
Deflation - Are lower prices scarier than higher ones? - chwolfe
http://www.slate.com/id/2262989/pagenum/all/
======
Gormo
Deflation poses a couple of significant threats.

Firstly, it acts as a disincentive to real investment: the rate of deflation
is effectively an interest rate earned on funds stuffed into mattresses. If
deflation is at 5%, no one will want to invest in any project with less than a
5% return over the same period. Risk and liquidity premiums would also
increase even for investments that do provide a higher return than the
deflation rate.

Secondly, existing long-term debts would become extremely onerous for
borrowers. The implications for outstanding mortgages could make the recent
default epidemic pale in comparison.

However, it's worth pointing out that the 19th century was largely a period of
sustained, gradual deflation, and was also a period of tremendous economic
growth with little of the amplified boom-bust cycle we experienced in the 20th
century.

I'd conjecture that a climate in which a small amount of deflation is accepted
as a given would foster economic decision making that tends to focus more on
real wealth-creation, and less on the kind of financial abstractions which
have led to the recent turmoil. As long as we could manage the transition from
a slightly inflationary to a slightly deflationary economy (i.e. find a way to
deal with the problem of outstanding debt), I'm not so sure it would be quite
the disaster that the article portrays.

~~~
jbooth
What? The latter half of the 19th century had ridiculous booms and busts.

~~~
Gormo
Even in comparison to the great depression and the recent financial collapse?

There are always booms and busts, but inflation tends to encourage much bigger
booms, and thus much bigger busts. Could you imagine the kind of risk-taking
behavior that led to the credit bubble happening in an environment of
anticipated deflation?

~~~
jbooth
The great depression and recent collapse are 75 years apart.

There were 4 major downturns in the 1800s, 3 in the later half, and they were
much more severe than the typical recession in the 20th century, 2 were full-
fledged depressions:

[http://au.answers.yahoo.com/question/index?qid=2008030421573...](http://au.answers.yahoo.com/question/index?qid=20080304215730AAbuqyC)

This is in the context of the industrial revolution, so yes, very much boom or
bust.

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noelchurchill
_"For decades, politicians and pundits on the right have told us that we need
to balance the federal budget in order to keep inflation low; this remains a
staple of libertarian thinking (even though economic research demonstrates
that except in wartime, there is effectively no relationship between the size
of government spending and the existence of inflation)."_

Well in that case, lets just stay out of war and let the gov hand out monthly
payments to everyone so we don't have to work anymore. If government spending
doesn't lead to inflation then this should work out fine.

~~~
gaius
Notice the phrasing. Not government _borrowing_ , not "quantitative easing"
(printing money) but spending. In the US and UK there's never been a peacetime
high-spending government that didn't also borrow unsustainably.

So if you're say Sweden (high tax, high spending) then perhaps you can avoid
high inflation, but you can't extrapolate from there to dissimilar economies.

~~~
noelchurchill
I don't think you read the article, or specifically the quote in my comment
you're replying to. It specifically refers to the concern about balancing the
budget. You can't run a unbalanced deficit budget without borrowing.

------
sp332
Computer hardware (and electronic hardware in general) has been in continuous
deflation for decades. "Wait until the price comes down" is common advice in
tech circles. And yet the market has grown exponentially regardless.

~~~
angstrom
Yeah, but qualitatively you usually got more for your money by waiting with
tech, the price may have gone down on the original product only because
something better replaced it. The price drops are predictably cyclical.

If I buy a commodity like corn, oil, or steel I'm still getting a virtually
indistinguishable good regardless when it is bought. The expectation of price
drop can create a deflationary feedback if it happens in enough commodities.

------
ajg1977
Krugman wrote a good article earlier this week addressing why deflation is a
bad thing.

[http://krugman.blogs.nytimes.com/2010/08/02/why-is-
deflation...](http://krugman.blogs.nytimes.com/2010/08/02/why-is-deflation-
bad/)

~~~
bfung
Plus the title of this post takes a naive twist to this topic. It's not the
current prices that makes deflation bad for an economy, but that the
(perceived?) future price will be even lower than the current price, which
discourages investment since the investment will just lose.

As for the comment about computer hardware (and this applies to cars), the
opportunity cost of using the physical good now vs later is a bit more
concrete than throwing money in a "business", esp. startups, which are by
nature extremely risky.

------
viggity
FTA: _"For decades, politicians and pundits on the right have told us that we
need to balance the federal budget in order to keep inflation low; this
remains a staple of libertarian thinking (even though economic research
demonstrates that except in wartime, there is effectively no relationship
between the size of government spending and the existence of inflation)"_

Sure there is no correlation between size of government and the existence of
inflation, but that isn't what the _"politicians and pundits on the right"_
have said, they said _"we need to balance the federal budget in order to keep
inflation low"_.

It isn't overall government spending is going indicate inflation, but rather
_large deficit spending and/or large gov debt_ that is going to lead to
inflation because the only way to pay off creditors is to print more money,
the more money in circulation the less value it has => inflation.

Am I wrong? Isn't there some awful inflation going on right now in Zimbabwe
because they government keeps printing more and more money to pay off its
debt?

~~~
noelchurchill
You're right.

Inflation actually refers to an increasing number of dollars in the economy,
not increasing prices of goods. More dollars in the economy will lead to
higher prices of goods and services, so this leads to the common
misconception. But like you said, if government spending is larger without
larger deficits, this would mean they're spending more existing dollars, no
new dollars are created, and prices of goods stay the same.

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chrismealy
Folks interested in deflation will want to check out Irving Fisher's debt
deflation and Hyman Minsky's work:

<http://en.wikipedia.org/wiki/Debt_deflation>
<http://en.wikipedia.org/wiki/Hyman_Minsky>

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j_baker
This is what I love about slate. It seems to do a better job of reporting on
issues like this without a lot of partisan ideology.

~~~
kevbin
Slate is partisan ideology packaged as Kinsley-ism: "the common wisdom is
right, but _not_ for the reason everyone thinks!" He brought that shtick over
from The New Republic and it seems to have taken root, even Jack Shafer can't
fix it.

If there's any doubt about Slate's partisan leanings, here's how Slate's
editors voted in 2008: Barack Obama: 55 John McCain: 1 Bob Barr: 1 Not McCain:
1 Noncitizen, can't vote: 4

<http://www.slate.com/id/2203151/pagenum/4>

------
hop
Information, trade and money flows at light speed around the world now. This
is very different than the 1930's and with a world wide market system, and the
US having the reserve currency, I think it would be tough to have spiraling
asset deflation like the Great Depression. Whats not tough is abusing this and
printing tons of money.

------
sentinel
Not for me they ain't.

