Cause of Today's Economic Crises: Too Much Thrift

[joshnorris14]

@Mansoor H. Khan

@Josh

@Mansoor H. Khan

Too much is when the public attempts to “save” too many fiat dollars in their bank accounts and economic activity slows down (consumption and actual physical investing activities). Saving Fiat dollars is not an investing activity in my definition (it is an accounting entry).

Even saving pieces of gold is not investing. It does not employ people. It does not (just by sitting in a mattress) build factories.

Do you understand?

How much is too much? too little?

When deflation ensues (broadbased economy wide sustained decline in prices of goods and services – as during the great depression).

So, you’re saying that a decline in prices is always bad?

And again, how much savings is too little?

[EternalSanction]

@Mansoor H. Khan

You are correct. All producers of real wealth and value (products and services) have to judge/choose which “money” will best help them traverse time and distance. At least people did before legal tender laws. Now producers are forced to transact in fiat currency of the government under a threat of violence/incarceration. But even now people can choose to hold cash in various currencies or even in gold and silver if they wanted to. Right?

But most people even now choose to hold their cash in fiat, specially dollars. Not in physical gold coins or GLD shares.

Major international transactions occur in dollars as well.

You missed the point. The very fact that value is subjective means that no good or money can be an actual claim on future production.

@Mansoor H. Khan

@Josh

How much is too much? too little?

When deflation ensues (broadbased economy wide sustained decline in prices of goods and services – as during the great depression).

How many industries need to be affected for it to be “economy-wide?” How long do prices need to be affected for it to be “sustained?” These terms aren’t objectively definable; they’re more useful to economic historians than economists.

[Mansoor114]

Ok. yes and no.

Yes. No one can absolutely guarantee that “particular” money will achieve the time traversal as expected and the claim will be worth anything. But all producers choose and my point is most producers don’t choose gold coins or gld shares in today’s world (even though they clearly can buy these after the initial transaction in fiat which is required by law). Most people use the highways even though they know they might not be able to successfully traverse distance (may get killed or maimed in an auto crash). It is very much like that. Now, if the confidence of the producers is killed in the dollar then something else will happen. But until then the confidence is there the claim is good!

[Smiling_Dave]

Welcome Mansoor. You have obviously given a lot of thought to this topic.

I’ll write my comments on it. The first part is fine. Then comes:

@Mansoor H. Khan

Now apply this situation to all excess producers participating in the world markets (by excess producers I mean people like our baker who produce more loaves of bread than they need for current consumption but would like to consume their output in the future). As people become more and more productive there is more and more excess production (if consumption does not increase in tandem with efficiency increases) then this excess production will be directed (by capital markets) to produce more and more assets which can be exchanged ultimately for consumer goods in the future. This is how we get a boom.

Notice that there are thousands of loaves of bread flying around that nobody is eating, but selling instead in order to invest in assets. What happens when there is plenty of bread? The price of it goes down. So although all the bakers will of course have SOME money to invest in assets, they won’t have the huge amount needed for a boom, will they?

Here is where AE steps in and says that the money that caused the phony boom came from paper money printed by the govt. Had that money not been printed there would be no boom and no bust after.

Now when people have more money than they need, they invest it in something. Notice that they could have invested it wisely [in solid companies with honest and competent management] or foolishly [in things that are not worth the money, but that they hope will go up in price anyway, so they can sell it to the next sucker]. And oddly enough, phony booms always come after there is a lot of money printing.

From this point on, let’s be specific and talk about a housing bubble.

Bust happens when excess producers realize their assets (like dot com company shares or residential and commercial real estate holdings) will not yield as much return as they expected and may even give a negative return.

In other words, they all invested foolishly. Why did that happen? Have they no concern for their hard earned money? Why did they gamble it away?

Rightly, excess producers then rush to safety of the most liquid asset (cash). This causes asset prices to fall and induces managers to reduce investment spending causing unemployment.

Unemployment in the housing industry.

But this does not mean our ability to produce goods and services has diminished.

