[danenania]

I'm not going to pretend I know the right answer here. It's an amazingly complex issue. But I find this to be a poor argument.

Absent central bank intervention, a productive economy should naturally undergo significant price deflation year after year as efficiency improves, causing more goods and services to be produced with the same inputs. This is why consumer technology prices trend continually downward.

So if the default, absent any intervention, would be for prices to go down every year across the board, pointing to "low inflation" numbers is a red herring. The question shouldn't be how far inflation numbers are above zero, but how far they are above the negative rate of inflation we'd see otherwise. That differential is what tells us how much wealth is really extracted from the economy via what is effectively a highly regressive tax.

[littlestymaar]

> Absent central bank intervention, a productive economy should naturally undergo significant price deflation year after year as efficiency improves, causing more goods and services to be produced with the same inputs

This comment assumes that central banks create money and that's what drives inflation but this isn't the case: commercial banks are the ones which create money (through credit).

Also, you can't sustain an economy under deflation, because deflation would just make the whole economy collapse. In a market driven industrial economy the limiting factor for the economy isn't the output, but the demand, and deflation is the ultimate demand killer (which is why basically nobody buy things in bitcoin: realizing the pizza you bought five years ago is now worth a few thousand dollars doesn't sound cool).

[thorwasdfasdf]

I hear this all the time: deflation causes demand destruction for consumers. But, how many consumers check the inflation numbers before buying a pizza? how many consumers even know what inflation is? (many do not). I really think we need to rethink this assumption that deflation is harmful.

[bob33212]

I agree deflation isn't a problem for consumers. How many people buy electronics knowing that they will be worth 30% less within a year?

It is a problem for debtors ( home owners, and corporations ) and banks.

Who wants to have a mortgage on a house that is going down in value every year?

How is a corporation going to get investment in their factory when a competitor could create a similar factory at a cheaper rate in a couple years.

Why would a bank lend money to people who may not be able to pay them back when just holding onto the money generates returns?

[SECProto]

> Who wants to have a mortgage on a house that is going down in value every year?

I do. That's how housing works in Japan - you buy a house to live in, not to save money or invest. Older houses have lost their value (largely due to perceptions of danger in old housing stock - until the last decade or so, increasing understanding of earthquake/tsunami safety meant that houses wouldn't meet current building codes)

That (combined with adequate housing stock, less zoning restrictions, and negative population growth) means that even in the biggest cities, housing is fairly affordable. You buy a house because you want the control and the permanence that comes from owning a house.

[Beldin]

> I do. That's how housing works in Japan - you buy a house to live in, not to save money or invest

Something I don't understand: if there is real deflation, your buying power increases if you wait. In this case: wait a year, get a nicer house for the same price, or pay significantly less for the current house. So even if you're not buying the house as an investment, waiting would improve your situation as a buyer. The more you wait, the better for you.

How do you ever get to actually buying a house in such circumstances?

[danenania]

The same reason you ever get to actually buying a computer, tv, or smartphone even though you know they'll keep going down in price if you wait.

[ford_o]

On this note, I have always heard that Japan is in horrible situation because of deflation. Is that actually true?

[danenania]

I think it depends what you measure. If you only look at metrics like GDP per capita (in USD), Japan might seem to be doing poorly.

If you look at metrics that actually matter, like quality of life, income inequality, education, crime rates, public infrastructure, life expectancy, etc., it's up near the top--and is certainly doing far better than the US in many important areas.

[javagram]

> Who wants to have a mortgage on a house that is going down in value every year?

Sounds like a car loan. If the house was cheap enough, people would probably be OK with it, but of course starting from current prices it would be incredibly bad.

[mrep]

Wikipedia describes it well [0]:

Deflation is generally regarded negatively, as it causes a transfer of wealth from borrowers and holders of illiquid assets, to the benefit of savers and of holders of liquid assets and currency, and because confused pricing signals cause malinvestment, in the form of under-investment.

