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Deflation Question


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HOLA441

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.

The debts are unpayable even with inflation because the inflation is created by new debt money, hence the "inflation is good" argument is essentially circular.

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HOLA442

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.

Yes, this is much more eloquent than I could manage but I concur.

Look no further than Sir Merv's pension- he's so convinced by the merits of mild inflation his pension is designed to counter it entirely. Meanwhile in the real world public bus transport round me is essentially off limits unless you are on some sort of freebie, a very occasional user or have no choice-over £3 for a four mile round trip.

Edited by The Knimbies who say no
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HOLA443

The debts are unpayable even with inflation because the inflation is created by new debt money, hence the "inflation is good" argument is essentially circular.

If a debt was payable by inflation alone then it would be costing the lender in real terms.

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HOLA444

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

I think you have it exactly wrong.

with excessive debt comes increased monetary demand to service the debt, and in the extreme, the debt servicing becomes overwhelmingly the largest part of monetary demand in the economy. Take away the debt in that situation, ie the debt collapses into a default, or debt deflation, and with it monetary demand collapses, and the definition of monetary demand collapse is monetary hyperinflation. When that happens the economy is finished.

The solution once you have excessive debt? There is none, the only choice is collapse it now or later. The solution is to never have excessive debt in the first place.

Edited by evetsm
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HOLA445

I think you have it exactly wrong.

Well, at least I'm exact...

with excessive debt comes increased monetary demand to service the debt, and in the extreme, the debt servicing becomes overwhelmingly the largest part of monetary demand in the economy. Take away the debt in that situation, ie the debt collapses into a default, or debt deflation, and with it monetary demand collapses, and the definition of monetary demand collapse is monetary hyperinflation. When that happens the economy is finished.

Whoosh... I think... I'm confused. Where was the money for debt-servicing ending up? It wasn't being burnt.

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HOLA446

Well, at least I'm exact...

Whoosh... I think... I'm confused. Where was the money for debt-servicing ending up? It wasn't being burnt.

The money stays out there. It does not get destroyed. But the demand for the money dries up in debt debt saturated economy when the debt collapses(defaults, is gone)

and debt servicing is no longer demanded. The debt has gone, written off.

What happens when the demand for anything dries up and the supply remains constant ? The value drops like a rock. And when the value of money drops like a rock, because demand dries up, it becomes worthless. That is the definition of monetary hyperinflation. Where you used to go to the shop with a pocket full of money to get a wheelbarrow full of bread, you now go with a wheelbarrow of money to get a pocketful of bread.

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HOLA447

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.

im confused by your use of the word "Debt"

Buying goods leaves you no more in debt than buying a pint of milk for cash.

The cash itself is a symbol of debt, but the settlement of the contract in the purchase involves no debt...save that in order for the transaction to complete, there will have been a moment when the goods were the sellers, the cash yours, an invoice raised and a settlement made. At the moment of agreement, a debt exists, albeit fleetingly between buyer and seller, but in all practicality, it doesnt have a bearing on the trade.

This is the same in principle as the The mortgage comes first in the creation of money scenario.

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HOLA448

im confused by your use of the word "Debt"

Me too ;) All I'm really trying to catch is the idea of the price you pay for the raw materials may be more than the price you can get for the finished product in a deflationary environment.

Let's say I do shopping for my elderly neighbour. I go to the shop and buy milk at £1, but by the time I get it back to the neighbour, the price has dropped to 50p and that's all they're willing/able to give me. Result, I can no longer shop for my neighbour... or is it? That 50p will now buy the same amount of milk, but if I hadn't gone shopping for the neighbour, I'd still have that quid and could now buy my own milk and 50p left over.

I think the point I'm trying to get to is that hyper-inflation and hyper-deflation both make trading very, very hard.

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HOLA449

Me too ;) All I'm really trying to catch is the idea of the price you pay for the raw materials may be more than the price you can get for the finished product in a deflationary environment.

Let's say I do shopping for my elderly neighbour. I go to the shop and buy milk at £1, but by the time I get it back to the neighbour, the price has dropped to 50p and that's all they're willing/able to give me. Result, I can no longer shop for my neighbour... or is it? That 50p will now buy the same amount of milk, but if I hadn't gone shopping for the neighbour, I'd still have that quid and could now buy my own milk and 50p left over.

