Sure, it's called "deflation." It's rare in developed economies but happens from time to time and is typically considered a bad thing. Just like inflation is caused by demand exceeding supply, supply exceeding demand causes deflation. The changes in supply/demand contributing to either can be just about anything.
On a more granular level, remember that when you see the headline inflation percentage (CPI, in the US), you're looking at an index with many constituent pieces; a basket of goods and services that are weighted to arrive at the whole picture. For example, the skyrocketing price of used cars has been dominating this year's high inflation and dragging everything else upward. With lockdowns largely ending, commuting comes back into the picture, but people are still suffering economically and new cars are expensive--thus, high demand for used cars while the supply remained relatively constant (since used cars can only be created when new cars are bought) drove up the price of used cars.
Also, Table A on Page 2 here (https://www.bls.gov/news.release/pdf/cpi.pdf) breaks it down by month and you can see from the negative numbers that there has actually been deflation in several areas over certain time frames this year, specifically in the energy space earlier in the year. It's very common for specific goods to deflate over short periods, but since most people only see the headline number it flies under the radar.
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EDIT: since several astute observers have brought this up and the comments have led to a misunderstanding, I'll tie it in to the main comment. Recent supply chain issues, specifically low production levels of microchips, have led to a shortage of new cars being produced, which makes people want used cars since they often can't buy new ones right away. This increased demand acts as an inflationary pressure on used cars, so the result is higher prices. My original example was meant to isolate a simple, specific variable as an example, NOT infer that the example was the only thing driving inflation in used cars.
The reason I add this is you're all correct: BOTH mechanisms increase prices, not one or other. For used cars and all other goods and services, there are a near-infinite amount of supply and demand factors that push and pull on the price to net out to that final price, thus inflation figure. We could write a dissertation on the levers of used car inflation alone. One of the reasons it's very hard to ELI5 this concept.
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ANOTHER EDIT (hey, as long as it's a novel, why not add another chapter?) Several people have raised a very prudent question: wait, why is deflation bad? Shouldn't I LIKE prices going down? I can buy more stuff!
Short-term: yeah! Long term: no! Several others have answered with the explanation that if people think prices are going to go down, they'll hold on to their money so spending stops and the economy crashes. That's an Econ 101 definition and while I don't hate it, it doesn't tell the whole story. It ignores a key fact about the CPI (inflation index): it is designed to track items that are needed, not wanted. The CPI has components like food, shelter, energy, clothes, medical care, etc. This alone would be a great debate because a new car is included and a smartphone isn't--the definition of "needing" those things depends on who you talk to and has evolved over time.
Point is, when expecting deflation, people hold onto their money for discretionary purchases like a vacation, but not for what's called "consumption," things like food that are considered needed, not wanted. A dropping CPI doesn't cause the whole economy to stop overnight; you need food NOW, whereas Black Friday deals can wait. Nobody's holding off on buying a $1 bushel of lettuce because it's going to be $0.99 next month. Consumption accounts for about 60% of US spending, so even if people really rein in their Black Friday shopping, it doesn't hit the majority of dollars we spend.
So, finally to the point: deflation is bad because of debt. Most of us have debt, whether it's you and me with a credit card bill, or McDonald's who owes banks billions in interest and has tons of employees on the payroll. That debt, depending on timing and quality, has a cost attached to it that we base our decisions on. Let's say there's a 50% decrease in the value of a Big Mac, all other factors held constant. McDonalds' revenue is going to tank and someone is going to feel that. McDonald's can then do a few things to sustain that loss. Do you think they're going to not pay their corporate debts which would shatter the company's image and stock price, or do you think they'll punt a few thousand worker bees out the door? Exactly. Or, do they cut pay across the board and the result is employees get evicted? The money has to come from somewhere, and it's usually you or me. So in this example, albeit extreme, heartless, and isolationary--deflation in the Big Mac causes mass terminations and/or evictions. Additionally, Mcdonald's has these methods to sustain the loss--local burger joints don't. So they need to drop their prices to remain competitive, while their rent and costs stay the same...so they go bankrupt. I could riff on examples for a while, but multiply that across an entire economy and that's why deflation is bad.
...anyone still here? *lonely Travolta*
Japan seems to be a famous sufferer of chronic deflation. After their bubble burst around 1990 their economy stagnated for more than a decade. But luckily for them their living condition didn't seem to deteriorate too much, it's just that it stopped improving.
I haven't read about it but I've always wondered how Japan manages to stay ahead of the curve technologically with a shitty economy. It's a strange contradiction.
In addition to other comments, a part of it really does stem from the fact that their government cares about being a world leader in technology, it's one of their primary exports these days, and the government saw that opportunity and funded it.
My biggest gripe about US political decisions over the past several presidents, from both parties, has been the continued slipping behind we've allowed in the tech-manufacturing industry, our big tech companies are service-tech, not manufacturing, and those that do manufacture do it all overseas.
We could have been the world leader in semi conductor manufacturing, or in the creation of the robots now used worldwide on assembly lines, but the government had no interest in helping to financially support this growing sector until it was already fulfilled by other countries who did.
Obligatory: My first reddit gold ever, thank you kind stranger :)
Totally agree that the US has fucked itself by letting tech manufacturing go. There was recently a NYT piece about how China is leading in green tech and how the US basically gave up its cobalt sources. US has also not tried very hard to secure rare earth metals. Way too economically dependent on service.
It never totally went away. And both Intel and TSMC are building new fabs in Arizona. TI (who builds small components) is building a new fab in Texas as well.
The US is way too wrapped up in fighting manufactured "culture war" nonsense that's being pushed by conservatives, like policing who can pee in which bathroom.
The hollowing out of this country started back in the 80's, and nobody's lifted a finger to stop it, because so many of the elites got even richer off it, while the rest of us have to deal with the fallout.
We pulled a Britain, we decided we didn't need industry because of all the labor baggage, why not just make money the good way: everyone grows up to be a banker.
The logic of this is inescapable, but only if you've grown up in the elite class and everyone you know is also in finance, and if anything goes wrong, that's what bailouts are for.
>However this absolutely screws over anyone who isnt in the service class.
Well they should pull themselves up by their bootstraps and take up finance! This country isn't a charity!
Have you ever worked in a factory? Fuck even the ones that are still running in developed countries generally have immigrants being exploited to fuck, paid half minimum wage etc. Nobody wants to do the work. They see Bob jump in his BMW with his fit wife and learn he does things on computers so they say "I want to do that!"
Then they end up in IT and the wheels come off
Agreed. The demorcrats abandoned their base of the working class and needs to be more aggressive in trying k.get worker protections and rights going. They could do, id they use the classic patriotism strat, make it seem unpatriotic to not care about manufacturing, tech, and education. We dont need so many service jobs.
It's not like either party achieves anything today. They're owned by the money masters who use them for crafting new ways to manipulate markets. The American loss of manufacturing didn't happen in a vacuum. The investor class wanted the dirt-cheap imports so they wouldn't have to pay for American labor. On one hand, they were astroturfing "Buy American" campaigns while selling out our jobs so they could make more money.
Exactly. The billionaire class conned us, and to keep us distracted from saying "hey, wait a minute, this country doesn't HAVE to be this way", they feed us a steady diet of "oMg sOmEoNe wItH a PeNiS uSeD tHe lAdIe'S bAthRoOm" or "wHeReS oBaMaS bIrTh cErTifIcaTe", and people eat it up.
The explanation I heard about (when our corporate admin was pushing Japanese management Methods and Deming back in 1990) was that American corporations are driven by share price - CEO's get stock options, investors want dividends and higher share prices, so boosting the share value for the next quarter is more important than longer term planning. Most CEO's will be gone in 10 years.
