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Fried Egg
Breakfast Cannibal
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 Posted: Mon Jun 16, 2003 10:48 am Post subject: 1 |
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Many governments around the world are currently more concerned with deflation than they are with inflation.
But is it really a bad thing? What's wrong with prices falling? |
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Dragon Phoenix
Judge Doom
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Aarondalf
the original GL stud
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| Posted: Mon Jun 16, 2003 11:05 am Post subject: 3 |
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Short answer: No with an 'if'.
Long answer : Yes with a 'but'. |
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Fried Egg
Breakfast Cannibal
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| Posted: Mon Jun 16, 2003 11:27 am Post subject: 4 |
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Dragon Phoenix
Looking through the article you linked to, I am failing to see a real explanation of the supposed "Dangers" of deflation.
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| Colin Asher is an economist at the Japanese investment bank Nomura Securities, based in London. He tells RFE/RL that deflation is dangerous because it creates a downward momentum: "In deflation, [there's] a declining spiral. Businesses make less profits so they cut back [on] employment. People feel less like spending money. Businesses then don't make any profits and everything works itself into a declining spiral." |
Why do businesses necessarilly make less profits when prices are falling? Surely, what really matters is the price spread (or differential) between their outgoings and the ingoings. If prices are generally falling, it should have little effect on their potential profits.
The author of this article then goes on to point out the real reason behind Japan's deflation:
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| Asher says in Japan, deflation has become more serious because of what he calls "structural problems." For years, he says, prices in Japan have been too high -- among the highest in the world. But as Japanese companies have increasingly farmed out labor to low-wage Asian countries, production prices -- and the prices of finished goods -- have dropped. |
Isn't it therefore a good thing that their prices (and therefore the cost of living) drops to a more reasonable level?
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| The lower prices are initially good for consumers, but ultimately the reduced prices translate into lower corporate profit margins, and the downward spiral begins. |
Again, this is founded on groundless logic.
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| Prolonged deflation squeezes consumers by lowering the value of homes, real estate, and investments, while leaving interest payments on debt and obligations unchanged. It hurts companies by depressing the value of factories and investments. |
Ok, if this is true, why are central banks around the world fighting the threat of deflation with interest rate reductions? Doesn't this merely encourage more people into debt?
And what about the long term benefit of deflation? If the cost of living falls in western countries, and wages fall accordingly, our manufacturing industries will be able to more effectively compete against other, less developed countries.
What I'm trying to say here is, surely we need a general harmoginisation of the cost of living around the world the level the playing field for free trade? |
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Dragon Phoenix
Judge Doom
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| Posted: Mon Jun 16, 2003 11:40 am Post subject: 5 |
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Fried Egg
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| Why do businesses necessarilly make less profits when prices are falling? Surely, what really matters is the price spread (or differential) between their outgoings and the ingoings. If prices are generally falling, it should have little effect on their potential profits. |
Not when the materials you are using are imported from countries that do not have this deflation. Japan is a prime example, with little or no natural resources. Like oil. |
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Fried Egg
Breakfast Cannibal
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| Posted: Mon Jun 16, 2003 12:19 pm Post subject: 6 |
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Dragon Phoenix
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| Not when the materials you are using are imported from countries that do not have this deflation. Japan is a prime example, with little or no natural resources. Like oil. |
But Japan's problems are rooted in the fact that so much of the manufactuing is farmed out to the surrounding third world countries. This is happening because the costs are far too high in Japan itself. Therefore, deflation is what they need to bring back the lost industry. |
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Dragon Phoenix
Judge Doom
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| Posted: Mon Jun 16, 2003 12:23 pm Post subject: 7 |
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Manufacturing costs = material + labour
Your supposed case for Japan: material and labour both outsourced, hence not deflated.
Selling prices lower due to deflation.
