Why is deflation bad?

[I Killed Kenny]

I'm wondering why is deflation bad?

I am talking about this year's deflation in particular.

The prices are coming down mainly from the lower crude prices (transportation, energy etc).

This (for the majority of people) is a welcome gift from the crisis.

Still all the economists say deflation could make even worse the crisis, why?

[MadImmortalMan]

It's a significant barrier to growth.

[DontSayBanana]

I'm wondering why is deflation bad?

I am talking about this year's deflation in particular.

The prices are coming down mainly from the lower crude prices (transportation, energy etc).

This (for the majority of people) is a welcome gift from the crisis.

Still all the economists say deflation could make even worse the crisis, why?

Deflation causes a price spiral where it becomes an impossibility for goods providers to break even.

[Razgovory]

Also money becomes scarce.  It's hard to buy things without money.

[MadImmortalMan]

It's also a barrier to consumption. You don't buy that car today if you know it will be cheaper tomorrow.

[Monoriu]

I'm wondering why is deflation bad?

I am talking about this year's deflation in particular.

The prices are coming down mainly from the lower crude prices (transportation, energy etc).

This (for the majority of people) is a welcome gift from the crisis.

Still all the economists say deflation could make even worse the crisis, why?

1. Your salary will be cut. 
2. If you owe any debt, deflation adds to your real interest burden.  You have to service the same debt with an ever reducing salary.
3. People do not buy things.  If there is a good chance that prices will come down next month, why not wait, and wait, and wait?

[ulmont]

2. If you owe any debt, deflation adds to your real interest burden.  You have to service the same debt with an ever reducing salary.

[DontSayBanana]

Basically, summing up, I think it's safe to say that deflation is bad because deflation is bad. It negatively impacts nearly everything in the economy, consumer and producer actors, as well as devalues goods, so you lose the international facets of your economy as well.

[Monoriu]

Deflation is bad for the whole economy, but the effect is different for different people.  For borrowers, it is a nightmare.  But it is good for lenders.  If there is 4% deflation, you just park your money in the bank and you earn 4% in real terms, plus whatever the bank pays in interest (usually not much in deflation times). 

Deflation is also good for people with stable incomes and jobs.  If your employer can't fire you, and can't cut your salary (or can't cut it to the full extent of deflation), then your real income will rise. 

[DontSayBanana]

Deflation is also good for people with stable incomes and jobs.  If your employer can't fire you, and can't cut your salary (or can't cut it to the full extent of deflation), then your real income will rise.

That's all well and good, but that covers a small percentage of employees at best, where their employers have no recourse for firing or for wage/salary reduction, and considering the number of contracted employees whose contracts are limited to the year, if deflation lasts longer than a year, than the number of protected employees effectively drops to zero.

Finally, many lenders in the US also have retail financial operations as overhead, so if their pool of customers is shrinking as the incomes shrink, I would think that that "4% deflation" would turn into maybe "1% net loss." It wouldn't be AS bad for lenders, but overheads put a real limit to what money can be "parked," so I think you'd see more a slow attrition of the lenders, especially if deflation became as severe as 4 percent.

[Monoriu]

That's all well and good, but that covers a small percentage of employees at best, where their employers have no recourse for firing or for wage/salary reduction, and considering the number of contracted employees whose contracts are limited to the year, if deflation lasts longer than a year, than the number of protected employees effectively drops to zero.

Finally, many lenders in the US also have retail financial operations as overhead, so if their pool of customers is shrinking as the incomes shrink, I would think that that "4% deflation" would turn into maybe "1% net loss." It wouldn't be AS bad for lenders, but overheads put a real limit to what money can be "parked," so I think you'd see more a slow attrition of the lenders, especially if deflation became as severe as 4 percent.

Think government employees who live below their means 

[DontSayBanana]

Think government employees who live below their means 

Well, remember, in the US we've got federal minimum wage. Except in four states, pretty much everybody at that income level is an at-will employee, which means they could be fired for any reason (or even no reason at all), provided the reason doesn't violate anti-discrimination laws or the state's labor laws.

[garbon]

This year, the federal minimum wage will be more than I made at my first job.

[PDH]

This year, the federal minimum wage will be more than I made at my first job.

Haha, you are old.

Wait, when I got my first job the minimum wage was a penny.  Per day.

[Fireblade]

2. If you owe any debt, deflation adds to your real interest burden.  You have to service the same debt with an ever reducing salary.

I have a general question regarding repaying debt: Let's say I owe $13,000 in student loans (which is what I actually owe  ). If Obama decided to go Mugabe style and crank out a gazillion dollars tomorrow, would the banks stick to making me pay $13,000? Because man, that would solve SO many of my cash flow problems right there, if I could just mail in a worthless piece of paper to pay for that worthless piece of paper hanging up on my wall.