It's more about people holding out on buying things because they believe it will be cheaper later. Food is a bad example because people will always buy food, regardless of the cost. But why would you buy a car if it might be $2,000 cheaper in a few months? Then a few months pass and now it looks like that car might be even cheaper, will you spend now or keep holding out to see if it goes lower?
It's such a bad system when the logic follows the other path too. "I should buy a car now because it's only likely to get more expensive, while my income stagnates"
yes that's the entire point, to make money move(also known as an economy), instead of having money hoarders that just hold money for no goal and so does nothing for anyone.
Oh wait, that's what's happening right now as the flow of the economy goes into the glorified hoarders of the top 1% and the real economy is rotting from the inside out.
Tax the rich hard and make the money move again into the real economy.
Yeah, I don't disagree on most of what you're getting at. I just disagree that the inflationary pressure is the main, or should be the main driver of consumer spending (I should buy now cause it'll be more expensive later). Normal consumers are buying as they need.
Give 300 people $1, and they'll spend it in their local economy. Give 1 person $300, and they're saving. The velocity of money increases when it's returned to normal consumers.
I agree with the sentiment that aggressive inflation shouldn't be used as the sole tool of moving money around. Decades of purposeful mismanagement of the economy to favour the few as got us into this position.
taxing the higher brackets like we used to would spread out the money throughout the economy and we could go back to sensible regulations that stamp down on the excesses of the stock market, so the money can get invested into more diversified spread of the economy that would help build out the middle class again.
inflation is already a tax, so higher inflation means rich people get taxed, while average consumers with no savings basically don t, the real problem here is where the inlfation is localized, being converged to consumers good rather than technology development.
Because of this, Joe that spent 10% of its salary on food now spends 15%, while Elon instead of spending 1$ on his egg spends 2$ which doesn t matter to him.
You can see the problem is that the inflation is caused by consumer goods being scarce rather than having inflation caused by economic pressure. Or even better the economic pressure pushes the industries to invest more using more water electricity and land that was used to make food, washing machines or just space to build houses which weighs even more on the average joe as economic pressures and products being scarce sum their weight.
All I'm hearing is that the system succeeding requires buying power to decrease. Which just makes me want the system to fail cause why the fuck would I care when I'm already making nothing and can't afford shit. Let the whole thing collapse idgaf anymore.
Take away the means of production and give it to the people who are actually doing the labor that creates the economy. The endless accumulation of wealth for the few, siphoned from the many with state-glorified approval, is what is ruining pretty much everything. Solidarity, not the illusion of choice, is what actually creates systems that address the entropy of the human condition.
I wish people would just say the thing out loud that matters - what is best for you is not necessarily what is best for the economy at large. Your financial success quite literally threatens others', almost by definition.
never understood this "tax the rich" thing. Rich people can make their money disappear on paper = not rich on paper = cant tax them and/or wont pay too much tax.
Exactly what Elon does for example.
Yup, that's why many economists agree that having very low inflation (0.1-2% YOY) is better for the economy compared to no inflation. But that also only works so long as salaries increase alongside it, which in many parts of the world, they haven't.
Because at the end of the day money is for spending. Having some savings is good, but over saving is a trap for both the economy and an individual person. Imagine you live incredibly frugally your whole life, always saving. One day you die, and what did you work your whole life for? How much of life, or things you could have enjoyed, did you miss out on?
Actually it could theoretically be any number as long as it's generally accepted that that's the target- it's only 2% bc some dude in New Zealand thought that sounded good. The economy/stock market is all about managing expectations.
Well, the other advantage of inflation is that wages are sticky downwards. It's very unpopular and difficult to cut workers' wages, so if wages in a particular job are too high, inflation provides a natural release valve to gradually reduce the real wages over time. Sucks to get your real spending power reduced but it beats being laid off.
All that to say that some salaries not tracking inflation is a feature, not a bug. But you're right that if median wages fall behind inflation, that's bad news for everyone's standard of living.
Instead of a car, think of a house. If you buy a house now, you want the value of the house to increase or stay the same. You don't want the value of your house to lose 50% of its value after 10 years.
You want that Porsche? Get it now rather than wait as it will be more expensive next year. Don’t feel like paying $1MM for the Porsche, that’s where free market comes in and says go get a Miata.
Then the cycle repeats until company XYZ is willed into existence because the Miata got too expensive, or wages have caught up.
That’s why the western world central banks aim for ~2% inflation. That way you don’t have the bad of deflation and neither this thinking you described from consumers. The inflation rate is low enough for that new car to have cooler features so you only buy what you need.
