Why Falling Prices Are Actually a Really Bad Thing

http://www.bloomberg.com/news/2015-01-21/why-falling-prices-is-actually-a-really-bad-thing.html

by orin_hanner • 12 years ago

30 100 12 years ago

kyllo• 12 years ago

Yep, it's called deflation and it leads to hoarding behavior and a stagnant economy. See Japan in the 1990s for a good example.

waps2• 12 years ago

Here is another factor you might consider. What happens to government finances during deflation ?

Well, deflation means falling prices. Prices sponsor wages. Falling prices means falling wages. The large majority of government tax income is a tax on wages, or a tax on consumption. Both of these go down.

Now this wouldn't be so bad, except ... Governments loan money both to fund expenditures and to pay interest on their old loans. Inflation effectively means they can spend 2% of the total amount of their old loans "for free" (by loaning it) (they key thing to realise here is that doing so does not increase the burden on their income, it was 2% of taxes, and it still is). They get this double, since they get it both on the income side, and on the new loans.

Deflation means the opposite. Tax revenues go down, interest payments go up. Unless they want to drastically cut spending, that means they have to use pretty much all of their yearly new loans just to pay back interest.

The problem is also the difference between years :

year 1 : 2% inflation -> government can spend 104% of it's budget year 2 : 2% deflation -> government can spend 96% of it's budget

So 2% inflation necessitates a 10% cut in loan-based spending, which is about half of government spending. So a seemingly tiny amount of deflation requires a 5% spending cut by the government at minimum.

But that is not all. Government taxes have always been effectively a percentage of GDP. Governments have historically been unable to raise tax income. Deflation will lead to a fall in GDP, historically of at least double the amount of the deflation, sometimes much more.

So the other half of government income goes down by ~4% (very, very optimistically).

Now because falling prices and wages mean that the stress on social services increases (for obvious reasons), government expenditures go up, usually again by much more than the amount of deflation you see. It leads to pretty much every part of social security going up. Unemployment, for obvious reasons. But also pensions (people will go on a pension earlier because there's no work) and even illness and disability (well we all know why).

So 2% deflation effectively means the government has to cut spending by ~10%, WHILE social security expenses go up.

The government controls central banks. QE, ostensibly to "cause inflation" hasn't caused inflation (rather the opposite). So in order to absorb this financial shock, the U.S. government has instead decided to finance it's operations by direct money printing, by lending from the money printer. They ran a risk by lending the way the constitution said they should lend, so they "cheated". Now we see the EU (and dozens of other governments, including China and lots of smaller ones) doing the same.

This is also an extremely important factor in central bank behaviour, as they are controlled by governments, and it is the reason that we have not seen the end of QE (except maybe in America, but to be honest, I think there is a non-negligeable chance the US will lower rates instead of raising them, in 6 months).

brc5• 12 years ago

I would believe these types of pop-economics articles a lot more if they could actually find and example of a deflationary spiral causing a long term depression.

Prices for many things already do decrease regularly. Every time I purchase a new computer I'm faced with the knowledge that, in 6 months time, a better, cheaper (or at least better value) model will come out. This myth that consumers will endlessly postpone purchases in the face of falling prices ignores the fact that a lot of ourchases cannot be postponed indefinitely.

And even if consumers postpone spending, it means they are saving. Which builds the investment base necessary for growth.

The point is that a currency cannot deflate to an infinite value, but it can be inflated to a zero value. There has been plenty examples of the latter, but zero examples of the former.

The real reason for the FUD around deflation is that it's not good for central banks. They, and their supporters are just talking their book. Fair enough, but like high or low currency values relative to other currencies, there are always winners and losers with deflation and inflation. One side is not inherently more evil than the other.

What would be really great is constant value of currencies over time. That would be mildly deflationary as technology increases production efficiency, and it would ward off a lot of bad investment decisions which excarbate the boom/bust cycle.

zzalpha2• 12 years ago

Congratulations for confusing micro and macroeconomics.

What happens to the price of a single good over the lifetime of that good is not a useful lesson in what happens as a result of broad, economy-wide deflation.

Frankly, the issue with purchase postponement isn't the biggest problem (although it's certainly a concern, as is hoarding). In my mind the biggest problem is wages being inelastic downward. As all prices deflate, income for employers goes down (or thought of another way, the value of money goes up which makes each employee more expensive). That forces two options: fire employees, or cut salaries. The latter is very difficult. So instead you see the former.