It has, for a while. Because all that money spent on, say houses nobody needs has eaten up a lot of land and materials and labor that was wasted on a useless house instead of producing useful things. Also a lot of people have lost their money.

If investment slows down and consumption does not increase production must decrease to match the new level of investment.

Here we have to be careful. Investment in what and consumption of what and production of what? In the houses nobody wanted in the first place.

But what usually happens during a period of reduced investment

in housing nobody wants

is that consumption slows down as well

cause nobody wanted the houses in the first place. They all thought they could sell it to the next fellow.

(unemployed and those fearing unemployment spend less)

reducing demand even more and reducing production even more

Not exactly. it depends on what you are talking about. We have to distinguish between things that should not have been produced [houses] and things that should [for simplicity, everything else].

Of course, the things that should not have been built in the first place are dead in the water. Production of houses will stop, as it should, cause nobody wants houses, and besides there are plenty lying around now at bargain prices.

With everything else, it’s a different story, as follows.

When demand goes down for everything else, prices go down. The law of supply and demand kicks in. Of course prices of raw materials go down too, because there is less demand for them as well. So that really good businesmen will be able to make a profit under these new conditions. The less competent will go bankrupt. Their stuff will be sold to the competent ones, who now have increased production capacity at a price that will still sell what they make.

even though our capacity to produce has not diminished during a bust.

Yes and no. Our capacity to produce “everything else” [not houses] has diminished, because our resources were going into houses.

Also, making the change from using resources for houses to using it for everything else is going to cost money. Where is this money going to come from? Only one place. The bakers. They will have to make more loaves, not eat all of them but sell them, and not spend the money they get from those loaves on Starbucks coffee or new cars, but invest it in a company that makes “everything else”. That company can use the bakers money they borrowed to buy up the land and factories and workers who were wasted on houses and make “everything else”.

Slow down of economic activity feeds on itself devastating the economy.

If this is so, how did any economy in the history of man ever survive? After all, the boom is inevitable once th abakers learn how to bake ten loaves a day. The bust is also inevitable, and then the slow down of economic activity will feed on itself devastating the economy. We should all be living in caves still if this line of reasoning is true.

In short, too much thrift devastates the economy.

This just ain’t so, as I hope I have shown.

On top of this productivity (output per labor hour) is continually increasing (and has rocketed upwards in the past 100 years).

In other words, it costs less and less to make things. Thus the maker can sell them chepaer and still make a profit. In fact his profit will be larger than ever, because once the price goes down more people will buy it. He can hire more and more people to make his product, because there are more people who can afford to buy it.

We will have more and more unemployment

Why? On the contrary.

unless one of following or combination of the following occurs to a sufficient degree to stem the tide of slowdown of investment activity and improving productivity.

1. Increase investment activity. But this won’t occur unless #2 below occurs.

Where will the money for this come from? And the incentive to take a risk, where will that come from.

2. Increase our consumption. Increase demand for goods and services.

Of things we want or things we don’t want? Obviously we should not buy something we don’t want, or encourage more investment in things we don’t want. Now if the govt takes our money away from us through taxes or [what is the same thing] inflation, they clearly cannot know as well I do what I want to spend my money on. So no point in the govt consuming and investing for me, is there?

So it’s all up to me, the private individual. I have a difficult time, the economy is in a shambles, I am not sure of my future. So I can do one of two things with my money. I can consume it all up now, leaving me with nothing. Is this smart? Is this what we want our economy to look like, everyone on the brink of poverty always, with no money saved to protect them? Or I can consume a little less, and save for harder times. If I save, should I hide the money under my bed or put it in a bank so I can earn some interest? If the bank can be trusted and gives a decent interest rate and I can trust the govt not to inflate my money away, I will put it in the bank. The bank will lend it to a business, and thus the money will be invested.

3. Decrease our labor hours. Work less.

So if I am very poor and need more money I should work less? is this what we want? A nation of paupers? Besides, just as we need money to be invested to improve the economy, we need labor hours too.

