

Why Falling Prices Are Actually a Really Bad Thing - orin_hanner
http://www.bloomberg.com/news/2015-01-21/why-falling-prices-is-actually-a-really-bad-thing.html

======
brc
I would believe these types of pop-economics articles a lot more if they could
actually find and example of a deflationary spiral causing a long term
depression.

Prices for many things already do decrease regularly. Every time I purchase a
new computer I'm faced with the knowledge that, in 6 months time, a better,
cheaper (or at least better value) model will come out. This myth that
consumers will endlessly postpone purchases in the face of falling prices
ignores the fact that a lot of ourchases cannot be postponed indefinitely.

And even if consumers postpone spending, it means they are saving. Which
builds the investment base necessary for growth.

The point is that a currency cannot deflate to an infinite value, but it can
be inflated to a zero value. There has been plenty examples of the latter, but
zero examples of the former.

The real reason for the FUD around deflation is that it's not good for central
banks. They, and their supporters are just talking their book. Fair enough,
but like high or low currency values relative to other currencies, there are
always winners and losers with deflation and inflation. One side is not
inherently more evil than the other.

What would be really great is constant value of currencies over time. That
would be mildly deflationary as technology increases production efficiency,
and it would ward off a lot of bad investment decisions which excarbate the
boom/bust cycle.

~~~
zzalpha
Congratulations for confusing micro and macroeconomics.

What happens to the price of a single good over the lifetime of that good is
not a useful lesson in what happens as a result of broad, economy-wide
deflation.

Frankly, the issue with purchase postponement isn't the biggest problem
(although it's certainly a concern, as is hoarding). In my mind the biggest
problem is wages being inelastic downward. As _all_ prices deflate, income for
employers goes down (or thought of another way, the value of money goes up
which makes each employee more expensive). That forces two options: fire
employees, or cut salaries. The latter is very difficult. So instead you see
the former.

So you get broad based increases in unemployment. That leads to reduced
consumer spending, which forces prices down even further, and so on.

As for real life examples, perhaps the Great Depression qualifies?

[http://www.economist.com/economics-a-
to-z/d#node-21529653](http://www.economist.com/economics-a-
to-z/d#node-21529653)

If you're looking for a more contemporary example, Japan experienced its own
deflationary spiral:

[http://www.forbes.com/sites/jamesgruber/2014/04/27/japan-
def...](http://www.forbes.com/sites/jamesgruber/2014/04/27/japan-deflation-to-
end/)

~~~
msandford
Yeah man, super true!

For example if prices were to start falling I'm going to start putting off the
following purchases:

1\. New computer

2\. New TV

3\. New stereo

4\. Toilet paper

5\. Food

6\. Gasoline

7\. Rent

8\. A new-to-me used pickup truck

9\. Clothing

10\. Several dozen other things which I can't really wait for but which I will
pretend I could for the sake of making a point

EDIT: Yes guys, I do realize that it's a marginal effect and that people
aren't going to STOP buying TP. The point I'm trying to make, though, is that
the "deflationary spiral" told as a story isn't entirely accurate either.
People don't STOP buying things, they simply reduce their consumption ever-so-
slightly and if EVERYONE does that, it cuts growth.

My point, though, is that there are a whole bunch of things which aren't
really elastic or which already have falling prices but don't cause general
malaise. Yes TV purchases do get put off for the next best model, but
eventually people do buy TVs and the industry has models that work even given
this reality.

In my personal opinion it's not that deflation itself is bad it's that it
takes a long time for the deflation to work through the economy and for
expectations to readjust. And given the maniacally long maturity of mortgages
it takes half a lifetime to reset expectations and it's simply unrealistic.

~~~
Amezarak
Something tells me the average HN commenter living in Silicon Valley making
six figures doesn't represent the average American.

While there are certainly fixed costs to being alive (like toilet paper), most
people do cut back and this behavior is observed. And when it gets very bad,
even those "fixed costs" start being cut - cheaper toilet paper, moving in
with mom and dad, etc. Not because they want to save now to buy more TP later,
but because when discretionary spending falls, people lose jobs, which further
reduces discretionary spending, and more people lose jobs, wages fall (because
of the surplus of labor), and eventually it all starts affecting you.

~~~
icebraining
_While there are certainly fixed costs to being alive (like toilet paper),
most people do cut back_

But why, if things are getting cheaper?

~~~
Retric
It's not cheaper right now, it _will be_ cheaper tomorrow.

EX: [http://buyersguide.macrumors.com/](http://buyersguide.macrumors.com/)
note the 'don't buy' recommendations.