In this sense it is the opposite of the more usual scenario of inflation, whose effect is to tax currency holders and lenders (savers) and use the proceeds to subsidize borrowers, including governments, and to cause malinvestment as overinvestment. Thus inflation encourages short term consumption and can similarly over-stimulate investment in projects that may not be worthwhile in real terms (for example the housing or Dot-com bubbles), while deflation retards investment even when there is a real-world demand not being met.

[0]: https://en.wikipedia.org/wiki/Deflation#Effects

[IanCal]

> How many people buy electronics knowing that they will be worth 30% less within a year?

Hasn't this been happening for a long time? Plenty of computing equipment had done just this.

[dv_dt]

If it's a problem for debtors it will be a problem for just about every past college student in America starting at least a decade ago.

Now, I think we should forgive most if not all student loans, and start paying for an education, but if the system insists on the majority of college degree seekers carrying student loans then you have a huge problem with deflation.

It would also be a massive problem for corporate debt right now. I think the central bank would rather print money by the Trillions then allow deflation at scale.

[nine_k]

> Who wants to have a mortgage on a house that is going down in value every year?

People rent housing, paying monthly and knowing that they'll have nothing to own in the end. People even stay in hotels.

They are buying a service: a place to live under their control, where they want it.

[tuatoru]

> Who wants to have a mortgage on a house that is going down in value every year?

The problem is not the declining value of the house, it's that the borrower's income is declining.

To a first approximation, inflation is rising wages relative to the goods and services bouoght with them.

Deflation means falling wages, which makes it progressively harder and harder to pay back loans, so people are less and lesss willing to take on debt.

Falling ability to repay also increases risk to lenders making them less willing to lend and causing them to demand higher rates and shorter terms, reducing both investment and consumption.

> just holding onto the money generates returns

No. No, it doesn't. To generate a return, it must be used for investment or lent (ultimately) to someone who invests.

Deflation also disincentivises investment directly (besides lender unwillingness): your market will have less and less disposable income over time, so the expected value of investment declines and the risks go up. So the business case hurdle for investment gets higher and higher.

Deflation is a reinforcing feedback spiral to zero for capitalism. Inflation at about 3% - 4% per year seems to be optimal.

[JamesBarney]

One of the biggest issues with deflation is it creates a high floor on interest rates. Even if the nominal interest rate was 0, the real interest rate would be 2% severely limiting the Fed's ability to fix recessions. The current federal funds rate is 0-0.25% and with an inflation rate of 2% that gives us a real interest rate of -2%. If we had 2% deflation then the real interest would be 2%. That's a 4% difference in interest rates, which is huge.

The demand destruction comes from individuals and corporation saving more money instead of spending or investing it because they get a 4% better return in one scenario than another.

The biggest purchase individuals make is buying a house. Surely you can't argue that paying a 1-4% higher interest rate on a house wouldn't noticed by consumers.

[JoshuaDavid]

> The biggest purchase individuals make is buying a house. Surely you can't argue that paying a 1-4% higher interest rate on a house wouldn't noticed by consumers.

That depends on how house prices are determined.

If houses are priced primarily based on the cost of construction plus the cost of materials, you would expect consumers to notice a significant difference in total cost under high vs low interest rates, since the base price of the house will be the same either way and a higher interest rate will lead to a higher total cost.

If houses are priced by people looking at what the maximum monthly payment they can afford is, and are bid up to whatever that maximum monthly payment is, people will just observe that houses cost "almost more than I can afford" no matter what the interest rate is. Lower interest rates will lead to higher prices (capped at 360 (30 years x 12 months per year) times what people can afford, at 0% interest rates), and higher interest rates will lead to lower prices (down to the floor the principal being the of cost of construction).

I think most housing markets are more like the first scenario than the second, at this time, but it is entirely plausible that this won't always be the case, and some would argue that e.g. the bay area housing market already more closely resembles the second scenario.