Therefore less margin for producers. |
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Dragon Phoenix
Judge Doom
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| Posted: Mon Jun 16, 2003 12:24 pm Post subject: 8 |
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| Abd deflation IIRC is lower prices, but at similar wage levels. So no chance of getting labour back due to deflation. |
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Fried Egg
Breakfast Cannibal
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| Posted: Mon Jun 16, 2003 12:42 pm Post subject: 9 |
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| Abd deflation IIRC is lower prices, but at similar wage levels. So no chance of getting labour back due to deflation. |
And what is preventing lower wages? Minimum wage laws, maybe. So scrap the minimum wage (or at least review it downwards as necessary) so that wages can fall.
Ultimately, something had to give. Japan had (and still has) the highest cost of living in the world. It's way over inflated. It needs to deflate.
[This message has been edited by Fried Egg (edited 06-16-2003 08:43 AM).] |
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Dragon Phoenix
Judge Doom
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| Posted: Mon Jun 16, 2003 12:45 pm Post subject: 10 |
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Cost of living in absolute terms or relative to salary?
If in absolute terms, devaluate the yen.
If in relative terms, dropping prices and salaries at the same time does not change a thing. |
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ML
Table Master
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| Posted: Mon Jun 16, 2003 12:49 pm Post subject: 11 |
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*Has not read DP's article*
I beleive that any uncertainty in the value of money is likely to be bad for the economy. A lot of companies and people plan at least 20-30 years out, and uncertainty makes that sort of planning hard.
My understanding is that deflation (which I think is a generalized fall in prices/labor etc) will cause consumers to think, "Why buy today, when I can buy tomorrow for less?". Of course, when no one buys today, many companies will not be around tomorrow.
I think that in this scenario it's important to distinquish actual drops in prices due to the rising value of money, vs. falling prices due to increased manufacturing effeciency. With increased manufacturing effeciency I see a fall in the price of goods, couples with a rise in the number/quality of goods that I want to buy. Good for everyone.
An example of the latter is computers (the perfect example for everything). You can buy a decent computer now in the US for a few hundred dollars. This is better than any computer in the world 10 years ago, back when a crappy PC cost around $2000. But ... a few days ago my wife and I were discussing how many computers we would "need" for price was to object, and we came up with around four.
Anyway, my two cents. |
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Fried Egg
Breakfast Cannibal
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| Posted: Mon Jun 16, 2003 1:05 pm Post subject: 12 |
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I found this interesting article: Deflation: The Biggest Myths
ML
| Quote: |
| My understanding is that deflation (which I think is a generalized fall in prices/labor etc) will cause consumers to think, "Why buy today, when I can buy tomorrow for less?". Of course, when no one buys today, many companies will not be around tomorrow. |
It's hard to gauge the truth of that sentiment. It seems to rest on the assumption that many consumers currently buy now (rather than later) merely because the price is likely to go up (in an inflationary economy). I'm not convinced that is the case. Maybe if there is sharp deflation, but a moderate rate of deflation wouldn't have that effect, surely?
But, even if you accept that it is a valid point, so what? To suggest that is bad rests on the assumption that less consumer spending (in favour of more saving) is bad for the economy. But more money saved leads t o a greater capacity to invest which is good for business. |
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Fried Egg
Breakfast Cannibal
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| Posted: Mon Jun 16, 2003 1:11 pm Post subject: 13 |
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Another interesting article: The Blessings of Deflation
quote:
And yet, many experts still say we should "worry about falling prices" because they represent a "destructive force" (according to Martin Wolk at MSNBC, for example). He explains as follows: "As prices keep going down, money grows more valuable. . . ." So far so good!
But he goes on to say that this is actually a bad thing because it creates "an enormous disincentive for consumers and businesses to spend money. Economic activity slows, unemployment rises and demand continues to decline." Well, but that presumes that consumers have something to gain by forever stocking up on dollars and never buying anything, which is absurd. It's true that falling prices create incentives to save, but so long as the preference of consumers is to save instead of spend, that can only prepare the way for a future of economic growth. Consumers save for a reason, namely, to spend later.