~~~
icebraining
Yes, but Amezarak said it was "not because they want to save now to buy more
TP later", which is what you're describing.

~~~
Retric
The gap between getting a new phone every 18 months vs 2 years is fewer
purchases over the long term. (~1 fewer phones every 8 years.)

The same thing works for durable goods not just improving goods like PC's.
Consider if you wait 1 month when buying a chair it's 1 month newer so you’re
likely to wait an extra month before replacing it. Multiplied by 100 million a
people and even just 1 month becomes significantly lower consumption.

'This' starts a vicious cycle where fewer durable goods are produced so make
fewer goods and thus have less money which reduces consumption of durable
goods and non-durable goods. Using the TP example if your broke you can
slightly cut back on TP use.

------
ttty
This is just stupid IMO, but I'm not any economist.

You worked X time: got 1000€

Day 1: You can buy 1000 candies at 1€ each.

Day 2: Inflation, prices +100%: you can only buy 500 at 2€ each

This means that you just lost 500 candies or 500€. This means that what you
worked 50% for nothing! You just lost 50% of your money, just like that! So
who has my money? not me of course.

Let's think about deflation:

Day 1: You can buy 1000 candies at 1€ each.

Day 2: Deflation, prices -50%: you can buy 2000 at 0.5€ each

Now if you would only buy 1000 candies you would still have 500€ to spend on
other stuff. You might save it or buy other stuff.

Let's think about none of them:

Day 1: You can buy 1000 candies at 1€ each.

Day 2: You can buy 1000 candies at 1€ each.

Today is the same as yesterday, I've worked X hours I buy Y candies, everyday.
Why should it change? I know many factors change the price but why?

Well, if you can see inflation is good for the banks. They inject more money
in order to make your money less valuable. So in other words you lose money
(your hard earned money) while they are just printing easy money! So who is
the dumb one? We can do nothing.

Again why deflation is bad?

I would buy to eat even if inflated or deflated, maybe less and more,
depending by inflation or deflation. I might even buy higher quality meals.

If I need a new phone do you wait until the prices fall to 100€? No some
people still buy them at 1000€. Some not, but is not inflation that will make
that change. For example the same people that don't wait a few months for the
price of Iphone to fall from 1000€ to 300€ will not wait for deflation to
decrease the price from 1000€ to 800€. He just want the Iphone and it will buy
it.

This is just a big lie thrown in my face!

please correct me if I'm wrong!!!

~~~
BSousa
Not an economist either. But the way I see it (ignoring food and other things
you can't live without)

Inflation Day 1: you can buy 1000 candies, and you suspect tomorrow you will
only be able to buy 500, so you buy 1000 candies and store them/eat them. You
'inject' money into the economy, give the government tax money, etc.

Deflation: Day 1: you can buy 1000 candies, but suspect that tomorrow you can
buy 2000 candies, you don't buy Day 2: you can buy 2000 candies, but suspect
that tomorrow you can buy 3000, you don't buy, or buy just enough for your
sweet tooth today (lets say 100) Day 3: you can buy 3000 candies, but again...
etc etc

Again, this is based on needs and wants. If you have 1000 euros. If your phone
breaks and you need one to work, you will buy today, no matter if we are in
deflation or inflation, but if your old one still works, you may very well buy
it today (in case of inflation, since it will will cost more of those 1000
euros tomorrow, or you will wait if you are in deflation since it will cost
less of those 1000 euros.

Of course, if you need rice to not starve, it doesn't matter! And for average
folks, deflation tends to be good since most of expenses are from needs and
not wants but this causes issues to business and (possibly) to the economy as
well.

If you want a smaller example, I've personally waited for weeks and months to
import some goods due to the falling EUR->USD rate, saving me between 5-6% of
the cost, so I don't see why others won't do the same if they expect the costs
to be less in the future.

~~~
facepalm
What if you really want some candy? I think that's what the theory misses. You
can only hold out for so long with certain things. If you are hungry,
eventually you'll have to buy something to eat.

An extreme example: I have bought a lot of computers in my life, even though I
knew their value would be close to zero within two years.

And maybe there are also benefits if people only buy the stuff they actually
need.

~~~
mikeash
What qualifies as "really need," and how much of the modern economy is
involved in producing that stuff?

