Price Deflation is "bad"?

Economics Economics Questions
1

So last night, in my Neo Keynesian class my teacher said deflating prices are bad because it makes the market stall, in that people are more likely to save their money so they get more “bang for their buck” and the market stops producing. And in order to provide the right incentive, a small amount of inflation is nessecary, so people are more likely to consume now rather than save.

This seems quite silly. If people are not buying products because they’re afraid that they would save more if they wait, it seems to me like businesses would have to increase prices in order to make back what they spent on producing the products. And as they increased prices by the very logic of nessesary inflation, people would start buying because the deals would be going away. I mean, hell, prices in the tech industry rapidly deflate regularly but people don’t seem to have trouble buying computers and things when they know it’s probably going to be cheeper in a few months.

Anyways, I was just wondering if anyone had more insight.

2

These people are so tiring.

  1. Consuming does not “drive” the economy
  2. Not spending money is not the same thing as saving

The reverse is actually true, inflation causes people to prefer consumption over savings. This is a sure way to deplete capital and reduce standards of living.

3

Well, I don’t know much but if the dollor keeps deflating or going down pretty soon I will not be able to afford milk anymore and a few other things. As for my savings well inflation just keeps nibbling away at it.

4

agreed[:)]

If there is deflation, it would be easier to afford milk.

5

I was talking about price deflation, not deflation in the value of the dollar (which would be physical inflation, but not inflation in the keynesian sense). Price deflation is the cost, or exchange ratio of everything else going down in relation to money.

And, of course, according to my teacher, inflation is actually the increase of prices on some contrived list of commodities; an increase in the CPI.

6

Well right now due to the price deflation of our currency prices in general are rising. at this point price deflation as an exchange ratio of everything else goimg down in relation to money is a like a mist that has surrounded you while out for a drive in the night. You can see some things once you get close enough but if you are traveling to fast the impact could have detrimental effects.

What does your friend Ken have to say about the value of currency deflating?

7

No, no. That’s not the definition of deflation. I think you’re confused on terms.

Yes, when the exchange ratio of money INFLATES, the price INFLATES, you call that inflation (at least in a classical economic sense). If the exchange ratio of money was decreasing, prices would be DEFLATING.

<_<

_>

LOL?

8

Ask your neo-keynesian teacher what he thinks of the current “stagflation”? Inflation isn’t doing much to grow the economy at the moment, is it?

9

The government can’t “grow the economy” by inflating the money supply. All you accomplish by printing new money is that you move wealth from one group of people (those holding cash) and transfer it to another group of people (those who print and spend the new money).

The present inflation is a massive transfer of wealth from the productive sector of the economy to the financial sectory. New money is printed by banks and hedge funds. Large corporations, due to their size, get to borrow at attractive interest rates, so they also are the beneficiary of inflation. As an individual, I can only borrow at high interest rates or not at all; most individuals don’t benefit from inflation. Wage increases typically lag inflation, so inflation steals the purchasing power of workers.

Government cannot create wealth. All government does is transfer wealth from one group of people to another, destroying wealth in the process.

Don’t confuse “wealth” and “money”.

The concept “deflation is bad, inflation is good” is pure lies and propaganda. Inflation benefits financial industry insiders, because they get to print and spend the new money. Deflation would benefit the average person, who is holding mostly cash. Most economists are paid directly or indirectly by the government (financial industry), so most economists teach pro-government propaganda instead of true economics.

Also remember that the CPI is a biased measure of inflation. True inflation is much higher. I use M2, M3, or the price of gold as my index of inflation, instead of the biased CPI.

10

Very well said, very well indeed

11

I suggest you buy Money, Bank Credit, and Economic Cycles by Jesus Huerta de Soto for a full understanding of this subject.

To directly answer your question, let me quote the famous monetarist economists Milton Friedman and Anna J. Schwartz who concluded that between 1865 and 1879:

The price level fell to half its initial level in the course of less than fifteen years and, at the same time, economic growth proceeded at a rapid rate… Their coincidence casts serious doubts on the validity of the now widely held view that secular price deflation and rapid economic growth are incompatible (A Monetary History of the United States 1867-1960, p. 15 and statistical table on p. 30).

