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tomandlu

Deflation Question

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I'm sure this has come up before, so apols.

There are, to my mind, four sorts of deflation - deflation linked to the production of something getting cheaper (PCs?) deflation linked to the availability of something becoming greater (chickens?), deflation linked to the reduction in credit available to fund the purchase (houses, hopefully - one day), and deflation linked to a monetary phenomenon (money printing to you and me).

Now, it seems fairly clear that these are two different general classes, with the first three types occupying one class, and monetary deflation occupying another. PCs getting cheaper does not imply that baked beans have got cheaper (if anything, they might get more expensive, as the baked bean makers might hope to capture some of the money we're not spending on PCs), but general, monetary deflation implies that everything is cheaper.

My questions - am I right to make the distinction and, more importantly, is the effect of the two classes radically different? We mock the government for making deflation into a bogeyman, but is that mockery largely a problem of categorisation?

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It's not that credit deflation isn't bad. It is that credit inflation was considered fine and dandy, yet credit deflation was considered as bad. The latter is the consequence of the former. If credit deflation is bad, so is credit inflation, yet where was the concern?

Sorry, but it is all too little, too late. It was so inevitable. So avoidable.

Moreover, indebting the unborn, printing money etc to make good on bad promises is pure evil. Whose is the debt? Where is the contract?

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Inflation is theft. Yes once upon a time it might have had the side effect of stimulating economic activity but that relied on market inertia and slow information flow in order to allow the new money to cause increased production before price discovery would kick in. In this day and age companies monitor competitors prices and thier own sales volumes in real time and are able to adjust prices in real time as well. lets say a supermarket knew all its customers had a 10% pay increase overnight, would it 1) increase its inventory or 2) hike its prices ? - how long do you think it would take to do (2) ?

Edited by goldbug9999

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Anyone want to have a stab at answering the original question? Nah...

some poster on here used to talk about biflation, which pretty much described your scenarios.

to me, inflation is the dilution of the number of monetary numbers v the amount of available wealth.

where productivity improvements come into play, then you get more bang for your buck, so in theory, your buck should buy you more by default. so in the case of IT, todays £1000 buys much more than last years £1000.

meanwhile, inflation continues at x% official.

some would say that is biflation. One though is down to money supply, the other is down to human ingenuity.

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Anyone want to have a stab at answering the original question? Nah...

The distinction between credit money and reserve money is somewhat arbitrary when looking at the big picture, as of course is the distinction between a govt and its central bank. I believe the technical term for the latter is consolidated govt, perhaps we should think in terms of consolidated money as well?

The issue with technology is Wonderpup's deflation paradox. I think it worth mentioning that although the chipsets get cheaper and/or more efficient through successive generations the chip fabs get more expensive at the same rate, also known as Rock's Law.

http://en.wikipedia....ki/Rock%27s_law

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Anyone want to have a stab at answering the original question? Nah...

If the net effect is that the same money buys more "wealth" - be it a more powerful computer or more bananas, then I don't see any need to make the distinction. Deflation is a good thing, contrary to established economic dogma it actually creates more economic activity and wealth in the long run. For example if phones didn't get any better/cheaper over time would people still buy a new one every 2 years or so ?.

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If the net effect is that the same money buys more "wealth" - be it a more powerful computer or more bananas, then I don't see any need to make the distinction. Deflation is a good thing, contrary to established economic dogma it actually creates more economic activity and wealth in the long run. For example if phones didn't get any better/cheaper over time would people still buy a new one every 2 years or so ?.

One reflects genuine advancements or improvements (or changes at any rate) in supply / production / resource availability. It's a reflection, at least to a degree, of real, physical differences, so an actual change of wealth. The other is the result of a monetary system that's become divorced from that reality. The same thing applies to inflation too IMO - a resource genuinely becomes scarce, or easy credit pushes up the prices - two quite different phenomena with the same end result. I think those two are the important ones. Whilst finding greater resources and producing more efficiently aren't the same thing they both reflect real-world changes.

Edited by Riedquat

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I'm sure this has come up before, so apols.

There are, to my mind, four sorts of deflation - deflation linked to the production of something getting cheaper (PCs?) deflation linked to the availability of something becoming greater (chickens?), deflation linked to the reduction in credit available to fund the purchase (houses, hopefully - one day), and deflation linked to a monetary phenomenon (money printing to you and me).

