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Old 10-02-2010, 01:59 PM
 
Location: Los Angeles area
14,017 posts, read 18,919,177 times
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Not my take exactly, but that of many economists, but it makes sense to me. People who are struggling to get by might wish for deflation because that would make goods cheaper to buy. Almost everything would cost less - housing, cars, food, clothing, and on and on. But the other side of the coin is that salaries and wages would also be going down, so individual families would be unlikely to be better off on balance. In fact it would be harder to pay off debt or pay down debt with the lower wages and salaries. But there is worse, much worse. A deflationary cllimate makes businesses and industries reluctant to spend; they are waiting for their costs to come down even more. In other words, why spend now when it may be even cheaper in three months? (And consumers would adopt the same attitude). This acts as a giant brake on the economy. We are in a very slow, shaky recovery right now; deflation would likely derail it.

But there are some who would benefit. First, people with little or no debt and substantial cash savings. Even if interest rates were to fall to zero, the cash savings would be worth more and more (in purchasing power) with continuing deflation. Others who would benefit are retirees on a "fixed" income. Social Security provides a cost of living adjustment (COLA) for inflationary years but there is no provision for reducing benefits in deflationary years. Likewise for retirees on various other kinds of pensions.

I doubt if the OP will agree with me here, but I can only hope that I have been coherent enough to make sense.
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Old 10-02-2010, 02:41 PM
 
Location: San Diego California
6,797 posts, read 6,644,701 times
Reputation: 5180
Quote:
Originally Posted by subsound View Post
The basics are available in every introductory economics course found at any local University or Community College. For those who are broke, or simply do not have the algebra required to pass one of those classes, a very high level analysis and explanation is available here for no charge.

What astoundingly baffles me is that some one who does not understand the basics of deflation and inflation starts threads threatening gloom and doom about economic indicators (that apparently are not understood) on a daily basis. Even with high level logical steps provided at previous points in this thread to keep embarrassment of those who studied econ for general education a long time ago to a minimum (which explains this point quite well). Just my opinion though.
Seeing as the inflation/deflation debate is taking place nationwide all the way to the level of the Federal Reserve without agreement, it is good to know that you have all the answers.
The reason I asked for an explanation of your statement is that, as you just demonstrated by avoiding it, you can't because it is not true.
Bringing asset prices back into line with earnings would help many people including the younger people who are yet to buy their first home, but have been saddled with the debts of previous generations.
It would also benefit the financially responsible people who are not over their heads in debt.
The people it would not benefit are the people who are grossly in debt, and the people who have financed those debts.
But I guess the thought of rewarding responsible behavior and penalizing irresponsible behavior is not PC nowadays.
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Old 10-02-2010, 02:51 PM
 
Location: San Diego California
6,797 posts, read 6,644,701 times
Reputation: 5180
Quote:
Originally Posted by Escort Rider View Post
Not my take exactly, but that of many economists, but it makes sense to me. People who are struggling to get by might wish for deflation because that would make goods cheaper to buy. Almost everything would cost less - housing, cars, food, clothing, and on and on. But the other side of the coin is that salaries and wages would also be going down, so individual families would be unlikely to be better off on balance. In fact it would be harder to pay off debt or pay down debt with the lower wages and salaries. But there is worse, much worse. A deflationary cllimate makes businesses and industries reluctant to spend; they are waiting for their costs to come down even more. In other words, why spend now when it may be even cheaper in three months? (And consumers would adopt the same attitude). This acts as a giant brake on the economy. We are in a very slow, shaky recovery right now; deflation would likely derail it.

But there are some who would benefit. First, people with little or no debt and substantial cash savings. Even if interest rates were to fall to zero, the cash savings would be worth more and more (in purchasing power) with continuing deflation. Others who would benefit are retirees on a "fixed" income. Social Security provides a cost of living adjustment (COLA) for inflationary years but there is no provision for reducing benefits in deflationary years. Likewise for retirees on various other kinds of pensions.

I doubt if the OP will agree with me here, but I can only hope that I have been coherent enough to make sense.
Actually I agree with you almost 100%. The only thing I have to add is that we seem to be under the mistaken impression that we can stop deflation.
In fact, every thing we have gone thru up to now, and everything the Japanese have been going thru for 30 years tells us at best all we can do is slow the process while increasing the national debt exponentially. Like pulling off a bandage, some things are better done quickly. We will not avoid the pain of economic downturn, but we can reduce the amount time we go thru it. As life is measured in years, we need to consider how long we want the economic downturn to continue.
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Old 10-02-2010, 07:07 PM
 
Location: Portland, Oregon
7,090 posts, read 11,191,616 times
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Quote:
Originally Posted by jimhcom View Post
The reason I asked for an explanation of your statement is that, as you just demonstrated by avoiding it, you can't because it is not true
Obviously the 4 posts describing a logical sequence exactly what would happen (as well as additional resources) is avoiding the subject entirely. I have never witnessed anyone over the age of 6 stick their fingers in their ears, close their eyes, and yell "I can't hear you, so it's not true". I applaud you, I am so cynical and have such a dark sense of humor very few people stun me with their insanity.

