Deflation: whats the problem?

neil

Legendary member
Pay later or Pay now ?

I guess it's bad if your in debt and hoped to inflate your way out of it like the eurozone!

You hit the nail on the head dealer911. I remember Cameron dropping (another) clanger when he said people should reduce their debt and lower borrowing like a good housewife. Someone whispered in his ear, as dealer is aware, that debt and inflation fends off or postpones the day of reckoning.Cameron then rapidly back tracked.
 

paszkman

Established member
also I guess companies have to drop prices, squeezing margins, leading to cost cutting such as layoffs..maybe if purchasing depts expect prices to drop then they will put off some purchasing decisions, leading to lower inventory levels which could also reduce amount of materials shipped, over capacity in shipping, more layoffs etc ..
 

0007

Senior member
Deflation – the debts ain't going away!

Deflation is a serious problem – good Economist article here: http://www.economist.com/news/leade...d-extremely-dangerous-worlds-biggest-economic


On a personal level, unless you're going on a long drive why would you rush out and fill your car up with petrol if the price is dropping by a few pence every couple of days – because that's what's happening around here – just paid 1.05 per litre and now almost on the verge of the pounds being less than the litres! Similarly I'm looking for various consumer/domestic items but I'm in no rush. Bit different from the 1970s when it was actually cheaper to buy on credit than wait to buy with cash by which time the price had gone up by some ridiculous amount. The politicians aren't going to enjoy this.
 

Splitlink

Legendary member
Deflation is a serious problem – good Economist article here: http://www.economist.com/news/leade...d-extremely-dangerous-worlds-biggest-economic


On a personal level, unless you're going on a long drive why would you rush out and fill your car up with petrol if the price is dropping by a few pence every couple of days – because that's what's happening around here – just paid 1.05 per litre and now almost on the verge of the pounds being less than the litres! Similarly I'm looking for various consumer/domestic items but I'm in no rush. Bit different from the 1970s when it was actually cheaper to buy on credit than wait to buy with cash by which time the price had gone up by some ridiculous amount. The politicians aren't going to enjoy this.

And talking about politicians. They are going to do something that they hope will help to cure the problem. It's called Quantitive Easing which is an impressive term for Monopoly money.

Good times coming, lads!
 

0007

Senior member
And talking about politicians. They are going to do something that they hope will help to cure the problem. It's called Quantitive Easing which is an impressive term for Monopoly money.

Good times coming, lads!

It certainly is going to be very interesting to see what happens when you print more money in a system (€) that is already fundamentally flawed.
 

Atilla

Legendary member
http://www.bbc.co.uk/news/business-30707644

"Deflation hits Eurozone as energy prices fall"

Why is the reduced cost of living seen as a bad thing?
Surely, for a given income, people have more to spend on consumables rather than essentials.
That is, money being spent on desirable things.


1. Inflation reduces the purchasing value of money. £100 pounds today will be worth less in years time.

Deflation increases the future value of money. Hence, £100 you owe now will effectively be worth more in the future.

Hence, it's bad for people in debt. As inflation effectively reduces and deflation increases burden of debt because its more difficult to pay back.



2. More importantly, deflation is very bad for manufacturers. Producers have to pay cost of input today to add value and produce goods for sale tomorrow. So greater the value added and passage of time, the greater profit with inflation; difference between input costs and product sale price.

However, if manufacturers buy materials for goods and services today at a price and sell it tomorrow for less with deflation; instead of more with inflation ---> leads to ---> lower margins and profits.

Has dampening effect in calculating ROI - reducing investment payback and stretching time-frame also hitting confidence and uncertainty. This leads to deferral of investment, R&D and everything else etc etc.

Can become a vicious cycle as experienced by Europe's austerity measures now trying to inflate economy out of deflation.
 

counter_violent

Legendary member
1. Inflation reduces the purchasing value of money. £100 pounds today will be worth less in years time.

Deflation increases the future value of money. Hence, £100 you owe now will effectively be worth more in the future.

Hence, it's bad for people in debt. As inflation effectively reduces and deflation increases burden of debt because its more difficult to pay back.



2. More importantly, deflation is very bad for manufacturers. Producers have to pay cost of input today to add value and produce goods for sale tomorrow. So greater the value added and passage of time, the greater profit with inflation; difference between input costs and product sale price.

However, if manufacturers buy materials for goods and services today at a price and sell it tomorrow for less with deflation; instead of more with inflation ---> leads to ---> lower margins and profits.

Has dampening effect in calculating ROI - reducing investment payback and stretching time-frame also hitting confidence and uncertainty. This leads to deferral of investment, R&D and everything else etc etc.

