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Deflation The Trouble With Falling Prices

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http://www.bloomberg.com/quicktake/deflation/

The ogre stalking the globe’s weak economies isn’t the one people have learned to fear. The monster isn’t inflation but its opposite: falling prices. Its name is deflation and it appears friendly. Why be afraid when the cash in people’s wallets buys more fuel and televisions, not less? Because when deflation grabs hold, companies and consumers stop spending. It strangles borrowers because their debts get harder to repay — a menace for countries struggling to exit the worst recession in a generation. In this fairy tale, inflation comes dressed in shining armor as policymakers debate how to create just enough of it to keep deflation at bay.

More at the link, where as clearly increasing prices ad infinitum makes perfect sense and paying £1m for a loaf of bread makes perfect economic sense.

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http://www.bloomberg.com/quicktake/deflation/

More at the link, where as clearly increasing prices ad infinitum makes perfect sense and paying £1m for a loaf of bread makes perfect economic sense.

Cheaper prices are only a problem if you've assumed they will stay the same or go up.

People don't go around front loading IT purchases for good reason - they wait until they need them, as they know they will get cheaper.

The fact that our monetary/economic/political system is completely bonkers, with current and future generation indebted up to the eyeballs, is the problem... not cheaper prices.

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Because when deflation grabs hold, companies and consumers stop spending.

Which is why-of course- no one has bought a computer for twenty years. :lol:

What's really strange about this 'deflation as the enemy' meme is the fact the one of the great virtues of free markets is supposed to be the fact that competitive forces drive prices down

So if deflation is bad then free market capitalism is bad? Can that be right? Because the free market is a deflationary engine that constantly imposes a downward pressure on prices.

Also why do debts become harder to pay?- after all if you are spending less on other things you have more money left to service those debts. Unless-of course- you were gambling on wage inflation to make those debts supportable, in which case you gambled and lost. Why should everyone else be subjected to higher prices just because some people chose or were conned into taking on more debt than they can sustain?

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Only for the overleveraged and over indebted. I yearn for a return to simpler times. A nice semi for under 20 shillings a week. However did we get to the current madness? In the advert below a months wages secured the deposit.

14874_595391133882563_1303557248_n.jpg

Edited by aSecureTenant

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Which is why-of course- no one has bought a computer for twenty years. :lol:

What's really strange about this 'deflation as the enemy' meme is the fact the one of the great virtues of free markets is supposed to be the fact that competitive forces drive prices down

So if deflation is bad then free market capitalism is bad? Can that be right? Because the free market is a deflationary engine that constantly imposes a downward pressure on prices.

Also why do debts become harder to pay?- after all if you are spending less on other things you have more money left to service those debts. Unless-of course- you were gambling on wage inflation to make those debts supportable, in which case you gambled and lost. Why should everyone else be subjected to higher prices just because some people chose or were conned into taking on more debt than they can sustain?

Exactly! It's obviously ******** when any serious thought goes into analysing it.

There are too many minds trapped in a paradigm which is logically inconsistent. Endless propaganda is the only way such a situation can be maintained.

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But assets are different.

If you look at Irish house prices, very few bought when prices were falling. Now prices have bottomed sales have ticked up.

Same with stock prices - few buys when they are falling.

It'a all about deflation of assets and banks balance sheets. Even a 5yr old kid could tell you that deflation of goods and services is good.

It amazes me how people assume that 2 to 5% inflation or government theft is a good thing.

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More at the link, where as clearly increasing prices ad infinitum makes perfect sense and paying £1m for a loaf of bread makes perfect economic sense.

Deflation is not buying a loaf of bread, deflation is when you make your own bread. ;)

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Deflation is not buying a loaf of bread, deflation is when you make your own bread. ;)

Its when you Yorkshire puddings don't rise

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But assets are different.

If you look at Irish house prices, very few bought when prices were falling. Now prices have bottomed sales have ticked up.

Same with stock prices - few buys when they are falling.

It'a all about deflation of assets and banks balance sheets. Even a 5yr old kid could tell you that deflation of goods and services is good.

It amazes me how people assume that 2 to 5% inflation or government theft is a good thing.

In fact a constant theme on Irish forums is that inflation is good as it inflates away the debt. No one ever says that inflation is bad as it steals savings.

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Deflation has a compounding effect on cheapness because ultimately all services and products are build/delivered using other products and services. Deflation actually encourages economic activity, for example there are many business models that would not be viable without the rampant deflation of internet bandwidth costs in recent years. Ditto for deflation in the cost of producing software. Deflation in one-off/small run manufacturing (courtesy of 3D printers) will give rise to new viable business models, as will deflation in financial service costs via crypto currencies, etc etc

Edited by goldbug9999

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In fact a constant theme on Irish forums is that inflation is good as it inflates away the debt. No one ever says that inflation is bad as it steals savings.