If people only buy the stuff they actually need, we on HN would all be out of
jobs tomorrow. Computers, smartphones, nice cars, high-end food, good booze,
entertaining movies, all of this goes away. I don't want to live in that
world, personally.

~~~
facepalm
So you need those things, an ongoing deflation is only a factor in your
evaluation. It doesn't mean you'll _never_ buy them. You will think "is it
worth for me to hold out a little longer before buying" and there will be a
threshold where you think "no" and you buy.

You could just as well argue that inflation leads to a spiral of death because
people won't be able to afford things. Therefore they won't buy things, nobody
will produce things, and there will be no things. Sounds just as logical.

~~~
mikeash
I'm sorry, I have no idea how your reply relates to my comment.

~~~
facepalm
Well "really need" is in the eye of the beholder. Except for staying alive. Do
you honestly believe because of Deflation people would only buy the barest
minimum of things to keep them alive?

And when would you buy a sleeping bag. Maybe it is Minus 5 degrees outside but
you can survive that. After all, tomorrow the sleeping back will be 1$ less
tomorrow, and after all you'll only die if it's minus 10 degrees?

~~~
mikeash
I'm not talking about deflation. I'm just addressing your idea that "maybe
there are also benefits if people only buy the stuff they actually need." I
don't think that this would be a good thing at all. I make no comment about
what might cause this to happen, only that it's not a desirable outcome.

~~~
facepalm
Only because you choose to interpret "stuff you actually need" in a
nitpicking, negative way. You are not trying to understand my point.

You said you need certain things like computers. So where is the problem?

~~~
mikeash
I said I _don 't_ need those things, but I want them, and I think a world
where people only buy what they need is a world where those things don't
exist.

If I misinterpreted what you meant by "stuff you actually need" then maybe you
should explain what you meant, because I don't see how else it could go.

------
bsaunder
Maybe it's me (I'm sure it is - I'm no ecomomist), but a basic income seems
like a perfect counter to deflation:

1\. It seems like it should increase consumption as everyone would simply have
more money to spend. Even if things are cheaper (and seem to be getting
cheaper), you now have a new stream of income that, for some people, will burn
holes in pockets and beg to be spent.

2\. It would allow some employees in the labor market to "opt-out" (as the
basic income supplants the "need" for a minimal wage job) and decrease the
surplus labor pool. This would seem to require wage growth as employers now
need to make the job proposition more compelling. Maybe they would even treat
their employees better. Bonus.

3\. "printing money" to pay for (or maybe just a portion of) the basic income
seems like it should be a nice inflationary counter to the natural
deflationary pressures.

I'm sure there are other pros and some cons of this approach, but those seem
like good starting points.

~~~
jmesserly
I'm not an economist either, but applying textbook theory from school, it
could help. A lot depends on the size, and making sure it isn't too big to
discourage employment.
[http://en.wikipedia.org/wiki/Basic_income](http://en.wikipedia.org/wiki/Basic_income)
would be a demand side stimulus, with money going to the folks most likely to
spend by taxing the folks most likely to save (you wouldn't want to do it by
"printing money"). That particular effect would point in the direction of
increased GDP (assuming we start from a deflationary trap with inadequate
demand and large private debt overhang). However the risk would be too much
employment lost, which points in the direction of decreased GDP.

A safer way to do the same thing would be to just spend government money on
things like building infrastructure. In current conditions, that translates
into increased GDP without the reduced employment risk. Similarly reduced
taxes on lower incomes would be less risky but work through the same means.

(This isn't addressing whether basic income would be morally good or bad. Just
the macro effects.)

------
supercanuck
> Lower profits = less money to go around to workers

Hasn't this shown to have been un-true in the last 5 years?

Higher profits has not meant more money going around to workers.

~~~
dragonwriter
> Hasn't this shown to have been un-true in the last 5 years?

Strictly speaking, no.

> Higher profits has not meant more money going around to workers.

That doesn't mean that lower profits don't reduce the maximum that can be
distributed to workers, however. (The fact that the actual amount distributed
hasn't historically increased when the maximum has is a different issue.)