Now, it seems fairly clear that these are two different general classes, with the first three types occupying one class, and monetary deflation occupying another. PCs getting cheaper does not imply that baked beans have got cheaper (if anything, they might get more expensive, as the baked bean makers might hope to capture some of the money we're not spending on PCs), but general, monetary deflation implies that everything is cheaper.

My questions - am I right to make the distinction and, more importantly, is the effect of the two classes radically different? We mock the government for making deflation into a bogeyman, but is that mockery largely a problem of categorisation?

The first group is commodity prices changing due to demand and supply changing.

The last is commodity prices changing due to the price of money changing.

When the price of money changes it is difficult to discern what the commodity demand/supply price should be and thus it becomes difficult to invest where there are real and not just apparent commodity shortages. This causes malinvestment and economic stress and boom and bust.

That is why monetary inflation is bad and that is why the authorities lie to us and deflect away from talking about pure monetary inflation and bastardize the word "inflation" to other meanings.

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I'm sure this has come up before, so apols.

There are, to my mind, four sorts of deflation - deflation linked to the production of something getting cheaper (PCs?) deflation linked to the availability of something becoming greater (chickens?), deflation linked to the reduction in credit available to fund the purchase (houses, hopefully - one day), and deflation linked to a monetary phenomenon (money printing to you and me).

Now, it seems fairly clear that these are two different general classes, with the first three types occupying one class, and monetary deflation occupying another. PCs getting cheaper does not imply that baked beans have got cheaper (if anything, they might get more expensive, as the baked bean makers might hope to capture some of the money we're not spending on PCs), but general, monetary deflation implies that everything is cheaper.

My questions - am I right to make the distinction and, more importantly, is the effect of the two classes radically different? We mock the government for making deflation into a bogeyman, but is that mockery largely a problem of categorisation?

I'm actually very surprised no-one has properly answered your question, given how many people here make statements on the merits of deflation. So I'll answer it.

It is possible to have deflation in the price of a particular good or service without deflation of the overall money supply. However, it is impossible (or at least I've never heard of it happening) to have deflation in the price of all goods and services without deflation of the money supply. Though when we talk about electronic goods its not actually deflation but replacement of one good with another of higher quality at the same price point.

Deflation is not intrinsically bad/good per se, but that our monetary system and how it is set up means that deflation is ruinous for our economies and wider prosperity.

I'm sure you know by now that the money we use is created when loans are made, resulting in the issuance of equal amounts of money and debt. What is less well known is that the interest portion means that at any moment in time there is more debt in existence than money. It might seem counter-intuitive for this to be true, yet it is. You can google and check it. More importantly this has profound implications in a deflationary environment.

For example, the UK has roughly £2 trillion in money in existence and roughly £4 trillion in debt outstanding. Now lets say the money supply deflates by £1 trillion.

What happens in this process is that borrowers take £1 trillion in money and pay off £1 trillion in debt.

Thus, £2tn - £1tn = £1tn in money,

and, £4tn - £1tn = £3tn in debt.

Now lets compare before to after deflation

Before, £2tn money vs £4tn debt = money-debt ratio of 1 : 2

After, £1tn money vs £3tn debt = money-debt ratio of 1 : 3

So ironically the debt load, that is the amount of debt vs the amount of money circulating to pay it, has become worse by attempting to pay down the debt via deflation. The end result being companies defaulting on their debts, as they simply cannot get hold of enough money to service their working capital loans irrespective of how profitable they might otherwise be. So as in the great depression wave after wave of companies default, fire their staff, and close their doors. Furthermore, these defaults result in fresh deflationary impulses traveling through the system, resulting in more defaults, etc, in a continual continuous cascade.

This is why deflation is anathema to economists and governments, except well maybe the idiotic germans. The masses as evinced by people here too, do not understand money, and thus do not understand what monetary deflation means. So we get people saying deflation is great! Things get cheaper! Not understanding what they are arguing for.

Edited by alexw

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Anyone want to have a stab at answering the original question? Nah...

