Is a deflationary economy a good thing?

[Renew Deal]

http://www.democraticunderground.com/discuss/duboard.php?az=show_topic&forum=104&topic_id=1210794#1210931

[Gimel]

1. It's good for some people

Prices go down because fewer people are buying. Too much unemployment, however, and the value of the currency is either stagnant or eroding.

If you're really poor it may not help you much. If you have a little expendable cash, you might find bargains and things you might not otherwise afford.

We're had a deflationary economy in Israel for a couple of years. Prices are stable now, but many things can be bought at a bargain price. For a while, prices were declining.

[jeter]

14. It's bad for countries with large debts, like the US

Or people with large debts.

Since the value of the produce erodes, the value of debt increases.

[Tiberius]

2. not really

Since prices for everything will fall, it becomes a spiral as consumers realize that if they just wait, they can obtain goods cheaper.

Also, since wages would decrease, people would have to pay off their past debts at new, lower incomes. That would be terrible since we're carrying so much debt.

8. Wages for blue and white collar are the only deflated area

Recent statistics show that debt is going up tremendously, while wages are not.

At the same time, all kinds of prices are going up--except for what you buy at Wal-mart.

The average car financed is up 30 percent since 2000. Houses went up at an annualized rate of 20 percent at the end of last year.

So its actually the worst possible scenario. Debt, and prices are going way up, but wages or jobs are not.

[On the Road]

3. If You Need a Job -- NO

If you need return on your savings or investments -- NO. If you need an expanding tax base to allow government programs to expand -- NO.

It's only good if you have a fixed amount of money regardless of your actions, or an employer who gains more from low labor costs than from an expanding market. A receding tide lowers most boats.

[Ready4Change]

4. What Deflation?

.

[troublemaker]

5. No No No!

It's economic Armageddon. In a broad deflation the only commodity in the world that increases in value is cash so all investment dries up. Pure disaster. And morally, think of all the third world countries that are completely dependent on commodities pricing -- minerals, oil, etc. We're talking mass starvation, riots, etc.

[orwell]

6. Ding

There really is no simplistic answer to this question. In any price translation there are winners and losers.

The overarching concern as far as structural considerations would be deflation in an economic system that employs excessive leverage (debt).

Ring any bells?

O

[aneerkoinos]

7. It's a wonderfull thing... with a right set of values

It might be a way out of the current unsustainable economic model of compulsory growth.

Less compulsory consumption would be a wonderfull thing. Stuff and more stuff don't make people happy, it just creates yearn for more and more instant gratification and makes people seriously unhappy. Besides, there's the wasting limited natural resources, polluting and destroying our planet with our consumerist way of life... and most people still living in absolute poverty and many dying of hunger.

Less compulsory work would be a wonderfull thing, naturally work and income should be spread somewhat equally, everybody quaranteed living income and work-a-holics allowed to work and earn more. Seriously, we could have much better life working (in wage slavery) half the time we do now.

[rapier]

9. scattershot notes on deflation

Deflation is the worst thing that can happen in an economy based upon credit. It is the one thing that CANNOT be allowed to happen at any cost. Massive inflation is far preferable to any deflation.


Inflation is the natural order of economies based upon credit and non metals backed currencies. In other words it is the natural and necessary condition of modern economies.

The worst thing about deflation has to do with debt. If deflation becomes widespread at all, debtors eventually start to default. One of the hallmarks of general deflation is debt default. Most debt is taken on the assumption that it will be paid back with cheaper, or to put it another way, more plentyful, money. If you have X payments on your debts monthly, and your income falls and falls and falls again, eventually your in trouble. If your a bussiness and the price of your product falls, you could be in trouble. While this price of things trend has been evident the last couple of years it has been spotty, not widespread.

Another sort of deflation that is deadly, even more deadly in our finance based economy, is deflation of financial assets. The stock market crash of 01-02 was quite a shock to the system but Al Greenspan saved the day by lowering rates madly. This lowering of rates, for complex reasons, allowed the value of bonds and other debt based financial instruments to inflate, which masked and overcame the deflationary forces in the stock sell off. It also allowed pockets of the economy to inflate thru the demand provided by cheap and easy credit. Think homes and consumer durables like cars and home entertainment centers and the like which kept right on selling.

Al and all his boys worried publicly and long about the threat of deflation last year, for good reason. The game is over if deflation takes hold. Think of the Great Depression. That was the result of deflation in first, financial assets and then general prices as demand cratered.

Now Al can't cut much anymore. Short rates which he controls can't go much lower. He can influence, and perhaps is manipulating longer term interest rates to keep real estate and debt based consumer spending going strong.

The now officiall wished for dollar fall is a response to the threat of deflation. Cheaper dollars are inflationary by definition so that is what they want, to counter the forces of deflation. Japans bizzare fight to keep the dollar strong vs the yes has been carried out by them with a policy that is massively inflationary. THey have been printing money like mad to buy dollars and then use the dollars to buy our Treasury paper, which keeps long rates low. So far inflation has not manifested intself in Japan so much, but one should expect it

Also commodities of all stripes are now rising, inflating. Mostly in dollar terms as the dollar fell but again, this is the desired outcome. Yes, inflation is our friend. Greenspan et al won't say it but know that it is true. How this will affect you with rising prices and stagnant income it is better to ignore. That isn't first or even second concern of the Fed. Their first concern is to keep the financial markets running so as to avoid a panic. A sudden loss of price, and liquitiy in the financial markets which would cause massive problems. Sure, a few million households haveing a tough time is one thing but Americans financial standing is the very essence of our power and wealth. Well, the wealth of our ever smaller and ever more inportant elites.

[54anickel]

10. "Indeflation". UIA posted a link to I think it was the Daily Reckoning

that coined the phrase for inflation (goods & commodities) and deflation (assets/debt) at the same time.

Guess we may as well name the beast as it will probably be settling in for a while.

[amazona]

11. no because it becomes stupid to invest in homes, education, etc.

Deflation is a disaster. See under the Great Depression.

People who buy houses see their incomes drop and lose their homes. Today people must also take out huge loans to finance higher education -- it means you could no longer go to college because you would burdening yourself and your family with a crushing debt relative to future earning power. Both deflation and uncontrolled inflation are bad, but deflation is worse because it destroys your ability to invest for the future, whether by buying a home, starting a family, investing in education, starting a business -- you can no longer do those things because you can't rely on having a job that pays the same as it did the year before. Deflation is already a reality for some people in technical fields who saw the value of their experience and education fall in half or even to nothing, and the result is lost homes, lost families, lost dreams, and finally bankruptcy.

[Strelnikov_]

12. No. 'Deflation' Is A Word That Most Economists Will Not Let . .

. . pass their lips. Kinda like the mention of the name "Sauron" in Middle Earth.

[kalian]

13. Nope...definitely not a good thing...

But guess what...it has the potential of rearing its ugly head.
Am I looking forward to it. You bet! We need some MASSIVE economic
corrections within our economic structure.
Its gonna hurt...but its tough medicine for a very sick patient.