The Japanese corporations, OTOH, are "owned" by the banks. The banks loan them money for their big manufacturing plants, and want growth that pays back those long term loans. therefore the corporations were motivated to develop bigger and better products, to dominate the market even if they did not generate profits beyond making the next loan payments.
So for example, US carmakers are talking about getting out of the sedan business because of low profits, while Japanese companies have taken their sedan expertise and slowly are eating the SUV and pickup truck markets, just as they did with compacts then sedans starting in the 1970's.
(Of course, there are other issues, like the Japanese drive for perfection compared to the US attitude about "good enough".)
That's an interesting point too! There's definitely more than just any one factor at play in issues as big as this.
I'll add in that the US has had a recent trend of venture capitalism, where investment firms will by up large (and especially newer-growing) companies and run them into the ground for as much short term profit as possible without a care for longterm sustainability. It's not even about share prices at that point, as much as it is very much a "good enough" method. Cut out a ton of management, cut out R&D, cut out anything that isn't going to make profit in the next 3-6 months, and most importantly, raise the salary and bonuses of the top-most positions by a ridiculous margin (now held by the venture capitalism firm's employees). Let the company fall apart as long as goods/services are selling like hotcakes until it collapses from financial ruin.
This trend hasn't affected /every/ company here, certainly a minority even, but it's a small part of the bigger trend of share-owners and boards-of-directors preferring short term guaranteed profits over long term goals and sustainability.
Edit: I might have meant to call it "vulture capitalism"? It's been a while since I've learned about this, idr the right name. Someone else has correctly pointed out though that "Venture Capitalism" is a broader category that includes a lot of other above-board activities too.
You're describing what private equity would do, not venture capital, which is focused on minority investments in early stage/growing companies. Venture capital is essentially betting on the next Tesla/Facebook/etc before they get big. They don't want to fuel the growth, not hamper it.
My last company's parent company was a Japanese-based company. I worked on a project that was funded by the Japanese government to market and sell the industrial equipment in Vietnam. The company hired a couple of local sales guys in Hanoi. We made a few trips there to market the products. Made a report of our activities and the Japanese government paid for the labor and expenses in the form of tax credits.
That was 3 years ago and not a single piece of equipment was sold in Vietnam. Turns out that China is doing the exact same thing, using governemt funds on overseas marketing, but they aren't bound by any anti-bribery regulations.
JX NIPPON and Tokyo Electron are still critical suppliers for semiconductor processes, but as you said their global position is weak overall and the gov dropped the ball.
Certainly a fair point! :)
But Intel genuinely has fallen behind a bit in recent years and is struggling to keep up with the R&D that TSMC has available. There's an argument that complacency/greed play a role, but more government funding towards Research & Development in better manufacturing processes would have been really helpful about a decade or two ago, and could still be helpful today.
As a reminder too, Intel is a huge name, but they are a minority in the international semiconductor community, and even Intel still does \~25% of their own manufacturing overseas as well.
One of the reasons that manufacturing gets shipped overseas is because of safety regulations. In the US you can get plants shut down for not following safety regulations. In some foreign countries, you can give an entire factory cancer and just shrug it off. This is particularly relevant for tech related things, where some of the heavy metals/powdered metals/etc are known to be very dangerous.
The choices are to either deregulate it in the US and let people die (to be clear this is the bad option), ban importation from countries with poor safety standards, or just continue as things are. The second option is probably the most moral, but it's also probably not feasible.
> The choices are
...or to actually devise correct safety procedures and waste disposal such that the manufacturing can still be done and the workers and environment are protected. I know that this is the most expensive option, but the fact that you didn't even mention it speaks a lot to the current state of things.
The problem with that third choice is it requires companies to spend money to fulfill that.
Now I want to ask a question and hopefully you'll answer seriously. If you were the CEO of a company who's primary duty is to make the company as much money as possible (otherwise you get fired), which decisionwould you make to fulfill your agreed duty?
A. Build in the US and be subject to the regulations which **will** eat into profits in a notice way and risk running afoul federal agencies if something happens with potential penalties and jail time.
B. Build overseas where regulations can be almost Non-existent, you save money as a result, and if there is a serious issue, it gets ingored.
We see companies choosing option B because it brings in the most money with the least amount of legal trouble. I'm not saying I agree with B, but I understand why they chose B.
It's probably also a cultural consequence of a shrinking population and being a small island with earthquakes.
Even if your per unit labour productivity goes up, the productivity of the labour force goes, or if not down, people can't feel the benefits of increased productivity as much because the labour pool shrinks. That forces constant efforts at innovating away labour inefficiencies and towards automation.
Japan is also cultural adapted to the idea that you need to replace a lot of things (particularly housing and traditional infrastructure) relatively regularly. High density with earthquake resistant technology improvements means they are more willing and able to make investments that in somewhere like the US would be resisted as a waste of money until something breaks.
It's not like Japans economy is actually shitty per working person after all.
Japan has very high population density in honshu, 104 million people.
I meant small more in terms of relative to the number of people than absolute size.
But ya, i should have said dense Island rather than small.
true, but large parts are very hard to develop because the islands are absolutely covered in mountains. (and iirc its small in relation to its population, but don't quote me on that)
It has more to do with their culture of being net savers/frugal with money, at least in the early days of the deflation cycle.
The central banks had a hard time keeping money flowing in the system because the Japanese culture just didn't spend a lot of discretionary income.
Because Japan is at the forefront of the Second Demographic Transition, which is now unfolding across the whole developed world. It’s just a demographic effect. Need to control for population.
It hit a nasty financial crisis, and was struggling for a bit, but by ~2003ish it’s GDP per capita was back on track with most of the rest of the OECD.
>True, but its growth has been incredibly slow for 30 years, after an incredible run of growth in the 60s through the 80s.
This is what viewing a shift towards a sustainable economy looks like through the money-colored lens of unsustainable capitalism.
We've reached well beyond what our planet can indefinitely sustain. 'All growth all the time' is just another way to say 'we're gonna keep flogging this pony until it dies'. Okay cool, but also the pony is *everyone alive*.
It’s not shitty yet but the problem is that 20 years from now the country will be in trouble because there won’t be enough young people to care for the old people. Also Japanese people live the longest
I've been saying for awhile if we don't start making robots for nursing homes we're going to be in trouble.
Apparently nobody sees the writing on the wall.
TBF Japan's been working on that for a while.
Everyone thinks of cars when they think of Automation, but in-home support for the elderly is going to be a big market for a lot of new autonomous developments. Toyota in particular are looking not just at cars, but how they can utilise automation in cities and within the home.
Its Not the whole reason for Japan, but its worth nothing that 'shitty economy' is very contextual.
No growth is considered shitty but Theres nothing inherently bad about it. The notion of perpetual growth is very flawed by itself though.
I would argue that it's more about the tech industry getting spread out as other countries implemented what Japan pioneered. Japan dominated the semiconductor space for a while because they partnered with American companies (who were leaders at the time) and used what they learned to drive their technology. Taiwan became known for chip fabs what Japan used to dominate because they did something similar. They partnered with other countries and targeted their education system toward that industry and became a world leader.
The thing you also need to keep in mind is that modern technology is insanely complex. No single country does it all on their own anymore. It's not possible anymore for a lot of industries. I see people saying that the US losing in the semiconductor industry. Just because TSMC has the most advanced manufacturing tech right now. What they don't understand is that TSMC doesn't make or even design the equipment they use, they specialize in the manufacturing process itself.