4. Do projects which will “use up” excess production.

Who will pay for these projects? The govt? Where do they get money from? From me. So I should pay for these projects? I don’t want them, and as you clearly say, they are just a waste of my money, “using it up” for no reason. How can this be good?

All the stuff about too much debt (public and private) , falling asset prices and printing money is just accounting entries.

From this point on we are a long way from the bakers. What I think you are saying is: What counts is our capacity to produce. Forget about the paper money details, they don’t really count. The factory can make the same amount of cars no matter what green pieces of paper are in someones wallet.

That’s true, but the green papers represent something very important. By law, they represent “the ability to buy things”. And of course, while an “ability to buy” isn’t out there on the assembly line cranking out those cars, it is nevertheless very very important. Without it, I can’t buy the raw materials or pay my workers. It is obviously of huge huge importance, and has to be well understood and treated with great care.

So at this stage, the time has come to reccomend the free short masterpiece “What Has Govt Done to Our Money”, available on this site.

The rest of your essay deserves attention as well, but this is long enough already.

[E_R_Olovetto]

@Mansoor H. Khan

You are correct. All producers of real wealth and value (products and services) have to judge/choose which “money” will best help them traverse time and distance. At least people did before legal tender laws. Now producers are forced to transact in fiat currency of the government under a threat of violence/incarceration. But even now people can choose to hold cash in various currencies or even in gold and silver if they wanted to. Right?

But most people even now choose to hold their cash in fiat, specially dollars. Not in physical gold coins or GLD shares.

Major international transactions occur in dollars as well.

Dollars can’t even really be viewed as money. They meet part of the test, that they are accepted as a means of exchange, but fail others.You seem to be forgetting that the US government confiscated citizen’s gold in 1933 and gold is outlawed as a method of exchange. People only use dollars as a method of self-defense.

[Mansoor114]

@Justin Spahr-Summers

How many industries need to be affected for it to be “economy-wide?” How long do prices need to be affected for it to be “sustained?” These terms aren’t objectively definable; they’re more useful to economic historians than economists.

Look. We can work on these details once you accept the general notion that deflation is destructive to the economy. We all know terrorism is destructive/disruptive to a civilization. It is hard to prevent. And just because it hard to prevent and requires all kinds of resources and judgements to be made does not mean we should not try and try very hard to prevent it. Because the alternative is much worse: Rewarding terrorism will lead to more terrorism.

Are you convinced that sustainded widespread decline is prices is very harmful to an economy?

[Mansoor114]

You are right about gold confiscation and law in 1933.

But right now employees/business owners can easily exchange their pay/profits for gold coins, gold bars or gld shars if they desired. But most don’t. Right?

[Mansoor114]

@E. R. Olovetto

@Mansoor H. Khan

You are correct. All producers of real wealth and value (products and services) have to judge/choose which “money” will best help them traverse time and distance. At least people did before legal tender laws. Now producers are forced to transact in fiat currency of the government under a threat of violence/incarceration. But even now people can choose to hold cash in various currencies or even in gold and silver if they wanted to. Right?

But most people even now choose to hold their cash in fiat, specially dollars. Not in physical gold coins or GLD shares.

Major international transactions occur in dollars as well.

Dollars can’t even really be viewed as money. They meet part of the test, that they are accepted as a means of exchange, but fail others.You seem to be forgetting that the US government confiscated citizen’s gold in 1933 and gold is outlawed as a method of exchange. People only use dollars as a method of self-defense.

But right now employees/business owners can easily exchange their pay/profits for gold coins, gold bars or gld shars if they desired. But most don’t. Right?

[joshnorris14]

@Mansoor H. Khan

We all know terrorism is destructive/disruptive to a civilization. It is hard to prevent. And just because it hard to prevent and requires all kinds of resources and judgements to be made does not mean we should not try and try very hard to prevent it. Because the alternative is much worse: Rewarding terrorism will lead to more terrorism.

Are you equating deflation to terrorism?

Why should I view buying something at $5 per unit instead of $6 per unit a negative?