I think the point I'm trying to get to is that hyper-inflation and hyper-deflation both make trading very, very hard.

I see that,, but that would be hyperdeflation in your example...shops already use price dropping as a weapon, but they tend to view that as a cost to attract clients in to sell other profitable brands.

Contracts tend to have an agreed price point, whatever the market conditions...so if your neighbour buys the milk from you on condition you go and get it for him, he cant really morally or legally decline to conclude when he has seen the same thing on ebay for half price.

and just who stops buying petrol because it will be cheaper next week....either they need it, or they dont..Inflation, on the other hand will bring forward purchases....and for a short time, things will look great from a sales point of view...its then a case of keeping the plates spinning if they want the "numbers" to continue to look good.

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HOLA4410
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HOLA4411

But would you fill your tank?

exactly my point about pulling forward demand.

Your petrol tank is a store of future costs...but at some point, in a deflation, you either top it up, or dont do the work...This is the issue with the situation today and the drive for eternal growth...we've had 30 years of it...and really, just who is better off for all that effort?

Its almost like the growth isnt really there.....;)

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HOLA4412

exactly my point about pulling forward demand.

Your petrol tank is a store of future costs...but at some point, in a deflation, you either top it up, or dont do the work...This is the issue with the situation today and the drive for eternal growth...we've had 30 years of it...and really, just who is better off for all that effort?

Its almost like the growth isnt really there.....;)

You could write a fairly good approximate equation of how much you would put in your tank that would factor in rate of deflation, boredom of stopping at a petrol station and expected journey distances. Bottom line, when there is inflation or static prices, you fill your tank, but when there is deflation, you put in as little as you can. Likewise, you no longer buy 24 cans of tomatoes because they're on offer, and that big ticket item? Let's leave it for a month...

Of course you're right in the fundamentals - you still need to eat, drive to work or buy a train ticket - there are still essentials that won't wait. But - and it's an important 'but' I think - it alters purchase patterns. Perhaps this doesn't matter - you don't use less petrol in a deflationary environment, you just go to the garage more frequently, and my 24 cans were going to be all consumed before I bought another 24. In addition, I might put of the big-ticket item for a month, but someone else who put it off last month now turns up instead. Still, when something is going up in value, people tend to hoard it.

You, I think, are sceptical of bitcoins. Isn't that scepticism partly based on there deflationary nature?

Edit to add: re-reading your post, I think I may have misunderstood your point. I'll have a think...

Edited by tomandlu
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HOLA4413

You could write a fairly good approximate equation of how much you would put in your tank that would factor in rate of deflation, boredom of stopping at a petrol station and expected journey distances. Bottom line, when there is inflation or static prices, you fill your tank, but when there is deflation, you put in as little as you can. Likewise, you no longer buy 24 cans of tomatoes because they're on offer, and that big ticket item? Let's leave it for a month...

Of course you're right in the fundamentals - you still need to eat, drive to work or buy a train ticket - there are still essentials that won't wait. But - and it's an important 'but' I think - it alters purchase patterns. Perhaps this doesn't matter - you don't use less petrol in a deflationary environment, you just go to the garage more frequently, and my 24 cans were going to be all consumed before I bought another 24. In addition, I might put of the big-ticket item for a month, but someone else who put it off last month now turns up instead. Still, when something is going up in value, people tend to hoard it.

You, I think, are sceptical of bitcoins. Isn't that scepticism partly based on there deflationary nature?

Edit to add: re-reading your post, I think I may have misunderstood your point. I'll have a think...

Im sceptical of just about anything that is hyped up. I appreciate being made aware, as people here have made me aware of Bitcoins, but the hype and the crime was just asking to be included.

Of course you could schedule your trips for the essentials taking deflation into account...but most people arent that detailed until they are forced to be...for example, is it worth saving 10p next door when its so easy to spend it here?...and whats 10p to me anyway?