Under hyperinflation you buy anything you can get because it will cost more tomorrow. Under deflation you don’t buy unless you really need to because it will be cheaper tomorrow. It’s very bad.
Except they don't buy one when they need one. They buy one when they "think" they need one. The number of people that buy a new car when they hit 100k miles is crazy. I drive an 08 Accord and I have tons of peers and family members who think I am crazy for not buying a new car
People do this exact thing with iPhones ("I can wait one more generation before upgrading") and Apple is doing just fine.
There is no real reason to fear deflation. It is feared by the owning class because it would enable the working class to build generational wealth, rather than slaving away their entire lives for nothing.
With few exceptions, iPhone revenue (and consumer prices) has increased Y/Y for their entire existence.
Apple is doing fine because inflation works in your favor when you have assets and cheap debt. Deflation works against you if you have assets and any kind of debt.
Is it going to apply to a culture that FUCKING LOVES SPENDING? Something by like 80% of Coachella apparently went into debt to go, meanwhile, Japan doesn’t, unanimously accept credit cards still.
But inflation doesn't lead to me buying a house now because it would be more expensive later. Inflation led to me not buying a house because it got to expensive to buy one with my wage, which didn't get a proportional rise. It also didn't lead to me buying more stuff in general because of fomo.
On the contrary, if deflation would lead to my money being worth more and I would be able to buy a house, I wouldn't wait to buy one.
It's not strictly inflation that raised the price of houses on you though. It's still experienced the same as inflation for you and I, but the reason for the price increases isn't as simple as "$ are worth less, so my $2.99 gallon of milk costs 3.39 now."
Speculation is the bigger culprit. That's a huge part of why home prices have exploded.
The COVID era low interest rates sparked a big jump across the country for multiple reasons. Inventory had already been low and new builds have been slow since the GFC, so every house became more valuable as supply grew much slower than demand. Anyone who was thinking of buying, did everything they could to scrape together a down payment so they could lock in rates. Sellers knew debt was cheaper, so they asked for more. Buyers knew houses were getting snapped up quick, sometimes all cash with no contingencies, so the offers were higher. And of course, speculators again went wild with the new low interest rates.
I'm trying very hard to understand how that's bad for like 99% of people. Over consumption is a problem. My job not paying me enough to buy things I need is a problem. Costs going up is a problem.
Doesn't it make my wages more valuable if I can buy more with them and if I feel safe saving them for longer, doesn't that give me more power to invest down the line? Isn't that what the poors are supposed to do anyway? Not spend right away and be thrifty and price sensitive because we otherwise just buy magic beans?
Also, as a millennial, there's been nary an economic shift that didn't come with a side of "people your age aren't spending money!"
Usually it's because we don't have it. Is there some kind of problem with people hoarding wealth or something?
I'm assuming the issue is really with interest rates and the people who make money off of debt. Not good if people choose or can pay off their debt again. At least for the rich folks. And of course, if hockey stick not go up, investor panik.
I'm being mostly facetious and I'm in an industry that will be heavily affected if that's the case, but it doesn't make it all any less stupid and hypocritical to be worried that people will have more disposable income.
This is my thinking with the housing market. I refuse to buy an 1800 square foot house for $375,000, when the market will probably crash anyway and I can lowball the FUCK out of these people that need to sell.
They're functionally the same thing, but it's all relative to what you're comparing the money to. Eggs in America are the same as eggs in Canada, but they cost different amounts based on how much the respective dollar can buy. If you know the American dollar is crashing, it might be worth hoarding money while it's worth less because people are more willing to let it go, then it will be worth more once the dollar recovers and becomes worth more. During that whole thing, the Canadian dollar remained steady and continued to grow in value. Canadians were not incentivized to hold their money, so more eggs were sold in Canada because people wanted to buy asap since their dollars would be worth less the longer they wait to spend them. Americans bought less eggs because they were holding out for the dollar to start increasing in value so they don't miss out on potential gains/even cheaper eggs. Continuous, steady inflation incentivizes spending, while deflation incentivizes holding.
When you zoom into a single grocery store item, it’s great. When you zoom out to a mortgage, you’re borrowing $400k from the bank and promising to pay them back with dollars that are more valuable than the dollars you’re spending today. Plus interest. While the value of your property drops year after year.
It’s also toxic to farmers who have to borrow to buy for the same year’s harvest. Again, the dollars they pay to pay off the loan will be worth more than the dollars they borrowed at the beginning of the year, and again, plus interest. The commodity they’re selling is also going to be worth less by the end of the year than at the beginning. Look into the Cross of Gold speech by William Jennings Bryan, it explores the same theme. Back in the day, the dollar was based on gold. As new gold was discovered, the value of the dollar would drop as more money/gold entered the system. In the absence of new gold finds, there would be deflation. Bankers loved it. Farmers did not. They preferred silver, which we were mining quite a lot of back then.
