return to lenders (assured pension income etc.), cheap energy/resources sourced from a tolerant if not friendly Russia would have Brits in a far better place than they presently find themselves to be. China/Russia/UK would not need to be a all-in thing, even just toleration might be enough to establish a viable and accepted alternative to the US$.

God forbid however that the UK might go down the China style road of spying on every citizen using cameras, geolocation, facial recognition, monitoring internet and calls activities, monitoring all financial transactions etc. Or that it might wipe out over 100,000+ individual such as by exporting Covid into care homes. Oh! Hang on! Aren't we already there?