What's the point in teaching people who can't learn?
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Old 10-03-2010, 01:18 PM
 
2,592 posts, read 4,873,690 times
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Deflation may bring wages down, but it would help with the people that are savers and don't spend above their means. I don't think deflation is many situations is as bad as many make it out to be. The Fed seems to have the opinion inflation is better than deflation. Many times in the deflationary economy, products become cheaper and people's purchasing power goes up. Even if they aren't making $60k a year, they don't need to.

The arguement that if we have deflation the economy would stall is ridiculous. Many products would become cheaper and people would be able to save more. If they save more than will then become investments to increase growth. The opposite thinking is true now, where many think you need to borrow and borrow to increase investments. People tend to invest when they have the money and can take the risk to do so. Borrowing money over and over again is not the way to productive growth.
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Old 10-03-2010, 01:32 PM
 
86,006 posts, read 83,522,039 times
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deflation is the worst thing that can happen. typically the consumer is ahead of the curve and deflation goes into a spiral death roll and typically the way it shakes out is , the more wages drop the less you buy the more costs drop the more wages are cut etc.. the price drops always lead to more wage cuts and job loses and there is no way out.


its not prices drop and your income stays the same so it balances out,its so far from that. with falling demand and prices goes jobs and your income.
unlike inflation where we can control rates and eventually kill inflation ,deflation is basically out of control and is very heard to reign in. japan deflated and its decades nw they canmt get out.

Last edited by mathjak107; 10-03-2010 at 01:46 PM..
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Old 10-03-2010, 01:51 PM
 
Location: Fairfield, CT
6,341 posts, read 9,321,433 times
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Quote:
Originally Posted by jimhcom View Post
For almost 3 decades we substituted debt for wage increases among the working class. The debt itself was perpetrated on artificial asset values in the equity and real estate markets. Meanwhile the wealthy are the only ones whose income was truly increasing. At some point this ponsie scheme does not work any more, the economy collapses because people cannot service their debts. The result is high unemployment that exasperates the situation. The problem cannot be solved without increasing wages for the working class, which is nearly impossible in an environment of high unemployment. Or the second solution would be for massive deflation to bring down prices to what the people can afford.
But on what items?

We have already had a sort of deflation in prices for many items. If these are imports, that's fine, but otherwise, deflation in the prices of goods and services also means reduced wages, so it's a bad cycle.

I think we need to deflate housing prices. Housing is not really an asset; houses are a financial liability that many people were tricked into thinking were an asset. In reality, housing is a huge expense and it is that huge expense that is burying many families financially. And the reality is that once you own a house, you don't really benefit from increases in its value legitimately. You can only 'benefit' from that short-term if you've been tricked into thinking you can 'unlock' the equity in your house by borrowing against it.

Lower home values will mean huge losses for banks, but I don't think we can avoid this. We've been trying to forestall it, but I don't think it will work over the long term.
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Old 10-03-2010, 02:04 PM
 
86,006 posts, read 83,522,039 times
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even deflating home prices can be a disaster beyond anything you can imagine. heres why:... a homeowner may owe the bank 200k on his loan and if he defaults the bank gets stuck for some dough. but thats not the end of the story .

you heard about cdo's or credit default swaps? well imagine going to a betting parlor and being able to bet 1 million bucks that that home owner will default. thats what a credit default swap is...

investors,banks and institutions the world over have created a derivitive to give investors away to bet on loans being repayed or defaulted on and winning big dollars...
nthere are clear cut winners and losers here and those billions of dollars have to come from somewhere.. if those institutions loose they loose big time.

it can be lehman all over again if we keep deflating much more... there are not only cdo's but cso's out there which are baskets of bets on various financial events happening that bet on baskets of cdo's.... its a monstor that can explode again ....

Last edited by mathjak107; 10-03-2010 at 02:30 PM..
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Old 10-03-2010, 02:08 PM
 
Location: Fairfield, CT
6,341 posts, read 9,321,433 times
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Quote:
Originally Posted by mathjak107 View Post
even deflating home prices can be a disaster beyond anything you can imagine. heres why:... a homeowner may owe the bank 200k on his loan and if he defaults the bank gets stuck for some dough. but thats not the end of the story .

you heard about cdo's or credit default swaps? well imagine going to a betting parlor and being able to bet 1 million bucks that that home owner will default. thats what a cdo is...

investors,banks and institutions the world over have created a derivitive to give investors away to bet bet on loaqns being repayed or defaulted on and winning big dollars...

there are clear cut winners and losers here and those billions of dollars have to come from somewhere.. if those institutions loose they loose big time.

it can be lehman all over again if we keep deflating much more... there are not only cdo's but cso's out there which are baskets of bets on various financial events happening that bet on baskets of cdo's.... its a monstor that can explode again ....
I imagine all that is why the government has been artificially propping up housing prices. But it may not be successful. The best we can do, IMO, is manage it as well as possible. I don't think we can hold it off.
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Old 10-03-2010, 02:14 PM
 
86,006 posts, read 83,522,039 times
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there is so much involved in the finances of the world and ramafications of doing things . its more then any of us even have a smidgeon of understanding about .that to even discuss a topic like this with all the knowledge of whats involved is just plain silly
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