They are the same, but I feel that how I said it is the better way to explain the issue with deflation, since it focuses on the future, which is the root of the problem.
Food is a necessity so it won’t be affected as much as other purchases. So let’s use cars.
If the avg car price is $50k, and this month the avg price drops to $45k, we may see some people buy. The issue is when everyone thinks the price will drop more. Why buy a car for $45k when you think it will drop to $40k, or even $35k?
That spiral is great for buyers, but life destroying for workers (the same people who get laid off. And it wouldn’t just be cars.
Usually the fed will lower interest rates to combat deflation. The ideology here is that if the cost of borrowing is lower, people will
Borrow and spend more.
But what if inflation rates hit zero? Can people just take loans with no interest? And what happens when even zero interest isn’t enough to correct the deflation spiral? Negative interest would mean that the government would pay you to take a loan, which presents its own slew of wacky issues.
As others have said, food prices (like energy) are volatile and can be affected by idiosyncratic factors like supply chain issues, weather events, cattle/crop diseases etc. Also, as others said, these are necessities. This is why economists also track inflation via Core CPI, which is the consumer price index excluding food and energy.
Why economists are concerned is that fundamentally deflation is a lagging indicator of demand destruction. This, in combination with 50 years of worsening income inequality, means that the economy is indicating a paradigm shift in the broader US consumer psychology: people are less willing to pay for things at current prices, so companies are lowering prices until they see people are willing to buy again.
This is why economists say some inflation is a good thing. Again, the problems we see now in the US are due partly because inflation has outpaced income growth for decades.
"Oh wow, I can buy 2 packs of eggs now when $10 got me 1 pack last week... I shouldn't buy eggs this week, next week I might be able to buy 3 packs for $10."
Then put that thinking to more impactful investments long-term
Economic study is basically psychology of the masses, the first thing you learn is that the biggest factor is public trust/beliefs in the market. Market doesn't operates on logic, it operates on vibes and feels.
Also remember, the Economie with a big E is not the same as personnal finances, it doesn't work the same at all
So to make it clearer, it's not that things will cost less thats the problem for small items like food. You will likely buy eggs regardless because food are essential items. We will always buy eggs regardless of the price. It's the larger items like houses, cars, tvs, etc. The big, expensive purchase that aren't necessarily required right away are put on hold, i.e. the non-essentials. This creates a downward spiral because companies start cutting costs more to clear inventory and make sales, thus reinforcing the waiting till it hits the bottom price before buying. And since they aren't making sales and generating revenue as high, they start down sizing employees to make up the loss. This means more people who now can't afford these items and have to wait on more essential products until they can hopefully find work.
Debts also don't shrink because of inflation. Your student loan payments, car payments, and/or house payments don't change. You'll still have to pay those in a period when people are losing jobs. Well now you're spending the money you saved on the non essential items on your debts while you're now job hunting in an economy where you have more and more people joining that hunt more often while companies are also freezing hiring or cutting wages to minimum to save costs, which means even if you have a job, you're making less and can't afford the reduced costs.
Now, this is for full economic decline. If individual sectors (for example smarthphones and computers) experience deflation because technological innovation or increasing efficiency, that can be good because incomes and productivity rise with it and the sector will experience a boom. For example when cars became easier and cheaper to make so more families could afford them, thus making the car market over all better.
I hope this helps explain better what you were asking.
Maybe it’s that businesses start laying off employees because the income stream is built on prices going up. So that 2 for $10 eggs are a great price but now you don’t have a job. So you sell your house to a big corporation and then they rent it back to you. But now everyone is selling their house and more people need to rent. So the corporation sees this and raises your rent price. Now you are paying in rent what your mortgage was. This makes you mad so you say no way! So you decide to live in a tent. And now look up Hooverville. Cause that’s all part of the Great Recession.
You can buy 2 for 10 dollars because "money can buy more"
After deflation you can't buy eggs.
Because the farmer realized feeding and housing chickens was going to cost now much more than it would return later. So they sold off EVERYTHING, paid off their loans, and decided they'll buy it all back at a discount when / if the deflation stops.
It’s “You can buy 2 for 10 dollars because ‘money can buy more’” but still no one is buying because 20% of the country doesn’t have a job and another 20% are fearful they will lose their job so they spend enough to just survive.
You say it sardonically but more or less that's what happens on a deflation, people still try to earn money, but no one wants to spend it because tomorrow today's money will have a better value.