Edit: typo

[JamesBarney]

You're right that the real estate and policy situation in San Francisco is so bad the supply is pretty inelastic. But I don't think it's perfectly inelastic. I think if the price of housing went up 10x in San Francisco you'd have more buildings being built.

But luckily for us very little of the U.S. is as screwed up as San Francisco.

[wahern]

Deflation tends to decrease labor demand. The ranks of the unemployed grow, and the purchasing power of paychecks (e.g. offered wages, etc) diminish faster than prices. This has happened time and again in economies all over the world. Not coincidentally, this happened to the U.K. during the interwar period, which John Keynes observed first hand.

And Keynes got to contrast the U.K.'s monetary policy with France's moderately inflationary policy. France made it through the Great Depression relatively unscathed.

Of course, Germany had strongly inflationary policies leading to hyperinflation. They also suffered terribly during the Great Depression. But Germany deliberately chose hyperinflation to spite the U.K. and France for enforcing crushing war reparations.

[roenxi]

> And Keynes got to contrast the U.K.'s monetary policy with France's moderately inflationary policy. France made it through the Great Depression relatively unscathed.

That is reducing a comparison of the French and English economies down to 1 variable. It is unlikely (nay, practically impossible) that inflationary vs. deflationary policy was the biggest difference between the two.

It is like saying inflation policy was the biggest difference between Japan and the US in the 90s. One of those countries had natural resources, favourable demographics and a fire-hose of migration. The other had limited resources, unfavourable demographics and migration-hostile policies. Their legal systems and approach to corporations was completely different. There are a large number of important variables when comparing the two. Monetary policy is important but not the be-all and end-all.

One is going to be better than the other, but 'Country A did X and did well, B did Y and did badly' isn't an argument. There is too much going on.

[wahern]

That's just one example. The Pulitzer Prize winning history book, "Lords of Finance: The Bankers Who Broke the World", has many other examples and goes into much greater depth. Of course, there are many more dimensions to 20th century economics than just inflation/deflation. Indeed, a driver of deflation in Europe was the gold standard, as the U.S. was a very large net exporter to Europe (kinda like China today) and accumulated a surplus of gold reserves (offsetting American deflationary policy), stoking deflation in the net importer countries as there was less gold to back British and French currencies.

[CuriouslyC]

Deflation is harmful because it is basically a super-regressive windfall. Those with wealth get wealthier, those with nothing get nothing.

[AtlasBarfed]

The only time I hear about deflation is where asset values (like the housing crisis) mass drop. In that case a lot of people are losing a lot of money, so they stop buying as many things.

I never hear about produced goods deflation that is a price drop like from mass efficiency gain where the existing money/assets start being able to buy more things. That should produce more demand, wouldn't it?

[petrocrat]

Deflation causes demand destruction by reducing income because deflation causes (or maybe is more a symptom of) layoffs. A consumer doesn't need to check the price of pizza if their income drops to zero. They will instantly change their spending behavior when they lose their job.

[melenaboija]

You don't need to check any inflation numbers to realize the impact of it, it is something that happens in your daily life.

Maybe don't think about it when buying a pizza (although I think even then it impacts on consumption), but I recently talked with a friend from Argentina and said that he was buying the sacks of concrete while working in US to build his own house in Argentina in the future as he did not want to deal with the contractor arguments about costs of the material due to the duration of the construction.

[littlestymaar]

> how many consumers even know what inflation is? (many do not)

Nowadays, people don't really know what inflation is because there is none (too little to bother at least) but back in the late sixties and seventies it was a huge popular concern.

> how many consumers check the inflation numbers before buying a pizza

An economy isn't just people buying pizzas. A significant part of the economy is corporate investment, or consumer spendings made thanks to credit, and those are what's really hurt by deflation.

[eli_gottlieb]

> But, how many consumers check the inflation numbers before buying a pizza?