I would challenge your classification of deflation. Not that any are wrong but that they miss a fairly crucial one - the self-fulfilling destructive deflationary spiral. This is where lower prices leads to lower wages which leads to lower expenditure, which pushes down wages further.

This is the deflation that economists fear, not that of cheaper televisions.

This site is full of defationistas who think it is utterly marvelous, whereas a bit of mild inflation is a crime. Fear a deflationary spiral - history shows it can be hard to escape.

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I would challenge your classification of deflation. Not that any are wrong but that they miss a fairly crucial one - the self-fulfilling destructive deflationary spiral. This is where lower prices leads to lower wages which leads to lower expenditure, which pushes down wages further.

This is the deflation that economists fear, not that of cheaper televisions.

This site is full of defationistas who think it is utterly marvelous, whereas a bit of mild inflation is a crime. Fear a deflationary spiral - history shows it can be hard to escape.

+1

And if not checked leads to cascading losses, soaring unemployment and systemic failure of the banking system. Of necessity the banks then have to be recapitalised, the resultant super inflation and decline in living standards far exceeding the damage that a little mild inflation would ever cause.

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I would challenge your classification of deflation. Not that any are wrong but that they miss a fairly crucial one - the self-fulfilling destructive deflationary spiral. This is where lower prices leads to lower wages which leads to lower expenditure, which pushes down wages further.

This is the deflation that economists fear, not that of cheaper televisions.

This site is full of defationistas who think it is utterly marvelous, whereas a bit of mild inflation is a crime. Fear a deflationary spiral - history shows it can be hard to escape.

Unfortunately 'mild inflation' as tolerated by the BoE has outstripped earnings for a number of years so it's no surprise people here get twitchy at the prospect of more under the guise of it being required medicine. I've enjoyed too much mild inflation lately and as a consequence have implemented a personal cost deflationary spiral, maybe 5% of regular spending so far. Will do for starters, plenty more to come in time I think. Perfectly rational response to irresponsible financial stewardship, in my view.

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Many, many thanks. Some interesting stuff.

It sounds like the potential for excessive general deflation, as well as the potential damage it will inflict, are both correlated to the amount of debt. More debt = greater chance of deflation + greater damage from deflation.

Where does an HPC via removal of excessive mortgage lending fall? It's a monetary phenomenon, but only impacts a single commodity, so I'd guess it's cheaper-television-deflation rather than 'proper' deflation?

Also, and putting my cynical hat on, afaict we haven't had a hyper-deflationary event since the black death, which would seem to indicate that it's fairly hard to trigger. Is it a genuine fear or a bogeyman? Wouldn't deflation tend to be self-limiting? If paying down debt is the trigger, but deflation makes it harder to pay down debt, then deflation would seem to come with a built-in pair of brakes.

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Thus, £2tn - £1tn = £1tn in money,

and, £4tn - £1tn = £3tn in debt.

Now lets compare before to after deflation

Before, £2tn money vs £4tn debt = money-debt ratio of 1 : 2

After, £1tn money vs £3tn debt = money-debt ratio of 1 : 3

Wouldn't the solution for this be that the CB should print an equal amount of new money, or would that be inflationary?

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It sounds like the potential for excessive general deflation, as well as the potential damage it will inflict, are both correlated to the amount of debt. More debt = greater chance of deflation + greater damage from deflation.

Where does an HPC via removal of excessive mortgage lending fall? It's a monetary phenomenon, but only impacts a single commodity, so I'd guess it's cheaper-television-deflation rather than 'proper' deflation?

It could come from slowing demand for ever higher mortgage debt as well.... lenders have made teaser offers that much sweeter only to lure in the greater fools already.

Excessive deflation lol. What about excessive HPI, and stupid high house prices now?

Destruction? How about new fresh lending, in huge volume, against lower house prices (the majority owned outright in some studies), and the good that will do for the economy/banks/gov's revenues.

If people are only just getting to grips with debt-deflation now, and saying it's not going to be fair, well you're years to late. Could have educated yourself ages ago.

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If people are only just getting to grips with debt-deflation now, and saying it's not going to be fair, well you're years to late. Could have educated yourself ages ago.

Well, yes, but what I'm trying to understand is the different sorts of deflation. My instinct is that, aside from the inconvenience to the over-indebted*, an HPC is a good thing - it's the 'right' sort of deflation (doubly so, since the commodity is an essential and directly impacts our competitiveness and QoL).

