There have been multiple real world examples of deflation so we don’t really have to guess.
There was a somewhat famous example starting in 1929 and extending through the 30s.
It’s less about whether you wait to buy food and more whether you decide to stretch your junker car out as long as possible, or put off home improvements because you’ll save thousands, or decide to put off capital investments and sit on your cash till it’s worth more.
Yes and no. In a vacuum it would be nice if goods generally seen as consumer necessities with lower price sensitivity (people need to buy food regardless of price) stayed cheap, but I think the received understanding in mainstream economics is that we can’t just lower food prices without also lowering other prices—and that lowering prices across the board is going to be a sign of deflation which will change consumption habits and potentially exacerbate other economic issues.
I’m not defending this view, but just trying to frame that I think the general view of economists is that grocery deflation is probably going to be inevitably linked to other falling prices which, as a whole, is a concern
This is also important in the context of investment. The general understanding is that even if input costs are falling (i.e., land, lumber, labor), why would anybody invest in new housing construction if deflation is going to mean the sale price is lower than the cost? At a macro level deflation means that your money increases in value without taking on any risk so instead of investing in the market or a potential new venture, just hold on to it and it’s be more valuable without the change that the stock declines or the venture goes belly up.
The concise framing of this is that “a dollar today is worth more than a dollar in the future” because of inflation so you should invest to, at minimum, keep buying power in real terms constant. But with deflation this is not true so business sees simply hoarding capital as a safer bet than deploying it into things that theoretically create job and drive growth/prosperity since a dollar tomorrow will be more valuable than today.
I appreciate the explanation and acknowledge that it is more nuanced than I wish.
But right now I’m burned out and angry…
What you’re saying sounds like lower prices would be good for normal people, but we can’t do it because businesses and rich fucks would ruin it for everyone.
Like, I’m not investing in land, lumber, or labor. I just want to eat lettuce.
I totally hear that. And again, not trying to defend this view simply present the convention understanding.
I think to your last point: you may not be directly investing, but if you have a retirement 401(K) or IRA or pension, you are linked into this. And if you don’t have retirement savings or other investments, your employer is making these calculations, or the companies that hire your company, or so on up the chain. Even if you work retail grocery and will be, basically fine in terms of steady employment, deflation/falling prices likely means mass un/underemployment for people in a lot of other industries.
Lower prices may be good for consumers in some ways, but they have knock-on effects that are are generally seen as significantly and negatively outweighing the positive of lower prices.
Sticking with building as an industry likely to see decreased investment, that puts keeps construction workers out of the job. It keeps those employed in trucking, lumber, architects, &c. out of work. Then the construction companies don’t have as much other consumption needs to companies that sell accounting software, project management software, engineering and site planning work contractors lose business and cut employment.
For cheaper lettuce: why would a farmer invest in planting? Between fuel, seed, fertilizer, other equipment, and labor, they’re going to have invest and in a deflationaey environment they might be able to sell their lettuce for less than they invested. Why not just sit on that cash since it’ll be more valuable at the end of the season anyway and avoid the price risk and the risk of crop failure?
It’s worth noting that both the Great Depression and Great Recession saw deflation—with the Depression especially having depressed commodity and wage prices.
I realize I’m going a long way to saying “business is connected” which is…not revolutionary…but there are significant risk if the economy stops investing. This is why centeal banks all target a small level of inflation, such as the 2% target for the Fed: if money doesn’t become less valuable nobody will have any incentive to do anything economically productive.
That, of course, gets to the heart of the infinite growth issue with cancerous capitalism, but there is a theoretically consistent internal logic to it and why, without larger systemic changes, falling prices is worrying under the currently prevailing economic regime.
Sounds good in theory, but I don’t think that holds up in practice. For example, computers getting more affordable and powerful year by year didn’t stop people from buying them.
If the price is lower than the opportunity cost of NOT having it, people will buy it now, even if the product will be priced better next year.
And a large part of the price increases people are struggling with are food and housing. It’s not like you can wait till next year to eat or have a place to live.
It’s not like you can wait till next year to eat or have a place to live.
Eat? No waiting. Live? Sure! If prices were consistently falling because of deflation, and you knew renting for a year would allow you to buy a larger house with the exact same amount of money you hand in your hand, most would do that and rent for a bit.
For buying a house, isn’t it kinda like the stock market (except way less liquid). Yeah, the prices may go down in a year but someone may swoop in and buy while you’re sitting on the sidelines trying to time the bottom.
Which would put inflationary pressure on rental prices which in turn would put inflationary pressure on property prices, and we are back to square one.
Sounds good in theory, but I don’t think that holds up in practice. For example, computers getting more affordable and powerful year by year didn’t stop people from buying them.
