The downside to deflation in a debt-based monetary system?

[Zippyjuan]

Maybe I'm confused, but It's my impression that you would rather spend money in a deflationary environment. In a deflationary environment, your money has more purchasing power. Think of gas. You were able to buy gas for less money last week than you could this week...

And if you wait until next week, you can buy even more. Why buy that TV now when it will cost less a month or whatever from now- especially if you don't need it today?

http://www.economicshelp.org/blog/21...n-and-poverty/

Deflation tends to reduce aggregate demand and economic activity.
If people expect prices to fall, people delay consumption and investment leading to lower output, and higher unemployment.
Deflation increases the real value of debts. This reduces living standards of those saddled with debts delaying growth and expansion.
In periods of deflation, nominal wages tend to be sticky downwards causing real wage unemployment.

- The worst period for poverty in the UK was not periods of high inflation (like the 1970s and late 80s). The worst periods were the 1920s and 1930s. Deflation in the 1920s was a major factor in causing mass unemployment and prolonging the great depression.

http://findarticles.com/p/articles/m.../ai_n28604039/

The National Bureau of Economic Research dates the 1920-21 recession from a general business peak in January 1920 to a trough in July 1921. It was mild at first. Wholesale prices continued to increase until May 1920, four months past the general business peak. By July 1920, the Federal Reserve Board's index of industrial production had declined by only 7 percent from its January peak, and factory employment had fallen 7.3 percent.

The contraction then became severe. By the year's end, industrial production had fallen 25.6 percent below its January 1920 peak and bottomed out at 32.6 percent below its January 1920 level in July 1921, the general business trough. Wholesale prices were 42.9 percent below their May 1920 peak by July 1921. Industrial production had fallen by 32.6 percent in eighteen months, wholesale prices by 42.9 percent in fourteen months. The deflation eliminated more than 70 percent of the rise in wholesale prices associated with World War I.

Civilian unemployment rose substantially during the recession. According to Lebergott [1964, 512], the unemployment rate was 1.4 percent for both 1918 and 1919, 5.2 percent for 1920, and 11.7 percent for 1921.

[The Gold Standard]

Maybe I'm confused, but It's my impression that you would rather spend money in a deflationary environment. In a deflationary environment, your money has more purchasing power. Think of gas. You were able to buy gas for less money last week than you could this week...

If prices are crashing most people will sit on their money until prices stop falling, but at some point prices will be low enough where you don't want to wait anymore. That's why there is no such thing as a Keynesian death spiral. People aren't going to starve to death because food might be cheaper tomorrow. Eventually prices fall to the point where there is demand for them and business inputs are cheap enough for entrepreneurs to buy up the failed companies and put people back to work. This obviously wouldn't be painless, but deflation like this only occurs after an inflationary boom, so we ought to learn to stay away from those.

[The Gold Standard]

Deflation tends to reduce aggregate demand and economic activity.
If people expect prices to fall, people delay consumption and investment leading to lower output, and higher unemployment.
Deflation increases the real value of debts. This reduces living standards of those saddled with debts delaying growth and expansion.
In periods of deflation, nominal wages tend to be sticky downwards causing real wage unemployment.

- The worst period for poverty in the UK was not periods of high inflation (like the 1970s and late 80s). The worst periods were the 1920s and 1930s. Deflation in the 1920s was a major factor in causing mass unemployment and prolonging the great depression.

LOL. People really do buy this shit, don't they. If your measurement of poverty is nominal wages in inflated money of course deflation looks a lot worse. And deflation has never caused long tern unemployment. Government enforced wage controls in a deflationary environment will do the trick though. (See Great Britain in the 1920s and 30s.)

The early 1920s must have been some kind of miracle. The CPI fell almost 16% from mid 1920 to mid 1921 (a bigger drop than any point in the Great Depression), yet unemployment peaked at 11.7% in 1921, fell to 6.7% in 1922, and 2.4% in 1923. All without wage controls and government stimulus.

[Zippyjuan]

Unemployment going from 1.4% to 11.7 percent in tw0 years is a pretty big rise- a tenfold increase.

What effect- if any- do you think that a serious deflation would have on unemployment?

It also depends on the reason for the deflation. If prices are falling due to increases in productivity then the unemployment will not rise by much if any but if the deflation is being caused by falling demand for goods then it can start to feed on itself more. Long and broad deflations are more often tied to falling demands.