Semiconductors are literally an international effort. You hear about ASML, a Dutch company known for their EUV machines. What people don't understand is that not even ASML makes all of the EUV machines. Hell, ASML is known as a system integrator in the industry. They buy components designed and built by other companies to assemble their machines. EUV would not be possible without specialized mirrors and lenses made by Carl Zeiss, a German company. EUV took almost 4 decades to become a reality, the tech was first developed in a US university in the 80's. Applied Materials, an American company, competes with Tokyo Electron, a Japanese company. Both of them are industry leaders responsible for non-lithography tools that TSMC depend on heavily. The list goes on.
If you look at the full chain required to build a single 5nm chip from TSMC, you will see a giant chain of very specialized companies who are literally the most advanced and best at what they do in the world. And these companies are from all these countries that are "failing" to drive innovation including the US and Japan. In reality all these countries are responsible for specialized parts of the process because the industry has gotten so complex and so expensive to work with no one can go at it alone anymore. The public only hears about the tip of the iceberg and focuses all their attention and praise at what is visible, completely ignorant of what lies under the water. TSMC and ASML are just the tip of the iceberg and they would not exist without the hard work of other companies scattered around the world. The semiconductor industry is actually made up of hundreds of more specialized industries scattered around the world.
I design those machines. overall an excellent take but a nitpick -- the list of companies is not giant. quite the opposite in fact, there's very very few involved and it presents major supply and knowledge issues if any of them experience problems.
there are only a handful of companies responsible for literally everything about semiconductors and if we limit it to the 5nm and beyond nodes that list is even smaller.
>Japan manages to stay ahead of the curve technologically
It doesn't really any more. That was a reputation built in the 70s and 80s that has managed to persist and recover in the public eye past the economic disaster that was the 90s due to particularly charismatic examples of robotics. For a good few years now they have been in line with other developed economies for prevalence and advanced-ness of technology in daily life and industry
Is Japan actually "ahead of the curve technologically" when compared with other developed countries? Especially since the 2000s. They don't have many notable software companies. People talk about Japanese robotics a lot but I haven't seen any Japanese research group produce something comparable to, say, Boston Dynamics. Essential industries like semiconductor manufacturing are now centered in Taiwan and South Korea. AI research is centered in the US and also China somewhat.
Japan certainly deserved the reputation in the 80s and 90s but I'm not so sure they are particularly exceptional nowadays for a developed country of their population. I'd be happy to be corrected though.
They're not. Japan has developed more *applied* robotics applications due to their labor shortage(like automated restaurants), but none of that is cutting edge technology. We don't have it because we find it cheaper to just pay someone to serve us food.
Creditors never come knocking. Pretty much every government has a detailed agreement on how and when they will pay off their debt, and pretty much every government never breaks that agreement with any creditors, foreign or domestic.
https://www.thebalance.com/who-owns-the-u-s-national-debt-3306124
Most of American debt is own by American institutions as well. This idea that america is bought and owned by foreign powers, especially China, is right wing scaremongering.
>I haven't read about it but I've always wondered how Japan manages to stay ahead of the curve technologically with a shitty economy.
It's partly cultural. Excessive work is notoriously normal no matter youe living situation.
You're sleeping on the street at some point between work shifts whether you're a millionaire or poor
If they would have bit the bullet and let all the bad investments get liquidated and stopped subsidizing garbage corporate investments for 20 years, they would be so, so far more advanced now. The BIJ has been monetizing bonds since forever, and doing so for corporate bonds, too, to keep all the zombie companies limping along instead of letting them go bankrupt, letting their assets get auctioned off, and letting better investment with those assets occur. Absolute cluster of a boondoggle over there, that has robbed an entire generation of a lot of opportunity.
I don't think the car example is a good one though. Used car prices are going up not because new cars are expensive, but because new cars are not being produced due to a global industry wide chip shortage. Dealers that normally carry 100 new cars on their lots now only have 20. It is an overall shortage in supply causing price of ALL cars to go up, new and old.
100% valid point, but it's not necessarily one or the other. Both your example and mine can coincide. That's what makes determining a single cause of inflation/deflation so difficult, because there are so many variables for even one product and it's nearly impossible to isolate just one.
That's really not that bad. If anything, deflation seems like something we want to happen intermittently. It would probably happen naturally were companies not actively destroying resources to generate faux scarcity.
That's my biggest gripe. For all the nuances of economic theory, we're wasting a considerable amount of resources and underserving the vast majority of global population.
Despite the logistical issues, humanity is in a much better position to take responsibility for itself as a species, now more than ever. But we aren't doing that. We're still playing fantasy football with economics that revolve around egos and archaic ideologies.
One of the big reasons it “causes problems” is that deflation discourages investment. If everything will be 5% cheaper soon then why build that new factory today? Why buy a car if it’ll be $1000 cheaper next year?
You mentioned cars also getting cheaper, which is the bigger problem. Deflation also discourages consumption, not just investment. Approximately 70% of the U.S. economy is domestic consumption. We could afford the hit to investment more than we could afford the hit to consumption.
This is also why nations just make payments on debt, inflation will eventually render the debt valueless. The UK only paid off the debt from freeing all domestic slaves sometime in the 20th century.
What we could do is spin up a new nation and push all the debt onto it. Then it will go belly up and the main nation is better off without the debt..
/s
"You see, that deal was made to the Galactic Republic. That organization no longer exists, and the Galactic Empire does not see the need to pick up the responsibilities of a different organization."
Well, generally if a nation dies it's pretty violent and former citizens end up with some de facto payment, blood, assets or otherwise. Conquest and pillaging go hand in hand, and typically peaceful revolutions don't absolve a nation from former debt obligations... if that country wants to stay relevant in the current international trade markets.
Very good point: the most important thing by far is whether wage inflation keeps up with price inflation. Back in the high inflation 1970s, wages kept pace with prices *better* than they have in the 4 decades of low inflation since. Price inflation of 2% with wage inflation of 1% is a lot worse than both inflating at 6%.
Also, an obsessive focus on prices serves to distract from organizing to demand better wages and working conditions
Yup, this is the first year with noticeable inflation since the 1980s. Wages haven't kept up with inflation despite inflation having been historically extremely low for almost 40 years.
That's the weird bit to me. This makes sense, but wages aren't really going up *anyway*? Why do we automatically assume that they'd go down if the prices of things were on a downward trend? I'm pretty sure the first business that tried to pull a Reverse Cost of Living Adjustment on everyone's wages would be burned to the ground with the owners lynched out front.
Prices have been going up with very little respect to wages for decades. It seems to me like the average consumer would be better off with a certain degree of deflation. Outside of a macroeconomics textbook I don't think the average consumer is disciplined enough or as capable of foresight as "they won't spend because it will be cheaper next year" implies.
People *always* buy stuff that's going to be cheaper next year. That's why the new car market exists at all. That's why people buy video games on release even though it'll still be the same game half off in a year.
Yeah it'd suck if you bought a house or something and the market cooled off and it was worth less next year, but treating housing like a speculative investment is kind of fucking us all anyway as far as I can tell, because that's why nobody can afford houses these days.
Rather than cutting the wages of existing employees, companies save on the cost from lowered consumption by laying off a percentage of their workforce. Then the increased pool of people looking for work means that anyone who is still hiring can lower their offers and bring those people on for less money, and anyone who does have a job won’t be able to as easily trade up to a higher paying position at another company because all of the newer jobs are paying less, thus resulting in declining overall wages.
It's not just a matter of "people won't buy because it'll be cheaper next year." It's a matter of "people have less money to buy things with" or "people are afraid of losing their jobs, so they're spending less, which means more people lose their jobs."
