Talk:Deflation (economics)

Contents

1 When deflation happens 2 Removals by Tacitus Prime 3 Good economic things to do 4 A bit unwieldy? 5 Overhaul? 6 Removed paragraph, June 2005

When deflation happens

Deflation basically happens when production of goods and services grows faster than the amount of money available (or the amount of money shrinks faster than production).

- In the late 19th century the money supply (gold) was relatively fixed while the Industrial Revolution brought a huge increase in the amount of goods available.

- In the Great Depression the failure of businesses and banks, and stricter government regulations, caused a drastic decline in lending, contracting the money supply.

- In Japan in the 1990's the decline of the stock market and real estate decreased banks assets, causing them to also decrease lending.

This is from the Monetarist ( http://www.wikipedia.org/wiki/Monetarism ) point of view, but it seems simpler yet more effective to me in explaining these examples than the theories in the main article.

 --Tom Tulinsky Culver City, CA, USA tomtul2@yahoo.com

Removals by Tacitus Prime

I'm removing

More certainly, large amounts of deflation are as destructive of economic health as large amounts of inflation. Severe deflations have been associated with severe recessions or depressions just as severe inflationary periods (or hyperinflations) have been associated with recessions or depressions.

It's not certain at all -- it's a reversal of cause and effect. Also counterfactual comments about people delaying purchases (Keynesian nonsense about consumption driving the economy, as well. Investment is what's important, duh!)

I put this back in and reworded it a bit. The section seems quite fair - both do harm. Small amounts do less harm, large more. I would be very interested to hear from anyone with an explanation of how this could not be true...? Please attribute your source so I (we) can do further reading and understand the reasoning if it isn't plain.

Claiming that people delaying purchases is counterfactual is interesting. How is this wrong? It seems common sense that people delay their purchases due to impending price drops all the time. I have done so with electronics myself, waiting until the price of something dropped to a reasonable level. -- user:Justanyone | talk Wednesday 5 may 2004 1:38 pm CDT.

But you buy sooner or later, yes? Why not keep waiting -- it's only going to get cheaper!? You provided the answer yourself: you wait until the price drops to "a reasonable level" - implying that you wouldn't have bought at all at the old price (or higher). I.e., you're not delaying the purchase because of deflation, you're making the purchase because of deflation; in a non-deflationary world, you'd have "delayed" (not purchased) forever! (Unless your idea of "reasonable price" changed, but "deflation" is not an issue then) Tacitus Prime 04:11, May 6, 2004 (UTC)

I'm removing this, too:

Any time consumers spend less, they have to put their money somewhere. In deflationary times, it makes sense for them to pay down their debts and increase their cash (or cash-equivalents like bank deposits) reserves. Economy-wide, this can be an unhealthy when it locks up capital (good economic investments are unfunded). Or, it can be a healthy adjustment if consumers had too much debt or insufficient savings to cover temporary income (job) loss.

Again, it's nonsense: in deflationary times, people need less money, so they're not going to increase their cash holdings.

I have moved this down and reduced the size somewhat to reduce the contention about it. It does deserve to be said that typically people reduce debt during deflations because that makes financial sense. -- user:Justanyone | talk Wednesday 5 may 2004 1:38 pm CDT.

Why? Interest rates (try to) take inflation/deflation into account, so there's no particular reason why debtors should be worse off in a deflationary world; interest rates would just be lower. In any case, reducing debt doesn't mean increasing cash holdings -- the money goes to pay down the debt; after that, extra money may go into consumer spending, or investment... Tacitus Prime 04:11, May 6, 2004 (UTC)

This next is just bad wording:

Most adverse effects of deflation are arguably due to rigidities in the economy: If wages, prices and interest rates adjusted seamlessly and predictably to deflationary expectations, they would have no real economic effects.

What is this "rigidity"? If it exists, it's caused by government policy, not the "economy".

Rigidity is the inablity due to entrenched financial interest to adjust to different circumstances. I have returned this paragraph and explained further.-- user:Justanyone | talk Wednesday 5 may 2004 1:38 pm CDT.

I changed "positive effect" to "negative effect" -- the intention of the stated policies is to prevent deflation, i.e., to negate it, not to increase it. The use of the word "positive" was clearly intended to imply that deflation is a bad thing, not that the effect is to drive it, but that's NPOV if anything is.

I fixed this to be "Other government policy changes that can reduce deflation include:" which is better wording. Thanks... -- user:Justanyone | talk Wednesday 5 may 2004 1:38 pm CDT.