Can become a vicious cycle as experienced by Europe's austerity measures now trying to inflate economy out of deflation.

Well if all these countries had their houses in order...none of this would be a problem. So finally do you see the problem with keynesian style economics. Buy now pay forever. Print some money get into debt print some more money get into even more debt. Doesn't just apply to idiot politicians though and they encourage individuals to go down the same path.

Deflation...bring it on....reset the game...but this time learn from it !!
 

Splitlink

Legendary member
Japan has had it for as long as a decade, at least. They are, still, alive and kicking although one does not hear so much about them, these days.
 

trendie

Legendary member
1. Inflation reduces the purchasing value of money. £100 pounds today will be worth less in years time.

Deflation increases the future value of money. Hence, £100 you owe now will effectively be worth more in the future.

Hence, it's bad for people in debt. As inflation effectively reduces and deflation increases burden of debt because its more difficult to pay back.

.....

I don't understand.
If I owe £100 now....
if the economy deflates or inflates, I still owe "£100" (excusing interest charges).
The perception that your money can "buy more" is physically realised in lower prices.
But a debt of £100 remains at £100 (excusing interest).
its just a number. If anything, if my cost of living reduces, I should have more disposable to pay off debt sooner.

I have NEVER understood money as a meta-concept.
(for example, if I go to a bank and borrow £100, and they are the ONLY bank in the world, and they print £100 for me, they will want interest, say 5%. they will want £105 back, but I can never repay the debt as there is only £100 in the whole world. As a meta-concept, banks rely on slowly accumulating the wealth of the world, as some proportion of people must, of necessity be required to fail and lose.
Happy New Year!!)
 

Splitlink

Legendary member
I don't understand.
If I owe £100 now....
if the economy deflates or inflates, I still owe "£100" (excusing interest charges).
The perception that your money can "buy more" is physically realised in lower prices.
But a debt of £100 remains at £100 (excusing interest).
its just a number. If anything, if my cost of living reduces, I should have more disposable to pay off debt sooner.

I have NEVER understood money as a meta-concept.
(for example, if I go to a bank and borrow £100, and they are the ONLY bank in the world, and they print £100 for me, they will want interest, say 5%. they will want £105 back, but I can never repay the debt as there is only £100 in the whole world. As a meta-concept, banks rely on slowly accumulating the wealth of the world, as some proportion of people must, of necessity be required to fail and lose.
Happy New Year!!)

Your ability to repay £100 will depend on your, personal, circumstances but many will not have a job to repay the loan. Besides, we are talking, perhaps, of mortgage loans, or overdrafts for cashflow purposes in business and these can be in the region of hundreds and thousands per month. If a shop is not selling, or their customers are not paying, the whole thing can have a chain effect through sectors of industry.

Deflation is bad for a country. Spain has 22% unemployment. The government has been able to reduce it 2%, Big deal. I believe that a lot of the people who have found employment are having to work for less.
 

counter_violent

Legendary member
Your ability to repay £100 will depend on your, personal, circumstances but many will not have a job to repay the loan. Besides, we are talking, perhaps, of mortgage loans, or overdrafts for cashflow purposes in business and these can be in the region of hundreds and thousands per month. If a shop is not selling, or their customers are not paying, the whole thing can have a chain effect through sectors of industry.

Deflation is bad for a country. Spain has 22% unemployment. The government has been able to reduce it 2%, Big deal. I believe that a lot of the people who have found employment are having to work for less.

It still isn't the govt's job to provide people with jobs...all they can do is set favourable conditions.
If these people are working for less, so what, at least they aren't claiming benefits.
 

neil

Legendary member
Only a working man

It still isn't the govt's job to provide people with jobs...all they can do is set favourable conditions.
If these people are working for less, so what, at least they aren't claiming benefits.

But many low paid workers in the UK do claim benefit to top up their wages !
Favourable conditions like no Zero hour contracts, a living wage, reasonable rents, house prices/rents within grasp of ordinary working low wage earner? Not with Cameron and the other rich kids.

http://www.theguardian.com/books/20...shment-how-get-away-with-it-review-owen-jones

The working man:

 

trendie

Legendary member
but deflation is triggered by companies lowering their prices.
its not that deflation comes first, then all this jobs/loans stuff happens as a consequence.
the price came down, by design of the companies, then it was seen as deflation.

example:
The price of cornflakes came down. This meant the cost of living went down.
This was seen as deflation.
Its ALREADY happened. (the price of cornflakes coming down)

Companies will continue to sell their cornflakes at a slightly lower price.
How does this mean jobs will be lost, or loans become expensive?
 