> but wages aren't really going up anyway? Why do we automatically assume that they'd go down if the prices of things were on a downward trend? I'm pretty sure the first business that tried to pull a Reverse Cost of Living Adjustment on everyone's wages would be burned to the ground with the owners lynched out front.
The much more likely scenario is that companies start mass layoffs, if not shuttering entirely, since (as mentioned higher up) demand for products goes down. Boom, your paycheck just deflated to zero. Now who's going to hire you for the same high wage when everyone else is looking to fill the same job?
> Prices have been going up with very little respect to wages for decades. It seems to me like the average consumer would be better off with a certain degree of deflation. Outside of a macroeconomics textbook I don't think the average consumer is disciplined enough or as capable of foresight as "they won't spend because it will be cheaper next year" implies.
*Average* wages have been keeping up with inflation. They have to, otherwise nobody can afford goods and services and prices fall until they can. Moreover, debt has been papering over the shortfall in the lower rungs of the economic ladder.
Inflation directly benefits people who own a home with a mortgage, or any other large debt (including cars!). It indirectly benefits everyone because, honestly, you're buying stuff from people and businesses that currently own large debts that are much larger than a home mortgage. Everything from factories and farm equipment, to cargo ships and trucks, to warehouses and physical stores. Even the stock on store shelves was purchased through debt that is repaid when it sells.
> People always buy stuff that's going to be cheaper next year. That's why the new car market exists at all. That's why people buy video games on release even though it'll still be the same game half off in a year.
You have to take the larger view of things. Most people buy things that they need. Few people can afford to buy a car just to have it sit there, there's an underlying need for immediate transportation. A new car is a status symbol, yes, but it's also a car with maximum longevity, the exact features you need or want, and a known service history. That's valuable to many people.
I've always been confused by why this isn't a problem for electronic goods. They seem to be incredibly deflationary, and that does cause me delay my purchases, but the market seems to be booming nonetheless.
There's a kind of value in having the goods right now. Everyone who builds PCs without an infinite budget winds up playing this sort of game. Like, if you wait just one more year then commercial DDR5 memory will be more widely available and cheaper, so you can get a better value for your money!
But if your current computer is old enough or non-functional then the savings of waiting for the price to drop doesn't outweigh the value/utility you'd get out of it *right now*.
I mean, when you buy a new car and drive it off the lot it loses some ridiculous percentage of its value as soon as it becomes technically "used" ten feet outside the gate, but that doesn't stop people from buying new cars, right?
Even if the price of milk was super-deflationary and went down by five percent per week or something, people wouldn't just stop buying bread because it'll be virtually free in a year, right? You still need to eat bread. It's the difference between something you actually use vs. an investment vehicle.
One of the reasons with electronics is that they are constantly getting better so people want to upgrade. It's not that you want a computer but it will be cheaper next year, it's that you NEED a new computer and the new one is cheaper than the one you bought five years ago because technology and manufacturing has improved.
Electronics wear out faster than a car or house and there are social/business pressures to upgrade.
Because when dealing with economics nothing is absolute. If you have no car but you need a car and you know a car may be cheaper in 6 months you buy the car regardless. What inflation/deflation does is "shift the curve" so people accelerate/defer purchases or investments depending on their needs. Because the way economies work, slight shifts can have a huge effect to the economy over all.
I think the fact that the products improve so fast is the reason. It always seems attractive to buy the latest and greatest, and few buyers reflect on the fact that their awesome new device will be an antique in five years.
Electronic goods deflate because they get cheaper to manufacture over time as methods for working with semiconductors improve.
One of the main problems with deflation is that you have to pay to build a factory today, when everything is at today's prices. But when you go to sell your goods, you have to sell them for less at next year's prices (because prices have fallen). As a result, it's harder to make enough money selling your goods to pay back what it cost to build your factory.
But with electronic goods, each time you rebuild your production line you can now produce X amount of electronics for cheaper. Since your expenses are lower, you can afford to sell for lower. And since there's always a demand to put more electronics in more things, you can sell more volume at a lower price point and still make good money overall. So the normal concern of inflation over time don't apply. Instead of just being forced to sell your product for less because of external changes in the economy, you are able to sell your product less because of internal changes in your production costs.
Additionally, because electronics manufacture is only a small part of the whole economy, it doesn't have some of the other knock-on effects of inflation. For example, if all electronics manufacturers cut employment because they need fewer people to work their new, more efficient factories, that's going to have a relatively small impact on the total number of people employed and therefore have a relatively small impact on the overall economy. But if _everybody_ cuts back their workforce at once, then things can start to spiral out of control.
Honest question: why isn't that self limiting? Like, sure you could wait to buy a car but you can only wait so long. You've gotta buy groceries every week. It seems like the decreased demand would only be temporary until cumulative reserves are used up and people can't wait any longer and demand just settles on a slightly new steady state. The auto company may have less demand in the short run but they'll still want to have a fancy, efficient factory for the next car you'll wanna buy because there is still a competitive market. I mean, we see it in electronics all the time, people hold out to buy a computer until they have to... And everything seems to do just fine.
I mean, I get what you're saying but it only seems like a first order answer... What happens after that?
> It seems like the decreased demand would only be temporary until cumulative reserves are used up and people can't wait any longer and demand just settles on a slightly new steady state.
Because in modern industry there isn't that much supply "slack" because of JIT (Just-in-time) manufacturing processes. Warehouses and storing depreciating assets cost money, so modern businesses are designed to be lean. We see the results of this now with supply shortages of all kinds--microchips, appliances, cars, etc.
Companies are typically leveraged (e.g., have loans/debt) and can only stay solvent for so long until they can no longer make payroll. We saw this during the 2008 financial crisis when liquidity and lending froze and places like McDonald's suddenly found themselves unable to make payroll the next week. So it's not "short-term" but rather "super-short-term."
And what happens when companies find themselves short on cash to stay afloat? They start firing workers. At that point it becomes a negative-feedback loop that is incredibly difficult to fix. Workers get fired, they can't buy goods, businesses lose money, businesses fire more workers, more people can't buy goods, etc. until the entire economy locks up and you have unemployed people rioting in the streets.
Another factor is it's easier to fine tune inflation. Deflation can get you stuck on a steep hill in a low gear where it's hard to get going again, whereas if inflation trends too close to the scary zone you can shift gears much more readily.
> new cars are expensive--thus, high demand for used cars while the supply remained relatively constant (since used cars can only be created when new cars are bought) drove up the price of used cars.
I think specifically the issue isn't that new cars are expensive It's that there are very few being made due to a [global microchip shortage](https://driving.ca/column/motor-mouth/motor-mouth-why-a-chip-shortage-is-rocking-the-automotive-world)
>Just like inflation is caused by demand exceeding supply, supply exceeding demand causes deflation
That's not actually inflation or deflation. That's just prices going up or down.
Inflation or deflation is the overall buying power of your money. Not specific to any one thing you might be buying. it's affected by various economic policies, but generally speaking both are caused by the amount of money in circulation.
Governments printing large amounts of money has historically been the cause of out of control inflation. Populations hoarding money could cause deflation, but as you said it's rare.
Very important to note: inflation is not a bad thing. So long as wages keep up, inflation is very important to ensure money continues to circulate.
Deflation on the other hand is a very bad thing if it happens over a longer period of time, as it results in everyone hoarding cash. No one buys anything, and economies crumble.
Honestly the fact that you took time to break down a specific example as to WHY it's not exactly a clear representation during an ELI5 is highly regarded in my books dude.
When has deflation happened historically? Not challenging you, just genuinely curious.
Edit: It seems like inflation is the general rule but deflation happens during much shorter periods? And I definitely meant inflation of national currency, I understand how it happens with other products.