[EternalSanction]

@Mansoor H. Khan

Look. We can work on these details once you accept the general notion that deflation is destructive to the economy. We all know terrorism is destructive/disruptive to a civilization. It is hard to prevent. And just because it hard to prevent and requires all kinds of resources and judgements to be made does not mean we should not try and try very hard to prevent it. Because the alternative is much worse: Rewarding terrorism will lead to more terrorism.

Are you convinced that sustainded widespread decline is prices is very harmful to an economy?

Of course not. In fact, prices tend to fall in the absence of intervention. How is price deflation any more “destructive” than price inflation? They both just represent changes in subjective value scales.

[Mansoor114]

@Smiling Dave

Welcome Mansoor. You have obviously given a lot of thought to this topic.

I’ll write my comments on it. The first part is fine. Then comes:

@Mansoor H. Khan

Now apply this situation to all excess producers participating in the world markets (by excess producers I mean people like our baker who produce more loaves of bread than they need for current consumption but would like to consume their output in the future). As people become more and more productive there is more and more excess production (if consumption does not increase in tandem with efficiency increases) then this excess production will be directed (by capital markets) to produce more and more assets which can be exchanged ultimately for consumer goods in the future. This is how we get a boom.

Notice that there are thousands of loaves of bread flying around that nobody is eating, but selling instead in order to invest in assets. What happens when there is plenty of bread? The price of it goes down. So although all the bakers will of course have SOME money to invest in assets, they won’t have the huge amount needed for a boom, will they?

Mansoor’s reply: Ok. Yes and No. If you just focus on loaves of bread yes. Now, Apply my scenario to all consumer products. The prices of consumer products will go down. That is correct. But producers will start making more and different consumer products (ipods, fancy cars, different variety of loaves) and that is good and fine. The problem is that productivity is continously increasing due to increase in our knowledge of engineering technology, information technology and business process improvements. If consumption does not increase in tandem with productivity more and more output will be directed to production of assets which can be exchanged for consumer goods in the future. And that is also good and fine. The problem is when producers realize that many of their investments will not work out they pull back to cash. This is where the disaster lies. Asset prices go down. Managers cut employment in those industries where excess cash was previously going. Even this is not all bad. Resources need to re-allocate now and them. The issue is: Those workers who were receiving wages creating the bad assets have no income. Therefore they cannot continue to spend as much on consumer goods (even though our capacity to produce consumer goods has not dimished a bit). Do you see a problem here. This can spiral out of control as it did during the great depression.

Here is where AE steps in and says that the money that caused the phony boom came from paper money printed by the govt. Had that money not been printed there would be no boom and no bust after.

Now when people have more money than they need, they invest it in something. Notice that they could have invested it wisely [in solid companies with honest and competent management] or foolishly [in things that are not worth the money, but that they hope will go up in price anyway, so they can sell it to the next sucker]. And oddly enough, phony booms always come after there is a lot of money printing.

From this point on, let’s be specific and talk about a housing bubble.

Bust happens when excess producers realize their assets (like dot com company shares or residential and commercial real estate holdings) will not yield as much return as they expected and may even give a negative return.

In other words, they all invested foolishly. Why did that happen? Have they no concern for their hard earned money? Why did they gamble it away?

Rightly, excess producers then rush to safety of the most liquid asset (cash). This causes asset prices to fall and induces managers to reduce investment spending causing unemployment.

Unemployment in the housing industry.

But this does not mean our ability to produce goods and services has diminished.

It has, for a while. Because all that money spent on, say houses nobody needs has eaten up a lot of land and materials and labor that was wasted on a useless house instead of producing useful things. Also a lot of people have lost their money.

If investment slows down and consumption does not increase production must decrease to match the new level of investment.

Here we have to be careful. Investment in what and consumption of what and production of what? In the houses nobody wanted in the first place.

But what usually happens during a period of reduced investment

in housing nobody wants

is that consumption slows down as well

cause nobody wanted the houses in the first place. They all thought they could sell it to the next fellow.

