We could all stand with some "deflation" in food and energy prices. And by the way, food and energy are the two things that the Bureau of Labor Statistics does NOT count when calculating inflation. How convenient.
Humans need to consume to survive and want to consume to improve their lives. That prices are dropping won't change that.
Now, if the government decides it must control prices and announces a schedule under which all prices must drop by such-and-such a per cent each month, then, perhaps, the fears of deflation might be true. Given a timetable, consumers might, indeed, alter their buying habits to take advantage of future savings.
But given a stable currency and an economic climate where investment in production resulted in gradual improvements in efficiency [and, therefore, price decreases], no such unwillingness to consume would happen.
The 1880s saw the greatest increase in per-capita GDP in American history. Unemployment fell to 2.5%, despite high immigration. Real wages rose 23% between 1879 and 1889. The country boomed, led by heavy capital investment. The amount of rail track laid, for example, grew from 2,665 miles in 1878 to 11,568 miles in 1882. The value of building permits increased by 150% between 1878 and 1883.
And here’s the most fascinating part of the story… prices steadily fell from the end of the Civil War until the early 1890s, when they finally stabilized. You’d be hard-pressed to find a working economist today on Wall Street who could explain why the greatest decades of economic growth in American history could have been achieved during a period of deflation.
We could all stand with some "deflation" in food and energy prices. And by the way, food and energy are the two things that the Bureau of Labor Statistics does NOT count when calculating inflation. How convenient.
Debtors will not repay loans with dollars worth much more than what they borrowed causing massive, systemic default. Widespread default means there are fewer people willing and able to loan money.
Of course that's only a problem for those who are debtors and without money.
Like 90% of the voters in the USA.
Bet on inflation. The Fed is a political animal.
There is a difference between falling prices, because of increased productivity and innovation......and falling prices because the economy is being starved of money.
There are other facets of deflation that should not be ignored. An important one is a strong decline in economic *velocity*. Velocity is how rapidly the same money travels through the economy.
For example, you are paid a dollar, then you immediately spend that dollar to buy a candy bar. The same day the store that sold you the candy bar purchases more inventory, and their wholesaler pays one of its employees with that dollar. This is substantial economic velocity.
However, during deflation, when you are paid that dollar, though prices are dropping, you hang on to it instead of buying things, or only spend it on essentials.
Gresham’s law (bad money pushes out good) happens with just the single currency, by slowing down economic velocity. That is, deflated money is the good money, which you save, and bad money is *not* buying things, even though their price is dropping.
Why would anyone *ever* drop the price of...anything?
...and the answer is: to sell something faster.
If you don’t want to sell something faster, then you can simply hold your price instead of dropping it.
So the answer to the question of deflation, falling prices, is that dropping prices speeds up sales.
Or viewed from the other angle: slowing sales cause Sellers to lower their prices.
On Sale Now! Hurry!
It is all about moving money faster.
Ping
True!
Interesting discussion; I just wish I had enough book learnin’ to really follow it.