Understanding Deflation and our economy woe's finally!

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MzMia -> Understanding Deflation and our economy woe's finally! (12/21/2008 8:31:49 PM)
I just read an interesting article about falling prices causing deflation. I did not fully understand what deflation was until this article broke it down to me. Deflation can be seen as a circle {my basic interpretation} ---->step 1 Consumers stop spending because they think prices will fall further ---> Businesses cut prices further to increase sales and this will also decrease profits ---> Many businesses cut workers and production to stay in business- -->Unemployment goes up, less people with jobs which means less people spending money, those with jobs cutting back on spending also ---> Some businesses have to close down and others are forced to lower prices to lure customers ---->Now to complete the circle, Go back to step 1. I understand deflation now!!! We have not had a period of prolonged deflation in America since the Great Depression. Any thoughts? Idea's on how long this period might last? Deflation's growing threat to the U.S. economy - Dec. 17, 2008

Hippiekinkster -> RE: Understanding Deflation and our economy woe's finally! (12/21/2008 11:26:36 PM)
Good question. What throws a kink into the whole equation is that manufacturing comprises less than 10% of GDP now, as opposed to >30% during America's heyday. Well, maybe. I really don't know if that matters much. But we are seeing deflation in the housing market for certain. We're seeing deflation in the consumer goods sector of the economy. I dunno about food prices, as my buying habits are not typical. Interesting thread.

MrRodgers -> RE: Understanding Deflation and our economy woe's finally! (12/21/2008 11:45:00 PM)
quote: ORIGINAL: MzMia I just read an interesting article about falling prices causing deflation. I did not fully understand what deflation was until this article broke it down to me. Deflation can be seen as a circle {my basic interpretation} ---->step 1 Consumers stop spending because they think prices will fall further ---> Businesses cut prices further to increase sales and this will also decrease profits ---> Many businesses cut workers and production to stay in business- -->Unemployment goes up, less people with jobs which means less people spending money, those with jobs cutting back on spending also ---> Some businesses have to close down and others are forced to lower prices to lure customers ---->Now to complete the circle, Go back to step 1. I understand deflation now!!! We have not had a period of prolonged deflation in America since the Great Depression. Any thoughts? Idea's on how long this period might last? Deflation's growing threat to the U.S. economy - Dec. 17, 2008 The only reason deflation is ANY concern at all is because the capitalist being allergic to risking his own money...has done what ? Borrowed it. That means with falling prices, he can't handle the interest (debt service) which usually means...somebody has to go. Business is ok, but I will get 9 to do the work of 10 and with her salary gone...it will now help me with my debt. Lowering the price is to increase demand. Funny how increasing prices ALL you want with rising demand is never a problem. Concerns about deflation are a capitalist ruse to have you thinking (and thus, govt. thinking) we must takes steps to shore up prices. Wrong Don't believe a word of it. We have well over 1000% inflation since the formation of the Fed. Capitalism IS inflation and speculation so de-flation hurts their bets on paper. With the paper-trading that capitalism is...during inflation...the last buyer is the one who gets fucked. If prices fall, deflation...the last seller gets fucked.

MrRodgers -> RE: Understanding Deflation and our economy woe's finally! (12/21/2008 11:58:38 PM)
quote: ORIGINAL: Hippiekinkster Good question. What throws a kink into the whole equation is that manufacturing comprises less than 10% of GDP now, as opposed to >30% during America's heyday. Well, maybe. I really don't know if that matters much. But we are seeing deflation in the housing market for certain. We're seeing deflation in the consumer goods sector of the economy. I dunno about food prices, as my buying habits are not typical. Interesting thread. As an example of how the whole capitalist culture has caught on...it is in our words, meaning and measurments. Gross Domestic PRODUCT would have you believe it is a measure of what we PRODUCE. IF 10% of of our total business is manufacturing, then 10% of our PRODUCE is manufacturing. The rest is a 'production' of nothing. Services and financial transactions do not PRODUCE anything and should never be counted as a part of GDP. But we can't let that happen. We count all of the paper-trading that capitalism is...as a 'produce' when it clearly is not. So what is important concerning the 'production' part of 'GDP' is that almost 20 years ago (1990 census) we finally had more people working for some level of govt. than in manufacturing. (19 million-govt....17 million manufacturing) There is a clue to the future there. Pay no attention to the numbers as they serve only the plutocrats and speculators.