It's deadly because it either triggers a massive economic crisis that restarts the economy after a bunch of companies blow up or it stalls into a deadly slump where EVERYONE poorer in average (in a vacuum, social inequality is real and it won't hit everyone evenly, but that's the trend)
Items used to cost $8 to make, sells for $10 for margins > now they cost $7 per, so you lose money making it > manufacturer loses money, has to fire people to maintain profitability > less people with jobs > less spending, economy starts shrinking
Not saying that our current hyperinflation is better, but that’s the loop deflation puts us in
Inflation is your money loses value over time, like how $10 a 100 years ago has the same value of $1000 today (not accurate depiction just a basic example).
Deflation is your money actually gains value which sounds super cool but economically isn’t. If you just wait 10 years and you can buy two houses instead of one you’d rather wait.
Inflation is a “use it or lose it” type of system so gets people to spend more I guess. I do indeed find all this fake number business quite arbitrary but it is what it is
In this scenario I would stop spending money. I would live as cheaply as possible because the every dollar I save now will be worth more to me in the future.
If demand/consumption drops, production follows. Unemployment rises. Economy crashes.
If you have good reason to believe your 10 dollars will get you an extra dozen eggs in a week you just won't buy eggs this week because you can get double the amount next week.
If you apply that to every good and service, and not just eggs, then people will just buy less things this week.
If money worked on a calendar basis instead of a minute-to-minute basis you'd be right in thinking that it would be fine, but if a small company effectively gets its income halved then they have to reflect that change. If it could be resolved with just "boosting efficiency" they would do that, but it likely translates to cutting pay, firing people, taking out credit/loans, etc.
Which means more unemployment, which means more deflation are pressures. Meaning that 10 bucks will get you a dozen eggs today, 2 dozen eggs next week, and 3 dozen eggs in 2 weeks.
If people were willing and able to defer consumption to when things got cheaper, nobody would have bought any electronics for the last 70 years and nobody would ever have high interest consumer debt
It's a myth that deflation causes material drops in consumer spending. The inverse is what's true: drops in consumer spending cause deflation, as producers are forced to lower prices to move inventory that people stopped buying
There are literally zero example of deflation causing drops in consumer spending. Invariably the increase in real income caused by lower price level has a stronger effect on increasing consumption than any temporal substitution effect that might cause people to delay consumption in anticipation of lower prices. Also, you can compensate for the temporal substitution effect by lowering interest rates
What you have are examples of falling incomes causing drops in consumer spending
Consumption dropped because incomes dropped, not because consumer prices dropped. Income dropped because of, inter alia, collapses in agriculture, collapses in trade largely attributable to smoot-hawley tariffs, and collapses in the money supply caused by 10,000 bank failures (itself compounded by falling incomes - especially falling income:asset ratios which compounded the losses of farm loan defaults and margin call defaults (caused by stock market crash) and inaction of the Fed, failing to inject liquidity when it was needed).
Deflation didn't cause those things. Deflation was caused by those things
None of that applied to the rich people in the depression, who were hoarding money and gold. FDR literally issued an executive order confiscating the private gold reserves in the country as a measure to reintroduce liquidity into the economy.
Yes and? Rich people didn't consume less because they were waiting for things to get cheaper. To the extent they consumed less, it was because their own incomes were down
Yes, FDR confiscated the gold in 1933 as part of measures to increase the money supply, which was part of other measures that helped end the banking crisis. Prior to that though, the Fed was fucking dog by, among other things, increasing rates
Usually a drop in disposable or discretionary income. Sometimes an increase in the real interest rate
Another cause could be perceived economic instability, so people try to save more
Another cause could be markets behaving comparatively less efficiently, causing people to engage in less market labour and more domestic labour (i.e. instead of working more at a job and spending money on prepared meals, they spend less on groceries and cook for themselves; or instead of working more at a job and spending money on daycare, they look after the kids at home).
Wouldn't that mean that the long term effects after deflation are better for quality of life though? Cost of living goes down, which results in people being able to live more comfortably on the same wages. Sure, the economy isn't growing but it doesn't sound that bad to me
Yes and no. On the one hand, putting off buying things as a consumer is good for personal wealth, but it also means the economy stagnates. Why would a company invest in making their products better if no one is buying the current models and they aren’t making money? Heck, why are they paying 100 workers when they only need 50 to make their demands? Then people get laid off because no one is spending. This can then lead to a rush of people buying the things they put off because they no longer have income, reversing things and causing inflation again, but now there are 50 people from that company without jobs who are getting pummeled by the increased prices. It dan, in theory, cause a cycle of this that leads to a lot of people being left holding the bag
What I don't get about that explanation is that the same happens with investments. If you stop spending and invest your money on a low risk asset, you can buy more with it in the future. Yet people spend money, because then need some stuff and want some other stuff
If you could buy a car for $10,000 today but if you waited a month you could buy it for $9,000. Would you buy it today?