(unemployed and those fearing unemployment spend less)

reducing demand even more and reducing production even more

Not exactly. it depends on what you are talking about. We have to distinguish between things that should not have been produced [houses] and things that should [for simplicity, everything else].

Of course, the things that should not have been built in the first place are dead in the water. Production of houses will stop, as it should, cause nobody wants houses, and besides there are plenty lying around now at bargain prices.

With everything else, it’s a different story, as follows.

When demand goes down for everything else, prices go down. The law of supply and demand kicks in. Of course prices of raw materials go down too, because there is less demand for them as well. So that really good businesmen will be able to make a profit under these new conditions. The less competent will go bankrupt. Their stuff will be sold to the competent ones, who now have increased production capacity at a price that will still sell what they make.

even though our capacity to produce has not diminished during a bust.

Yes and no. Our capacity to produce “everything else” [not houses] has diminished, because our resources were going into houses.

Also, making the change from using resources for houses to using it for everything else is going to cost money. Where is this money going to come from? Only one place. The bakers. They will have to make more loaves, not eat all of them but sell them, and not spend the money they get from those loaves on Starbucks coffee or new cars, but invest it in a company that makes “everything else”. That company can use the bakers money they borrowed to buy up the land and factories and workers who were wasted on houses and make “everything else”.

Slow down of economic activity feeds on itself devastating the economy.

If this is so, how did any economy in the history of man ever survive? After all, the boom is inevitable once th abakers learn how to bake ten loaves a day. The bust is also inevitable, and then the slow down of economic activity will feed on itself devastating the economy. We should all be living in caves still if this line of reasoning is true.

In short, too much thrift devastates the economy.

This just ain’t so, as I hope I have shown.

On top of this productivity (output per labor hour) is continually increasing (and has rocketed upwards in the past 100 years).

In other words, it costs less and less to make things. Thus the maker can sell them chepaer and still make a profit. In fact his profit will be larger than ever, because once the price goes down more people will buy it. He can hire more and more people to make his product, because there are more people who can afford to buy it.

We will have more and more unemployment

Why? On the contrary.

unless one of following or combination of the following occurs to a sufficient degree to stem the tide of slowdown of investment activity and improving productivity.

1. Increase investment activity. But this won’t occur unless #2 below occurs.

Where will the money for this come from? And the incentive to take a risk, where will that come from.

2. Increase our consumption. Increase demand for goods and services.

Of things we want or things we don’t want? Obviously we should not buy something we don’t want, or encourage more investment in things we don’t want. Now if the govt takes our money away from us through taxes or [what is the same thing] inflation, they clearly cannot know as well I do what I want to spend my money on. So no point in the govt consuming and investing for me, is there?

So it’s all up to me, the private individual. I have a difficult time, the economy is in a shambles, I am not sure of my future. So I can do one of two things with my money. I can consume it all up now, leaving me with nothing. Is this smart? Is this what we want our economy to look like, everyone on the brink of poverty always, with no money saved to protect them? Or I can consume a little less, and save for harder times. If I save, should I hide the money under my bed or put it in a bank so I can earn some interest? If the bank can be trusted and gives a decent interest rate and I can trust the govt not to inflate my money away, I will put it in the bank. The bank will lend it to a business, and thus the money will be invested.

3. Decrease our labor hours. Work less.

So if I am very poor and need more money I should work less? is this what we want? A nation of paupers? Besides, just as we need money to be invested to improve the economy, we need labor hours too.

4. Do projects which will “use up” excess production.

Who will pay for these projects? The govt? Where do they get money from? From me. So I should pay for these projects? I don’t want them, and as you clearly say, they are just a waste of my money, “using it up” for no reason. How can this be good?

All the stuff about too much debt (public and private) , falling asset prices and printing money is just accounting entries.

From this point on we are a long way from the bakers. What I think you are saying is: What counts is our capacity to produce. Forget about the paper money details, they don’t really count. The factory can make the same amount of cars no matter what green pieces of paper are in someones wallet.