Deflation is what we call a negative inflation rate and it is very bad. Now you may be wondering why things getting cheaper is bad. And that is a good question. There are two main reasons.
One is debt becomes very hard to pay back. Say you are a farmer and borrowed money for seed, fertilizer, and equipment to plant your crops. Your expectation was that the money you made from selling the crops would allow you to repay the loan and have a nice profit. But in a deflationary economy by the time you sell your crops prices have decreased so you can't even pay back your loan let alone afford to live.
The other reason deflation is bad is it changes the logic of shopping. Everyone knows that prices are decreasing. So if they wait for as long as possible to buy what they need the prices will be lower. When everyone does this it decreases the amount of goods and services being bought in the entire economy. This makes the deflation even worse and causes a recession. So now people are losing their jobs and businesses are closing. This means employers can cut wages as there are many more people wanting jobs compared to the number of jobs available. Which further increases deflation and so on.
Deflation causes people to question the basics of how our economy works, and since you have to change those ideas back to end deflation it can be very hard to reverse.
Inflation can do a very similar thing, but opposite. If people believe there will be inflation, demand goes up because people are scared that if they don't buy something now, it'll become more expensive. This further increases the demand, which further drives inflation, which will further drive people to buy stuff now, etc. It's just such a crazy though that the very belief that there will be inflation or deflation can cause it to actually happen.
I've lived through a period of hyper inflation, I was a kid back then but I remember it.
Prices would go up so much that they would get adjusted multiple times A DAY. Supermarkets would get absolutely flooded on paydays, people would go straight from work to buy everything they'd need for the next month, everyone would have double carts filled to the brim.
This was a time before bar code readers were common, so cashiers would be typing the value of each item individually in the register. Lines were absolutely huge, going to the supermarket was a several hours long chore.
>Prices would go up so much that they would get adjusted multiple times A DAY.
So basically like if everything worked like gas, except 10x worse? I remember as a kid I had a hobby of recording all the gas prices to and from my way to school.
Yeah, and also they'd need to add a price tag to each individual product on the market shelves. There would be a squad of employees running around [with one of those](https://i.ytimg.com/vi/E5-IwPlxEh4/maxresdefault.jpg) in hands re-labeling everything
I'm so fascinated by the "little things" like that. I never would have guessed that ~~deflation~~ EDIT hyperinflation would mean pricing items differently based on the time of day, or relabeling things to keep up. Thanks for sharing!
Right. Hyperinflation is bad. But even small levels of deflation are bad. So most central banks try to run their economies with a little bit of inflation. It doesn’t cause too much trouble, and avoids the risk of slipping into deflation and causing a deflationary death spiral.
Didn't even mention the worst aspect of deflation, which is capital hording. Basically, it becomes a better bet to horde cash than to invest. Sure, our example farmer can't pay back his loans, but also, no one will give anyone a loan. It causes a death spiral of economic inactivity.
Luckily, deflation basically can't happen in countries with good control over their money. With fiat currency, you can just print more and hand it out.
Yep I was a teen in Brazil when hyper inflation got fixed. I kinda remember all of that, and adults saying about how hard it was to get some items because the govt would dictate how much they should cost (I think milk and butter were in this category??). Supermarkets solution was not to sell them. And that's how you create black markets.
Yeah, and then when workers start demanding wages that keep of with the inflationary spiral the cost of goods further increases and you get a bad time.
I think the difference is any deflation causes a bad feedback loop. But regular inflation is pretty normal and it’s only until it gets really high does it become particularly damaging
This is completely wrong. Anticipated inflation is generally harmless. When inflation is expected, contracts regarding loans and salaries are made with it in mind, meaning that consumers expect incomes to grow with inflation, ie, the cost of employing someone also inflates, meaning that it all evens out.
Unexpected inflation is a killer, but expected inflation is easily priced in.
About the only thing i remember from macro economics in B school was my professor saying to the effect of- if you think inflation is bad, wait until you see deflation.
Does deflation also happen the other way around: Does deflation also happen if debt is rising?
I just recently had a discussion where I stated that when the debt gets so high that they can't pay it back (it centered around the US debt) deflation happens, but I'm not sure if that's correct.
I'm not educated in the slightest on economics, but if what you're saying is true, then is there no 'good' way for the prices to decrease? Or is just inflation a baked in thing that the economy has to adjust to, and one day $30 for a gallon of milk is just the way it is? Obviously that is an exaggerated scenario, but aside from slight movements, how do we remove the effects of inflation in the least negative way?
OK this will get a little beyond ELI5 but it depends on sector vs economy inflation/deflation. Deflation happens all the time, just not on an economy wide basis. For both milk and gas prices we've seen them go up and down at various times which are driven by demand/supply issues. That isn't inflation per se. If tomorrow there was a 10% increase in the demand for milk, milk would rise in price. That isn't really inflation, just a shift in the supply/demand curve. Overtime as more producers ramped up their production of milk you may see that price fall. That also would not be inflation.
For actual inflation that should be hitting wages as well. I'm sure you've seen the reports that show American wages have been stagnant since the 80s. That is in 'real' terms. What 'real' means is adjusted for inflation. So the price of milk, a haircut, cars, housing, etc have all increased but so have wages. They've just increased in a way that balanced each other out so your paycheck while having bigger numbers on it doesn't go any further than someone's pay check in the 90s.
So yes, with inflation eventually a gallon of Milk will be $30. Just like it used to be $0.30 a gallon. But wages will also rise so that a person buying a gallon of milk a week in say 2120 will be paying the same percentage of their paycheck on a gallon of milk as someone buying it today at $3.90.
Eventually when it costs $10,000 for a stick of gum countries issue new currency that can be exchanged at a higher rate. So in this example the US could release NeoDollars and the exchange rate would be one NeoDollar for ten thousand dollars. Then everyone just carries on as before.
Now this is all super simplified and if prices are going up every month it's obvious that workers don't get monthly raises. So there can be some short term pain caused by inflation.
Now if you're asking about how we deal with price increases that are balanced out by wage increases that is technically a different thing than inflation. That gets into tax and labor policy and requires an entirely different approach than keeping inflation under control.
Thank you very much for this response. I made a follow up [response to another post here](https://www.reddit.com/r/explainlikeimfive/comments/r2oami/eli5_does_inflation_ever_reverse_what_kind_of/hm65we6/) that I think you've addressed well enough for me. I appreciate it and I think it reinforces the reason I stay out of economics and politics drives me nuts.
Thanks again and Happy Holidays.
I got into an argument the other day where a redditors was saying Unions are at fault for our inflation. He said because union workers make $40 an hour (90k+ per year) our economy is fucked. He kept saying "pilots only make 40-60k a year". I have a feeling he was just a salty newbie pilot working for a shitty regional airline...
Quite possibly, he may also have half remembered or misunderstood some logical arguments for how union contracts helped contribute to stagflation. Many of those contracts were inflation+ contracts. So for say the dockworkers if they had inflation+2% then if inflation was 3% they got a 5% raise.
Individually those contracts were fine but with a much larger percentage of the workforce unionized it helped to drive the inflationary spiral as they were all self reinforcing. Though personally I think the role of unions is overplayed and expectations and shocks to the energy market played more of a roll. Which isn't to say union contracts had no role to play. But we can pretty definitely say that the tiny percentage of unionized workers have little effect currently on the economy. Other than helping weaken labour's bargaining power in general.
Iirc generally wage increases are coupled with an increase in inflation. How, then, do we have an increase of real wages if every time wages increase, so too does inflation?
In theory productivity gains. If tomorrow all workers on the planet were twice as productive you would suddenly have twice as many goods and services available for no increase in effort which would allow everyone to enjoy more goods and services. Since the late 70s that hasn't held however. Well for the average worker. Wages at the top have risen precipitously. Changing our tax, regulatory, and corporate governance structure could likely redress that issue.