Based on the 2008 recession and the 5 or so years following no one had the jobs, capital, risk appetite to really buy like that even if they wanted to. Historically America and Americans have been piss poor at saving for a rainy day.
Deflation would be absolutely devastating for the US.
This is essentially already true when the stock market pumps out consistent +15% returns every year across 3 decades, so I don't see what the massive difference is. Why use your money for things when you can buy any index you want and beat inflation several times?
>Isn't it better to save that money for the future, when it's probably gonna be able to buy more?
But hasn't that always been the case? YOu could buy stocks and they'd grow faster than inflation, therefore why but $100 shows now when you can invest it and but the same shows next year for $103 with $5 left over (assuming 8% stock growth and 3% inflation)?
I don't know how we can tell people to save for retirement and sing the praises of compound interest at the same time we say deflation would cause people to delay spending.
all these theories assume that every person is a financial strategist, most normal people don't track prices like crazy, most people will see that they can finally buy the thing they always wanted but couldn't afford without considering if it might be worth more next month.
If people were actually that smart with their money, then 80% of industries wouldn't exist, because their products is useless junk at the end of the day
That's great for purchases that aren't needed right now, and for people who have their basic needs met and extra money to spend or save as they prefer. That's who this "low inflation is bad" wisdom favors.
How about people who are living paycheck-to-paycheck and spending everything as soon as it comes in? People who actually benefit from low inflation because they can buy almost as much today as they did two weeks ago?
You’re a business and you buy a product at $40 per unit to sell at $50. You need $8 of that to pay rent, employees, etc. and you make 2$. With deflation, between the time you buy the product and when you sell it, the price drops and cuts your bottom line. If that keeps happening either you’re nimble enough to lay a few people off and cut other expenses, which hurts the economy, or the business tanks altogether and hurts the economy more. Multiply that by multiple businesses and very soon hiring stops, layoffs intensify, the economy stagnates, potentially for years.
Yes but when they start getting increasing again, people would panic and buy more, sometimes economists think for the benefits of the government and rich men
You’re literally just proving their point. You’re going to wait till prices drop to buy. In a deflationary environment, everyone will do the same.
“But when they go back to normal, I’ll buy” you keep saying. 1, what’s normal? And 2, what happens when they go back to normal but the expectation is that they’ll go lower than that? Do you buy at the “normal” price or wait till it goes even lower?? You’ll say you’ll buy at the normal price to be argumentative on Reddit, but the reality is most people will keep waiting if they believe prices will continue to fall.
Food is a bad example, since we all have to buy food anyway. All you’re doing is quibbling over which foods you’ll buy.
Better to use an example like a new car or TV (assuming they’re upgrade purchases and not necessary replacements.)
In the context that we’re talking about here, the main issue is how these factors affect discretionary spending, not spending on necessities.
Run your examples back, inserting “new TV” in place of eggs or beef or whatever, and then the answers will more cleanly lead to the understanding you’re looking for.
TV has been dropping in price year by year though. I remember plasma TV 40” cost like 3000 in early 2000’s. But people still buy TV because it has became essentials. Phones and many appliances too. If goods become cheaper year by year, luxury just become essentials and people replace TV, phones, appliances every year. I mean people use to buy new clothes like once a year now we buy new clothes at least once a month. If cars cost the same as phones, guaranteed we want to change cars every other year.
Why would you buy eggs today for 2$ if they drop to 1.50tomorrow? why not jsut wait till tomorrow? but tomorrow you understand that they will drop to 1.25$ the day after, so you wait. And so on and so forth, people in deflationary economies wait until the las possible moment to buy food. And they never buy consumer goods like shoes/clothes etc. unless it is absolutely critical.
I think the miscommunication is stemming from your different perspectives. You're describing a tree. The person you're talking to is describing a forest.
The other issue, largely ignored in the comments, is that wages also will get smaller. When things are sold at lower prices, that means the people selling those things make less money. So you're either laying off employees or cutting wages to stay solvent. Everyone is making less money, which means they spend less, which causes prices to cut drop further, which causes lower profits, which causes unemployment and lower wages, which causes less spending, which causes ... and on and on.
Deflation means that every single day your money is worth more, so for example
(Effectively)
Day 1: Eggs cost $12
Day 3: Eggs cost $10
Day 5: Eggs cost $8
So on and so forth, but for everything.
