[vinceguidry]

> Everyone is scared of deflation, but is completely comfortable with the rapid drop in the price of electronic goods over the last few decades.

Those are two absolutely different things. One stems from production, transportation, and financial improvements across the board, the other comes because fewer people want to buy anything.

> The traditional theories that warn against deflation are concerned about consumers delaying spending in the hope of waiting for even cheaper prices. This delay theoretically forces the economy to grind to a halt.

It's not so much about consumers delaying spending. It's what happens further up the chain. If the holders of wealth that seed the economy figure out that it's better for them to hold on to their assets rather than invest them, then people lose jobs. We need them to keep investing their money.

Deflation also penalizes debt holders. The dollars you spend to pay back your mortgage are worth more than the dollars you make now. Since most Americans hold more debt than assets, deflation hurts common people more than it helps.

[tsotha]

>If the holders of wealth that seed the economy figure out that it's better for them to hold on to their assets rather than invest them, then people lose jobs.

That's the theory, but I'm skeptical. If the economy is healthy they'll have investment opportunities that compensate adequately for risk and they'll still invest.

Conversely, in an inflationary environment people with savings may invest their money, but they may also buy fixed assets like gold or real estate. That doesn't help the economy very much.

>Deflation also penalizes debt holders.

And inflation hurts savers. I don't see a benefit to prioritizing the interests of debtors over savers.

[vinceguidry]

> If the economy is healthy they'll have investment opportunities that compensate adequately for risk and they'll still invest.

A healthy economy will, in most cases, exhibit inflation. For most economies, it would take a concerted act by a central bank to force deflation in a normal, growing economy. People are making more, spending more. The government has to print more money to keep up, otherwise it will fall short of people's needs. Only in special circumstances does this not hold up.

> I don't see a benefit to prioritizing the interests of debtors over savers.

There's a huge benefit. We want to encourage economic activity over inactivity. Money in circulation is the very definition of economic activity. Money saved is the very definition of economic inactivity. Nobody borrows money unless they want to spend it, it makes no sense to borrow it just so you can keep it in the bank or under a mattress. Money borrowed is money invested.

[tsotha]

>A healthy economy will, in most cases, exhibit inflation.

A healthy economy will exhibit monetary inflation as it grows. But there's no reason for it to exhibit price inflation.

>The government has to print more money to keep up, otherwise it will fall short of people's needs.

That's a circular argument. It's not like people in a deflationary environment don't have any money - they have less money, but that money is worth more.

>There's a huge benefit. We want to encourage economic activity over inactivity.

Sure. I'm just not convinced getting people to go into debt really does that. Oh, it does in the short run. But once your debts start to pile up not only do you have to pay for the things you've already purchased, but you have to pay interest. If, instead of borrowing money, you'd just bought things as you could afford them, you would end up spending more.

>Money borrowed is money invested.

No, money borrowed is money spent. Sometimes that's investment. Sometimes it's not. If I borrow money to buy a bed made in China, that's not helping the US economy very much.

The idea deflation is bad for an economy doesn't hold up to historical scrutiny. The US grew strongly in the 19th century (far more strongly than today), and during that time it experienced long periods of growth accompanied by low deflation. People still have to buy food, pay the rent, buy clothes, etc even when the currency is deflating.

[scriptman]

>Money saved is the very definition of economic inactivity

When people save money, do you really think they put it under a mattress? No, they put it in a financial institution like a bank, who can then use it as capital to loan out further funds. By increasing the amount of saving you should naturally reduce interest rates. Saved money doesn't just drop out of the economy.

Even if someone did put money under their mattress, they are risking having inflation eat away as its value. Also, if they never spend their money, all they have done is increase the value of everyone else's money. Prices have to fall to the point that markets will clear.

[scriptman]

>Those are two absolutely different things. One stems from production, transportation, and financial improvements across the board, the other comes because fewer people want to buy anything.

That's true, but they are measured the same way: through the nominal value of goods and services. The people that the economists are worried about, consumers, only have the price of goods to guide them, they have no information as to whether the falling price is due to improvements in efficiency or lack of demand.

>It's not so much about consumers delaying spending. It's what happens further up the chain. If the holders of wealth that seed the economy figure out that it's better for them to hold on to their >assets rather than invest them, then people lose jobs. We need them to keep investing their money.

I'm not sure I've read this as being the main driver of the theory previously. To me, it doesn't really make sense since theories concerning deflation don't make any predictions concerning the return on investment. If deflation is uniform, then the return should stay the same since the cost of inputs should fall as well. If deflation isn't uniform, then you'd see changes in the allocation of resources as some industries make large profits due to falling input costs, while other industries might go bust due to their input costs staying the same even while their sell prices fall.

Personally, I think that that productivity growth is far more important than deflation and will compensate for any short term negative effects that deflation might or might not bring.