* the inconvenience is two-fold. The unavoidable, "oh-shit-I'm-stuck-with-excessive-debt" bit, and the "I-can't-remortgage-at-a-decent-rate-and-I'm-stuck-here" bit, which always seems to me one of those umbrella/bank moments.

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I would challenge your classification of deflation. Not that any are wrong but that they miss a fairly crucial one - the self-fulfilling destructive deflationary spiral. This is where lower prices leads to lower wages which leads to lower expenditure, which pushes down wages further.

This is the deflation that economists fear, not that of cheaper televisions.

This site is full of defationistas who think it is utterly marvelous, whereas a bit of mild inflation is a crime. Fear a deflationary spiral - history shows it can be hard to escape.

Whereas the situation we have now is more than mild inflation if you're on minimum wage and declining real wages/underemployment for virtually everyone else.

Plus ca change.

If inflation targetting achieved it's supposed goals we would have price/wage equilibrium.Instead we have the poor bailing out the rich so that mean average incomes can be held up to the light and the CBers can congratualte themselves on a job well done.

The simple reality is that if you pump enough air into a balloon it'll burst.

I've attached an interesting inflation/deflation chart covering the USA from the 16th century.Consider my balloon comment and look at the last fifty years.

800px-US_Historical_Inflation_Ancient.svg.png

post-37037-0-21711100-1396426169_thumb.png

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I would challenge your classification of deflation. Not that any are wrong but that they miss a fairly crucial one - the self-fulfilling destructive deflationary spiral. This is where lower prices leads to lower wages which leads to lower expenditure, which pushes down wages further.

This is the deflation that economists fear, not that of cheaper televisions.

This site is full of defationistas who think it is utterly marvelous, whereas a bit of mild inflation is a crime. Fear a deflationary spiral - history shows it can be hard to escape.

the idea that all people will stop buying all things because they will get a better price next week is fear mongering.

yes, a person might hold back on buying that designer bag until the sales....they may suspect there are going to be more sales next week.

the designer bag firm may well go bust.

But, someone somewhere needs a bag...his old one broke, he needs to heave more logs, whatever...so there IS a buyer somewhere for a product at a time, not necessarily at a price point.

thus, a whole town might see the price of bread falling every week.

They however, cannot withhold that purchase till the day before they starve.

In an inflation though, people start by having no means to pay for a loaf, no matter that the price is rising and they are better off buying it now.

In other words, a deflation is self cancelling...an inflation is not...indeed, when the madness sets in, the bean counters see the dead on the streets as a price worth paying to control the inflation.

Edited by Bloo Loo

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the idea that all people will stop buying all things because they will get a better price next week is fear mongering.

<snip>

I switch between the view expressed in the your post and the 'classical' view, and I still haven't made up my mind. The main thing I'm stuck on is the "Deflation is bad because it makes debts unpayable" principal.

Well, for excessive debt, perhaps it's the debt that's bad? If I said 'braking is bad because I've got a massive spike sticking out of my steering wheel', you might think I was a bit thick. However, there is legitimate debt - a manufacturer buys raw materials using debt, but by the time he produces the goods, he will have to sell below production and raw materials cost. Is this a real problem? After all, the last batch of goods he sold could be used to purchase the materials, and in that case deflation has worked in his favour. Okay, leverage becomes very hard to pull off, which would slow growth, which would be terrible, because... (struggling here) because... look, growth must always be fast. Fast is better. Really.

One can't help feeling that some of the argument against deflation would be best summed up as "deflation is bad because it makes it really hard to sell debt".

I think I shall continue to fence-sit and stick to the general principle that a little bit of deflation or a little bit of inflation is okay and to be expected, but excessive deflation or inflation is best avoided.

Note that I'm only talking about general monetary deflation, not deflation in specific goods.

Edited by tomandlu

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Meanwhile the European Central Bank is dicing with the gravitational pull of deflation. Already perilously close, slower than expected growth could get them stuck in an irreversible deflationary spiral, even so it is unlikely they will cut rates later this week..........

http://main.omanobserver.om/?p=69184

How long before the ECB prints money? If so it is bound to boost stock prices?

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