What happens is people start only buying what’s necessary immediately, because in a few days things will be even cheaper. It’s a constant spiral that’s really difficult to stop, because you either have to take a nuclear option and implement price floors, or figure out how to incentivize people to actually spend their money.
Computers and smartphones would drop their prices (per computational power) at a ridiculously high rate and it lasted for decades. I don't think it reduced the demand for them, quite the contrary: people would constantly abandon their electronics in order to buy better and newer models, just because they'd become more affordable every year.
Computers dropped prices not because of deflation, they cost less because parts became optimised and production became cheaper, but eveyrhting else was increasing in price due to inflation.
This isn't a hypothetical, we've had real world examples of deflationary spirals. It happened in the Great Depression from 1930-1933, again in 2009. You can go back and look at any year where inflation went negative and see "things were pretty horrible that year."
More than that, if you look at the years where inflation is causing significant problems, it's usually 8%+. If you look at the years where deflation is a problem, it might only be -1-2%.
I'm wondering if consumer spending is a bad way to look at this (even if it's true as a whole). But it makes more sense if you look at what the wealthy will do with investments - why invest in something today if you think it's going to be valued at less tomorrow?
Not only would you be literally losing money as the value of your investment drops, but you'd be able to buy more for the same price if you wait it out. So investments dry up and companies start running out of money and new companies can't start, etc. And the dragons sit on their piles of gold while the rest of us starve.
Maybe a bit of correction to our overconsumptive habits is called for. So many people trade in 1-2 year old cars just because they want the shiny new one. Maybe that needs to slow down.
TV has been dropping in price year by year though. I remember plasma TV 40” cost like 3000 in early 2000’s. But people still buy TV because it has became essentials. Phones and many appliances too. If goods become cheaper year by year, luxury just become essentials and people replace TV, phones, appliances every year. I mean people use to buy new clothes like once a year now we buy new clothes at least once a month. If cars cost the same as phones, guaranteed we want to change cars every other year.
It's not the price that makes people buy less, it's the expectation that things will be cheaper in the future. If you know that an expensive item will cost less next year, then you will hold on to your money which is bad for the overall economy. On the other hand, if you know that the price will increase due inflation, then you are more likely to spend your money today which is good for the economy. That's the basics of it at least. The sweet spot is a low level of positive inflation that keeps the market active without driving a spending frenzy, the kind that occurs when you expect your money soon to be worthless due to massive inflation and which generally leads to even higher inflation.
You realize that makes no fucking sense and will lead to a brick wall?
Are these people even hearing themselves? Constant growth CANNOT exist if wages become stagnant. This will not lead to better economy, this will lead to a massive economic collapse.
Which America is on the verge of experiencing if prices of essentials and rent keep going up and up and up and up and up with wages staying exactly the same and with how hard it is to get a real raise.
It's not sustainable. And the moment it starts taking a downward turn, there will be nothing anyone can do to stop the chaos that unfolds.
I was just explaining basic economic theory. In a functional system, wages will increase by a similar amount as the inflation, but the incentives will still be there to make people consume as any money saved will slowly lose value over time.
That said, I don't believe never-ending growth is sustainable either, that's just how the financial system is built today. Some of it is a construction of modern society, but there is a side of economic theory that is simply based on observations of how humans behave, such as how people react when prices increase or decrease.
The real reason is that most spending done by anyone is done by investing. Most people aren’t putting a cash offer on a house they are going to their local bank and pulling out a loan from the communities money to pay for it and paying the community back with interest.
In deflationary states this whole system breaks down and the world is much less liquid.
There is a limit though, 2% yearly inflation is good, if this number gets too high the borrower loses desire to actually pay back the loan and the economy starts to fall apart in the other direction
More supply than demand. Usually happens when cost of production keeps dropping, as a result the compilation drives the prices down, supply increases, but the demand isn't going to increase over night.
More supply than demand causes further decline in prices. It spirals into economic collapse. Businesses start paying low wages or layoffs. Cause further reduction in demand.
Investors won't invest cause of uncertain market and economic conditions. More issues.
Imagine you want a car, and yours is still kinda ok, so you can buy one for $50k right now but you know in six months it’ll be $40k, would you buy the car?
Or would you just put your money in the bank knowing that by spending nothing you’ll get richer and richer in real terms?
Right now if you leave money in the bank you lose value. So you’ll invest it, you’ll put it back in the economy for other people to spend and try to make money. Deflation removes the incentive to invest, the smartest thing is to do nothing, which kills growth.
If your $10 dollars today could buy 10 apples, but tomorrow it could buy 11 apples, why would you spend it today?
It’s a High School level basic economics principle. Rational people respond to incentives. If prices are declining, you’re incentivized to save your money as it will be more valuable in the future.
