Economics is about how to organise things so that stuff is being to put to the best possible use. Government intervention may not be moral but you can’t just make a categorical statement that it isn’t economical. Most likely there is no case where government intervention could be economical but we still need to investigate the issues and especially areas where the free-market may not be perfect cause it is only there anything could be improved.
If we find out people loose value buy the market providing them false information about future expectations like in the case here we need to know how severe this problem might be and it is a problem. The market have many problems with imperfect information in many scenarios, that the government can’t solve it any better doesn’t mean it suddenly it is all perfect.
Yes, cause if this happens faster then the flow of information it will work like inflation. If people buy there cars before car-dealers have time to adjust there prices to they new money coming back into circulation they will sell there cars way to cheap. After the cars are sold prices will go up. This means there income will be lower then there accountants expected and there expenses higher. This normally means bankruptcy for a business…
An unexpected strong deflation can motivate people to alter their behavior, that much is true. But that does not necessarily mean a slowing down of production in general. The consumers will eventually buy the goods and services they desire, even if observing constantly sinking prices: they would like to enjoy them sooner rather than later (due to good old time preference). It can be therefore expected, that consumption during a deflation period will continue at a marginally slower rate, but the total production will actually grow: because resources unused for consumption are saved, and as such serve to increase production further. (Note: any abrupt change in the structure of consumer demand and prices will tend to have negative effects. But it can be also said that a) in a free market are price changes likely to be smoother and b) an inflationary system is not exactly immune to these shocks either.)
Yeah, the electronics market is a good illustration I used as a counter argument in my text already.
So it is unlikely that a hoarding cycle would start in the first place cause the natural decrease in prices is small. If it does happen people have vastly different time preferences so they wont all come in and out at the same so the changes in the price on money will happen slowly and be transparent across the whole market giving business enough time to adjust prices meaning it won’t cause any problems if it happens.
it certainly is not a manual for central planning. what arbitrary definition of ‘best possible use’ are you using?
what you described is not an information problem; maybe you could think up some new problems which would have the forms of information problems, but your original thread post is not one.
It would be if that was the way to make participants in the market place get the value from there decisions that best correlate to there expectations.
It is a problem of imperfect information in the price mechanics for money. Business would not cut there prices so much if they knew exactly what was going on. Specifically here to the car dealer there is no way of knowing if people aren’t buying his cars cause they think they are rubish and don’t want them at the current price or if they aren’t buying because they are hoarding money.
So economists identify a problem and entrepreneurs can use this information to make better decisions, in this case not slice prices as much as it appears they should in times of massive hoarding.
If the phenomenon I have described exist ignorance of it will destroy resources (people will make bad decisions and not get there expected value from there economic decisions), with everyone having full knowledge of what is going on and what is actually happening the price of money there naturally wouldn’t be a problem because they would all make perfect decisions and all resources would be allocated to highest possible utility.
No not according to me. According to there own expected return.
Since as I explained they will be expecting to spend the money for the same value but don’t have time to do that if enough people stop hoarding at the same time.
Nor should the prospect of a fall in prices in and of itself be taken as the cause of an increase in the desire to save, still less of an increase in the demand for money for holding and thus of a monetary contraction. To the extent that falling prices are the accompaniment of greater prosperity, the prospect of falling prices is accompanied by the prospect of greater prosperity. The prospect of greater prosperity in the future provides an inducement to greater consumption in the present.
It should be understood as operating in the same way on present consumption as the prospect of coming into an inheritance. It means that one’s future is better provided for and thus that one can afford to increase one’s consumption and enjoyment in the present. This offsets the fact that every dollar withheld from present consumption will have greater buying power in the future. In other words, the effect of falling prices caused by increased production on the degree of saving and provision for the future should be assumed to be neutral, because the prospect of greater future buying power of the monetary unit is offset by the prospect of greater future prosperity. In such circumstances, the prospect of falling prices does not provide a basis for a rise in the demand for money for holding.
they know exactly what going on. customers arent buying because prices are too high, and prices need to fall, so the entrepeneurs drop their prices till the market clears…
you are confusing their ex-ante and their ex-post rationalising on the issue.
So you mean that the correct busniess decision for generating profit is exactly the same if people
Don’t buy your cars cause they think they are rubbish and don’t want to pay your price for them
Really want to buy your cars at the current price but are speculating you will drop your price in the future.
In 1 the dealer will never sell a car at the current price, if he down lower the price he will go bankrupt.
In 2 the dealer will sell cars at the current price if he can just afford to wait long enough to dispel the belief that he will lower prices within the time period that his customers views as an acceptable wait for whatever price decrease they assumed. This really shouldn’t take very long and be pretty simple.
So if he has any asset reserves at all the correct choices for him to make to maximise his profit become vastly different depending on which circumstance it is and whether he is aware of it or not.
If you add the possibility of an infationlike rapid price surge when they finally start selling the two circumstances become even more different.
No, what I am saying is if you have bad information the correlation between the two will be poor and this wastes resources and the decision maker could have achieved a higher utility if he had some means to make a decision on better information from the start.
As for the angel thing I don’t really see the relevance, it is not going to happen that way. If there is a problem it would be about people speculating on the future development of the price of money knowing that eventually it will turn down again and trying to spend it in the high peak.
Also you might have missed it but I tried to summarise the reasons why this won’t be any big problem above, which kinda means I am satisfied with the answers to my question for now and have found some good arguments here to poke a whole in this hypotheses about deflation spirals.
