The popular idea that prices should fall to previous lows gives most economists chills. Deflation is bad for everyone, they say.
The popular idea that prices should fall to previous lows gives most economists chills. Deflation is bad for everyone, they say.
Financial planner here. Deflation is bad for “everybody” that wants to talk to you about it. It’s bad for financial planners because it makes the stock market go down, so we make less money. It’s bad for politicians because everybody that votes seems to think the economy consists of however high the Dow Jones gets. It’s bad for companies because it’ll cut into their profits. The more these entities can convince you that deflation is bad, the more likely people are to campaign against it.
The real truth of it is that deflation is good for PEOPLE. People are not the economy. The concern I have is that during a deflationary period companies tend to do more layoffs and cut corners on quality control. As long as income & unemployment stay the same then deflation would be a very welcome reprieve from these last couple of years.
This is why the union strikes are so important right now. If people see that the current union strikes work, then they’re far more likely to unionize when companies start to do layoffs. Really the only way for companies to protect themselves from deflation is to screw over the workers, and unions stand in direct opposition to that move.
> The real truth of it is that deflation is good for PEOPLE
Deflation encourages businesses and people to hold on to their money instead of spending it. One person’s spending is another person’s income, so when spending goes down so do incomes. When people’s incomes go down, they reduce their spending in response. This is a vicious cycle that leads to a lower standard of living.
Don’t believe me? It is what happened to Japan since the 1990s after their real state bubble exploded. It is called “the lost decades” and it was very much felt by the population.
Fair. The 2% inflation that the FED is pursuing by raising rates is because that’s the economic sweet spot. If we end up in a 10 year deflationary period then that would be catastrophic. I was moreso referencing a short term “return to 2019 numbers” type of deflation that I believe could be a good thing for people.
Since the FED is focused on a 2% inflation hedge and we’ve raised interest rates so much, they would just lower them again to prevent a repeat of Japan. They’re predicted to lower them next year because of this.
Are you saying that a 2%-ish deflation rate sustained for ten years would be catastrophic, but a return to 2019 prices would be a good thing? On what sort of time period would that be beneficial?
Because the accumulated inflation since 2019 is somewhere around 20%, and if we correct it over ten years that would approximately match the scenario you deemed as catastrophic earlier.
Well, that is what Japan tried to do and it wasn’t enough. The problem is that in the real world you can’t lower interest rates beyond a certain point, because as interest rates approach zero or even negative values (ZIRP), banks find it very difficult to make a profit from lending, which leads them to bankrupcy, which in turn slows the economy down, which is the opposite of what you are trying to achieve. Not to mention that on the way to ZIRP private debt balloons and when interest rates eventually revert to their mean the debt burden becomes unbearable, which leads to a recession.
In other words, macroeconomics is a tricky unstable system and simplistic takes have poor outcomes.