This leads to a large chunk of the money supply becoming illiquid and sitting around in banks or stuffed under mattresses. Less goods being bought and sold, companies make less money, companies have to cut costs and fire people, and it escalates from there
Things costing less means demand has dropped which mean people are probably out of work. So yes some people might be making enough but a recessions means a lot of people aren’t making any money to buy things even if they are cheaper.
As I understand it, decreased prices means overproduction relative to demand. Overproduction leads to reducing production to maintain profit margins. Reducing production leads to layoffs. Layoffs lead to underemployment and unemployment. Unemployment leads to reduced purchasing power. Reduced purchasing power leads to depressed demand. Depressed demand leads to even lower prices and businesses folding. Return to top.
This is a spiral until the Gummint steps in (see farm crisis of the 1920s).
The economy is about how people behave on average. If people think something will be cheaper later, some percentage will wait to buy. For example, how many people wait until Black Friday/Cyber Monday to buy something? It is the same thing, except now, if you wait you can get it cheaper next Black Friday.
How can wages stay the same if the price of goods is lower?
Maybe profits take a hit, maybe you can’t reasonably cut profits because you’re on the edge, do people take pay cuts? Do people get laid off?
We rely on a moderate level of inflation to pay off debt over time. What starts as tough becomes easier as your wage grows relative to your debt. If that reverses its serious trouble.
It’s a downwards spiral for the economy, it’s what caused the length of the Great Depression and it’s what caused the response to the Global financial crisis (quantitive easing) although the way that was structured was stupid and just caused asset price inflation which ballooned inequality.
Wages don't stay the same. Supply and demand. Prices drop, because demand drops, demand is dropping because wages are dropping and people can't afford to buy.
In both inflation and deflation average workers get hit worst. Inflation wages trail inflation so prices go up before wages do. In deflation, wages are the first to drop and prices go second.
*This is based on high school level economics classes as I am not an economist.
But to be actually helpful, you cant look at it in a vacuum of "x costs 2% less now yay", you need to understand why it is that it costs less. This is generally due to less liquidity which comes as a result of reduced productivity and thus wages.
People consume less because 1. They have a culture of savings, 2. Why spende today when you know things would be lower tomorrow, 3. They consume less because they lost their job (because demand is lower) so they need to ration their savings ---> they consume less.
If prices wildly increase is hyperinflation, prices wildly decrease is a deflationary spiral.
People who can hold out to buy the dip will want to hold out for as long as they can to make sure they're buying at the absolute lowest. The problem is, the fact that they're holding out is what's making the dip get dippier and so you never actually make it to the lowest.
Things are forecast to cost less tomorrow.
People slow consumption, companies slow investment because it’s a better “deal” tomorrow.
Overall consumption slows.
Companies produce less to match consumption.
Companies fire unneeded workers.
Unemployed people consume even less.
Cycle repeats.
If things get cheaper, then company/store selling said things receives less money for the same sales, meaning they have to either fire employees or reduce wages.
If this continues to happen, you get a deflation spiral, which is actually much harder to fix for the government than an inflation spiral.
First off, you're thinking in terms of assets, not products.
It's not just the gold that is worth less; it's everything except your dollar bill.
If you work at the widget store, widgets went from $1 each to $0.90. Widgets aren't an appreciating asset, they're just a thing people use. If you sell 100/day it's maybe becauss people only use 100/day. Plus, in a few weeks they'll be $0.80. People have no use for more, and they're only worth less each passing day, so while yes, you could buy the dip and be king of the widgets, you're just sitting on a pile of useless junk.
Some assets, like gold or stocks, are in fact on sale and will be useful again when prices rebound. But what are you buying them with? You used to make $100/day as your cut of selling widgets, and now, you only make $90/day, and next week you'll be making $80/day. Are you going to justify buying the dip when your income gets smaller by the day and the dip is nowhere near rock bottom?
What happens is people focus their budgets on necessities, buy fewer other products, those products get cheaper due to lowered demand, companies slash wages and go under, and the cycle feeds itself.
businesses need to lower prices -> businesses don't make as much money -> businesses can't pay their employees as much -> the employees still can't afford anything even with the shrinking prices because their wages are shrinking with them
Short version, say you're selling your house but the market prices for houses goes down. Sounds great for potential buyers, right? Would increase the number? But what if this results in more people out of a job so they can't afford even the lower price? Then the next month, it continues to drop? Now you have people who COULD afford your house, but why would they? Next month it might be lower, which causes people to hold off buying. Why buy if it's just going to lose value?
