deflation - why it is much scarier than inflation!

a timely analysis of why deflation is a far more scary prospect thatn deflation.

Category:

Education

Tags:

• economics
• price
• prices
• inflation
• deflation
• debt
• demand
• supply
• consumption
• interest
• rates
• nominal
• real
• marketing
• management

[danben72]

Your argument is as partial as that of any politician or for that matter that of Helicopter Ben.

1. Nothing wrong with putting off some of your purchases as it complies with the economic concept of conservation (less oil, less trees etc. pp.)

2. Limit of monetary policy bcs of the downward limit of interest rates is a problem for Helicopter Ben but not for the citizen.

3. Nothing wrong with increasing real debt burden,everybody is free to do as he pleases,no obligation to take on debt.

[danben72]

The good thing of deflation is that because restructuring and the debt deflation you get new owners with new technologies into the market which accelerates progress and not as you try to imply hinders it.It' painful but necessary.I know your "Theory" is the standard interpretation but it only serves the central bankers,the banks, the robbers of our time as well as academics like you living off the normal citizens by feeding this fairy tale to justify something which cannot be proven.STOP IT!

[pajholden]

Don't presume to tell me I am 'living off normal citizens'. Who do you think you are? These videos represent accepted economic theory/my opinions and are aimed at helping students of Economics get through their exams and stimulate some thought. Do you think I get paid for this or something?

[pajholden]

@danben72 1. Nothing wrong for the consumer perhaps - but that consumer won't have a job when the store he works in lays him off as their sales are crashing

2. Negative inflation + nominal interest rates of 0% = real interest rates above zero and a reluctance not to borrow which central bank cannot help alleviate

3. Rising real debt burden is killing to those paying a mortgage, repaying an amount far in excess of the falling value of their asset. And their pay falls with deflation.

[saraahxhc]

@danben72 stfu

[plodej]

Senseless arguments from a Keynesian economist.

[hagunadari]

About mortgages - banks encourage now progressive rates (higher now, lower on the end). But if the difference (for the sake of argument) is +500 now and -500 in the end on the rate, with inflation that 500 is worth more now, than people would save in 30 years.

With deflation, whatever I earn now will keep it's value. I can borrow it or keep it under the pillow. It makes no difference to me, but banks could make them safe AND lend it to someone who wants to invest. Still not a bad thing to me.

[hagunadari]

"Why spend money on a house if that house is falling in value?"

Ok, if that is true, why didn't the high-tech economy sector crumbled already? Every year things are getting cheaper and cheaper. A computer bought now is worth around 2/3 of it's price in ~6-8 months, so why does anybody buy computers?

In my opinion, deflation discourages speculation and incourages innovation (to not let yourself go out of business) and raising efficiency. How is that a bad thing?

[BaptizedinFire]

Also, since banks in an inflationary economy use attractive interest rates to compete for customers, wouldn't banks in a deflationary economy do the same thing, but reverse? Since banks have a greater chance to profit from deflation, they will also have the possibility of attracting customers by adjusting the loans for deflation (could be called a negative interest rate, perhaps?)

[BaptizedinFire]

I don't see the problem. If you borrow a thousand dollars with low interest rates, and there is deflation while you're paying back the money; in what way are you worse of than if there was inflation? As far as I see, all that happens is that the creditor gets richer from the deflation. You still have your salary (since otherwise you wouldn't get the loan), and the price level at which you consume goes down. What's the downside, jealousy towards the bank for doing a better deal than you?

[TheDanAdibi]

You are awesome. can you explain to me the "shoe leather costs" concept, the book doesn't explain it as well.

[Surfwtw]

@Surfwtw and of course you need to subtract 1 from both equations.

[Surfwtw]

The Real Interest Rate would be 1+ Nominal rate/1+ inflation

In the case of deflation

Real Interest Rate = 1+nominal rate/1 - deflation rate