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?
It's a significant barrier to growth.
Quote from: I Killed Kenny on April 16, 2009, 08:15:25 PM
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.
Also money becomes scarce. It's hard to buy things without money.
It's also a barrier to consumption. You don't buy that car today if you know it will be cheaper tomorrow.
Quote from: I Killed Kenny on April 16, 2009, 08:15:25 PM
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?
Quote from: Monoriu on April 16, 2009, 08:49:25 PM
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.
:bleeding:
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.
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.
Quote from: Monoriu on April 16, 2009, 09:13:04 PMDeflation 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.
Quote
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 -_-
Quote from: Monoriu on April 16, 2009, 10:09:42 PMThink 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.
:o
This year, the federal minimum wage will be more than I made at my first job.
Quote from: garbon on April 16, 2009, 10:30:38 PM
:o
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.
Quote from: Monoriu on April 16, 2009, 08:49:25 PM
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.
Quote from: garbon on April 16, 2009, 10:30:38 PM
:o
This year, the federal minimum wage will be more than I made at my first job.
Tell me about it. On January 1st, NJ's state minimum wage jumped by $1.35 to $8.50 considering that my unemployment is still based on my income of $7.15 from when I was working at PBP, that's grossly unfair.
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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.
Unless there is an odd provision in the loan terms, I think the answer should be yes - you only have to repay US$13k regardless of inflation.
Quote from: Monoriu on April 16, 2009, 11:03:22 PM
Quote
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.
Unless there is an odd provision in the loan terms, I think the answer should be yes - you only have to repay US$13k regardless of inflation.
Excellent. Obama, please be everything the right-wingers say you are. :D
Quote from: Fireblade on April 16, 2009, 10:57:00 PMI 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.
That depends on whether your interest rate is fixed or variable. If the former, they're screwed. If you've got variable rate loans, they can take an initial hit, but if you don't have it paid off
immediately, prepare to be smacked with sky-high interest rates as a counter.
Quote from: DontSayBanana on April 16, 2009, 11:15:35 PM
That depends on whether your interest rate is fixed or variable. If the former, they're screwed. If you've got variable rate loans, they can take an initial hit, but if you don't have it paid off immediately, prepare to be smacked with sky-high interest rates as a counter.
You mean the other way around. If we hyperinflated you could pay a fixed rate loan with pocket change.
The US Department of Ed issed variable rate student loans for two years in the 90s, everything else is fixed.
Indeed. Wasn't sure if you were going for "issued" there or not.
Quote from: DontSayBanana on April 16, 2009, 10:20:34 PM
Quote from: Monoriu on April 16, 2009, 10:09:42 PMThink 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.
Yeah, but unless the business is closing, they can't fire all the minimum wage earner they employee. So a typical fast-food employee is going to be protected against deflation unless the place they work at shuts down. Of course, it the downturn is bad enough, eventually people will stop eating out so much, so some fast-food place will close, but on the other hand, they aren't the only place that employees minimum wage earners--a lot of retail and clerical workers are at or near minimum wage.
In theory, Congress could lower the minimum wage, but I don't see that happening.
A deflated tire just doesn't roll very good.
Quote from: lustindarkness on April 17, 2009, 11:49:23 AM
A deflated tire just doesn't roll very good.
Uses more gas and so is bad for the enviornment.