[superuser2]

People with money just sitting on cash (instead of investing) is a nightmare scenario - it's the shape of global economic meltdown. Capitalism requires that people with capital invest it. In theory, capital gets something worth more than what they spent, a business is created, it pays employees who pay other businesses who pay employees, etc. and you get a self-sustaining cycle of prosperity. Everybody is better off than they were before.

Inflation encourages investment - you need to invest in securities with a rate of return at least as good as inflation in order to not lose money. Incentives are aligned to make you do the thing that keeps the cycle going.

Deflation encourages hoarding - you would do better to keep the money under your mattress and wait for prices to fall before circulating it. Incentives are aligned to make you do the thing that destroys the economy.

Inflation in principle isn't horrible, but inflating prices while wages stagnate leaves everyone objectively worse off than they were before. This is already happening to an extent and causes a baseline level of unhappiness; if it were to get out of control things would be very ugly.

The task of a central bank is to use some very broad levers (interest rates, creating currency, etc) to try to keep the rate of inflation low but positive.

[bko]

If deflation encourages hoarding, why don't we see that in items that are well understood to be deflationary? An example is technology. Everyone knows that the value of their smartphone will decrease by ~25-50% a year, but we still purchase them.

Economists discount deflation as being dangerous with just one sentence (it encourages hoarding). Are there any examples of deflation actually being harmful in an economy? There are plenty of examples of inflation being dangerous [0]. Technology is an example where deflation does not encourage hoarding.

[0] https://en.wikipedia.org/wiki/Hyperinflation

[Retra]

Money works differently from technology. You can trade old cash for an amount of new cash with the same face value whenever you want.

If I bought a computer for $600 in 1980, it's not going to be traded for $600 today. But if I got a $600 check in 1980, I could cash it today for $600. Inflation is what makes this a reasonable thing to do. If money deflated, I wouldn't cash my check, I'd want to hold it for as long as possible. Deflation basically means you collect interest on any cash you have.

[bko]

Yes you may not cash it in today if it's going to be worth more tomorrow but you also wouldn't have the money to use for something else you value.

I don't see how that's different from choosing not to spend $600 for a computer today knowing that it'll be only cost $500 a year from now. You buy it today because it has a higher value to you now rather than a year from now (we still prefer things sooner as opposed to later, despite deflation). You would also may choose to cash in the $600 knowing well that it will be worth more if you wait because you want to spend it on something now.

Even with deflation, people would still spend money as we prefer to consume now rather than later. If cash had a positive return, I'd imagine riskier assets would have an even greater return so you wouldn't necessarily be all tied in cash. I know cash has a negative return (due to inflation) but I still hold it.

[superuser2]

I wrote a longer reply, but the problem is you're looking at this from the side of consumers consuming things they want. I don't give a shit about the resale value of my Macbook Pro, and in 2015 if you're buying a new car you're well aware that you're throwing away the first third of its value in 5 years. Deflation is not a concern when we're talking about people buying things for the joy of owning them.

What we're talking about is investors buying things (like capital equipment) for the purpose of making money. But even for an individual - would you go $200k into debt for a house that's going to be worth $50k in 10 years? Of course not! A rational actor would even shy away from leases - you want to jump to something cheaper (or better for the same price) as frequently as possible, to minimize the amount of time that you're paying above market value for housing. Just like how you want to move between tech jobs relatively frequently to minimize the amount of time you're being paid below market value.

[Gibbon1]

Well it's not just one sentence. One of the problems with deflation is debt payments. And the value of labor, assets and prices.

Lets say a store has $50,000 worth of inventory bought on revolving credit. In normal times, $50k worth of inventory might sell for $100k. The $50 worth of gross margin goes to pay, labor costs, rent, and the owners take. Lets say due to deflation that 50k is now only going to sell for $90k, the business is short $10k. What's the owner going to do?

Go out out business that's what.

So the problem with deflation is it tends to rape the books of perfectly well run businesses. And then you get cascading failure. The mill has a cash flow problem, goes bankrupt, and then half the business in town close.

A most subtle problem is a lot of businesses really run on credit backed by pledged collateral. The chain of collateral forms what called a credit chain. When you have deflation and a demand slump the assessed value of the collateral becomes suspect. Credit chains shorten and collapse. And businesses can't get liquidity. And then fail.

It goes on and on.

[superuser2]

>items that are well understood to be deflationary

People buy smartphones because they want smartphones, not to make money on them. Rational capitalists, on the other hand, use their assets in a way that maximizes gain and minimizes risk.

In an inflationary economy, the best investments are profitable businesses, or derivatives/aggregates thereof. Your capital is put to use buying means of production that makes more money than it costs and employs people along the way. Every year, the prices of the products you sell rise higher, but you've already paid for the factory! And you're incentivized to fund that factory now, because factories are only going to get more expensive.

In a deflationary economy, cash is a low-risk/high-reward investment. Business, meanwhile, is hard - high-risk, aggregate low reward. Yes, consumers have more buying power, but production capacity is created and scaled by going into debt to buy capital equipment. In a deflationary economy, the real value of debt is increasing while prices are falling. So every day, the output of your assembly line is worth less, but what you owe on the line itself hasn't changed. You just have to hope that you can pay off the factory and make some profit faster than the price of the widget it makes approaches zero.

Why isn't this the case with technology? Because with technology, the rate of descent of the price people will pay for, say, smartphones still leaves room for a profit margin compared to the rate at which production is getting cheaper, and last year's high-end production lines are still useful for making what's now a third-world phone.

When you eventually get to a point of losing money on your factory, you lay off your employees, who now have less money to buy things from other factories, and if the economy gets on the wrong side of that snowball you're looking at hell. The more this happens, the more likely investors are to stop investing in businesses and park their wealth in cash. The same checking account balance will always be able to buy a bigger factory tomorrow. You effectively stop the pump of economic activity, causing recession.

In the crudest terms, the central bank printing currency like crazy can make sitting on cash an even worse option than investing in business again, so you opt for the latter.

tl;dr deflation makes it more rational to own money and less rational to own things that try to make money by employing people.

[ap22213]

Good question.

I am not skilled in econ, but isn't this because the utility of new technology increases faster than inflation? In other words, utility(technology1, t1)/cost(technology1, t1) < utility(technology2, t2)/cost(technology2, t2).

Ignoring any affects of supply and demand,

If I buy a tractor 1.0 today for X dollars to produce Y units of utility (i.e. Y/X), but tomorrow tractor 2.0 costs 2X dollars (with inflation) to produce 4Y units of utility (i.e. 2Y/X), then my tractor 1.0 should be worth 1/2 dollars tomorrow (assuming that it still has Y units of utility). And, I may buy a tractor 2.0.

But, if on the next day, tractor 3.0 comes out and still has 4Y units of utility (technology stagnation) but costs X dollars (deflation occurs and production costs have gone down), then my tractor 2.0 should be worth 4X dollars. I'm not going to buy tractor 3.0.

[AKrumbach]

> Are there any examples of deflation actually being harmful in an economy?

According to the Federal Reserve Bank of Minneapolis, no: https://www.minneapolisfed.org/publications/the-region/defla...

In fact, one of the theorists there suggested a rate of -3% (or 3% deflation) might be optimal.