Deflation: whats the problem?

neil

Legendary member
5,167 747
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.
 

Splitlink

Legendary member
10,850 1,233
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.

No growth. Rising unemployment, therefore lower tax revenues, goods are cheaper but no one has money to spend on them.
 

paszkman

Established member
649 54
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
2,376 660
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
10,850 1,233
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
2,376 660
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
19,461 2,879
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
10,623 2,821
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
10,850 1,233
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
6,551 1,138
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
10,850 1,233
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
10,623 2,821
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.
 
 
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