Jump to content
House Price Crash Forum
anonguest

Deflation Bad Inflation Good - the age old argument

Recommended Posts

Many others here, I suspect, will have heard/be familiar with the commonly touted academic argument for why price deflation in society is bad (and coversely modest price inflation is perfectly acceptable) - that deflation, in effect, results in people delaying purchases because "they know they will get it cheaper" in the future, etc etc.

Like many I find that, whilst perhaps superficially intellectually seemingly plausible, I wonder IF there is ANY reasonable real world hard evidence and peer reviewed published research showing that such behaviour by people does actually occur, and in quantity enough to impact the wider economy.

Can anyone point to ANY such material?  OR is this thesis just that - a thesis? One that is amply written and published about by academic economists with all manner of fancy equations, etc BUT no hard supporting evidence.

I have tried looking but cannot find anything (or at least anything I can mentally digest/comprehend).

N.B Yes I know all about the 'secret' need for inflation to keep the credit based monetary system alive, etc.  I am only interested in countering the 'deflation is bad' argument - at least with an absence of material supporting evidence.

Anyone?

Share this post


Link to post
Share on other sites

Could it be that some people delay purchasing/improving because they have more urgent things to spend their money/debt on.......got plenty of spare, may want to re-tile the bathroom today rather than in a couple of years, to do it because labour and materials tomorrow may cost more, will it add value, or be nicer to look at?......improvements that don't actually improve anything much, but still a considered purchase just to look at a differently decorated wall?........😉

Edited by winkie

Share this post


Link to post
Share on other sites

https://www.aeaweb.org/articles?id=10.1257/0002828041301588

Deflation and Depression: Is There an Empirical Link?  Andrew Atkeson, Patrick J. Kehoe.  AMERICAN ECONOMIC REVIEW VOL. 94, NO. 2, MAY 2004 (pp. 99-103).

Their conclusion?  Only in the Great Depression, otherwise no.

https://doi.org/10.1111/j.1468-0327.2005.00151.x

Deflation and monetary policy in a historical perspective: remembering the past or being condemned to repeat it?
Michael Bordo  Andrew Filardo.  Economic Policy, Volume 20, Issue 44, 1 October 2005, Pages 800–844

Maybe this, but I can only read the abstract.

Edited by Will!

Share this post


Link to post
Share on other sites
17 minutes ago, Will! said:

https://www.aeaweb.org/articles?id=10.1257/0002828041301588

Deflation and Depression: Is There an Empirical Link?  Andrew Atkeson, Patrick J. Kehoe.  AMERICAN ECONOMIC REVIEW VOL. 94, NO. 2, MAY 2004 (pp. 99-103).

Their conclusion?  Only in the Great Depression, otherwise no.

That's the sort of thing I had in mind. Can't access the paper myself - so will take your word for it that the summary/conclusion is as you say it is.

I wonder IF all other published research also confines itself ot this one event. Is there nothing from more modern, and presumably better documented, times (e.g. Japan, etc)?

Also, and again without being able to see the paper, I wonder how they define/differentiate purchases (e.g. discretionary vs non-discretionary)

And finally, for now...... I wonder IF the Great Depression case study is a valid piece of supporting evidence for the modern deflation bad/inflation good argument that talking heads on TV always spout. Specifically that the deflation in that historic event was significant/non-trivial(?)   And my argument relates to a scenario of much more modest deflation or even just de facto zero inflation (e.g. +0.5% this year, -0.5% next year, +0.5% year after, etc). In such a case I wonder if the much dreaded 'postponed purchases' would really materialise - with all the ensuing claimed impact on the wider economy?

 

Edited by anonguest

Share this post


Link to post
Share on other sites

There's quite a lot of stuff on Japan, but the conclusions tend to be that Japan is a special case and not generally applicable.

Share this post


Link to post
Share on other sites
8 minutes ago, Will! said:

There's quite a lot of stuff on Japan, but the conclusions tend to be that Japan is a special case and not generally applicable.

How convenient (and typical!) for the economists.  IF the facts don't fit your thesis then claim that an evidential case is not applicable! Quelle surprise.

Share this post


Link to post
Share on other sites
1 hour ago, anonguest said:

Like many I find that, whilst perhaps superficially intellectually seemingly plausible

I think even calling it "intellectually plausible" is too kind if you're talking about low single digit percentage deflation per year. Maybe in hyperdeflation of 20% per day you would wait until tomorrow to buy your groceries.

What fraction of purchases can realistically be delayed for very long? Food? No. Utilities? No. Clothing? No. Transport? No. Health and education? No. Housing? No. White goods? Usually no.

So what does that leave? A new sofa or a fountain for the fish pond? And who's going to wait 5 years for the price to come down 10%?

Consumer electronics have been collapsing in price for decades and yet almost every household is full of them. Why did consumers buy VCRs costing a month's pay when a £15 DVD player was mere decades away?