I removed

It is obvious that extreme deflation can cause serious economic side effects (a kind of vicious circle known as a deflationary spiral). However, inflation is also obviously quite bad, with serious side effects itself.

for two reasons: (1) it isn't obvious at all, and (2) it's blatantly untrue -- a "deflationary spiral" can only occur until the supply of credit money has been sopped up: the supply of "real" money is a limiting factor. Unlike an inflationary spiral, which can go on effectively without limit.

Maybe with 50 or 100 more years of good economic statistics gathering, the answer to this will be known.

The answer is known. Some people just don't like it -- they're the ones with the non-neutral POV.

I would love more info on what you mean by credit money and 'real money. Please don't say that real money is Gold, this might brand you as a bit of an economics fringe element (nothing personal, I just believe that a very few people would actively advocate for a return to the gold standard).-- user:Justanyone | talk Wednesday 5 may 2004 1:38 pm CDT.

I assume [s]he means by "credit money" money that is not backed by existing Federal Reserve notes (in the US case); that is, fractional reserve banking means banks lend out far more money that actually exists - that is "credit money" (but correct me if that's not what you mean, anon). In the event of a "bank run", that money isn't available to be paid out (unless Bernanke starts running his presses on overtime - but then it would eventually end up back in the banking system forming new reserves for an unprecedented inflation!).

As for "very few people would actively advocate for a return to the gold standard", anyone who actually understood the issues (and wasn't actually evil) would ... even Alan Greenspan did, in 1960! Tacitus Prime 03:00, May 6, 2004 (UTC)

There's still a lot wrong with the article (e.g., the price of cars falling is not deflation! Deflation proper is a fall in the money supply, but price deflation means a general fall in prices, not just the price of cars falling! During deflation, the production costs of the cars will be falling as well, so the factory can still make a profit) 218.101.88.104 05:53, 5 May 2004 (UTC)

I believe the link to 'Myths about Deflation' site is NOT NPOV. This site advocates for the return to the gold standard, which is very much NOT mainstream economic thought, regardless of it being true or not. Since it is under debate if Gold Standard policies are good/bad, I'm okay with the link, but we need to forewarn people that this site is not NPOV somehow.-- user:Justanyone | talk Wednesday 5 may 2004 1:38 pm CDT.

I very much agree that this article could well be improved further. While I am quite literate in general economics, I'd welcome any professorial perspective on this topic, with historical perspectives, advancements in monetary theory, current Federal Reserve Board policy, perspectives from Japan and throughout Asia after their currency crises of 1998, etc. -- user:Justanyone | talk Wednesday 5 may 2004 1:38 pm CDT.

Good economic things to do

These are all problematic. A lot of these are "good economic things to do" but most of them don't have anything to do with deflation.

• Reduce the value of the local currency (makes it cheaper)
  • Imports inflation by increasing the cost of imports.
  • Reduces the yield from savings.

• Increase government spending
  • Makes up a shortfall in consumer spending with government spending.
  • Wisely spending on infrastructure like roads, bridges, water/sewer, electrical, etc., can enable quicker economic growth as well as providing jobs and solving needs;

Other government policy changes that can reduce deflation include:

• Improve public safety
  • Safe and happy populations buy more goods, work harder, are more efficient workforces, etc.
  • Money spent on safety is, in a sense, wasted; it is capital not spent in a way that generates economic growth;
  • Money transferred during crime is often inefficiently allocated;
  • Many crimes causes damage to capital goods or service capabilities, reducing economic growth potential;

• Improve bankruptcy laws
  • When businesses fail, they trap business assets including both the physical plant and monetary assets;
  • Business assets being well-deployed is vital to economic growth;
  • Bankruptcy laws dictate how assets of failed businesses are sold off to pay creditors;
  • Creditors have a portion of their cash back and can use it for economic growth;
  • Bad bankruptcy laws trap business' physical assets and creditors cash in limbo until a court settles things
  • Good bankruptcy laws make very clear how courts should decide ownership of a failed company's assets, increasing economic turnover and enabling good growth.

• Improve property ownership laws
  • Reduce tight restrictions on real estate property sales preventing efficient transfer of property to where it's more useful and thus increase economic growth;
  • Reduce limits on foreign ownership of certain asset classes (real estate, corporate stock, food- or defense-related industries, etc.), preventing foreign transfer payments (investment) from buying up and exporting excess capacity or capital equipment. This turns excess capacity directly into growth-inducing and inflation-producing cash, and thus is a very effective tool;
  • Engage in trade agreements that reduce mutual tarrifs. This increases exports, and reduces excess domestic capacity;
  • Solidify laws surrounding private ownership. Some former communist countries do not have clear laws on private ownership, which leads to highly inefficient allocation of capital, reduced foreign investment, etc.
  • Improve contract laws so transfers of property during a execution of a contract is very predictable and reliable;
  • Improve both criminal and civil justice systems: court systems that are predictable, just, fair, ethical, and reasonably quick can improve economic growth very quickly.
  • Improve government transparency: money wasted by corruption or fraudulent government activities like confiscation of private property stifles growth and drives the economy ;
  • Reduce government red tape: if there are complex procedures required to create any new business, even a small one, prevent economic growth;
  • Reduce incentives for captial flight by creating a predictable business policy environment. Capital flight is wehre money is sent out of the country for safekeeping, reducing capital available to grow the economy.