Wrong question. The real issue is: how many consumers check the unemployment numbers before buying a pizza? Answer: a whole hell of a lot.

[WalterBright]

> deflation would just make the whole economy collapse

All we have to do is look at history to disprove that. From 1800 to 1914, for example, the USA had periods of inflation and deflation netting out to zero.

[littlestymaar]

This was a super messy economic era for the US with a shit ton of economic crisis and monetary issues were a big part of the mess, that's why the Fed ended up being created.

[WalterBright]

Most of that was due to the government's attempts to manipulate the money, such as bimetalism.

We've also had quite a history of crashes, crises, inflation, etc., since the Fed was created.

[immawizard]

People don’t buy stuff in bitcoin because of the high transaction costs, and low adoption in points of sale. If you believe that bitcoin price will go up in the future, you would buy bitcoin instead of pizza using dollars.

[wz1000]

Two things:

1. It isn't clear that the (real) cost of essentials like food, shelter, clothing, healthcare, education is actually going down significantly.

2. Even if what you say is 100% correct, this "extraction of wealth due to inflation" seems to be a somewhat stable scenario, and certainly hasn't lead to the apocalyptic visions of collapse that inflation hawks perennially create a ruckus about. So even if you think we are living through a hyper-inflationary doomsday scenario, certainly this is a very different doomsday than what one is usually led to imagine (Zimbabwe, Wiemar Republic, Venezuela etc.). Maybe inflationary Armageddon isn't so bad after all!

[autokad]

I generally dont worry about inflation, I roll my eyes when certain financial people talk about the inflation boogieman that hasnt existed for 40 years.

however, we are in a unique situation that has the potential for causing hyper inflation. I say potential because I still think it's not a likely outcome. We are paying people not to work, but eventually someone has to produce something. We ALL can't wfh or be unemployed and collect checks as if we were employed and expect our Amazon deliveries and canned food to arrive; someone has to make and deliver it.

Eventually all the extra money laying around today will chase yesterday's production. I think this is why we often see hyper inflation scenarios stem from low inflation environments. it sounds counter intuitive at first.

This is why we have to be extremely careful when we try to pick and choose what is essential or not. Now we got situations were food is rotting on the vines and milk being dumped down the drain. I dont think we will enter hyper inflation, but we have to be careful about it.

[JamesBarney]

I only glanced through the wikipedia, and it doesn't seem at all like hyper inflation stems form low inflation environments.

https://en.wikipedia.org/wiki/Hyperinflation#Notable_hyperin...

[tuatoru]

> 1. It isn't clear that the (real) cost of essentials like food, shelter, clothing, healthcare, education is actually going down significantly.

It is if you think about it. In the 1970s a baby born premature at 28 weeks would have been unlikely to survive. Healthcare quality has increased enormously. If you could get 1980-level healthcare it would cost less of your wage than it did in 1980.

Food, clothing, transport, and heating have unambiguously fallen as a proportion of wages.

Education is perhaps an outlier here. The spiralling cost is usually explained as a zero-sum social signalling mechanism that is super important for life outcomes, and its rising price as being enabled by the falling cost of everything else.

[roenxi]

The spiralling cost of education is a bit illusory; the actual cost of education is rapidly approaching 0. I can gain free access to a stunning amount of front-line academic research, and anyone can have access to pretty much all of it for prices that are low relative to what it would have cost in the 80s.

You can probably listen to free lectures by country-leading authorities on any STEM subject. Well, TEM. I'm not sure about biology and the other sciences. Access to humanities-related texts is also unbelievable vs the 80s.

The cost of getting socially certified as having become educated is growing. Not the cost of education.

[chiefalchemist]

I won't call it cause but there certainly seems to be correlation between lowering food costs and healthcare increasing.

Truth is, worldwide there are more deaths from the side effects of too much food, than not enough.

[nerfhammer]

That's only true if people don't want better stuff over time, only larger quantities of exactly the same stuff