Share this post


Link to post
Share on other sites

If you controlled the number of money tokens in existence/circulation by lending them at interest to the community of money users, would you prefer to lend more money tokens (inflation) or fewer money tokens (deflation)?

How might you persuade the users of your tokens to support and enthuse about your preference?

 

Share this post


Link to post
Share on other sites

Service industry is disproportionately large in the UK...who would delay going for a meal out because it may be cheaper in two months? Folks want gratification now.

Share this post


Link to post
Share on other sites

Money becoming worth more is clearly bad for people with little money.

 

Inflation was invented by the Chinese in order to recoup the poor's money, slowly and surely

 

During ww2 inflation was 0.

 

Wake up 

Share this post


Link to post
Share on other sites
2 hours ago, Dorkins said:

I think even calling it "intellectually plausible" is too kind if you're talking about low single digit percentage deflation per year. Maybe in hyperdeflation of 20% per day you would wait until tomorrow to buy your groceries.

What fraction of purchases can realistically be delayed for very long? Food? No. Utilities? No. Clothing? No. Transport? No. Health and education? No. Housing? No. White goods? Usually no.

So what does that leave? A new sofa or a fountain for the fish pond? And who's going to wait 5 years for the price to come down 10%?

Consumer electronics have been collapsing in price for decades and yet almost every household is full of them. Why did consumers buy VCRs costing a month's pay when a £15 DVD player was mere decades away?

Yep.  This is exactly where I was coming from in posting this thread - and the various other replies echo these same sentiments.

My point, however, was to find out if I can 'arm myself' with sufficient ammunition to rebuff someone the next time I get involved in a conversation involving this deflation is bad meme - with inevitably the other party typically spouting, unthinkingly, the age old argument they have been 'educated' in by the media (i.e. the supposed danger of 'deferred purchases').

Yes, we can all retort back with the accusation that if they engaged in just a minute or two of critical thinking, such as highlighted above, they themselves would begin to question the logic of the claimed threat of deflation.

What would help clinch it is IF one could, with confidence, challenge/wager them to find any supporting evidence for the deferred purchase phenomena (e.g. sociological/psychological studies of peoples attitudes/responses to the promise of a modest price fall in not too distant future vs option of buying now).

Share this post


Link to post
Share on other sites
9 minutes ago, anonguest said:

My point, however, was to find out if I can 'arm myself' with sufficient ammunition to rebuff someone the next time I get involved in a conversation involving this deflation is bad meme - with inevitably the other party typically spouting, unthinkingly, the age old argument they have been 'educated' in by the media (i.e. the supposed danger of 'deferred purchases').

Doesn't the example of consumer electronics do that? They spent decades falling in price but people didn't wait, they still bought them.

Share this post


Link to post
Share on other sites
1 hour ago, TheCountOfNowhere said:

Money becoming worth more is clearly bad for people with little money.

 

Inflation was invented by the Chinese in order to recoup the poor's money, slowly and surely

 

During ww2 inflation was 0.

 

Wake up 

Sumerians, Babylonians and Assyrians had frequent debt jubilees, central to which was the redistribution of land and building rights, but this practice became increasingly impossible under Roman law, as creditors sought to maintain their unearned privileges via military enforcement. Early Christians were thus obliged to give the ideal of a debt amnesty a ghostly, eschatalogical meaning: "The meek shall inherit the Earth."

Share this post


Link to post
Share on other sites
16 minutes ago, Dorkins said:

Doesn't the example of consumer electronics do that? They spent decades falling in price but people didn't wait, they still bought them.

For me of course it does. And I HAVE used that line of argument to break down the 'deflation is bad' stance that others unthinkingly quote.

It's fascinating to watch someone, often fairly well edcated and otherwise intelligent, start to to think through the various points used to shoot down the deflation is bad meme.....and slowly see them start to doubt it themselves. 

BUT THEN, almost without fail, there comes a sort of involuntary reflex repulsion accompanied with some comment along the lines of "But if it's wrong why do so many economists/politicians/etc claim it....".  In effect, how can you possibly know better than they all do sort of attitude.

 

 

Edited by anonguest

Share this post


Link to post
Share on other sites
1 minute ago, anonguest said:

BUT THEN, almost without fail, there comes a sort of involuntary reflex repulsion accompanied with some comment along the lines of "But if it'wrong why do so many economists/politicians/etc claim it....".  In effect, how can you possibly know better than they all do sort of attitude.

Most people just want to spend their lives playing it safe and following the herd.

Share this post


Link to post
Share on other sites
5 minutes ago, Dorkins said:

Most people just want to spend their lives playing it safe and following the herd.

I suspect this 'rejection reflex' is the same sort of response shown throughout time when people with a long held belief have that belief shot down in flames. Must have been the same for people being shown that the Earth really does go around the Sun, even though the authorities had told them otherwise since time began.