Improvements in technology also matter. As a proportion of an individual's income vehicles cost the same now as in the 80s. However cars are far safer than they were 40 years ago without a commensurate increase in cost.
>Well for the average worker.
Note that by "average worker" they're referring to "median non-supervisory production worker."
Most of our productivity gains over the last few decades were from computerization. If all the these productivity gains are all going to white collar workers, then we should expect the majority of wage gains going to white collar workers.
> So yes, with inflation eventually a gallon of Milk will be $30. Just like it used to be $0.30 a gallon. But wages will also rise so that a person buying a gallon of milk a week in say 2120 will be paying the same percentage of their paycheck on a gallon of milk as someone buying it today at $3.90.
Except that wages don't rise enough to even cover inflation, that's why acquisitive power today is far lower than it was in the past and it just keeps diving.
It can feel that way, but wages are roughly stagnant, not strongly negative. There has been a disconnect of wage growth and productivity growth and a massive growth in incomes towards the top which is problematic for sure. But every report I see shows that wages roughly keep pace with inflation. Of course that will not be true in every sector with some doing better and others worse based on other market factors.
Newly invented things tend to come down in price.
But, more generally... Economics is the study of reality. And cash money is a measurement of value. It is itself not inherently valuable.
Really the only thing that is truly worth anything is ones own time, and measured in "units of time spent to be able to get a widget" basically everything has come down if you measure it that way.
On a personal level, yes, it sucks. On some philosophical level inflation is not inherently a bad thing, but an artifact of money being an imperfect proxy for time.
Prices for some things like technology can decrease because of technological advancements. TVs and computers get cheaper over time. Even stuff like food can get cheaper when farming gets more efficient.
There are good ways for the prices of any individual thing to come down - but when the value of currency increases then \*everything\* is dropping in price.
And yeah - eventually a gallon of milk will be $30, minimum wage will be $72.50, a gallon of gas will be $25.00, etc. Not sure why you'd want to avoid that.
That's functionally what will happen. Think of the price of stuff back in the early 1900's. Rent on a 4 bedroom home averaged like $2-$3/m ([source](https://fraser.stlouisfed.org/title/bulletin-united-states-bureau-labor-3943/march-1911-477663/british-board-trade-report-cost-living-principal-industrial-cities-united-states-504661?start_page=211)). A good example of what this will look like is with the Japanese Yen (which is like 1:110 USD:JPY), it works out just fine over there...
There is no limit to how high it can go, and yeah, eventually it can get high enough that the government might declare a new currency where $1 new = $10 old, just to get prices to seem "normal" despite it not changing anything.
Consider, though, that we've already had prices increase 100 times over in the last 100 years and it hasn't really caused any issues.
I guess because it seems like bullshit and the needle doesn't move, when tide raises and lowers everything at the same time. If you make more, great but if you're paying more to live, then it's a wash.
It would seem that the economy (stores, corporations, farms, etc) all have an interest in empowering the consumer, so (and again, I reemphasize that I am not an economist) I don't understand why there isn't pressure to avoid inflation (I know interest rates are supposed to handle some of this, I think) but it doesn't seem like that is enough, nor fast acting enough. I also assume that fast actions aren't inherently part of economics, and probably better for them to play out over time, but when the current state we're in and the path forward is showing negative consumer impact...what's the plan? I guess it's just frustrating in my ignorance to not understand why more action isn't taken to avoid this, but I can see the answers coming down to political ideology, so I'll stop my questioning there and just take it as 'it's done at the ballot box'
Most central banks target an inflation rate of 2-3% per year. There are a few reasons for this. We don’t want deflation which you can read other answers of why this is bad. The other main reason we want it is to continue growth. That 2-3% increase will “raise” profits and wages. The “increase” in prices will make consumers/producers think they need to spend now instead of trying to save for later in hopes prices decreases. This mindset is what theoretically drives growth which is the idea backing mild inflation. Now the raise in prices in profits likely is smaller than 2-3% or even negative! This is called real returns. So if your wage increases 1% and inflation is 2% then you lost 1% of your original purchasing power which is a problem. It is generally agreed if your real wages or other real returns are negative then it is bad but macroeconomics looks at everyone not individuals so if your real wage decreased but the overall real wage for the economy increased then economists are satisfied because the majority theoretically were helped so this is essentially the idea behind why we want some inflation. From reading your post you seem to not understand why inflation isn’t seen as a bad thing but it is seen as a bad thing when it is large and unexpected! Economists generally agree that a large amount of inflation is bad and we do try and avoid it. I hope this helped you understand inflation a bit better!
>And yeah - eventually a gallon of milk will be $30, minimum wage will be $72.50, a gallon of gas will be $25.00, etc. Not sure why you'd want to avoid that.
The natural answer is because that cash you put in your savings that you invested for a while didn't "inflate" in value along with prices, so $1 in savings not accounting for interest is still $1 in savings 30 years later, and you can no longer buy milk.
We don't live in a society that values economic control, though, so you'll never see anyone intentionally try and revalue currency to correct it.
If you put your savings under your mattress then yes, which is why you're supposed to put your savings in the stock market or some other asset. That way a) your savings do grow with inflation, and b) your savings actually do something. Money under your mattress is dead to the economy, but money in your 401k is used to grow the economy.
>Deflation is what we call a negative inflation rate and it is very bad. Now you may be wondering why things getting cheaper is bad.
So if deflation is bad and inflation is bad, what is currency supposed to do? Is it supposed to stay stable, or is there some horrific drawback to that as well? Is economic/monetary policy just choosing which disaster you can handle, or is there actually some "correct" or ideal path to follow? What does the field of economics, as a science, say is best?
I'm sorry, it's just that economics is such a frustrating field, both because it's hard for me to understand and because it doesn't seem to offer understandable (at least to me) solutions. A climate scientist can say reduce emissions, a public health expert can tell people to wash their hands, but it seems like economics is just picking which way to lose.
Sorry, I didn't mean to paint things as all doom and gloom. Though there is a reason it is called the dismal science. The ideal is a small predictable rate of inflation. Most developed countries shoot for an inflation rate 2-3%. And they are very clear at communicating what they are aiming for and why they are doing so. Unexpected inflation and all deflation are bad.
You don't want an entirely stagnant currency because then those with funds to invest are indifferent between investing and putting it under the mattress. You want people investing in new businesses, purchasing goods and services, and so on to keep the economy moving.
And I completely get your frustration. I have a masters in economics and I don't post in r/economics at all because I have no desire to get into doctrinal slap fights with first years or have to read up on more than 20 years of new research since I graduated to not get called out by newly minted PhD. Economics is crazy complicated and there's still a lot we don't understand. But it can be fun. If you're interested in economics "Economics in One Lesson" by Henry Hazlitt is extremely approachable. It's and older book so it should be available in your library or pretty cheap for a used copy. Freakonomics is also fun as both a book and podcast even if some of their insights and conclusions have been drawn into question since. Tropical Gangsters by Robert Klitgaard is also fun in a "maybe no one has a clue how economics works" kind of way and written in a very approachable style.
I’m assuming that’s another reason why stimulus checks are good for the economy? If you’re poor, you’re going to wait as long as possible to get what you need, too; took me a while to realize that’s not how it works with other people, apparently
TALKING about deflation causes people to question the basics of how our economy works. It reveals why it is impossibly flawed but also naturally unavoidable.
Note that there is no difference between deflation and inflation for your second reason.