awmslave -> RE: Understanding Deflation and our economy woe's finally! (12/22/2008 12:11:06 AM)
As I understand it deflation is just another way of looking at recession. US government has proudly built so called "consumption driven economy". Sometimes they call it "service economy". It is obvious people stop consuming or using services if there is a recession and they do not make money. Deflation is secondary effect not the reason. As soon as people get resources deflation stops.

variation30 -> RE: Understanding Deflation and our economy woe's finally! (12/22/2008 3:49:40 AM)
quote: ORIGINAL: MzMia I just read an interesting article about falling prices causing deflation. I did not fully understand what deflation was until this article broke it down to me. Deflation can be seen as a circle {my basic interpretation} ---->step 1 Consumers stop spending because they think prices will fall further ---> Businesses cut prices further to increase sales and this will also decrease profits ---> Many businesses cut workers and production to stay in business- -->Unemployment goes up, less people with jobs which means less people spending money, those with jobs cutting back on spending also ---> Some businesses have to close down and others are forced to lower prices to lure customers ---->Now to complete the circle, Go back to step 1. I understand deflation now!!! with all due respect, you don't. first off, deflation is not a decrease in prices - it's a decrease in the money supply. that won't happen...so deflation won't happen. secondly, I've had a few rather tedious conversations with an Austrian friend of mine who posits that on the continuum of inflation/deflation, deflation would not occur until all inflation has been counteracted. good luck achieving that. and finally: http://mises.org/article.aspx?Id=1241 http://mises.org/article.aspx?Id=1040 http://mises.org/story/3236 and on a more recent note: http://mises.org/story/3249 that should do you.

variation30 -> RE: Understanding Deflation and our economy woe's finally! (12/22/2008 3:54:26 AM)
quote: ORIGINAL: MrRodgers The only reason deflation is ANY concern at all is because the capitalist being allergic to risking his own money...has done what ? Borrowed it. That means with falling prices, he can't handle the interest (debt service) which usually means...somebody has to go. Business is ok, but I will get 9 to do the work of 10 and with her salary gone...it will now help me with my debt. Lowering the price is to increase demand. Funny how increasing prices ALL you want with rising demand is never a problem. Concerns about deflation are a capitalist ruse to have you thinking (and thus, govt. thinking) we must takes steps to shore up prices. Wrong Don't believe a word of it. We have well over 1000% inflation since the formation of the Fed. Capitalism IS inflation and speculation so de-flation hurts their bets on paper. With the paper-trading that capitalism is...during inflation...the last buyer is the one who gets fucked. If prices fall, deflation...the last seller gets fucked. I really don't think you understand the difference between a capitalist and a rent-seeker. here's something you are probably comfortable with: http://en.wikipedia.org/wiki/Rent-seeking there ya go. for further clarification: http://en.wikipedia.org/wiki/Cornelius_Vanderbilt#Ferry_empire Fulton and Livingston were rent-seekers. Vanderbilt was a capitalist.

SilverMark -> RE: Understanding Deflation and our economy woe's finally! (12/22/2008 4:58:32 AM)
Deflation isn't just the decrease in the supply of money....it is a decrease in the value of things....with the exception of the Austrian school of economics....and those like Variation who seem to be strict Austrian are about the only ones who believe that to be the case. Stag-deflation is what the larger worry is in our case. More or less the decrease in intrinsic value of the means of production as well as goods produced,a deflationary spiral or glut of items that no one will or can buy is a larger issue for our economy.

MzMia -> RE: Understanding Deflation and our economy woe's finally! (12/22/2008 6:11:18 AM)
quote: ORIGINAL: awmslave As I understand it deflation is just another way of looking at recession. US government has proudly built so called "consumption driven economy". Sometimes they call it "service economy". It is obvious people stop consuming or using services if there is a recession and they do not make money. Deflation is secondary effect not the reason. As soon as people get resources deflation stops. Deflation might be "secondary" at this point, but IF it happens it means we are in deep trouble. In a deflationary period--> businesses cut production {even if most of these products are not made in America, many people have jobs that involve selling these products}--->cuts in production and sales leads to job losses--> and the scenario continues to get worse as we crawl into a depression. Many here might not see it as a threat, but the FED and many economists see it as a threat. Another reason why interest rates keep dropping. Interest rates now are lower than they have been in what 30 years? At least I understand why deflation is bad for the economy.