That’s true, but the green papers represent something very important. By law, they represent “the ability to buy things”. And of course, while an “ability to buy” isn’t out there on the assembly line cranking out those cars, it is nevertheless very very important. Without it, I can’t buy the raw materials or pay my workers. It is obviously of huge huge importance, and has to be well understood and treated with great care.

So at this stage, the time has come to reccomend the free short masterpiece “What Has Govt Done to Our Money”, available on this site.

The rest of your essay deserves attention as well, but this is long enough already.

[Mansoor114]

@Justin Spahr-Summers

@Mansoor H. Khan

Look. We can work on these details once you accept the general notion that deflation is destructive to the economy. We all know terrorism is destructive/disruptive to a civilization. It is hard to prevent. And just because it hard to prevent and requires all kinds of resources and judgements to be made does not mean we should not try and try very hard to prevent it. Because the alternative is much worse: Rewarding terrorism will lead to more terrorism.

Are you convinced that sustainded widespread decline is prices is very harmful to an economy?

Of course not. In fact, prices tend to fall in the absence of intervention. How is price deflation any more “destructive” than price inflation? They both just represent changes in subjective value scales.

Ok. Let’s talk about how deflation relates to behavior of people who are getting ready to invest money for real world projects. For investing purposes people will not part with their money until the following criteria is met:

1. The returned money from the project must be more than sufficient to cover the initial outlay and must compensate for perceived risk of the project.

If the investor expects deflation then the hurdle of covering the initial outlay is greater than it would otherwise be if prices were not deflating.

Do you agree with the above statement?

[wilderness]

I have one question.

How can savings be the cause when the economic downturn happened first, and afterwards some people increased their savings? [Maybe I’m being too contingent or maybe there is an aprior in what I said.]

[Smiling_Dave]

@Mansoor H. Khan

Are you convinced that sustainded widespread decline is prices is very harmful to an economy?

It’s very good for an economy. Would you like to pay the price that computers sold for when they first came out? Or cell phones?

In 1956, ONE megabyte of hard drive space cost $10,000. Now you can get 10 megabytes for a less than a penny. When was the computer industry better off? When was the world’s economy better off?

Well, I found the answer to this recession. Charge $10,000 a megabyte for hard drive space and we are saved.

[jmorris84]

@Mansoor H. Khan

You are right about gold confiscation and law in 1933.

But right now employees/business owners can easily exchange their pay/profits for gold coins, gold bars or gld shars if they desired. But most don’t. Right?

What do you think most people will do if it appears unfavorable (right now) to transact in anything but USD? Isn’t it illegal to transact in gold coins? In any coin that is not minted by the US Gov’t for that matter? Ask yourself what you think might happen if these laws are removed.

[Mansoor114]

@Smiling Dave

@Mansoor H. Khan

Are you convinced that sustainded widespread decline is prices is very harmful to an economy?

It’s very good for an economy. Would you like to pay the price that computers sold for when they first came out? Or cell phones?

In 1956, ONE megabyte of hard drive space cost $10,000. Now you can get 10 megabytes for a less than a penny. When was the computer industry better off? When was the world’s economy better off?

Well, I found the answer to this recession. Charge $10,000 a megabyte for hard drive space and we are saved.

My reply from above applies:

Mansoor’s reply: Ok. Yes and No. If you just focus on loaves of bread yes. Now, Apply my scenario to all consumer products. The prices of consumer products will go down. That is correct. But producers will start making more and different consumer products (ipods, fancy cars, different variety of loaves) and that is good and fine. The problem is that productivity is continously increasing due to increase in our knowledge of engineering technology, information technology and business process improvements. If consumption does not increase in tandem with productivity more and more output will be directed to production of assets which can be exchanged for consumer goods in the future. And that is also good and fine. The problem is when producers realize that many of their investments will not work out they pull back to cash. This is where the disaster lies. Asset prices go down. Managers cut employment in those industries where excess cash was previously going. Even this is not all bad. Resources need to re-allocate now and them. The issue is: Those workers who were receiving wages creating the bad assets have no income. Therefore they cannot continue to spend as much on consumer goods (even though our capacity to produce consumer goods has not dimished a bit). Do you see a problem here. This can spiral out of control as it did during the great depression.