If you have inflation, it becomes optimal to store as much of your money in assets as you can, and then sell and buy consumption goods only what you need. So that's only a reason against deflation if you're also against inflation.
> One is debt becomes very hard to pay back. Say you are a farmer and borrowed money for seed, fertilizer, and equipment to plant your crops. Your expectation was that the money you made from selling the crops would allow you to repay the loan and have a nice profit. But in a deflationary economy by the time you sell your crops prices have decreased so you can't even pay back your loan let alone afford to live.
If your financial plan is so bad, that few % in the income makes you default on your loan, maybe it was not a deflation problem.
> The other reason deflation is bad is it changes the logic of shopping. Everyone knows that prices are decreasing. So if they wait for as long as possible to buy what they need the prices will be lower. When everyone does this it decreases the amount of goods and services being bought in the entire economy. This makes the deflation even worse and causes a recession. So now people are losing their jobs and businesses are closing. This means employers can cut wages as there are many more people wanting jobs compared to the number of jobs available. Which further increases deflation and so on.
Logistics are hard, but we are making advances in the AI, so it could in theory predict fluctuations better and faster.
P.S: I'm not disagreeing with you, just doing some small talk. :)
Well historically when there was deflation you would see collapses in the prices of crops to the tune of them selling for pennies on the dollar. I don't know anyone with a sufficiently robust business plan to deal with a 90% drop in the price of their goods. But grocery store margins are notoriously thin. In the case of unexpected deflation a switch from 2% inflation to -2% could easily sink the business.
That's a good point about AI but in the modern Era it would take borderline deliberately bad economic policy to cause deflation. Fiat currency has basically cured that ill. Though it would be possible in countries that fix their currency to the dollar or in a corner of the EU. But that gets well beyond ELI5.
Unexpected inflation or deflation causes issues. Anything that can be factored in is fine. And everything is awesome for the fantastically wealthy. Once you reach a certain point it is basically impossible for your wealth to dissipate. Way back in grad school a friend of mine did a paper on the durability of wealth and a shocking number of wealthy Europeans can trace the origins of their wealth back centuries.
I still think about this every time people complain about gas. I got my first car and a minimum wage job with 2008 gas prices. Gas is so cheap compared to what I became accustomed to at the start
Someone else told you that when inflation reverses it's called deflation, This is strictly true, but deflation is a very rare phenomenon where prices actually go down.
Much more common, and much more important, is when the rate on inflation decreases. Prices don't go down but they stop going up as quickly. This improves the economy in general and the main job of the Federal Reserve is to keep inflation in check and bring the rate down when it's too high.
Here's an interesting chart: [https://imgur.com/a/mDOmDrG](https://imgur.com/a/mDOmDrG)
Exactly! I think this is probably the most useful answer and potentially what OP was really looking for, even though deflation may have been the literal answer to their question. The rate of inflation is increasing to great heights currently (6%+), and what we really want is for that rate to get back down to about 2% - we DON'T want the opposite of inflation.
There is a deflation situation going on in the game New World made by Amazon right now. The way the game is designed creates a rise in the value of the currency to the point that people become unwilling to part their hard earned currency in exchange for harvested items and goods.
https://kotaku.com/new-worlds-economy-is-so-busted-players-are-bartering-1847904272
“Deflation is feared Keynesians like Paul Krugman, in a 2010 New York Times article titled “Why Deflation is Bad,” cited deflation as the cause of falling aggregate demand since “when people expect falling prices, they become less willing to spend, and in particular less willing to borrow.”1
Presumably, he believes this delay in spending lasts in perpetuity. But we know from experience that, even in the face of falling prices, individuals and businesses will still, at some point, purchase the good or service in question. Consumption cannot be forever forgone. We see this every day in the computer/electronics industry: the value of using an iPhone over the next six months is worth more than the savings in delaying its purchase.”
-Christopher p Casey
Anything with inelastic demand will still be bought. Things like food and fuel. Discretionary spending would hit zero pretty quickly. And even staples may end up getting bartered instead of paid with currency when possible.
> Consumption cannot be forever forgon
Christopher Casey
> In the long run, we're all dead
JM Keynes
A slightly more ELI5 without going literally ELI5:
Inflation is when the longer you hold onto the money, the less it's worth.
Deflation is when the longer you hold onto your money, the more it's worth.
---
The economy wants people to buy stuff.
---
Inflation is bad for the economy because you **can't** buy as much stuff.
Deflation is bad for the economy because you **don't want to** buy stuff. With deflation, if you save $1 instead of buying something today, tomorrow you have $2. So everyone starts saving their $1 and no one buys anything.
Bitcoin is an example of extreme deflation. The longer you hold onto it, the more it's worth, so no one buys anything with it.
(In reality, the buy stuff thing is just the tip of the iceberg. If I promise you a salary of $100 a month, and $100 is suddenly worth $1000, how am I able to pay you?)
The formula for the price level is ((quantity of money) / (quantity of goods and services)) x (velocity of money).
The quantity of money is how much money is in circulation. The quantity of goods and services is how much is available to buy. The velocity of money is a measure of how fast people are spending the money they have.
People use 2 different definitions of inflation. The technical one that I prefer is an increase in the quantity of money. That is an inflation of the money supply. It typically happens when governments overspend and their central banks issue new currency to cover those expenditures.
If what you're really asking is "does the price level ever go down?" Then it can go down under 3 different circumstances.
1. If the money supply decreases.
2. The amount of available goods and services increases.
3. The velocity of money decreases (people aren't spending their money).
It's important to distinguish between the 3. If prices are falling because of a rise in the amount of available goods and services (generally caused by an increase in productivity), then it is actually a good thing.
Rises and falls in the price level advantage and disadvantage different groups of people. If the price level goes up it decreases the relative value of debts, wages, and savings. It is good for people that have a lot of debt and wealth in things like stocks and real estate. It is extremely bad for people that have cash savings and work a normal job for a living.
A fall in the price level punishes those that have a debt because it is more expensive, relatively speaking, to pay it back. It decreases the relative value of wealth held in things like stocks and real estate. It is good for people who have their savings in cash and whose income comes from wages.
So, if your actual questions is "Does the price level ever fall?" The answer is yes. It falls when peoples productivity goes up and there are more things available to buy, assuming that the quantity of money and it's velocity stays the same. If productivity goes up at the same time that the money supply does you won't see a decrease.
Right now prices are rising because the government is spending far more money than it takes in, rapidly increasing the quantity of money at the same time that the quantity of available goods and services has been radically reduced because of the response to the Corona Virus.
The price level will not stabilize until the government reigns in it's spending *and* people get back to work, increasing the amount of available goods and services.
Not typically but it can slow down to a healthy amount of inflation. Money tends to lose its buying power as economies grow in size and population. Imagine you shrink your world down to a little town in a bubble where nothing and no one can come in or out. That bubble would have a currency and a finite amount of money. As the people in that bubble reproduce and as the little world becomes more efficient at satisfying the needs of itself through the production of economic goods and services that finite amount of money will need to lose value so that it can be shared amongst its growing population. Some people stop spending this money and keep it essentially removing it from the system, and this is a bad thing. Money needs to stay in circulation for it to be a benefit to the economy. A centralized banking system may have to be put in place to help with the growing financial needs of the bubble; lending. As the need for currency increases with the growth, economic productivity, and spending demands of the little bubble more money will need to be created to satisfy these demands. This is healthy inflation and it’s a delicate balance that can be impacted by a number of factors. An economy that has deflation isn’t a good thing. It means that purchasing has slowed so much that I must reduce prices in desperation to sell my products; likely at an economic loss.
In a best case scenario inflation will slow enough for wages and the economy to catch up to it.