Edited by anonguest

Share this post


Link to post
Share on other sites
8 minutes ago, anonguest said:

I suspect this 'rejection reflex' is the same sort of response shown throughout time when people with a long held belief have that belief shot down in flames. Must have been the same for people being shown that the Earth really does go around the Sun, even though the authorities had told them otherwise since time began.

Its not really though is it. When I saving £40K for a deposit I wanted deflation. Now I've got a mortgage, I want inflation. Is deflation good or bad depends on your circumstances. Its not a case of you being right and they're wrong. I think you will always have trouble countering a deflation is bad argument with some people because chances are deflation would be bad for them. 

Share this post


Link to post
Share on other sites
5 minutes ago, locky82 said:

Its not really though is it. When I saving £40K for a deposit I wanted deflation. Now I've got a mortgage, I want inflation. Is deflation good or bad depends on your circumstances. Its not a case of you being right and they're wrong. I think you will always have trouble countering a deflation is bad argument with some people because chances are deflation would be bad for them. 

Why would monetary deflation be bad for, to use your example, someone paying a mortgage? What you really want is low interest rates.

As others have said here already....how, in general, can an increase in purchasing power of the money in your pocket/bank account/etc be bad?

IF deflation results in you getting reduced payrises year on year and so presumably not being able to 'write off' the mortgage as quickly as you would have hoped to do (like people did in the 1970's) you would surely gain elsewhere in your cost of living savings? 

Edited by anonguest

Share this post


Link to post
Share on other sites
17 minutes ago, anonguest said:

Why would monetary deflation be bad for, to use your example, someone paying a mortgage? What you really want is low interest rates.

As others have said here already....how, in general, can an increase in purchasing power of the money in your pocket/bank account/etc be bad?

Of course. But I also want inflation so my DEBT is also reducing by 2% a year in value, which is massive. I mean a lot more than my disposable increasing in value 2%. This is assuming wages are generally keeping up. Stagflation is a bitch

Edited by locky82

Share this post


Link to post
Share on other sites
19 minutes ago, anonguest said:

Why would monetary deflation be bad for, to use your example, someone paying a mortgage? What you really want is low interest rates.

As others have said here already....how, in general, can an increase in purchasing power of the money in your pocket/bank account/etc be bad?

IF deflation results in you getting reduced payrises year on year and so presumably not being able to 'write off' the mortgage as quickly as you would have hoped to do (like people did in the 1970's) you would surely gain elsewhere in your cost of living savings? 

This is what gets me about people moaning about how they had great interest rates in their mortgage in the 70s-equating it to difficulties ftbers have now. Having loads of inflation when you have debt is great as long as your wages go up at a similar rate. All that debt is worth less. 

Edited by UnconventionalWisdom

Share this post


Link to post
Share on other sites
1 hour ago, anonguest said:

BUT THEN, almost without fail, there comes a sort of involuntary reflex repulsion accompanied with some comment along the lines of "But if it's wrong why do so many economists/politicians/etc claim it....".  In effect, how can you possibly know better than they all do sort of attitude.

Its the crime thats too audacious to name. Once you concede that deflation is good then the logic that banks have been engaged in wholesale theft of trillion of $ of wealth across several generations becomes inescapable, most people are simply not able to contemplate this because it would be an admission that they stood by and let someone steal from them.

 

Share this post


Link to post
Share on other sites

I regularly want to throw my shoe at the radio when this nonsense is touted on Radio 4’s Today programme. 

If the kind of deflation that is often described put people off, we would never buy televisions or laptops. 

Also, deflation usually describes a period of broad price stability in which on balance more goods are falling in price than rising. 

Deflation is actually a symptom of wider economic problems where prices fall in response to falling demand - which can become a vicious cycle  

 

Share this post


Link to post
Share on other sites
9 hours ago, locky82 said:

Its not really though is it. When I saving £40K for a deposit I wanted deflation. Now I've got a mortgage, I want inflation. Is deflation good or bad depends on your circumstances. Its not a case of you being right and they're wrong. I think you will always have trouble countering a deflation is bad argument with some people because chances are deflation would be bad for them. 

You created inflation simply by borrowing a big lump sum of money to use as security against property......all you need is more and more people doing the same as you, having the ability and will to do the same as you, preferably interest only, no killing the debt now.😉

Share this post


Link to post
Share on other sites

Slight, gradual deflation is the natural state for a well run economy based on sound money.

Thus deflation of this kind should be seen as the ideal to aim for.

Share this post


Link to post
Share on other sites

Deflation is touted as bad because it favours poorer people rather than rich people. In deflation wages become worth more, so poorer people can acquire assets. The wealthy want the poorer people to have to earn more and so work longer to buy anything. Inflation captures the fruits of poorer people's labour for wealthy people, they own the land, property, corporations that sell things and of course the banks.   

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...

  • Recently Browsing   0 members

    No registered users viewing this page.

  • 337 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



×
×
  • Create New...

Important Information

We have placed cookies on your device to help make this website better. You can adjust your cookie settings, otherwise we'll assume you're okay to continue.