[The Gold Standard]

Unemployment going from 1.4% to 11.7 percent in tw0 years is a pretty big rise- a tenfold increase.

I know. It was a severe correction after inflating for the war. It's pretty incredible how unemployment was back down to 2% 2 years after prices crashed by 16% and there was no monetary or fiscal stimulus.

Then 10 years later prices fall half as much, the government gets involved and creates a decade long depression, and deflation gets the blame.

[Black Flag]

Steven

because as the supply approaches zero, its value goes toward infinity.

But that never happens because goods exist, which means there is a supply.

The problem with the hypothetical is that you didn't account for economic law "... at what price?..."

All economic goods have a price, and at some price there will be a sale.
Humans require economic goods to live, and at some price there will be a sale.

Therefore, there will always be a buyer and a seller at some price. Your theory of 'hyperdeflation' simply cannot exist.

Because hyperinflation, and the destruction of the value of money does exist does NOT mean that an opposite -hyperdeflation- must exist.

[Black Flag]

U

It also depends on the reason for the deflation. If prices are falling due to increases in productivity then the unemployment will not rise by much if any but if the deflation is being caused by falling demand for goods then it can start to feed on itself more. Long and broad deflations are more often tied to falling demands.

There appears nothing more confusing to people then the cause of inflation/deflation - yet, the concept is incredibly simple.

Money is merely another economic good, like any other economic good, and obeys exactly the same laws of economics like any other economic good.

It's only "additional" feature is that it merely happens to be the most desired economic good in an economy, and thus, a lot of people want to trade for it and trade with it.

The law of supply and demand applies to money exactly the same way the law of supply and demand applies to apples and oranges and cars, etc.


If the supply of apples is high vs. the demand of apples, the price of apples will fall.
If the supply of apples is low vs. the demand of apples, the price of apples will go up.

If the supply of money is high vs. the demand of money, the price of money will fall.
If the supply of money is low vs. the demand for money, the price of money will go up.

But because the rest of the economic goods in trade is measured in relation to money - that is we "price" all economic goods in terms of the money - the way we see the rise and fall in the price of money is by the amount of money it takes to trade for an economic good.

Thus, when the price of money falls due to oversupply, it will take more money-goods to trade for the same amount of other economic goods - the result of "needing more money" is equal to "the price of other goods goes up".

When the price of money rises due to under-supply, it will take less money-goods to trade for the same amount of other economic goods - the result of "needing less money" is equal to "the price of other goods goes down"

Note that there is not one thing here that has anything to do with a "falling demand for (other) goods" - it is solely the rise and fall of the price of money itself due to the increase/decrease in the supply of money PERIOD - no more than the rise and fall of the price of apples depends on the rise and fall of demand of automobiles..... we look at the rise and fall of the supply of apples in attributing to the rise and fall of the price of apples, and pay no attention to the demand/supply of automobiles!

Do the same with money....

[Steven Douglas]

because as the supply approaches zero, its value goes toward infinity.

But that never happens because goods exist, which means there is a supply.

I'm talking about supply of currency, not goods or services available for exchange, although they are impacted as well during a debt deflation, as happened leading into the Great Depression, as described by Irving Fisher in 1933 as nine interlinked factors for cause and effect:

Assuming, accordingly, that, at some point of time, a state of over-indebtedness exists, this will tend to lead to liquidation, through the alarm either of debtors or creditors or both. Then we may deduce the following chain of consequences in nine links:

1) Debt liquidation leads to distress selling and to
2) Contraction of deposit currency, as bank loans are paid off, and to a slowing down of velocity of circulation. This contraction of deposits and of their velocity, precipitated by distress selling, causes
3) A fall in the level of prices, in other words, a swelling of the dollar. Assuming, as above stated, that this fall of prices is not interfered with by reflation or otherwise, there must be
4) A still greater fall in the net worths of business, precipitating bankruptcies and
5) A like fall in profits, which in a "capitalistic," that is, a private-profit society, leads the concerns which are running at a loss to make
6) A reduction in output, in trade and in employment of labor. These losses, bankruptcies and unemployment, lead to
7) pessimism and loss of confidence, which in turn lead to
8) Hoarding and slowing down still more the velocity of circulation.

The above eight changes cause (9) Complicated disturbances in the rates of interest, in particular, a fall in the nominal, or money, rates and a rise in the real, or commodity, rates of interest.

