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Rationally, people should wait as long as possible to buy tech because they'll get more later. Instead, they buy it at a furious rate. Why is that?



stevenwagner shows by example why this isn't so, but to spell it out: If you were buying a CPU as an investment like a share of a mutual fund, to buy, hold, and sell, you'd want to wait as long as possible. In fact, you'd never buy one; we pretty much always expect the price of a given CPU to go down in the future.

But if you're going to use it to generate value, you should buy it as soon as your expectation for the marginal value it will generate is greater than the price of the CPU.


That makes sense, but what I'm wondering is: why doesn't the same argument apply to all products in the presence of deflation?

It seems to me the real problem of deflation is that debts get harder to pay off, not that people put off their purchases. But the "deflationary spiral" of delayed purchases is what people keep talking about, and I haven't heard a good reason why the tech industry is uniquely exempt from that.


Deflationary spirals happen when the average price of everything, economy-wide, is going down. It’s perfectly normal for some things in the economy to get cheaper while other things get more expensive. Consumer technology is conspicuous and the way it gets cheap is conspicuous, but it accounts for a small proportion of what the average American spends money on. (The average American spends a small proportion of his/her income on consumer electronics because they’re so cheap.)


Sure, but why does that make the difference? Why doesn't that incentive work the same way when it's one class of products, as when it's all products?

Also, there are several periods in American history when we had modest deflation and a booming economy. The Roaring Twenties was one. How did that happen?


Consider the effect on wages.

If computers get cheaper while the average consumer’s disposable income stays constant, then people will just buy fancier computers, or spend less on computers and use their savings to buy more of other things, or be grateful that the cheaper computers make up for rising prices in other things they want (e.g., health care).

If the average price of everything goes down, then the average consumer’s disposable income must eventually decrease; to make up for the lost income, employers will have to either cut wages or lay off workers.

PS: The Roaring Twenties were not always so roaring. There was a depression in 1920–21, and according to the helpful St. Louis Fed graphs, there were two other recessions between 1921 and 1929.


First explanation I've seen that makes some sense.


I know! The iPad is going to be so much cheaper in 10 years. Im waiting.




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