• Loosen labor laws to enable businesses to:
  • freely reduce their workforces (lay off or fire workers) to quickly adjust their capacity to the demand;
  • easily fire inefficient, incompetent, and/or unethical workers;
  • change workers hours such that a factory can work multiple shifts, using physical capital more efficiently and generating growth;

• Tighten some business regulations:
  • Force businesses to state their real assets and liabilities, so companies that should be bankrupt can be seen and either bought out or forced into liquidation;
  • Better environmental regulation may reduce production capacity by taking inefficient and polluting equipment offline;
  • Simplify and/or fine-tune tax collection to enable government to receive a more fair share of the income from business activity and use it for transfer payments (to needy people) or growth projects;

• Increase interest rates (if interest rates are already at zero, during extreme situations) (NOTE: this is a controversial tactic)
  • Deflation is caused by excess capacity.
  • Reducing capacity forces reduction in supply, redistributes production capacity to new (more efficient) uses.
  • Raising interest rates raises cost of capital
  • Fragile businesses fail, reducing capacity.
  • Fragile consumers who had high debt burdens go bankrupt, forcing redistribution / write-off of bad debt; money moved to more productive uses;
  • Banks are forced to write off bad loans & improve loan-giving decision making;
  • Overall credit quality improves, driving capital to on-average-better performing areas, inducing growth.

I agree--Confuzion 03:23, 14 May 2004 (UTC)

A bit unwieldy?

I think this article has grown a bit upwieldy, esp. the tools to fight deflation - the government policy stuff could go on forever if you really wanted to; but I don't really know how effective they are, relatively - also, they may be easily summarized as 1. stimulate economic growth 2. increase consumer confidence 3. legislation to improve capital/labor allocation

Also, is the following statement accurate? I thought that, for the most part, the US economy was mainly, if not completely, still in a mild inflationary state during 2001 to 2004... does anyone actually have facts to back up the statement below about US deflation from 2001 to 2004?--Confuzion 03:22, 14 May 2004 (UTC)

Minor deflations: Throughout the nations' history, inflation has approached zero and dipped below for a short time (negative inflation is deflation). This was very common in the late 1800's, and even more recently in 2001 through 2004.

Rubbish! The US (and pretty much the whole world) has been inflating massively for years. What are you using to determine recent deflation? The CPI? That's a useless measure, well known to undercount inflation.

Removed statement about recent inflation. From above, I was just questioning why that statement was placed there as I also had doubts about the statement; I did a quick lookup, and according to http://inflationdata.com/inflation/Inflation_Rate/CurrentInflation.asp the statement seems to be incorrect - from the inflation table, the lowest monthly inflation between 2001 and 2004 was June 2002 at 1.07%; no deflation appears in this timeframe, not even for a single month--Confuzion 09:41, 20 May 2004 (UTC)

This statement is inaccurate: "decrease in the money supply (the M3). If there is less money, each unit of currency becomes more valuable, and this is deflation. When an economy contracts, production is too high and must fall to meet (decreased) demand. However, the capacity to produce often remains the same for a while."

A decrease in the money supply does technically make each unit of currency more valuable but it also must be noted that wages go down at an amount that is equal to the money supply contraction. For instance, if the money supply is cut in half, prices are cut in half but so are wages. Therefore, each unit of currency technically becomes more valuable, but a consumer's spending power will not be increased. I'm changing this statement. --Dissipate 22:17, 23 Jun 2004 (UTC)

Overhaul?

This article needs a complete overhaul. It is very confusing because it does not distinguish between the different types of deflation. If deflation is defined to be a cause (general decrease in prices), all the main causes must be clearly stated. I'm working on an overhaul, it should be done in a few days. --Dissipate 03:48, 24 Jun 2004 (UTC)

Removed paragraph, June 2005

I took this out of the article:

In truth, Joe's bank doesn't really like this situation, either. Since Joe is effectively paying more for the loan, the probability is much higher that he will default on the loan, which pushes up costs for the bank significantly. Contrary to popular belief, a foreclosure is often a net loss for a bank.

Seriously, this contradicts the paragraph immediately prior to it, and it is hardly a solid economic argument. What this is saying is that bankers dislike an opportunity to charge people higher real interest rates. - Nat Krause 05:37, 14 Jun 2005 (UTC)