------
kyllo
Yep, it's called deflation and it leads to hoarding behavior and a stagnant
economy. See Japan in the 1990s for a good example.

~~~
waps
Here is another factor you might consider. What happens to government finances
during deflation ?

Well, deflation means falling prices. Prices sponsor wages. Falling prices
means falling wages. The large majority of government tax income is a tax on
wages, or a tax on consumption. Both of these go down.

Now this wouldn't be so bad, except ... Governments loan money both to fund
expenditures and to pay interest on their old loans. Inflation effectively
means they can spend 2% of the total amount of their old loans "for free" (by
loaning it) (they key thing to realise here is that doing so does not increase
the burden on their income, it was 2% of taxes, and it still is). They get
this double, since they get it both on the income side, and on the new loans.

Deflation means the opposite. Tax revenues go down, interest payments go up.
Unless they want to drastically cut spending, that means they have to use
pretty much all of their yearly new loans just to pay back interest.

The problem is also the difference between years :

year 1 : 2% inflation -> government can spend 104% of it's budget year 2 : 2%
deflation -> government can spend 96% of it's budget

So 2% inflation necessitates a 10% cut in loan-based spending, which is about
half of government spending. So a seemingly tiny amount of deflation requires
a 5% spending cut by the government at minimum.

But that is not all. Government taxes have always been effectively a
percentage of GDP. Governments have historically been unable to raise tax
income. Deflation will lead to a fall in GDP, historically of at least double
the amount of the deflation, sometimes much more.

So the other half of government income goes down by ~4% (very, very
optimistically).

Now because falling prices and wages mean that the stress on social services
increases (for obvious reasons), government expenditures go up, usually again
by much more than the amount of deflation you see. It leads to pretty much
every part of social security going up. Unemployment, for obvious reasons. But
also pensions (people will go on a pension earlier because there's no work)
and even illness and disability (well we all know why).

So 2% deflation effectively means the government has to cut spending by ~10%,
WHILE social security expenses go up.

The government controls central banks. QE, ostensibly to "cause inflation"
hasn't caused inflation (rather the opposite). So in order to absorb this
financial shock, the U.S. government has instead decided to finance it's
operations by direct money printing, by lending from the money printer. They
ran a risk by lending the way the constitution said they should lend, so they
"cheated". Now we see the EU (and dozens of other governments, including China
and lots of smaller ones) doing the same.

This is also an extremely important factor in central bank behaviour, as they
are controlled by governments, and it is the reason that we have not seen the
end of QE (except maybe in America, but to be honest, I think there is a non-
negligeable chance the US will lower rates instead of raising them, in 6
months).

------
math
"When shoppers see persistent price declines, they hold out on buying things."
and yet I keep buying computers... I don't think I agree with this statement
(unless there is massive deflation).

~~~
Chathamization
Hmm, I’ve heard multiple people talk about jumping in during the housing
bubble because they thought if they didn’t buy right then the price would keep
going up. And I’d say that there’s pretty good evidence that people will buy
things sooner if they think that waiting would entail a price increase (which
is why sales are so effective).

So if people are expecting the price to rise, they’re more likely to make a
purchase, and if they aren’t expecting the price to rise they’re less likely
to. I don’t think it’s too much of a jump to think that if the price of
something is going to go down next week, people are more likely to hold off on
purchases.

Though I imagine a bigger issue is the need for investment. When there’s
stagnation firms tend to sit on a lot of cash, because they believe that money
slowly losing value (low inflation) or even gaining value (deflation) is
preferable to the few and possibly risky investment opportunities they see.
This causes credit and investments to dry up. This hording behavior, as well
as the wage inflexibility mentioned above, ends up being a major drag on the
economy. On the other hand, with a decent rate of inflation firms are going to
be making sure that their money is working, because if it’s just sitting there
it’s going to be losing money year after year.

------
debacle
> When shoppers see persistent price declines, they hold out on buying things.
> They ask, will I get a better deal next week, next month, next year?

Who does this? For 90% of my consumer goods, I don't care what they're going
to cost in a month or a year. I need to replace the one I have _today_.

~~~
pjc50
90% of your goods or 90% of the value of your goods? It's the big ticket items
- TV, car, housing - that people delay.

~~~
freeasindave
No it's not. Millions of PC's are sold each quarter, even though they cost as
much as a TV and they get cheaper all the time. When you need it, you need it.
You might wait a couple of months, but at the end of the day you have to pull
the trigger based on need. It's called marginal utility. When you determine
that the usefulness of a good (to you) outweighs the usefulness of the cash
that good would displace, you buy it.

------
pjc50
People are having trouble getting this. Consider:

\- if you expect to get a 1% pay increase every year, is it reasonable to take
out a mortgage at 3% and pay $X/mo for 25 years? Yes, and at the end of the
term it will be a smaller fraction of your expenditure. And if your house goes
up in value by 1% you're benefiting there as well.