Forexmospherian

Legendary member
but deflation is triggered by companies lowering their prices.
its not that deflation comes first, then all this jobs/loans stuff happens as a consequence.
the price came down, by design of the companies, then it was seen as deflation.

example:
The price of cornflakes came down. This meant the cost of living went down.
This was seen as deflation.
Its ALREADY happened. (the price of cornflakes coming down)

Companies will continue to sell their cornflakes at a slightly lower price.
How does this mean jobs will be lost, or loans become expensive?

Hi Trendie

I dont think you have ever been in business have you ?

Both micro economics and macro economics are complex - we dont live in a simple ( one bank) world whereby every one is equal and we all are happy with the same wage and same amount of work output and there are no new births and deaths in the world - and nothing changes every decade - etc etc.

For example - my late Father spent if I remember correctly £38 guineas / pounds on his first new car and £320 on his first 3 bedroom house in Staffordshire England. At that time the population of England was approx 39 million people and world population under 4 billion

Now look at the situation today - average cost of new car - over £10k - average house over £180k - population - big increases.

So more people to feed and work and produce goods - but life expectancy different today than 70 years ago and the whole world is more advanced etc etc.

So to try and say its simple and its start with companies reducing their prices is a bit like the "hen and the egg" question.

The world today is now a small place - and todays people maybe want to much compared to life 50 -100 yrs ago. Ideally - it would be great if life was simple and nothing changed and there was no bankers or crime or politicians etc etc ;-)

Then Inflation and deflation would be dead easy to sort out

Regards


F
 

Atilla

Legendary member
but deflation is triggered by companies lowering their prices.
its not that deflation comes first, then all this jobs/loans stuff happens as a consequence.
the price came down, by design of the companies, then it was seen as deflation.

example:
The price of cornflakes came down. This meant the cost of living went down.
This was seen as deflation.
Its ALREADY happened. (the price of cornflakes coming down)

Companies will continue to sell their cornflakes at a slightly lower price.
How does this mean jobs will be lost, or loans become expensive?

Consider why would company reduce price.
- To sell more
- To beat competition
- Cost of production falls and it passes some of it to consumer
- Demand falls, reduces prices to get rid of old stock

Either way... here is an example...


Year1 - Factory sells goods X for £100

Year2 - Factory sells goods X for £105 in Year-2 (inflation 5%) &
- Marginal Revenue > Marginal Cost thus
- Borrows £100K over 5 years at 6% interest to buy 2nd machine to double output.

Year3 - Factory sells goods X for £115.50 in Year-3 (inflation @ 10%) &
- 2nd Machine installed and running at full capacity. Business continues expansion.

Year4 - Factory sells 75% of goods X for £115.50 (25% of goods X goes into inventory storage) Slow down in demand.

Year 5 - Factory can only sell 50% of goods X for £110.0 (50% goes into inventory)
- ROI less than forecast. Variance between budgeted and actual returns.

Year 6 - Factory is heavily discounting to shift inventory stock and cuts production. Can only sell 60% of goods X for £95.00.

Factory margins now squeezed but still have to service loan £100K at 6% interest over another 3 years.

Price of good X fallen - good for the man on the street. We have deflation. Factory has to produce more to make up monies to service same debt.

However, factory now cuts production and lays off workers.

Let's say factory is big employer in town and layoffs reduces towns disposable income effecting local business. Prices have fallen but so business now slowed down and layoffs and wage freezes.

Now multiply this across the UK, continent and the globe.


Hope it makes sense.

Play it out again with let's say continued and rising inflation. Company makes more money and produces more as prices rise increasing revenue over cost of production. Likely to buy third machine. Invest and hire more labour.

Etc etc... (y)
 
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neil

Legendary member
Trendie

but deflation is triggered by companies lowering their prices.
its not that deflation comes first, then all this jobs/loans stuff happens as a consequence.
the price came down, by design of the companies, then it was seen as deflation.

example:
The price of cornflakes came down. This meant the cost of living went down.
This was seen as deflation.
Its ALREADY happened. (the price of cornflakes coming down)

Companies will continue to sell their cornflakes at a slightly lower price.
How does this mean jobs will be lost, or loans become expensive?

Trendie -I hope this helps:

A sort of summary:
http://touchstoneblog.org.uk/2014/10/deflation-watch-1/


A bit long winded I know:

http://europesworld.org/2014/10/09/the-spectre-of-deflation/#.VK7S2SusXT8
 
 
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