By force I mean when the resource you are spending becomes insufficient...inflation makes the resource of money plentiful and people become careless about how they spend it...of course they do and thats good for some groups...do it skillfully, and you can get 100 years of wealth taken from the producers and they wont even notice, indeed, many will be delighted to hand it over as their house is no not worth £300 ( my grandad bought in Ilford for that) its worth £300,000.

there is no reason why reality shouldnt rule....inflation makes a mockery of reality.

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HOLA4414

and you can get 100 years of wealth taken from the producers and they wont even notice, indeed, many will be delighted to hand it over as their house is no not worth £300 ( my grandad bought in Ilford for that) its worth £300,000.

there is no reason why reality shouldnt rule....inflation makes a mockery of reality.

Well, yes. But now you're talking about inflation in the price of a specific asset, and given the fundamental need for housing, a 'bad' asset to overly-financialise IMHO. Besides, I'm not intending to defend inflation apart from a few minor ripples, I'm just puzzling over deflation - what it means, whether it's good or bad, and so on.

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HOLA4415

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?),

Those ones you are thinking of are not deflation, because in all such cases recently we basically have PCs getting cheaper but more PCs in total such that the total amount spent on PCs has increased despite them being cheaper. Likewise for chickens. Cheaper chickens but more chicken farms.

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).

Remember that deflation or inflation can result from a decline or increase the velocity of circulation of that which serves as a medium of exchange. Prices are always some product of velocity and quantity. The results you obtain from this depend on what part of the money supply you count as money and which you count as credit.

The kind of "monetary" deflation you are talking about appears to be one in which prices fall but velocity does not, thus keeping income at the level it was previously but with cheaper prices. I'm not sure that scenario makes any sense. Typically, when prices fall across the board(and in aggregate, not just one item or good) then income also falls due to declining velocity,

Secondly, there can be deflation, where nominal liabilities remain unchanged, and deflation where nominal liabilities adjust with falling prices.

So genuine (i.e. not the PCs/chickens case) deflations can be categorized as:

* fall in aggregate price level with stable velocity and income

* fall in aggregate price level with falling velocity and income

And then in addition (i.e. orthogonal to) the above:

* fall in aggregate price level with unchanged nominal liabilities (debt). This is the 'binding zero lower bound' case

* fall in aggregate price level with corresponding reduced nominal liabilities (debt). This is the 'negative nominal interest rates' case.

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HOLA4416

Those ones you are thinking of are not deflation, because in all such cases recently we basically have PCs getting cheaper but more PCs in total such that the total amount spent on PCs has increased despite them being cheaper. Likewise for chickens. Cheaper chickens but more chicken farms.

Remember that deflation or inflation can result from a decline or increase the velocity of circulation of that which serves as a medium of exchange. Prices are always some product of velocity and quantity. The results you obtain from this depend on what part of the money supply you count as money and which you count as credit.

The kind of "monetary" deflation you are talking about appears to be one in which prices fall but velocity does not, thus keeping income at the level it was previously but with cheaper prices. I'm not sure that scenario makes any sense. Typically, when prices fall across the board(and in aggregate, not just one item or good) then income also falls due to declining velocity,

Secondly, there can be deflation, where nominal liabilities remain unchanged, and deflation where nominal liabilities adjust with falling prices.

So genuine (i.e. not the PCs/chickens case) deflations can be categorized as:

* fall in aggregate price level with stable velocity and income

* fall in aggregate price level with falling velocity and income

And then in addition (i.e. orthogonal to) the above:

* fall in aggregate price level with unchanged nominal liabilities (debt). This is the 'binding zero lower bound' case

* fall in aggregate price level with corresponding reduced nominal liabilities (debt). This is the 'negative nominal interest rates' case.

Still seems a bit vague. Whose income? Workers, capitalists or bankers?

As I've mentioned before, PCs get cheaper but chip fabs get more expensive. Surely these divergent dynamics have to be considered in aggregate to make sense of the question. You're not accounting for the cost of debt.

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HOLA4417

And still the commodities deflationary super cycle continues, combined with unseasonably warm weather the wholesale gas price has crashed -43%, yes 43%. It is expected that Utilities will have to act within months as they pre-order at the new price.

Deflation, bring it on...............

http://news.sky.com/story/1235827/uk-wholesale-gas-prices-hit-new-low

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HOLA4418

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