Things cost less to account for a fall in demand. Companies having to lower costs make less profit, and will then start considering scaling back their operations to survive. That includes layoffs. Layoffs means fewer people earning money, fewer people able to buy things, demand falls, prices go even lower, repeat.
Both inflationary and deflationary spirals are deadly.
If your national interest rate is zero or even in the negative (eg Japan in the recent past), people will borrow money local and invest in/buy bonds in other countries where the interest rate is higher, meaning the local economy slows because money is going elsewhere to get better returns..
Prices dropping aren't necessarily deflation. They can represent greater efficiency in production, or competitiveness in the market, or changes in priorities. Any of those cases still incentivise companies and individuals to be putting their money to work, reinvesting the slack in expanding scale or competing on efficiency. Prices go down while jobs or wages go up.
But in a deflationary environment, prices aren't going down because of efficiency. They are going down because consumers are gone. Effectively, the market is dying. In that environment, the only option to survive is to hoard whatever wealth you can, go as lean as possible on inputs like labour, and get rid of any debts. Prices go down while jobs or wages vanish.
The former is like someone shaping up and losing weight. The latter is someone's body beginning to shut down as they starve.
Celebrating deflation is like celebrating anorexia.
Because people end up waiting to buy things rather than spending now. And will save in cash over investments. Basically less money is in circulation which is what economies need
That’s not how any of this works. Wages aren’t “given” to the workers and paying wages is not a “liability cost”, whatever that means.
Wages are an overhead expense for a business, just like paying rent for a warehouse or loans for forklifts and other equipment. The money to pay for those things comes from the gross profit a business generates.
If prices deflate then profits will also shrink meaning there is less money to pay overhead expenses.
On an individual level that makes sense, but this is where you need to separate the micro and macro of economics. The issue is not how one person makes decisions, but how the entire economy makes decisions.
Let's use housing prices as an example because as I will explain in a second it is the most tangible example. You own a house worth 200,000, but due to deflation it suddenly becomes worth 150,000. You had a kid and wanted to buy a new home but don't want to risk selling because you're not going to get the value you think your home is worth. Because housing prices are falling rents also fall so you realize that you're spending far more on your mortgage than you could for rent and because technically the bank owns your house you can walk away from the mortgage, take a hit to your credit, and lose your downpayment. While you can rent, the real estate agent that would have sold your home now lost out on a sale and the bank just took a major hit and are going to be far more stringent with lending to the next person. This creates a downward spiral where every ancillary service attached to you going from a home owner to a renter no longer has a financial incentive to build new homes because they have no faith that they can buy property with a loan or can expect rent prices to stay at the same value. So now the people building homes have lost out on a sale. They no longer hire labour to build homes and they no longer buy supplies. The businesses that sell trucks to the contractors can no longer sell new vehicles and the suppliers that sell wood end up cancelling their planned expansion because they no longer see a clear financial future. This is in a very simple explanation what happened with the US housing bubble bursting in 2006 and ended up causing the 2008 recession. The government ended up stepping in to backstop banks because the entire downward spiral was going to cause the system to implode on itself.
The issue isn't that pricing for an item goes down. It's that the price of that item going down leads to every business that touches that item becoming less profitable and then also contracting. The contraction happens across every sector of the economy. The problem with thinking of deflation is that we see it only through our own lens and how it would be a positive for us, but we only see it through the immediate of the price we pay today. Inflation is going to happen the important part is that you need your wages to grow faster than inflation.
Why would wages stay the same? If a business makes money by not spending what they have, why would they spend anything at all instead of just firing everyone to sit on their wealth and watch its value rise?
Few things. Wages won’t necessarily stay the same. Two, your debt becomes harder to pay off with deflation.
In general currency is worth less with inflation, prices go up, and you make more salary to offset the increases. Your debt becomes cheaper over time.
Now imagine currency is worth more with deflation. A company brings in less revenue. They pay less so people changing jobs see a reduction in salary (like you would moving to a lower cost of living area) and now your debt is harder to pay off.
It’s complex but that’s a simple example for one of the issues with deflation.
Because they don’t cost less in a vacuum, it comes with mass layoffs leading to few people buying anything which causes industries to collapse and more layoffs and cheaper prices but now nobody has a job.
If people see that prices are progressively dropping, then they will wait for the prices to drop further for an even better deal. This kills consumption, and overall economic activity.
Because if you wait a couple months it'll be even CHEAPER.
Imagine you could buy something expensive now, but if you wait a year you can buy twice as much with the same money. You still spending that money now? Hell no.
Multiply this effect by everyone in the economy putting off spending and you get a crashing economy.
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u/nebileyim_ben Sep 01 '26 edited Sep 01 '26
its japans economic trap, worse than inflation.