Price deflation is not a bad thing at all. It simply means that people have a lower time preference: they prefer to save and invest (use more money later) than spend (use less money now). When people save, they don’t horde just for the sake of hording. They save up money to spend later on more expensive, durable, capital goods (i.e. houses, vehicles, machinery, repairs to those capital goods, etc.). So what happens in a free market is that less spending on consumer goods (non durable goods like clothing, food, services, etc.) means price deflation in those areas. As prices go down, some business that produce nondurable consumer goods might go out of business or might fire workers to replace them with machinery. This increases the demand for capital goods, meaning more workers are needed in that sector. That coupled with the fact that average people are now saving more so that they can make use of capital goods and repair capital goods means even more jobs in the more industries that produce capital goods (i.e. the housing market). On top of all of that indirect investment in the form of certificates of deposit increase the loanable funds supply, driving interest rates down. And all the while direct investment occurs at a greater rate due to the change in time preference.

So, basically, price deflation, economic growth, and low unemployment are completely compatible. Your professor or teacher is probably mistaken by using the Phillips curve as a justification, which incorrectly states that higher inflation means less unemployment. Monetarists such as Friedman and Schwartz point towards deflation in the 30s as the primary reason why the Great Depression was so severe. The true reason why we see recessions and deflation occur simultaneously in modern times is due to central monetary expansion that blows up bubbles like the housing market. Monetary expansion through banks artificially increases demand temporarily, creating huge fiascos like tech, telecom, and housing bubbles (all of which are capital-intensive, not consumer-intensive industries).

12

I’d have to digress by saying that printing money is no more stealing than creating more goods. If you own a house and no more houses are ever built, your house will appreciate in value (just as free market currency), but if more houses are built your house will depreciate in value (as long as supply outstrips demand). This isn’t considered stealing, so why is printing money? I understand why large monetary expansion as we have had under the Fed is bad, especially when it is via banks, but it isn’t outright “stealing,” IMO.

And the reason inflation is bad isn’t necessarily because it is a transfer of wealth as much as it distorts the market. An increase in loanable funds via credit expansion creates bad price signals leading us into a boom and bust cycle.

13

Printing money isn’t stealing? Why don’t I operate a printing press in my house? When I spend the newly printed money I’m “stimulating the economy”?

What’s that? The Secret Service will arrest me if I print my own Federal Reserve Notes and spend them? But you just said I could print my own money and spend it?

When I print money, it’s a crime. When the financial industry in collusion with the Federal Reserve prints money, it’s morally acceptable?

When new money is printed, you’re stealing from everyone else currently holding money. That’s true whether you’re an individual with a printing press, or a bank doing it “legally”.

Suppose I build a house myself, or hire someone to build one for me. That is NOT stealing. I performed labor and a new house was built. I’m not diminishing everyone else’s house by building a new house.

14

Say the government bypassed the Fed and started printing silver certificates to pay its debts, at what point would it become better to hold silver certificates than Federal Reserve notes/ Also, if the government chose to do such a thing would it be inflationary and if so would it result in higher inflation than if the Fed had printed Reserve Notes?

15

Printing money depreciates the value of existing currency. Building houses depreciates the value of existing houses. Is building a house stealing? Nope.

… because the federal government has monopoly power over the USD?

You know, I’m pretty sure that statement overqualifies for a strawman.

It takes labor to print money. If you build a house, you’re deminishing the value of every other house by increasing supply. The same with money: an increase in supply devalues the currency.

If creating new currency is a crime, would you illegalize gold mines under a gold standard? After all, they mine gold and then they (more likely special goldsmiths) turn the good gold into currency. Same principles apply.

I’m not saying that credit expansion by government is justified, especially when the currency is forced upon the people, but it isn’t stealing either, unless you want to classify the creation of any and every good as stealing.