samboct -> RE: Understanding Deflation and our economy woe's finally! (12/22/2008 6:20:42 AM)
Hi Mia That cycle left out an important part of deflation- and why a certain amount of inflation is good for an economy. The largest problem with deflation is debt. Let's say you buy a house for $100,000 and you've got a $50,000/yr salary. Your boss now comes to you and says- it's a deflation- your money goes further, but demand for our goods/services has dropped, so I have to cut wages if everybody's going to keep their job. (This is a good boss- mass firings are happening.) Your salary now drops to $40,000/yr. Unfortunately, your house still has a $100,000 mortgage which was affordable when you made $50k/yr, but things get tighter at $40k/yr. This is why deflation is bad. Existing debts become heavier, and our tax code has favored enormous amounts of debt. This is why a bit of inflation is good (I hate AARP- they're a big chunk of the reason we're in the current pickle), since debt loads become lighter over time (the amount of money needed to pay off the debt as a percentage of your income drops over time.) there's more money freed up for new consumption/investment/development/businesses and effectively the standard of living increases. Does this help? Sam

MzMia -> RE: Understanding Deflation and our economy woe's finally! (12/22/2008 6:26:35 AM)
quote: ORIGINAL: samboct Hi Mia That cycle left out an important part of deflation- and why a certain amount of inflation is good for an economy. The largest problem with deflation is debt. Let's say you buy a house for $100,000 and you've got a $50,000/yr salary. Your boss now comes to you and says- it's a deflation- your money goes further, but demand for our goods/services has dropped, so I have to cut wages if everybody's going to keep their job. (This is a good boss- mass firings are happening.) Your salary now drops to $40,000/yr. Unfortunately, your house still has a $100,000 mortgage which was affordable when you made $50k/yr, but things get tighter at $40k/yr. This is why deflation is bad. Existing debts become heavier, and our tax code has favored enormous amounts of debt. This is why a bit of inflation is good (I hate AARP- they're a big chunk of the reason we're in the current pickle), since debt loads become lighter over time (the amount of money needed to pay off the debt as a percentage of your income drops over time.) there's more money freed up for new consumption/investment/development/businesses and effectively the standard of living increases. Does this help? Sam Sam, it does help. But in my OP I said, I now understand the basic principals of "deflation". I have understood the principals of "inflation" for years, up front and personally. It was "deflation" I was not understanding not "inflation". [;)] I never said I thought deflation was a good thing, did I? At least I will understand more what economists are talking about when they throw the term "deflation" around. I think many of us will be hearing that term a lot in 2009.

Musicmystery -> RE: Understanding Deflation and our economy woe's finally! (12/22/2008 6:38:55 AM)
quote: Lowering the price is to increase demand. No, and a common mistake. Demand is a range of quantity demanded at various prices. Merely lowering price changes demand not at all. It does change the quantity demanded, however, assuming the demand curve isn't vertical. Further, the change in quantity demanded can be slight, depending on elasticity--e.g., lowering prices on broccoli won't significantly change consumption (you can only eat so much broccoli). quote: Funny how increasing prices ALL you want with rising demand is never a problem. Also not true. If demand is truly rising, the entire curve shifts. Still, price/quantity will be determined by the curve, and not by "increasing prices all you want," as to do so will decrease the quantity demanded--even with rising demand.

MzMia -> RE: Understanding Deflation and our economy woe's finally! (12/22/2008 6:47:00 AM)
Here is a great article on the USA and deflation for those that missed it in my OP. Deflation's growing threat to the U.S. economy - Dec. 17, 2008

samboct -> RE: Understanding Deflation and our economy woe's finally! (12/22/2008 6:51:20 AM)
Hi Mia Nope-you certainly didn't say a deflation was a good thing. I just thought of an additional problem- there's no reason for people to keep their money in a bank. Under the mattress works just as well. Basically, in a deflation, the bank can't pay interest. Interest is based on the concept that the money will either hold or be inflated, hence there needs to be some return over time. If a dollar has the purchasing power of one dollar now, but in a year, has the purchasing power of $1.25 (deflationary prices)- why stick the money in the bank? They need to charge fees to stay in business at that point- how can they pay interest? No wonder economists are terrified of a deflation- they're right- it's a downward spiral. Sam

pahunkboy -> RE: Understanding Deflation and our economy woe's finally! (12/22/2008 6:53:47 AM)
I go to thinking. I will miss the cheap junk from China. I hate being disorganized, and the way I cant find, store my junk... Mia, check out Peter Schiff. He brings the point to a logical conclusion.