Both hyperinflation and hyperdeflation are strictly monetary phenomena, having little to do with a scarcity or abundance of goods. Shortages of goods under hyperinflation are not because of a scarcity of goods, but rather a glut - virtually no scarcity - of the currency. A shortage of money under hyperdeflation also has nothing to do with the supply of goods, but rather an absolutely scarcity of currency with which to buy them.

The problem with the hypothetical is that you didn't account for economic law "... at what price?..."

At what price indeed, the real question is "at what quantity of what"? If there is no currency available to you, it really does not matter what the price is in that currency. You can try to price what you want or need in other things, but with no competing currencies, you're talking barter.

The bigger economic law - the fundamental that most don't take into account, is that a debt-money based economy - an economy where money can only be created as a form of debt - is only viable in a productive, growing economy, with at least moderate inflation required to sustain it. But the economy MUST perpetually expand, taking on ever-increasing (exponentially increasing) amounts of debt to sustain the monetary system, as designed, because it is nothing more than a vast network of inverted pyramids.

All economic goods have a price, and at some price there will be a sale.
Humans require economic goods to live, and at some price there will be a sale.

Again, see above.

Also, I didn't agree with the premise that the primary cause of deflation is tight-fisted people who are hanging onto their money, rubbing their two dimes together, waiting for better prices. That will happen in some areas, but it's incidental. That notion is based on the Keynesian bogeyman called the "Paradox of Thrift", which attempts to make currency holders (read = non-existent savers in our monetary regime) into the primary "liquidity trap" of sorts - the Deflationary Would-Be Monsters who can't be trusted with their own money, because they won't circulate it enough.

Under deflationary contraction, however, nobody even has money to be tight-fisted about. With the currency scarce, most can't even meet the nominal price of their own past and current obligations, let alone have discretionary income to spend. Savings have already been taxed practically out of existence for most in our current highly distorted economy, which encouraged a mass shift to market investments as a mechanism for beating the perpetual inflation required to keep the Ponzi money system afloat.

Therefore, there will always be a buyer and a seller at some price. Your theory of 'hyperdeflation' simply cannot exist.

Again, priced in what, and is it available at any price? Who could get a loan ten years ago? Now, out of those people, how many can get one today?

There is no accepted definition for hyperdeflation, so I think of it loosely as prices falling, rapidly and substantially over a very short period of time (call it a "crash), and primarily as a result of a contraction of the money supply - which in our debt-money regime means contraction of credit, because that is the only way money is created. Using this meaning, hyperdeflation most definitely occurred during the Great Depression, which was a deflationary depression with a period where the money supply contracted rapidly, and prices fell sharply everywhere. Goods and services rapidly hit a floor. Anyone with two dimes to rub together could buy just about anything for a song, but few had two dimes to rub together. That is the nature of a deflation, because credit, and therefore the money supply itself, had contracted/imploded.

Because hyperinflation, and the destruction of the value of money does exist does NOT mean that an opposite -hyperdeflation- must exist.

True. However, while the reality of one does not necessarily require its opposite, neither does it preclude it. It certainly doesn't have the same dynamics, any more than death by asphyxiation has the same symptoms as death by hypoxia. However rare it is (and it is rare) hyperdeflation has happened in the past, and therefore could happen in the future.

[Roy L]

Maybe I'm confused, but It's my impression that you would rather spend money in a deflationary environment. In a deflationary environment, your money has more purchasing power. Think of gas. You were able to buy gas for less money last week than you could this week...

No, you are not spending in a deflationary environment because your money will buy even more tomorrow.

[Roy L]

If prices are crashing most people will sit on their money until prices stop falling, but at some point prices will be low enough where you don't want to wait anymore.

Only if you think they won't go even lower.

That's why there is no such thing as a Keynesian death spiral. People aren't going to starve to death because food might be cheaper tomorrow.

An economy that shrinks to providing only necessities is a disaster. The only thing worse is an economy that DOESN'T provide necessities, which is a catastrophe.

Eventually prices fall to the point where there is demand for them and business inputs are cheap enough for entrepreneurs to buy up the failed companies and put people back to work. This obviously wouldn't be painless, but deflation like this only occurs after an inflationary boom, so we ought to learn to stay away from those.

The problem is that the debt money system is inherently unstable. There is positive feedback under both inflationary and deflationary conditions.