Or if someone wants to start a Laundromat and buys quickly deprecating machines. But people still raise money to buy quickly deprecating assets. If I raise money for an AI startup today I would be using the money to buy GPUs, but if I wait a year from now I'll be able to buy them more cheaply (or buy better ones). So in a deflationary environment you can think of money appreciating in real terms ($1 would buy you more a year from now), so required investment rates would have to adjust.īut it's still true today with technology. Kind of like two years ago my savings account was paying nothing and now you can get close to 5% risk free just to park your money. You can see it featured predominantly in the Wikipedia for example.Īs to no one investing, nominal interest rates are based in part on expectations and the risk free rate. I think you're wrong about the "deflationary spiral" as not being the central argument as to why deflation is dangerous. this could either be a slow oscillation between the two or periodic shocks. eventually the lack of credit and new investment decreases production to the point of reverting to an inflationary environment. if you can get a solid risk-free return on your pile of cash, it lowers the incentive to do risky things like start a business or lend money to others to start a business. My understanding is that the major issue with deflation is on the investment/credit side. this does not describe the majority of consumers. inflation/deflation are most impactful to entities that are sitting on large amounts of cash. even with luxury items, deflation has to be quite strong to outweigh the desire to "have it now". a large chunk of consumer spending is on daily necessities like food. I don't think this is the core argument of anything, assuming you are talking about consumer spending. I can point to several counter examples and I can't get a straight answer why this is not true in these examples, or why deflation is so dangerous not relying on that argument > The core argument of the danger of deflation is "no one will buy anything if they know the price is going to come down". Every extreme inflationary cycle (and there are many examples) were disastrous in terms of any available metric (deaths, despair, poverty, crime, etc). It provides uncertainty and inefficiencies and makes operating a business harder (in extreme cases). It also hurts mostly poor people that disproportionately spend their income on non-discretionary items like food and shelter. It robs people of their savings, especially the less fortunate who don't have their savings in financial assets. I can easily explain why inflation is bad and it doesn't take me forever. The core argument of the danger of deflation is "no one will buy anything if they know the price is going to come down". Saying it's "micro" vs "macro" and a bunch of hand waving around dynamic localized variables is not an explanation. You can buy last year's model at a discount. It's entire product lines.įor instance, cars. So until someone can explain to me why deflation is awful and we need to continue to trust the central bank to create money out of thin air to keep the economy from collapsing, I'm going to think it's all a big scam. According to Keynsians, no one would buy it if they knew a better version for the same price was coming out next year! And the deflationary pressure is so high that it's got the same dollar price as an inferior model from a few years ago. This iPhone version will drop prob 10% a year in price and people will still line up to get it. But none of them address the fact that many of the hottest fastest growing industries are extremely deflationary. I've read all the arguments about the economy collapsing if things get cheaper over time and a vicious savings death spiral that can only be stopped with a steady 2% (and occasional 10%) annual inflation. I believe the "danger " of deflation is a conveniently devised fable to keep the printing press running as a backdoor means of taxation without legislation.
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