MzMia -> RE: Understanding Deflation and our economy woe's finally! (12/22/2008 7:02:56 AM)
quote: ORIGINAL: samboct Hi Mia Nope-you certainly didn't say a deflation was a good thing. I just thought of an additional problem- there's no reason for people to keep their money in a bank. Under the mattress works just as well. Basically, in a deflation, the bank can't pay interest. Interest is based on the concept that the money will either hold or be inflated, hence there needs to be some return over time. If a dollar has the purchasing power of one dollar now, but in a year, has the purchasing power of $1.25 (deflationary prices)- why stick the money in the bank? They need to charge fees to stay in business at that point- how can they pay interest? No wonder economists are terrified of a deflation- they're right- it's a downward spiral. Sam Thanks Sam, I get your point now. As usual you have given me more to think about. I am feeling I need to almost be an economist to make the best decisions with my money these days. [8\|]

MzMia -> RE: Understanding Deflation and our economy woe's finally! (12/22/2008 7:04:23 AM)
quote: ORIGINAL: pahunkboy I go to thinking. I will miss the cheap junk from China. I hate being disorganized, and the way I cant find, store my junk... Mia, check out Peter Schiff. He brings the point to a logical conclusion. pahunky, Peter Schiff is a very interesting person. Many of his predictions seem to be "dead on". pahunky, thing is.....I do blame Capitalism and the "global economy/free trade" at least partially. We can always agree to disagree? Peace[;)]

ScooterTrash -> RE: Understanding Deflation and our economy woe's finally! (12/22/2008 8:51:23 AM)
quote: ORIGINAL: samboct Hi Mia Nope-you certainly didn't say a deflation was a good thing. I just thought of an additional problem- there's no reason for people to keep their money in a bank. Under the mattress works just as well. Basically, in a deflation, the bank can't pay interest. Interest is based on the concept that the money will either hold or be inflated, hence there needs to be some return over time. If a dollar has the purchasing power of one dollar now, but in a year, has the purchasing power of $1.25 (deflationary prices)- why stick the money in the bank? They need to charge fees to stay in business at that point- how can they pay interest? No wonder economists are terrified of a deflation- they're right- it's a downward spiral. Sam Actually there is another factor not calculated in here. The banks will continue to loan money out at a higher interest than they pay for the use of same money, that is their cut of the pie. Even with deflation, recession, depression or inflation, all of which keeps the value of the dollar fluctuating, as long as they can see a positive return in dollars (not necessarily value), they would continue to pay interest (dollars) to those who save money with their institution. Keeping cash in a mattress would never see an increase in dollars as with the interest collected from the bank (even if it is very low), the increase with the mattress would only increase in value which would happen in either case. Interest plus an increase in value will always be better than just an increase in value. Interest plus a decrease in value, will always be better than just a decrease in value. I'm afraid the mattress theory just doesn't work as well.

samboct -> RE: Understanding Deflation and our economy woe's finally! (12/22/2008 9:14:51 AM)
True enough- but banks have been known to charge fees which more than negate the amount of interest they pay on an account. Also- in the 30's the fear was that the banks would fail- not a problem if the money's in your mattress. Yes, today there is FDIC insurance, but we may be putting that to the test. In short, bank fees and access charges (ATM fees) already can cost you money in a "savings" account- and if things become deflationary, I'd expect those fees to increase further relative to the "interest" paid on the account. Sam

ArticMaestro -> RE: Understanding Deflation and our economy woe's finally! (12/22/2008 11:17:56 AM)
True, if your money is in your mattress, the bank failing will not matter. And of course if your home burns down (or there is a flood, ect), you can claim the 100,000$ stuffed in your mattress, and of course the insurance company will replace it..... The only way FDIC is going to fail is in a general collapse of the economy/ Government, which would leave you with a mattress full of green toilet paper.

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