\- if you expect to get a 1% pay _cut_ every year, is it reasonable to take
out a mortgage at 1% and pay $X/mo for 25 years? No, that's going to be a
disaster as it gradually squeezes you, unless you carefully refi regularly.
And if the house goes down in value by 1% a year, that's even worse.
Construction industry collapses as a result.

------
pillowpants2
Aside from the theory that people are going to stop buying goods because of
expectations that they will get cheaper, I thought the price of consumer
products were lowering because of cheaper energy, which would decrease COGS
and improve margins/prices, not affect revenue?

------
learnstats2
OK, this article explains deflationary spiral.

This depends on the assumption that people hold out on buying non-urgent goods
in the belief that prices will continue to fall - leading prices to fall
further. But in the current economic climate, almost nobody is buying non-
urgent goods anyway. (Yet we have seen consistent inflation)

The current 'deflation' is primarily led by a sharp downtick in oil prices
that won't be repeated - there's no immediate suggestion that prices will
continue to fall.

With years of consistent inflation above wage increases compounding to give
high prices, any deflation is just as likely to be seen by consumers as a
relief from high prices - a good opportunity for people to spend the money
they've been holding onto.

~~~
Amezarak
> (Yet we have seen consistent inflation)

Last month, the US inflation rate was 0.8%.

For 2014 as a whole, it was 1.6%.

This is, in fact, credited in part to low consumer demand. Slack demand
generally leads to job cuts, which leads to even slacker demand. That's the
spiral they talk about.

> The current 'deflation' is primarily led by a sharp downtick in oil prices
> that won't be repeated - there's no immediate suggestion that prices will
> continue to fall.

This is why economists talk about core inflation, to remove as much as
possible the influence of volatile commodities such as oil. Inflation will
remain very low even with oil prices go up. Since 2008, inflation has actually
at times been negative (i.e., deflation.)

People who think deflation is a good thing need only look at the Great
Depression, Japan, the present Eurozone, and the 2008 recession. Just because
high inflation is bad doesn't mean that deflation is good.

~~~
jbooth
In addition, this incredibly low inflation happened in an environment with
rock bottom interest rates and the fed basically printing money because you
can't cut interest rates below 0.

Those moves were supposed to create hyper-inflation and be the reason for You
to Buy Gold Now. Actually they barely kept us out of deflation.

~~~
Amezarak
I can only assume there is something that for most people just feels
absolutely, intuitively true about more money = inflation = bad.

Since 2008, the Fed has increased the money supply by a factor of 5, inflation
has been rock-bottom or nonexistent, real interest rates on Treasuries are
_negative_ , but hyperinflation is even now _just around the corner_. No
matter how often the prediction is wrong, new ones are made and the failure of
the appearance of hyperinflation on schedule is ignored or handwaved away with
vague declarations about how the government is conspiring to hide inflation,
or the Fed is using some kind of temporary monetary/balance-sheet magic trick,
or as soon as the economy starts up again we're all _doomed_.

What I have never understood is why computer-technical types so often
participate in this kind of thinking when we're usually pretty good on other
sciences. To be sure, economics is a field with more cranks than usual - paid
cranks, even-, but there are working, well-tested mainstream models that churn
out accurate prediction after prediction and are largely ignored in favor of
whatever the WSJ or Ron Paul says.

------
jkot
IT industry had falling prices for last 60 years.

~~~
arethuza
Most organizations and individuals are probably spending more than they ever
had have on "IT" related purchases.

------
facepalm
...in theory.

------
totalrobe
It's definitely a bad thing for all the big banks holding oil that just got
f#$@@d

------
CapitalistCartr
If I knew the price of everything I buy would be 1%-2% lower next quarter, it
wouldn't affect my spending behavior at all. I have, in fact, known gasoline
was dropping by a lot more than that for the past two quarters, and I've not
put off even casual consumption. Marginal deflation isn't enough to change my
spending habits, and my mortgage and utilities are pretty fixed.

~~~
waps
True. But here's what it would affect.

If you are a huge company, or a government, with an extremely large negative
net worth (ie. you loaned loads of money). Deflation will cause :

1) your income to go down by more than the deflation amount 2) your loans
don't go down

So deflation will kill large companies very quickly, and put governments in a
really difficult position.

