What people think living in a deflationary economy looks like: Groceries are 5% cheaper than last year.
What living in a deflationary economy is actually like: Nobody is spending money. Your hours are cut and you won’t get a raise this year. Your income is down 25% compared to last year. You can’t afford to buy anything. Businesses everywhere have to cut prices to compete for the dwindling number of customers.
Investment dries up. Job creation comes to a complete stop. 500 people competing for every job opening that comes up. Wages keep going down as a result. The uncertainty means that even people who still have a job are choosing to save as much as possible rather than spend.
Foreclosures rise, people lose their homes as the wealthy snap up the newly-freed housing stock at distressed prices. Car repossession rates skyrocket, causing a surge of used cars to enter the market, dragging down new car prices along with them. Automobile manufacturers start biting their nails as analysts project lower sales numbers and tighter margins, pushing most heavy industry into the red. Workforce cuts soon follow.
Credit default rates soar, leading to the first bank failures. National deposit insurance schemes soften the blow and prevent a full banking crisis, but deposit insurance rates start climbing, causing banks to raise fees and cut benefits.
The lower economic activity causes budget shortfalls in every city in the country. Poor tax growth forecasts force local councils to start cutting services. The first to go will be cultural events. Then the public transport cuts come. And then homeless services. Then eventually all departments except police, fire, water, and electricity get cut down to the bone, and then some. Maintenance on public buildings get slapped with 5- or even 10-year deferrals.
People are skipping meals to make ends meet. Produce rots on the shelves until grocers learn to order less. Lower crop prices push many small to medium farms into insolvency; larger corporate farms are better able to weather the storm. Groceries are 5% cheaper than last year.
What about moderate deflation? Not “nobody is spending money” but “everybody is spending 5% less”, to go in accord to your groceries example.
Hey no fair, you’re just reciting the events surrounding 2008!
But yeah. Scary stuff.
Seems like that happens in an inflationary economy as well, see the US.
Because deflation isn’t the only thing that causes them. It’s just that a deflationary economy makes them far more likely to happen to a far greater number of people.
Gen Z-ers… Yeah, we’ve been waiting for this shit to pop.
You’re conflating an economic problem that is causing deflation with deflation itself.
There is nothing inherently more negative about deflation compared to inflation for the average person. It’s just generally not caused by anything positive under our current economic model.
Deflation of a currency discourages people from spending it, because you can make more money by just holding on to it. It makes loans more expensive to provide because someone can borrow money and it will increase in value without them doing anything, so you have to have higher interest rates to counterbalance this. This harms economies. What you want is stable prices, erring on the side of inflation if you must.
I suppose for a single person deflation doesn’t feel like much, but money is collective so the party doesn’t last.
At the loan part, you’re confusing inflation and deflation. You need higher interest rates to counterbalance inflation because money loses value. Loans during deflation make the loan giver get richer by default. But TAKING a loan during deflation is a shit deal because the value of what you’re paying back keeps increasing. Inflation, assuming that it comes with gradual raises in income (which it theoretically should, just not in the modern US), actually makes your loans cheaper to pay back over time.
And the purely stupid thing is, it’s all made up. The same number of people exist to produce the same amount of goods and consume the same amount of goods. The society could just continue on. But they can’t, because money.
Absolutely not, and I hate this term “made up” whenever people are trying to describe the economy.
In an economy populated by free economic agents, prosperity is determined less so by the amount of goods available but by how much those agents trade among each other. For each type of economic resource, whether that be goods, services, labour, money, or social status, there is a certain distribution of those resources which maximises everyone’s utility. It is impossible to nail down what that distribution is, but when people are more willing to trade with each other, those resources have a tendency to flow towards the people who most want them. Even though the amount of resources available does not grow, a “good economy” where people are willing to exchange resources will feel more prosperous than a “bad economy” where everyone is scared of losing their resources and thus hoard what they have.
You are happy when you are able to trade the resources you have (possibly just your labour) and get in return things that you value more than keeping your labour. Food, shelter, cars, and Pokémon cards. You could keep your 40 hours, but surely you wouldn’t be very happy with just that, would you? Trade creates value.
And because I know people like talking about socialism here, this is where the Soviets went wrong and where the Chinese went right. The Soviets thought that the way to prosperity is to produce more. The Chinese know that the way to prosperity is to allocate better, and one of the best ways to allocate resources that we know of, is by letting people trade. That’s not to say it’s a perfect way or even a good way, but so far we have not come up with anything better than to let people trade and then step in when the trade goes wrong or does not produce an optimal distribution of resources. Don’t misunderstand; unregulated trade tends to clog itself up and results in a very suboptimal resource distribution. It needs to be closely regulated.
Money is nothing more than an intermediary to allow trade to occur. When people hoard money, that in itself is a dampener on economic growth. Money which is spent circulates again and again, and greases the wheels of trade. An economy where people freely spend and freely earn money is a prosperous one. An economy where people hoard money is one where nobody gets what they want (except the idiots who somehow derive utility from hoarding money).
So no, it is not “made up”. In economics, public confidence is what creates prosperity. When people are confident, they spend. They earn it back. They trade. They create value. When people are scared, they desperately hold on to what they have. They stop trading. That value, it never gets created.
I think you’ve hit it on the head. The economy is the stupid part.
If there is food, and there are people, it’s stupid that we have hungry people who don’t get the food. And all the reasons you listed are a consequence of the “economy” which incentives people to not get the food to the other people.
That isn’t to say that an economy is worthless. But when it’s failing to the point that people are starving, it’s idiotic to follow its incentives.
Trade creates value
Labor creates value, trade allows us to quantify the value between different goods (which are themselves still the output of labor)
I agree with what you’ve laid out here, except that I think you’ve missed the point of the comment you are replying to. When an economic downturn happens not for material reasons (resource constraints, logistical choke-points, and the like) but for financial reasons, then yes, physically it is arbitrary. The 2008 crash happened because of mortgage debt in a ledger - our physical ability to work and produce goods didn’t change.
This was quite educational, thank you very much for all the detail! I feel like I understand fundamental economics a little better now.
Thats from Jan Van Eyck, right?
Yeah, that window being reflected fish lense style is a proper tell.
You don’t know the name of the painting do you? I was hoping to see a higher rez version to see who is reflected in that mirror.
i don’t see the problem - banks
Deflation is devastatingly bad for banks. It discourages investment and new businesses because it shifts the maths in favour of just holding cash rather than investing in new businesses. No new businesses means fewer people need loans. And deflation makes loans more expensive for ordinary people, who stop borrowing. Banks profit only by lending out the money that they have. No loans, no profit.
Deflation? You talking about Afghanistan or Sri Lanka or where? Not a lot of countries tolerate deflation.
am Talking about USA after AI crash hits all corporations will feel deflation.
I hope it comes soon.
Unless you live in the US, because the reason that your money would deflate is that you would have a lot less of it.
The longer the bubble continues to grow and the bigger it is when it pops, the worse the crash/deflation will be, which is why I say I hope it comes “soon”.
I guess that and so that I can stop having LLMs forced on me.
Oh, and “deflation means you have less money” is a bit overly simplistic. If you’re living hand-to-mouth and don’t have a lot of debt, deflation can actually be a net good thing because a paycheck in the future can buy more than a paycheck of the same size today.
I’m in the U.S. if you’re curious.
While I’m aware of the causal influence a deflationary currency can have upon economic activity, I’m not sure how the inverse works
Care to explain?
Less spending → less demand → prices drop. that’s what you’re asking?