It absolutely delay people buying. If you held out for 6 more months, you’d get a substantially faster computer. Thats the second variable you’re introducing with this example. If your current computer was “fast enough” you’d wait, and people did.
This is my problem with economics. You’re talking about theory and practice as if they’re the same thing. All consumers do not make perfectly rational choices. Hell, most don’t. This kind of theory only explains how rich people want you to think things work. It’s not how things work in the real world.
This is my problem with economics. You’re talking about theory and practice as if they’re the same thing.
Way back when, I used to sell computers and computer parts at retail. I assure you this was a regular conversation topic. “When is the Voodoo 4 graphics card coming out? 4 months? Okay I won’t buy the older Voodoo 3 now because I can make do with my Nvidia TNT2 until then.”
All consumers do not make perfectly rational choices.
No they don’t, nor or do they need to if you’re taking a macro view.
Hell, most don’t.
Are you saying:
consumers NEVER make rational choices?
consumers don’t make 100% rational choices 100% of the time a choice is available?
I disagree with the former, but I agree with you on the latter. None of that invalidates micro or macro economic theory.
This kind of theory only explains how rich people want you to think things work. It’s not how things work in the real world.
Many rich people get rich because this works. They also play dirty tricks to create the situations, but then again in those situations the theory works.
I’ll be the first to say economic theory is far from perfect and the deeper you go, the more complex, and potentially less reliable, it gets, but the basics are pretty sound.
An upgrade for a non-essential item you already own might prompt some of these considerations from some people. The decision to buy that item in the first place usually won’t, especially when you’re talking about essential items like groceries and housing, which is what the article in the OP is referring to.
But even if we could get relief on inflation, the prices wouldn’t keep decreasing by large amounts forever, right? It’s not like cars would eventually cost negative money and they pay you to take them. At some point the expected savings from waiting aren’t enough to justify the pain of doing without the shiny new thing.
It’s not like cars would eventually cost negative money and they pay you to take them.
While I accept your point, I feel conditioned to interrupt here and clarify that I absolutely would download a car. There was some unexpected confusion about this, at one point.
Let me guess, deflation disincentivizes consumption so it can lead to a feedback effect that leads to recession?
Pay and wages tied to the rate of inflation would probably preferable; I’m sure congress will get right on it…
Lower prices incentivize consumption though, right? It definitely hurts profits, but people buy lots more pointless shit if they can afford it.
Static lower prices might, but deflation does not. If prices will be lower tomorrow or next week, it’s wiser to hold on to your money and buy later.
Do people really do that? If lettuce got back in the range I was used to paying before, I feel like I’d start buying it again as soon as I noticed.
There have been multiple real world examples of deflation so we don’t really have to guess.
There was a somewhat famous example starting in 1929 and extending through the 30s.
It’s less about whether you wait to buy food and more whether you decide to stretch your junker car out as long as possible, or put off home improvements because you’ll save thousands, or decide to put off capital investments and sit on your cash till it’s worth more.
Yes and no. In a vacuum it would be nice if goods generally seen as consumer necessities with lower price sensitivity (people need to buy food regardless of price) stayed cheap, but I think the received understanding in mainstream economics is that we can’t just lower food prices without also lowering other prices—and that lowering prices across the board is going to be a sign of deflation which will change consumption habits and potentially exacerbate other economic issues.
I’m not defending this view, but just trying to frame that I think the general view of economists is that grocery deflation is probably going to be inevitably linked to other falling prices which, as a whole, is a concern
This is also important in the context of investment. The general understanding is that even if input costs are falling (i.e., land, lumber, labor), why would anybody invest in new housing construction if deflation is going to mean the sale price is lower than the cost? At a macro level deflation means that your money increases in value without taking on any risk so instead of investing in the market or a potential new venture, just hold on to it and it’s be more valuable without the change that the stock declines or the venture goes belly up.
The concise framing of this is that “a dollar today is worth more than a dollar in the future” because of inflation so you should invest to, at minimum, keep buying power in real terms constant. But with deflation this is not true so business sees simply hoarding capital as a safer bet than deploying it into things that theoretically create job and drive growth/prosperity since a dollar tomorrow will be more valuable than today.
I appreciate the explanation and acknowledge that it is more nuanced than I wish.
But right now I’m burned out and angry…
What you’re saying sounds like lower prices would be good for normal people, but we can’t do it because businesses and rich fucks would ruin it for everyone.
Like, I’m not investing in land, lumber, or labor. I just want to eat lettuce.
I totally hear that. And again, not trying to defend this view simply present the convention understanding.