Also, you are focusing on just one industry. Prices can go down in one industry because of efficiency increases. Efficiency increases occur slowly over time. This means that excess labor can be deployed to other industries or even in the same industry creating more/different products slowy over time. This is not what occurred during the great depression. Almost all industries were depressed together with severe collapse in consumer demand. Please re-read the above underlined paragraph and tell me if you see an issue?

[jmorris84]

@Mansoor H. Khan

Ok. Let’s talk about how deflation relates to behavior of people who are getting ready to invest money for real world projects. For investing purposes people will not part with their money until the following criteria is met:

1. The returned money from the project must be more than sufficient to cover the initial outlay and must compensate for perceived risk of the project.

If the investor expects deflation then the hurdle of covering the initial outlay is greater than it would otherwise be if prices were not deflating.

Do you agree with the above statement?

Please explain the computer industry and many other electronic industries for that matter. Explain some of the areas where cosmetic surgeries have fallen in price.

[Mansoor114]

@jmorris84

@Mansoor H. Khan

You are right about gold confiscation and law in 1933.

But right now employees/business owners can easily exchange their pay/profits for gold coins, gold bars or gld shars if they desired. But most don’t. Right?

What do you think most people will do if it appears unfavorable (right now) to transact in anything but USD? Isn’t it illegal to transact in gold coins? In any coin that is not minted by the US Gov’t for that matter? Ask yourself what you think might happen if these laws are removed.

Yes. You must transact in USD. But you can easily exchange your USDs for cold coins and/or GLD shares. Right?

[Mansoor114]

@jmorris84

@Mansoor H. Khan

Ok. Let’s talk about how deflation relates to behavior of people who are getting ready to invest money for real world projects. For investing purposes people will not part with their money until the following criteria is met:

1. The returned money from the project must be more than sufficient to cover the initial outlay and must compensate for perceived risk of the project.

If the investor expects deflation then the hurdle of covering the initial outlay is greater than it would otherwise be if prices were not deflating.

Do you agree with the above statement?

Please explain the computer industry and many other electronic industries for that matter. Explain some of the areas where cosmetic surgeries have fallen in price.

Please see my reply to smiling dave above.

[jmorris84]

@Mansoor H. Khan

My reply from above applies:

Mansoor’s reply: Ok. Yes and No. If you just focus on loaves of bread yes. Now, Apply my scenario to all consumer products. The prices of consumer products will go down. That is correct. But producers will start making more and different consumer products (ipods, fancy cars, different variety of loaves) and that is good and fine. The problem is that productivity is continously increasing due to increase in our knowledge of engineering technology, information technology and business process improvements. If consumption does not increase in tandem with productivity more and more output will be directed to production of assets which can be exchanged for consumer goods in the future. And that is also good and fine. The problem is when producers realize that many of their investments will not work out they pull back to cash. This is where the disaster lies. Asset prices go down. Managers cut employment in those industries where excess cash was previously going. Even this is not all bad. Resources need to re-allocate now and them. The issue is: Those workers who were receiving wages creating the bad assets have no income. Therefore they cannot continue to spend as much on consumer goods (even though our capacity to produce consumer goods has not dimished a bit). Do you see a problem here. This can spiral out of control as it did during the great depression.

Also, you are focusing on just one industry. Prices can go down in one industry because of efficiency increases. Efficiency increases occur slowly over time. This means that excess labor can be deployed to other industries or even in the same industry creating more/different products slowy over time. This is not what occurred during the great depression. Almost all industries were depressed together with severe collapse in consumer demand. Please re-read the above underlined paragraph and tell me if you see an issue?

Do you agree or disagree that during The Great Depression resources were not allowed to re-allocate (which you appear to agree must happen)?