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ML
Table Master
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| Posted: Mon Jun 16, 2003 2:12 pm Post subject: 14 |
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In a failure of self control, I got sucked into the Mises articles. They seemed to present pretty good arguments as to why deflation is bad.- Makes it nearly impossible to borrow money. (which should destroy the construction business.)
- Price shocks should take a few hours or days (because that's always good for the economy :rolleyes: )
- Will bankrupt many enterprises and businesses (fortunately, only those that the author disagrees with)(including most governments)(and most homeowners)
But these negatives must be weighed against the advantages of deflation ....- Deflation will force us to return to the gold standard
- Inflation is bad, therefore deflation must be good.*
*to quote: "Given the enormous waste that goes in hand with inflation, it is not farfetched to assume that deflation will spur economic growth both in the long run and in the immediate run"
[edit: spelling]
[This message has been edited by ML (edited 06-16-2003 10:13 AM).] |
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Fried Egg
Breakfast Cannibal
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| Posted: Mon Jun 16, 2003 2:42 pm Post subject: 15 |
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ML
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| Makes it nearly impossible to borrow money. (which should destroy the construction business.) |
It doesn't make it impossible to borrow money, it merely creates a disincentive. In otherwords, it promotes responsible, rather than reckless, financial planning.
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| Will bankrupt many enterprises and businesses (fortunately, only those that the author disagrees with)(including most governments)(and most homeowners) |
As far as governments are concerned, they are heading for bankrupcy anyway. Ever increasing public spending (paid for by an ever increasing public borrowing) is creating an ever larger burden for future generations to bear at some point.
Ultimately, we would all be better off by budgeting better, using our resources more efficiently and borrowing less. The trick is, how do we get from here to there (minimising the negative effects you mention). I think the answer is low levels of deflation so that people have more time to adapt. |
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Fried Egg
Breakfast Cannibal
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| Posted: Mon Jun 16, 2003 2:52 pm Post subject: 16 |
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Actually, thinking about it a little more, wouldn't deflation put a downward pressure on interest rates anyway?
If people were less inclined to borrow (because the value of their debt, before interest, would increase over time) and more inclined to save (for converse reasons), banks would be able to offer lower interest rates to savers and would have to offer lower rates to attract borrowers.
Indeed, if deflation were that severe, couldn't banks actually set negative interest rates? If people were that reluctant to borrow, they would have to actually offer to reduce the debt over time in order to partially offset the fact that the value of the debt was increasing so fast. |
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ML
Table Master
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| Posted: Mon Jun 16, 2003 3:04 pm Post subject: 17 |
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| couldn't banks actually set negative interest rates? |
No. Thus I stand by "impossible to borrow". Why would I loan you money at -2% intrest when I could bury it in the backyard and earn a healthy 0%, risk free?
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Fried Egg
Breakfast Cannibal
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| Posted: Mon Jun 16, 2003 3:25 pm Post subject: 18 |
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ML
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| No. Thus I stand by "impossible to borrow". Why would I loan you money at -2% intrest when I could bury it in the backyard and earn a healthy 0%, risk free? |
Ok, point taken.
But in reality, it wouldn't be set at 0%, would it? Japen had interest rates at 0%, but only because they were trying to use the interest rates to reverse the effects of deflation.
As long as the rate of deflation wasn't excessive, it should still be possible (although less desireable) to borrow. |
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Samadhi
+1
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| Posted: Mon Jun 16, 2003 5:10 pm Post subject: 19 |
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Obviously deflation isn't that bad. What ML said about computers is a perfect example.
Prices keep dropping dramatically on computers. People are buying lots of computers. |
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Fried Egg
Breakfast Cannibal
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| Posted: Tue Jun 17, 2003 12:29 pm Post subject: 20 |
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Thinking about it, it seems to me that deflation is no more likely to make borrowing impossible than inflation makes saving impossible. As long as the ecomomy does not deflate too quickly, there shouldn't be a problem.
And, as I have said already, most western economies need to deflate to create a more level playing field in which free trade can operate without creating adverse side effects. |
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