I think to your last point: you may not be directly investing, but if you have a retirement 401(K) or IRA or pension, you are linked into this. And if you don’t have retirement savings or other investments, your employer is making these calculations, or the companies that hire your company, or so on up the chain. Even if you work retail grocery and will be, basically fine in terms of steady employment, deflation/falling prices likely means mass un/underemployment for people in a lot of other industries.
Lower prices may be good for consumers in some ways, but they have knock-on effects that are are generally seen as significantly and negatively outweighing the positive of lower prices.
Sticking with building as an industry likely to see decreased investment, that puts keeps construction workers out of the job. It keeps those employed in trucking, lumber, architects, &c. out of work. Then the construction companies don’t have as much other consumption needs to companies that sell accounting software, project management software, engineering and site planning work contractors lose business and cut employment.
For cheaper lettuce: why would a farmer invest in planting? Between fuel, seed, fertilizer, other equipment, and labor, they’re going to have invest and in a deflationaey environment they might be able to sell their lettuce for less than they invested. Why not just sit on that cash since it’ll be more valuable at the end of the season anyway and avoid the price risk and the risk of crop failure?
It’s worth noting that both the Great Depression and Great Recession saw deflation—with the Depression especially having depressed commodity and wage prices.
I realize I’m going a long way to saying “business is connected” which is…not revolutionary…but there are significant risk if the economy stops investing. This is why centeal banks all target a small level of inflation, such as the 2% target for the Fed: if money doesn’t become less valuable nobody will have any incentive to do anything economically productive.
That, of course, gets to the heart of the infinite growth issue with cancerous capitalism, but there is a theoretically consistent internal logic to it and why, without larger systemic changes, falling prices is worrying under the currently prevailing economic regime.
Sounds good in theory, but I don’t think that holds up in practice. For example, computers getting more affordable and powerful year by year didn’t stop people from buying them.
If the price is lower than the opportunity cost of NOT having it, people will buy it now, even if the product will be priced better next year.
And a large part of the price increases people are struggling with are food and housing. It’s not like you can wait till next year to eat or have a place to live.
Eat? No waiting. Live? Sure! If prices were consistently falling because of deflation, and you knew renting for a year would allow you to buy a larger house with the exact same amount of money you hand in your hand, most would do that and rent for a bit.
For buying a house, isn’t it kinda like the stock market (except way less liquid). Yeah, the prices may go down in a year but someone may swoop in and buy while you’re sitting on the sidelines trying to time the bottom.
A specific house may be bought up, but others will be available that are similar for substantially less in a deflationary market.
Which would put inflationary pressure on rental prices which in turn would put inflationary pressure on property prices, and we are back to square one.
You’re absolutely right. The average Joe does not approach buying stuff with any kind of investment theory.
In practice, deflation always leads to recession.
As to computers, the price didn’t go down, we just got more bang for our buck, different thing altogether.
It absolutely delay people buying. If you held out for 6 more months, you’d get a substantially faster computer. Thats the second variable you’re introducing with this example. If your current computer was “fast enough” you’d wait, and people did.
That describes most of my life, under Moore’s Law.
I handled it in the traditional way: I bought what I wanted, and then I immediately cussed about my shitty timing to my friends the next day.
This is my problem with economics. You’re talking about theory and practice as if they’re the same thing. All consumers do not make perfectly rational choices. Hell, most don’t. This kind of theory only explains how rich people want you to think things work. It’s not how things work in the real world.
Way back when, I used to sell computers and computer parts at retail. I assure you this was a regular conversation topic. “When is the Voodoo 4 graphics card coming out? 4 months? Okay I won’t buy the older Voodoo 3 now because I can make do with my Nvidia TNT2 until then.”
No they don’t, nor or do they need to if you’re taking a macro view.
Are you saying:
I disagree with the former, but I agree with you on the latter. None of that invalidates micro or macro economic theory.
Many rich people get rich because this works. They also play dirty tricks to create the situations, but then again in those situations the theory works.
I’ll be the first to say economic theory is far from perfect and the deeper you go, the more complex, and potentially less reliable, it gets, but the basics are pretty sound.
An upgrade for a non-essential item you already own might prompt some of these considerations from some people. The decision to buy that item in the first place usually won’t, especially when you’re talking about essential items like groceries and housing, which is what the article in the OP is referring to.
only if you have money to hold to start with
But even if we could get relief on inflation, the prices wouldn’t keep decreasing by large amounts forever, right? It’s not like cars would eventually cost negative money and they pay you to take them. At some point the expected savings from waiting aren’t enough to justify the pain of doing without the shiny new thing.
While I accept your point, I feel conditioned to interrupt here and clarify that I absolutely would download a car. There was some unexpected confusion about this, at one point.
Okay. Carry on. Thank you.