[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.