So you get broad based increases in unemployment. That leads to reduced consumer spending, which forces prices down even further, and so on.

As for real life examples, perhaps the Great Depression qualifies?

http://www.economist.com/economics-a-to-z/d#node-21529653

If you're looking for a more contemporary example, Japan experienced its own deflationary spiral:

http://www.forbes.com/sites/jamesgruber/2014/04/27/japan-def...

Retric4• 12 years ago

Salary is somewhat elastic if nothing else fire and rehighering works. The real issue is debt is not elastic. So it becomes an unbound risk durring deflation.

msandford2• 12 years ago

Yeah man, super true!

For example if prices were to start falling I'm going to start putting off the following purchases:

1. New computer

2. New TV

3. New stereo

4. Toilet paper

5. Food

6. Gasoline

7. Rent

8. A new-to-me used pickup truck

9. Clothing

10. Several dozen other things which I can't really wait for but which I will pretend I could for the sake of making a point

EDIT: Yes guys, I do realize that it's a marginal effect and that people aren't going to STOP buying TP. The point I'm trying to make, though, is that the "deflationary spiral" told as a story isn't entirely accurate either. People don't STOP buying things, they simply reduce their consumption ever-so-slightly and if EVERYONE does that, it cuts growth.

My point, though, is that there are a whole bunch of things which aren't really elastic or which already have falling prices but don't cause general malaise. Yes TV purchases do get put off for the next best model, but eventually people do buy TVs and the industry has models that work even given this reality.

In my personal opinion it's not that deflation itself is bad it's that it takes a long time for the deflation to work through the economy and for expectations to readjust. And given the maniacally long maturity of mortgages it takes half a lifetime to reset expectations and it's simply unrealistic.

rondon23• 12 years ago

"So you get broad based increases in unemployment." I know it sucks to go from making 70k to making 60k but in a world where prices are going lower someone will still be able to have a similar quality of live at 60k. What kind of economic "Theory" would assume that people would rather starve to death than take a salary cut at another job?

skywhopper4• 12 years ago

Totally right about downward wage pressure. The worst effect of all of deflation is that it increases the value of debt. So every company and household with debt will see their debt grow in relation to their earning potential. At any level of deflation, suddenly it's a terrible idea to ever borrow any money, which means no new housing, no new factories, no new cars.

Our economy relies on inflation to make it work. A lot of the persistent sluggishness of the current economy is due to the remarkably low inflation, meaning that all the debt people built up prior to the crisis in 2008 is still hanging around and will be for years to come. People are stuck under student loans and underwater mortgages, and unable to invest in their own future. With stagnant wages, digging out from under the debt will take a long time, and until that happens, the economy will continue to trudge along.

asgard1024• 12 years ago

What happens to the price of a single good over the lifetime of that good is not a useful lesson in what happens as a result of broad, economy-wide deflation.

True. But why then the article is titled "Why Falling Prices Are Actually a Really Bad Thing" and not "Why Deflation Is Actually a Really Bad Thing"?

I can imagine economy where you don't have deflation, prices of all products fall, and the economy is actually growing, because people produce and buy completely new products they could not afford before.

freeasindave2• 12 years ago

You're assuming macro-economics is concrete, peer reviewed science. Lot's of people disagree. The great depression lasted way longer than it should have because of the anti-deflationary measures put into place, like slaughtering millions of livestock to prop up commodity prices while starving, out of work people looked on in horror. If prices had been allowed to fall, wage rates could have come down to a price where hiring made sense.

Read Rothbard's "America's Great Depression" for a good overview of the case against macro-economics and deflationary interventionism.

dang• 12 years ago

Congratulations for confusing micro and macroeconomics.

This comment would be much better without this acerbic swipe. Please don't do that on Hacker News.

brc5• 12 years ago

Hoarding is Keynesian fantasy, and can only exist if people stuff gold or cash in their mattress. Paying down debt or saving is a healthy base for a a economy to grow from.

Japan suffered a deflationary event, but has not had a deflationary spiral. The problems for japan have been exacerbated by following the madness of Keynesian policy prescription, to the point where they have increased their debt to 2x GDP over two decades, redirecting their resources towards building bridges to nowhere, instead of allowing entrepreneurs and innovators to allocate capital.

All while they have their demographic death spiral in place.

Plenty of other Asian countries have suffered large setbacks, particularly during the Asian financial crisis, but by avoiding the same path that Japan slavishly followed, have rebounded with strong growth ever since.

What is necessary is a short sharp correction, which will include bad debts and higher unemployment. This will be bad. This is still better than two decades of a zombie economy where an entire generation don't experience a growing economy and the benefits that entails.

jayess2• 12 years ago

The other reason for so much FUD is that the modern economy is entirely based on debt -- personal, corporate, and (especially) government. Therefore central banks needs to keep the bubble growing perpetually so that the debt can be serviced. But it can't continue forever...

dublinben2• 12 years ago

But it can't continue forever...

Why not? Malthusian predictions have proven to be wrong so far.

marcosdumay• 12 years ago

The usual example of a deflation spiral is the 29's crisis. Altough it's not helped by the fact that most developed countries got into a crisis by about the same time, with several kinds of monetary policies, from US deflation to Germany iperinflation, with everything in the middle.

The only point of the article that makes any sense is #5. The author does even ignore the keynesian theory of sticky salaries pricing people out of the labor market (however true it is). It's an almost thought-free article.

brc5• 12 years ago

I don't agree that a reduction in growth (recession or depression) is a deflationary spiral. Yes, there was deflation, but it didn't go into an uncontrolled tailspin.

The problem was the old canard of irrational exuberance and excessive bad debt. Which must be cleared by letting bad choices come home and businesses go broke so that resources can be reallocated. The measures to 'fight' it, like confiscating and refining the price of gold, and other measures, most likely prolonged it.

Alex3917• 12 years ago

I would believe these types of pop-economics articles a lot more if they could actually find and example of a deflationary spiral causing a long term depression.

The obvious example would be bitcoin. No one ever spends their BTC, because of the fear that something that costs 1 BTC today will cost only 0.5 BTC tomorrow.

debacle5• 12 years ago

That's an issue with volatility, not deflation.

marssaxman• 12 years ago

I don't care whether bitcoin goes up or down tomorrow; I only care whether it goes up or down between the time I buy the bitcoin and the time I send it to someone. That is: bitcoin is a medium of exchange, not a store of value.

dragonwriter7• 12 years ago

I would believe these types of pop-economics articles a lot more if they could actually find and example of a deflationary spiral causing a long term depression.

The US depression of the mid-1800s and the UK depression starting in the late 1920s are usually cited as examples, and the Fed's deflationary policy after the 1929 crash in the US is often cited -- even by libertarian economists -- as a contributor to the US's Great Depression.

Prices for many things already do decrease regularly. Every time I purchase a new computer I'm faced with the knowledge that, in 6 months time, a better, cheaper (or at least better value) model will come out. This myth that consumers will endlessly postpone purchases in the face of falling prices ignores the fact that a lot of ourchases cannot be postponed indefinitely.

Postponing consumption isn't really the issue, reducing investment is. If holding on to cash has positive expected utility, there is less incentive to to use funds that are beyond what is desired for immediate consumption and invest them in productive assets.

Also, see the comments by other posters on debt in deflation.

jscott2• 12 years ago

I agree on this: debt in deflation is rough. Maybe the lesson is that people/governments should stay out of debt, not that deflation is the boogeyman. That'd certainly be more anti-fragile.

math• 12 years ago

"When shoppers see persistent price declines, they hold out on buying things." and yet I keep buying computers... I don't think I agree with this statement (unless there is massive deflation).

Chathamization3• 12 years ago

Hmm, I’ve heard multiple people talk about jumping in during the housing bubble because they thought if they didn’t buy right then the price would keep going up. And I’d say that there’s pretty good evidence that people will buy things sooner if they think that waiting would entail a price increase (which is why sales are so effective).

So if people are expecting the price to rise, they’re more likely to make a purchase, and if they aren’t expecting the price to rise they’re less likely to. I don’t think it’s too much of a jump to think that if the price of something is going to go down next week, people are more likely to hold off on purchases.

Though I imagine a bigger issue is the need for investment. When there’s stagnation firms tend to sit on a lot of cash, because they believe that money slowly losing value (low inflation) or even gaining value (deflation) is preferable to the few and possibly risky investment opportunities they see. This causes credit and investments to dry up. This hording behavior, as well as the wage inflexibility mentioned above, ends up being a major drag on the economy. On the other hand, with a decent rate of inflation firms are going to be making sure that their money is working, because if it’s just sitting there it’s going to be losing money year after year.

learnstats2• 12 years ago

OK, this article explains deflationary spiral.

This depends on the assumption that people hold out on buying non-urgent goods in the belief that prices will continue to fall - leading prices to fall further. But in the current economic climate, almost nobody is buying non-urgent goods anyway. (Yet we have seen consistent inflation)

The current 'deflation' is primarily led by a sharp downtick in oil prices that won't be repeated - there's no immediate suggestion that prices will continue to fall.

With years of consistent inflation above wage increases compounding to give high prices, any deflation is just as likely to be seen by consumers as a relief from high prices - a good opportunity for people to spend the money they've been holding onto.

Amezarak6• 12 years ago

(Yet we have seen consistent inflation)

Last month, the US inflation rate was 0.8%.

For 2014 as a whole, it was 1.6%.

This is, in fact, credited in part to low consumer demand. Slack demand generally leads to job cuts, which leads to even slacker demand. That's the spiral they talk about.

The current 'deflation' is primarily led by a sharp downtick in oil prices that won't be repeated - there's no immediate suggestion that prices will continue to fall.

This is why economists talk about core inflation, to remove as much as possible the influence of volatile commodities such as oil. Inflation will remain very low even with oil prices go up. Since 2008, inflation has actually at times been negative (i.e., deflation.)

People who think deflation is a good thing need only look at the Great Depression, Japan, the present Eurozone, and the 2008 recession. Just because high inflation is bad doesn't mean that deflation is good.

jbooth2• 12 years ago

In addition, this incredibly low inflation happened in an environment with rock bottom interest rates and the fed basically printing money because you can't cut interest rates below 0.

Those moves were supposed to create hyper-inflation and be the reason for You to Buy Gold Now. Actually they barely kept us out of deflation.

totalrobe• 12 years ago

It's definitely a bad thing for all the big banks holding oil that just got f#$@@d

CapitalistCartr• 12 years ago

If I knew the price of everything I buy would be 1%-2% lower next quarter, it wouldn't affect my spending behavior at all. I have, in fact, known gasoline was dropping by a lot more than that for the past two quarters, and I've not put off even casual consumption. Marginal deflation isn't enough to change my spending habits, and my mortgage and utilities are pretty fixed.

waps2• 12 years ago

True. But here's what it would affect.

If you are a huge company, or a government, with an extremely large negative net worth (ie. you loaned loads of money). Deflation will cause :

1) your income to go down by more than the deflation amount 2) your loans don't go down

So deflation will kill large companies very quickly, and put governments in a really difficult position.

ttty• 12 years ago

This is just stupid IMO, but I'm not any economist.

You worked X time: got 1000€

Day 1: You can buy 1000 candies at 1€ each.

Day 2: Inflation, prices +100%: you can only buy 500 at 2€ each

This means that you just lost 500 candies or 500€. This means that what you worked 50% for nothing! You just lost 50% of your money, just like that! So who has my money? not me of course.

Let's think about deflation:

Day 1: You can buy 1000 candies at 1€ each.

Day 2: Deflation, prices -50%: you can buy 2000 at 0.5€ each

Now if you would only buy 1000 candies you would still have 500€ to spend on other stuff. You might save it or buy other stuff.

Let's think about none of them:

Day 1: You can buy 1000 candies at 1€ each.

Day 2: You can buy 1000 candies at 1€ each.

Today is the same as yesterday, I've worked X hours I buy Y candies, everyday. Why should it change? I know many factors change the price but why?

Well, if you can see inflation is good for the banks. They inject more money in order to make your money less valuable. So in other words you lose money (your hard earned money) while they are just printing easy money! So who is the dumb one? We can do nothing.

Again why deflation is bad?

I would buy to eat even if inflated or deflated, maybe less and more, depending by inflation or deflation. I might even buy higher quality meals.

If I need a new phone do you wait until the prices fall to 100€? No some people still buy them at 1000€. Some not, but is not inflation that will make that change. For example the same people that don't wait a few months for the price of Iphone to fall from 1000€ to 300€ will not wait for deflation to decrease the price from 1000€ to 800€. He just want the Iphone and it will buy it.

This is just a big lie thrown in my face!

please correct me if I'm wrong!!!

BSousa• 12 years ago

Not an economist either. But the way I see it (ignoring food and other things you can't live without)

Inflation Day 1: you can buy 1000 candies, and you suspect tomorrow you will only be able to buy 500, so you buy 1000 candies and store them/eat them. You 'inject' money into the economy, give the government tax money, etc.

Deflation: Day 1: you can buy 1000 candies, but suspect that tomorrow you can buy 2000 candies, you don't buy Day 2: you can buy 2000 candies, but suspect that tomorrow you can buy 3000, you don't buy, or buy just enough for your sweet tooth today (lets say 100) Day 3: you can buy 3000 candies, but again... etc etc

Again, this is based on needs and wants. If you have 1000 euros. If your phone breaks and you need one to work, you will buy today, no matter if we are in deflation or inflation, but if your old one still works, you may very well buy it today (in case of inflation, since it will will cost more of those 1000 euros tomorrow, or you will wait if you are in deflation since it will cost less of those 1000 euros.

Of course, if you need rice to not starve, it doesn't matter! And for average folks, deflation tends to be good since most of expenses are from needs and not wants but this causes issues to business and (possibly) to the economy as well.

If you want a smaller example, I've personally waited for weeks and months to import some goods due to the falling EUR->USD rate, saving me between 5-6% of the cost, so I don't see why others won't do the same if they expect the costs to be less in the future.

facepalm5• 12 years ago

What if you really want some candy? I think that's what the theory misses. You can only hold out for so long with certain things. If you are hungry, eventually you'll have to buy something to eat.

An extreme example: I have bought a lot of computers in my life, even though I knew their value would be close to zero within two years.

And maybe there are also benefits if people only buy the stuff they actually need.

collyw• 12 years ago

Deflation is only bad if you are in debt (it effectively increases what you owe rather than reduce it).

The governments of most western nations are in debt, hence their fear of deflation.

lottin• 12 years ago

You're 100% right. If prices fall faster than wages, it means that gradually people have more real income and you'd expect that their consumption would increase, not decrease. While in specific circumstances some purchases might be postponed temporarily due to falling prices, it's extremely dubious that the end result would be less consumption in the economy.

jmesserly2• 12 years ago

This is just a big lie thrown in my face!
please correct me if I'm wrong!!!

You're wrong. Deflation is basic economics. If you take a college macroeconomics course it will be covered.

It's hard to summarize in a way that will convince you in an internet debate. Sort of like trying to argue electromagnetism with someone that never learned about Maxwell's equations. An econ textbook would be ideal, but another place to start would be: http://en.wikipedia.org/wiki/Deflation

(By the way, no offense intended with that. It's hard for anyone to comment on a scientific subject if they didn't learn the background, even super smart folks.)

There are several things wrong with your story, but the first one that jumps out is that some prices are more sticky than others. For example, wages are likely to not go down much, instead firms tend to cut employment. There's a lot of evidence for this: http://en.wikipedia.org/wiki/Nominal_rigidity. Another big factor is the effect of debts, which are not reduced: http://en.wikipedia.org/wiki/Debt_deflation

Here's another summary on deflation, intended for a popular audience: http://krugman.blogs.nytimes.com/2010/08/02/why-is-deflation...

Jtsummers4• 12 years ago

Inflation is good for borrowers, employers and sellers. Deflation is good for lenders, employees and buyers.

Borrowing - Inflation: I borrow $1000.00 today at 3% with an inflation rate of 2% (per year). At the end of this year I pay the loan back in full at $1030.00. I have spent a larger nominal value, however the real value of the loan is now $1030.00 * 0.98 = $1009.40. Meaning my effective interest rate was around 1%.

Borrowing - Deflation: Let's take the same numbers, but now it's 2% deflation. I pay back the loan, $1030.00 nominal value. The real value is $1030.00 * 1.02 = $1050.60. My effective interest rate is around 5%.

Salary - Inflation: I am paid $100,000 this year for my work, inflation rate of 2%. Without a pay raise my nominal salary remains the same next year, but my real salary becomes $98,000. This is a pro for employers, I am a cheaper employee. It's a con for me, my time is worth less.

Salary - Deflation: I am paid $100,000 this year for my work, deflation rate of 2%. Without a pay raise my nominal salary remains the same next year, but my real salary becomes $102,000. This is the reverse. I cost my employer more, but without changing nominal salaries my time has become more valuable.

Purchasing - Inflation: You want a widget worth $1000.00 today and face 2% inflation. If you purchase it at the start of the year, ignoring depreciation on the widget, it's worth $1020.00 at the end of the year. So if you resell it at that point you've made 2% (nominal), though the real value is the same.

Purchasing - Deflation: Using the same widget, price and 2% deflation. If you purchase it at the start of the year for $1000.00, and sell at the end for $980.00 you end with the same real value, but you've lost 2% of the nominal value. Barring a need to purchase an item within a particular time, it makes sense for purchasers to delay purchasing as long as possible. On the other hand, vendors want to sell as early as possible because the nominal value of their goods are decreasing (and this ignores other costs of holding inventory).

jkot• 12 years ago

IT industry had falling prices for last 60 years.

arethuza• 12 years ago

Most organizations and individuals are probably spending more than they ever had have on "IT" related purchases.

bsaunder• 12 years ago

Maybe it's me (I'm sure it is - I'm no ecomomist), but a basic income seems like a perfect counter to deflation:

1. It seems like it should increase consumption as everyone would simply have more money to spend. Even if things are cheaper (and seem to be getting cheaper), you now have a new stream of income that, for some people, will burn holes in pockets and beg to be spent.

2. It would allow some employees in the labor market to "opt-out" (as the basic income supplants the "need" for a minimal wage job) and decrease the surplus labor pool. This would seem to require wage growth as employers now need to make the job proposition more compelling. Maybe they would even treat their employees better. Bonus.

3. "printing money" to pay for (or maybe just a portion of) the basic income seems like it should be a nice inflationary counter to the natural deflationary pressures.

I'm sure there are other pros and some cons of this approach, but those seem like good starting points.

jmesserly2• 12 years ago

I'm not an economist either, but applying textbook theory from school, it could help. A lot depends on the size, and making sure it isn't too big to discourage employment. http://en.wikipedia.org/wiki/Basic_income would be a demand side stimulus, with money going to the folks most likely to spend by taxing the folks most likely to save (you wouldn't want to do it by "printing money"). That particular effect would point in the direction of increased GDP (assuming we start from a deflationary trap with inadequate demand and large private debt overhang). However the risk would be too much employment lost, which points in the direction of decreased GDP.

A safer way to do the same thing would be to just spend government money on things like building infrastructure. In current conditions, that translates into increased GDP without the reduced employment risk. Similarly reduced taxes on lower incomes would be less risky but work through the same means.

(This isn't addressing whether basic income would be morally good or bad. Just the macro effects.)

supercanuck• 12 years ago

Lower profits = less money to go around to workers

Hasn't this shown to have been un-true in the last 5 years?

Higher profits has not meant more money going around to workers.

debacle5• 12 years ago

I think in general it has. The cost function for labor has kind of bottomed out. Demand is so low in comparison to supply.

dragonwriter7• 12 years ago

Hasn't this shown to have been un-true in the last 5 years?

Strictly speaking, no.

Higher profits has not meant more money going around to workers.

That doesn't mean that lower profits don't reduce the maximum that can be distributed to workers, however. (The fact that the actual amount distributed hasn't historically increased when the maximum has is a different issue.)

debacle5• 12 years ago

When shoppers see persistent price declines, they hold out on buying things. They ask, will I get a better deal next week, next month, next year?

Who does this? For 90% of my consumer goods, I don't care what they're going to cost in a month or a year. I need to replace the one I have today.

pjc504• 12 years ago

90% of your goods or 90% of the value of your goods? It's the big ticket items - TV, car, housing - that people delay.

debacle5• 12 years ago

I wouldn't hold off on a car or housing - to assume that is ignorant - though with prices going down I would likely purchase a new vehicle much sooner than I otherwise would have.

freeasindave2• 12 years ago

No it's not. Millions of PC's are sold each quarter, even though they cost as much as a TV and they get cheaper all the time. When you need it, you need it. You might wait a couple of months, but at the end of the day you have to pull the trigger based on need. It's called marginal utility. When you determine that the usefulness of a good (to you) outweighs the usefulness of the cash that good would displace, you buy it.

facepalm5• 12 years ago

...in theory.

pillowpants2• 12 years ago

Aside from the theory that people are going to stop buying goods because of expectations that they will get cheaper, I thought the price of consumer products were lowering because of cheaper energy, which would decrease COGS and improve margins/prices, not affect revenue?

pjc504• 12 years ago

People are having trouble getting this. Consider:

- if you expect to get a 1% pay increase every year, is it reasonable to take out a mortgage at 3% and pay $X/mo for 25 years? Yes, and at the end of the term it will be a smaller fraction of your expenditure. And if your house goes up in value by 1% you're benefiting there as well.

- if you expect to get a 1% pay cut every year, is it reasonable to take out a mortgage at 1% and pay $X/mo for 25 years? No, that's going to be a disaster as it gradually squeezes you, unless you carefully refi regularly. And if the house goes down in value by 1% a year, that's even worse. Construction industry collapses as a result.

Why Falling Prices Are Actually a Really Bad Thing

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