That only works if you have wage inflation to match

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People don't go around front loading IT purchases for good reason - they wait until they need them, as they know they will get cheaper.

Funny how the Tech industry is still going strong isn't it? Companies are still manufacturing TVs, PCs, Smartphones and games consoles.

Funny how people don't hold off until just before they die to buy a 10 foot 3D OLED TV.

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Funny how the Tech industry is still going strong isn't it? Companies are still manufacturing TVs, PCs, Smartphones and games consoles.

Funny how people don't hold off until just before they die to buy a 10 foot 3D OLED TV.

Components get cheaper but the fabs get more expensive. In a deflationary environment the debt you need to take on to finance construction of the fab becomes unserviceable. Generally, if a debt is defaulted on then the credit issuer is forced into a loss. If these defaults are many in number then the banking system collapses and has to be re-financed via inflation. It's the potential repercussions of debt default/re-inflation that are the real threat.

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That only works if you have wage inflation to match

In fact, even if you have wage inflation to match price inflation, any savings that you have are stolen by inflation unless the interest rate is high enough to give an after tax inflation beating return.

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Funny how the Tech industry is still going strong isn't it? Companies are still manufacturing TVs, PCs, Smartphones and games consoles.

Funny how people don't hold off until just before they die to buy a 10 foot 3D OLED TV.

Never see any jeans on sale now either because they are half the nominal price of 40 years ago.

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In fact, even if you have wage inflation to match price inflation, any savings that you have are stolen by inflation unless the interest rate is high enough to give an after tax inflation beating return.

...you don't need an inflation beating return, only a rate that matches inflation or even slightly below inflation.....the benefit of cash is so that you can buy at no cost things that are of below present and future value. ;)

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Funny how the Tech industry is still going strong isn't it? Companies are still manufacturing TVs, PCs, Smartphones and games consoles.

Funny how people don't hold off until just before they die to buy a 10 foot 3D OLED TV.

If we had had house price deflation I think we would have much more advanced housing by now. Houses would resemble something out of a Gerry Anderson production in the 60's. Probably build them in a day using a 3D printer or something all the high tech gadgetry.

Instead they are basically the same, construction wise as a Victorian terrace, (with slighter better foundations and insulation perhaps) .

All we've done is pour ever increasing amounts into the same old bricks and mortar.

Edited by aSecureTenant

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If we had had house price deflation I think we would have much more advanced housing by now. Houses would resemble something out of a Gerry Anderson production in the 60's. Probably build them in a day using a 3D printer or something all the high tech gadgetry.

Instead they are basically the same, construction wise as a Victorian terrace, (with slighter better foundations and insulation perhaps) .

All we've done is pour ever increasing amounts into the same old bricks and mortar.

Hold on - don't we need inflation to keep people "busy like worker bees"? Need to pay everyone their performance related pay increase don't we? And it needs to be above "inflation". If we didn't have pay rises people would move jobs far more often like musical chairs and it would be much harder to control the population. The increase in wages and general population feeds through in to an increase in prices. That's why everyone needs growth! The pie needs to get bigger by 2% a year globally just to keep up with population growth. So 2% growth just means your standing still. Hirer means that you are attracting labour and/or resources from other nations and your capital will generate a higher return

This is the system.

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Hold on - don't we need inflation to keep people "busy like worker bees"? Need to pay everyone their performance related pay increase don't we? And it needs to be above "inflation". If we didn't have pay rises people would move jobs far more often like musical chairs and it would be much harder to control the population. The increase in wages and general population feeds through in to an increase in prices. That's why everyone needs growth! The pie needs to get bigger by 2% a year globally just to keep up with population growth. So 2% growth just means your standing still. Hirer means that you are attracting labour and/or resources from other nations and your capital will generate a higher return

This is the system.

The problem is that people don't realise that it is wealth per head that matters, not total wealth.

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Components get cheaper but the fabs get more expensive. In a deflationary environment the debt you need to take on to finance construction of the fab becomes unserviceable. Generally, if a debt is defaulted on then the credit issuer is forced into a loss. If these defaults are many in number then the banking system collapses and has to be re-financed via inflation. It's the potential repercussions of debt default/re-inflation that are the real threat.

Nice. So taking on any kind of debt, even 'good' debt, is perilous in a deflationary environment.

I don't have any particular preference either way - gentle deflation or gentle inflation can be coped with. It's excessive or hyper where the trouble lies. And, while deflation sounds nice for anyone with savings, it presumably hits wages as well while over-rewarding savers.

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Nice. So taking on any kind of debt, even 'good' debt, is perilous in a deflationary environment.

You wont need debt because there will enough people with savings to make capital investments.

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