16

The Fed wouldn’t be able to print silver certificates willy nilly since they’d have to back it up with silver when people want to exchange the certificates for silver.

What I’m saying is that printing money isn’t stealing any more than creating any good is stealing. Every good created devalues all the other goods of the same type since supply becomes higher than it otherwise would have been. In your example, silver mining would slowly depreciate the value of silver and therefore the silver standard (or silver certificates). There’s nothing wrong or illegal about this and there shouldn’t be anything wrong or illegal about it. In a free market, the expansion of goods outstrips the expansion of credit anyways (since precious metal mining is a relatively long process), so price deflation occurs anyways. Also, monetary expansion outside the banking industry doesn’t have the same negative consequences (boom-bust cycles) as monetary expansion inside the banking industry.

All in all, I’m not justifying the Federal Reserve or any other central bank since they all impose their currencies on their citizens under the punishment of law. I disagree with that. But I also disagree calling money printing illegal. You just as well might illegalize gold mining under a gold standard because of this principle, or even the creation of any good (even perishible goods like food and clothing)!

17

Printing money and building a house are entirely different.

If you could ban people from building new houses, then the market value of existing houses would rise. Suppose I conclude that building a new house is cheaper than buying an existing house. I build a house and this keeps housing prices in a market equilibrium.

If I build a house, that doesn’t diminish your ability to utilize the house you already own. If your house is mortgaged, you may suffer if housing prices don’t rise as fast as you expect. However, your house is still worth a house.

If 10% more houses are built, then there are 10% more houses. The total housing wealth of the world has increased by 10%.

If 10% more money is printed, and the supply of goods remains the same, then all existing money loses 10% of its purchasing power. The preson who printed and spent the 10% new money stole 10% of the wealth from the rest of society.

If you really believe that building a house is morally equivalent to printing new fiat money, I probably shouldn’t be wasting my time writing here.

Also, mining gold is NOT the equivalent of printing new paper money. Under a gold standard, unless there was a discovery of a massive new gold mine, gold mining should have a negligible effect on prices.

Also: I didn’t say that the Federal Reserve is illegal. I said the Federal reserve is immoral. There’s a difference between “legal” and “moral”. Printing new fiat money is immoral. Building houses is morally acceptable.

18

OK, you don’t understand basic economics. Here it is:

This is a supply and demand curve

The y-axis represents price, the x-axis represents quantity. When the supply increases (moves to the right), the price decreases. When you build a house, the price of a house falls relative to the price of every other good.

When you print a unit of currency, the price of that unit of currency fall relative to every other good (yes, a currency is a good).

Wealth is not determined by quantity. Wealth is determined by the subjective values of many different people. This, in other words, is supply and demand. If supply for something is low and demand is high, the price will be high. If you expand the supply the price of every single good will fall, unless demand offsets it, in which case it still would be stealing since you stole the future values of those goods.

However, if you are a person of principle, the truly critical question is:

DO YOU BELIEVE THAT GOLD MINING SHOULD BE ILLEGAL UNDER A GOLD STANDARD?

Because under your premise that creation of credit is stealing, it should be illegal. More gold in the market devalues gold, making the certificates of a gold standard worth less than they would’ve been.

19

I don’t think printing money can be considered theft, as theft is the aggressive removal of PHYSICAL property. Deflating the market value of a currency is not the physical removal of ownership.

All fiat currency is is a forced association.

20

That is exactly the problem I have with fiat currency: it is forced upon people.

Printing presses can create new money just as mines can excavate more precious metals. In both examples, your currency devalues. The problem with fiat currency is that it is forced upon people, that there is no check against endless printing, and that monetary expansion through banks creates business cycles. It’s not some abstract view that it is “stealing.” The creation of any good would be “stealing” in this view.

Even in fsk’s example of achieving market equilibrium by offsetting supply and demand you are stealing value because you are building your own house instead of bidding for one of the existing ones. That new house then is one more. And what happens when you move out? There will be one more house on the market forcing prices down, even if it’s just a little bit.