I question your choice of words. they didn’t really want to buy cars at the current price, or they would have. you need to concede that these particular peoples future expectations meant that they did not want to buy at current prices. thats what it means to prefer to buy at future lower prices…
your answers to the points raised make the trivial point that those who’s speculations marry closely to reality, thereby avoid entrepeneurial profit and loss compared to those speculators that are less accurate; be they producers or consumers of cars.
I dont think you give enough space to the fact that people can evaluate how much ( /relative to other things they want/ )they want cars, and the current price of cars; you have conjured up a world of speculators who don’t express the attributes of consumers.
Yes, in an ideal world where there wasn’t a previous boom brought about by fractional reserve banking (basically like your scenario that the money supply would remain constant).
But a deflation preceded by an inflation will result in many businesses going bankrupt, like the ABCT shows. Those companies who believe prices would keep increasing and interest rates would remain low often take on too much debt to repay at lower prices.
This is a problem with the boom, not the bust. The bankruptcies were inevitable the moment long term unprofitable investments were started - investments that couldn’t appear profitable without the decrease in interest rates (and perhaps also the assumption that prices would steadily rise over time).
When the bust comes, if prices are allowed to adjust, there are still many losses as assets change hands and as much capital is shown to have been malinvested.
The problem is when making your argument that your professor or textbook will refer to deflations that were harmful (although they wouldn’t have been nearly of harmful without the fixing of wages, other prices, tariffs, etc) in history, being unable to find any real examples of a steady money supply in history.
There are some examples of deflationary periods where the recession was short lived thanks to little gov’t interference, and studies that show empirically there is no clear correlation between deflation and depression. I’ve been looking for links to these, but am having trouble finding them.
There is a good point I haven’t seen yet! I was thinking of the following scenario: part of the demand for some goods comes from people wanting to have them “first”, like fashion apparel, electronical gadgets, etc. Since the fashion victims and those living on the technological edge (or those really really wanting a particular feature) can afford more of other goods in the future, they can afford to spend more of “their” goods in the present. And so, even if there was a general tendency of many consumers to defer spending, there would be segments of the market, where the situation would be the opposite.
But Reisman makes an even better point here: exactly because people will be able to afford their goods more easily in the future, they can also afford to spend more on them now. Most likely, they will defer the buying of some goods, while choosing to buy and enjoy some goods sooner.
And so can a deflation lead to greater consumption. (Thanks, nirgrahamUK!)
What makes you say this? The price of technology declines at an extremely rapid pace, yet the lines for the new Ipod are always around the block.
The money they “hoard” will go to banks as the interest rate rises (we’re talking about a recession and a deflationary correction, right?), which will funnel vital savings to firms which need them to correct and finish the longer-term investments they mistakenly engaged in. Some firms simply won’t make it, but they need to fail so that their resources can be reallocated towards more economical uses.
If you live in a nation without a functional banking system (I mean, one where there aren’t banks–this isn’t even the case in eastern Europe anymore), then your hoarding will turn into loans on the loanable funds black market, or you’ll just hold it for transactions. Now, there are some Austrians who say that if the latter situation occurs, namely if people, for whatever weird reason, decide to hold their money under their pillow, then there may be some need for monetary expansion, but never by a central bank. You never want the market rate of interest to rise above the natural rate.
Either way, the argument you’re hearing is called the “paradox of savings” or “dilemma of thrift,” which is simply absurd; there is no paradox nor is there a dilemma. You want savings during recessions, the businesses need your resources. Say’s law holds.
They DID really want to buy cars at the current price. They just rather buy them later and cheaper, they can’t do booth and are presented with a better option, that doesn’t mean they didn’t want to do the first if the better option is removed (by the business not cutting prices).
I think consumers do show these attributes quite clearly, consumer behaviour changes pretty much in today’s business cycle. It is pretty clear that consumers don’t simply go out an buy whatever they want most whenever they have money which you seem to think. They have many other considerations such as safety and so forth, one of these concerns expected future prices. People behaviour under inflation and especially hyperinflation also shows that expectations about the future price of money plays a role in consumer choices.
whats the difference between really wanting and just wanting? the word ‘really’ is one used to obfuscate.
On speculation/consumption. it must be granted that in reality consumers embody a speculative element. if you completely strip them of their consumptive element and leave only the speculative you will derive all the paradoxes that come from consumers that ‘want to consume’ but never demonstrate this in action.
Actually, I do not believe the Keynesian “hoarding” story leaves out time preference as you suggest. Time preference primarily influences HOW MUCH YOU SAVE. If someone has a low time preference, they may save a larger portion of their income because they place more emphasis on future consumption.
However, the Keynesian “hoarding” story focuses most on HOW YOU SAVE–in other words it focuses on the balance of your portfolio. For example, I can keep my savings in the form of stocks or bonds or I can keep them in the form of cash. But if I expect prices to fall next month, I may decide to shift more of my portfolio toward cash and away from things like stocks or bonds. In making this shift, I do not necessarily change how much I have in savings, but I do change how I am allocating my savings.
Now of course, as Milton Friedman pointed out, there will be some interaction between these two decisions (e.g. if the stock market suddenly took off, you may reevaluate how much to save). But, I believe asserting that time preference is all together ignored is an error.
One thing that would probably counteract a deflationary spiral is savings. As people defer purchases their savings will build up. At some point the desire to wait for prices to fall will be overridden by the fact that you have tons of money in the bank.
I may use the word wrong cause I am not a native speaker of English but I tried to make the point that they would buy the car today if the expected lower price tomorrow was not there more clear by saying they really want it…
Anyway thanks for the input and helping me express exactly what was wrong with what my Keynesian professor said.
I of course agree with all the excellent posts till now. The only thing I have to add is that a thorough treatment of this whole issue is to be found right here: