Why is deflation bad?

[Archatype]

Please enlight me

Isn't it good when products and various things get cheaper rather than constantly increasing?

[bosque]

Originally Posted by Archatype

Please enlight me

Isn't it good when products and various things get cheaper rather than constantly increasing?

Will you be happy if your salary decreases as various things get cheaper to buy ?

[Sporran]

i guess if all things deflated relatively then it wouldnt be a problem.

Say the economy deflates by 30% this year, would you take a 30% pay cut

[Archatype]

Originally Posted by bosque

Will you be happy if your salary decreases as various things get cheaper to buy ?

Why should that be decreased? Under what justification?

Is it "bad" for the economy if all people are able to afford more things?

[Iccz]

Originally Posted by Sporran

i guess if all things deflated relatively then it wouldnt be a problem.

Say the economy deflates by 30% this year, would you take a 30% pay cut

But your pay is by contract.

You can't breach the contract... only way to do it would be getting the employee signing a contract agreeing to it.

You can drop their hours and if they're paid by the hour... yes.

But if you're on an annual salary it's contractual.

[Sporran]

i wasnt getting in to the realms of what would happen if, it was a response to why deflation is bad.

Of course they wouldnt cut pay.

Though an employment contract is worth nowt if the company goes through caused by the effects deflation.

[wormvortex]

Originally Posted by Archatype

Please enlight me

Isn't it good when products and various things get cheaper rather than constantly increasing?

Not when my savings account offers me a lower and lower rate. Mine paid >6% last year it now pays <2%

[Archatype]

Have yet to receive the concrete answer am after for

[andykn]

I would guess it because businesses will get less income but only be able to cut wages by getting rid of staff.

And people will tend to delay buying some stuff if they think it will be cheaper next month.

And Government debt will be harder to pay off as taxes fall.

[loz]

Originally Posted by Archatype

Have yet to receive the concrete answer am after for

Actually, it is for some of the reasons given.

If prices go down for example, then sellers would have no choice but to cut their costs - such as wages.

So you are no better off if as prices fall, so does your salary.

The key problem though is the fall in value of assets. The majority of the "good times" of the last decade was funded through the inflation in the value of assets, such as property. You can lend money against the equity you have in those assets. So as the value of your house goes up for example, but your mortgage stays the same, you have increasing assets to play with.

However, with deflation, the value of assets fall, so people cannot use the equity to fund purchases.

This isn't just an individual thing, it is the same for large corporations, banks, pension funds and such, who use the growing value of their assets to fund investment. So if their assets are devaluing too, then they have less money to invest or loan to people, or to buy further assets to increase growth.

[dalethecaptain]

Deflation is assumed to be bad because people still associate it with the great depression, but in that instance there really was no money kicking about, many were absolutely destitute thanks to Wall Street.

The problem today is, (currency markets excluded from this) that people don't spend money, and the supply of money is tightened. The general populous have money, but do not spend it as everything you buy today will be cheaper tomorrow, and hence it becomes a big spiral, as the next week it will be even cheaper and then next month even cheaper again. And so on.

So aside from the populous buying daily essentials, sales of real 'consumer goods' virtually evaporate, for fear of it being worthless/much cheaper the next week.

This in turn leads to the next problem, so called 'quantative easing' in which the Bank of England will now effectively steal some of your hard earned back by printing more money without the financial/gold reserves to back it up (we are not talking Zimbabwe free for all money printing just yet), so all this lending is being funded on future growth returns which are simply not happening right now, and nobody knows when growth will return. I am not going to quote figures, they are scary.

[dalethecaptain]

Originally Posted by andykn

And Government debt will be harder to pay off as taxes fall.

This is the crux of the matter. The banks will not even begin to lend to Joe Public until the have had a good chip at the amount of money they owe to HM Government, as once they (HMG) start the easing process, the asset value of the currency will buy less, and make the cost of repaying the debt even higher. Growth will not be coming from inside the country as nobody will part with what little cash they have for fear of the source of income further drying up.

[dalethecaptain]

Originally Posted by loz

The key problem though is the fall in value of assets. The majority of the "good times" of the last decade was funded through the inflation in the value of assets, such as property. You can lend money against the equity you have in those assets. So as the value of your house goes up for example, but your mortgage stays the same, you have increasing assets to play with.

However, with deflation, the value of assets fall, so people cannot use the equity to fund purchases.

The other chink in the armour of capitalism. You can not use a property, especially one in which you live, to fund your wealth generation. Its only an asset when you own it outright and can afford to lose it. This is another prime risk for deflation, when property is used as a cash generating commodity (taking equity out to buy a car or pay other debts, or go on holiday) you are not hedging the risk of prices ever falling, the money is not used to fund further asset procurement that at least has long term or underlying value, and far too many people have taken to cashing in real wealth for short term cash flow. This 'plastic wealth' has been the only source of real cash flow (and hence market growth) for the majority of people, and its now gone. Deflation will now exacerbate this effect.

Just my tuppence worth, Britain has been bust since about 2003 as the amount of money going around simply was not proportional to income. The national average wage is still a little under £24,000, just with the levels of personal debt (not including mortgage debt) the figures don't stack up.

[gbcasual]

Short term deflation is no bad thing as it generally means you get more for your money.

The problem is when deflation lasts too long and people/businesses stop spending their money or making investments as they expect things to just continue getting cheaper. The knock on effect of this is companies having to take measures like car firms are doing at present and halting production, cutting bonuses and reducing wages by having to make staff redundant, the overall effect of which is less wages being earnt in the economy.

With less money being earnt, the value of existing debt, relative to wages, effectively increases which means it takes longer to pay those debts off, and in the UK we generally have massive levels of debt compared to other leading economies.

Of course if you have no debt at all and are blessed with a fixed income then deflation is your friend. This means that for a lot of pensioners out there deflation will be a good thing!

Cheers

Jon

[Epicurus]

Deflation itself isn't the problem, it's the symptom of the problem, and that is a contraction in the economy. Prices fall when spending falls, and if spending falls it means there is less money keeping businesses afloat which means more redundancies, less payrises and less innovation, all the opposite of what happens when people ARE spending money.

Inflation, like so many things in economics, is all about balance. Too high and you risk a crash, too low means you're already in one!

However all the talk of deflation is so woefully wrong this time around because the British economy has never been in the unique situation it is now. Because we are a net importer of produce, and because the value of the £ plummeted in recent months, we are actually still getting inflation which compounds the existing spending problem!