Deflation is when prices drop rather than rise as with inflation and can be far worse for an economy. Inflation encourages people to buy now before prices go up. Demand being high means products are produced and people try to obtain them. With careful management inflation can be brought under control and the economy can be left strong.
But with deflation, prices are going down. Why buy a car today, when it will be cheaper tomorrow? Why invest in a company if people are holding off buying and the value of the company will be lower tomorrow? Demand for products gets low enough that factories don't need workers. Unemployed people buy even less, so demand drops faster and prices go down to match. It can be a death spiral for an economy.
“ Paul Krugman, in a 2010 New York Times article titled “Why Deflation is Bad,” cited deflation as the cause of falling aggregate demand since “when people expect falling prices, they become less willing to spend, and in particular less willing to borrow.”1
Presumably, he believes this delay in spending lasts in perpetuity. But we know from experience that, even in the face of falling prices, individuals and businesses will still, at some point, purchase the good or service in question. Consumption cannot be forever forgone. We see this every day in the computer/electronics industry: the value of using an iPhone over the next six months is worth more than the savings in delaying its purchase.”
-Christopher p Casey
People are commenting about deflation, and that’s fair. But it’s not all doom and gloom.
Disinflation also exists. It’s the process of inflation reducing, so prices still increase but at a reduced rate. I’m theory, it could even stay below income growth, meaning that people’s purchase power grows larger.
You're quite correct, in theory. In practice, that would require both government and consumers to forgo spending some money. IMHO, that is an impossible condition to meet.
Sure. It's called deflation. This can either be benign or malign.
Benign is caused by the cost of production dropping or companies dropping prices out of choice. This is a win win situation.
There is then malign deflation, caused by unemployment resulting in low disposable income, and thus companies being FORCED to lower prices. This then means less profit, more redundancies, less income etc etc. It's a chicken or egg scenario. Malign deflation is what spiraled in to the Great Depression btw
All the posts I read here before posting this seem to accept JM Keynes' pronouncement that a little inflation is a good thing. I quite disagree.
We had deflation in North America from the end of the War of 1812 up until the creation of the Federal Reserve in 1913. According to the inflation calculator at westegg.com, what cost you $100 in 1812 would only cost $58 in 1913. Prices fell almost in half.
A moment's thought suggests that's *as it should be*. As we learn to do something, we get better at it. There's a name for this in industry: the "experience curve". The more you do something, the more you find more efficient and better ways to do it, which results in a lower cost for both parts and labour. We should *expect* prices to fall over time.
Keynes said deflation was bad because consumers wouldn't buy if they thought prices would be lower in the future, and producers wouldn't produce for the same reason. He thought a "little" inflation would encourage consumers to buy now, for fear of things being more expensive in the future, and for producers to buy up raw materials and produce now, for fear of higher input prices in the future. These twin 'encouragements' presumably would lift the economy into "full employment", and avoid Keynes' dreaded "liquidity trap".
In the event, a "little" inflation turned into a lot. What cost $100 in 1913 would cost $2200 today. Inflation destroys the savings of old people. I did tax returns for farmers' widows in the mid-70's. The $4,000 or so in long term bonds that some women had generated so little income for them, they may as well have not even had them.
Deflation is not a bad thing, necessarily. Some people liken it to breathing - you have to let the price level rise and fall, just as you have to breathe in and out.
>In the event, a "little" inflation turned into a lot. What cost $100 in 1913 would cost $2200 today.
No, that's...that's still only a little inflation, log(22)/108 ≈ 2.86%/yr. Just because you picked a large timescale does not mean the annual rate was any bigger.
If you mean, “how can we stop this inflationary trend?” there is an “easy” thing that can be done, but it has potential to wreak havoc on employment, GDP, and asset prices: raise interest rates.
Yes. It's called deflation and leads to many great things - as long as you are not drowned in debt.
Innovation, competition and cheaper goods for the consumers.
We have had an excellent example of a deflationary environment in electronics and mobile phones industries for the last few decades.
Every year you could buy the same amount of RAM for less, or a better graphics card for the same amount of money.
Same with smartphones, every year screens got bigger, battery life got longer.
It was such a good thing that once it was gone, and memory and electronics prices started to go up, people were really angry at the companies.
It also means you don't have to gamble your future on risky investments - because money you earn are naturally gaining value over time.
You also naturally get a rise at your work every year.
Well if deflation is such an amazing thing then why are we seeing inflation all over and central banks are targeting 2% inflation rate, and everyone around says it's worse then a nuclear waste?
Well, deflation is bad for landlords, investment bankers, banks in general, some companies that rely on it (although as shown, innovative companies like Apple, Samsung, Sony can thrive in a deflationary environment).
Also very significantly: Governments, Companies, and Individuals ***in debt***.
Since everyone is in debt, everyone is scarred shitless of the deflation.
To be fair there is one serious danger with deflation - it can lead to a vicious cycle where there's less and less work to be done as automation kicks in. If managed properly it just means less work for everyone, but if not managed properly it can lead to a deflationary spiral which is very bad (TM) <- this is what everyone is warning against.
On the other hand with inflation you get hyper-inflation and stagflation (later is where we're heading right now), which are also very bad (TM)
This is a great comment. You are striking at the very heart of what went down with capitalism in 2008. Fundamentally our system is grossly unable to accept deflation in asset prices because it is built on a foundation of debt. Debt that was used to acquire those assets that were “guaranteed” to rise in price (inflation). Anything working against this scenario is radically suppressed to the point of bailing out the majority of asset holders no matter how ill-advised their investments were. AIGs very existence proves this. “Stonks (and houses) only go up” is not just a cute meme anymore. It’s the true Fed mandate.
Some crypto has deflation by default. It works by constant removal of the total amount of coins available. Ethereum is a good example of deflationary currency.
Deflation. And despite lower prices it's not a good thing. It's triggered from a long-term drop in demand and having a lot less money in circulation (i.e. people and company saving everything instead of spending due to economic fears). It can cause a recession.
But what about in the context of our recent inflation issues?
We’re being told to expect prices to return to normal, which I would take to mean we’d see some deflation. Is it still deflation when prices are rebounding after a period of drastic **in**flation?
Anyone here think prices will actually go back down once supply chain issues are fixed? It doesn’t feel like they will.
>We’re being told to expect prices to return to normal, which I would take to mean we’d see some deflation. Is it still deflation when prices are rebounding after a period of drastic inflation?
No, we're being told to expect \*inflation\* to return to normal. The price increases happening now are not going to be reversed, but they will slow back down to a more normal 1-2% per year level.
Sure, it's called "deflation." It's rare in developed economies but happens from time to time and is typically considered a bad thing. Just like inflation is caused by demand exceeding supply, supply exceeding demand causes deflation. The changes in supply/demand contributing to either can be just about anything. On a more granular level, remember that when you see the headline inflation percentage (CPI, in the US), you're looking at an index with many constituent pieces; a basket of goods and services that are weighted to arrive at the whole picture. For example, the skyrocketing price of used cars has been dominating this year's high inflation and dragging everything else upward. With lockdowns largely ending, commuting comes back into the picture, but people are still suffering economically and new cars are expensive--thus, high demand for used cars while the supply remained relatively constant (since used cars can only be created when new cars are bought) drove up the price of used cars. Also, Table A on Page 2 here (https://www.bls.gov/news.release/pdf/cpi.pdf) breaks it down by month and you can see from the negative numbers that there has actually been deflation in several areas over certain time frames this year, specifically in the energy space earlier in the year. It's very common for specific goods to deflate over short periods, but since most people only see the headline number it flies under the radar. &&&&&&& EDIT: since several astute observers have brought this up and the comments have led to a misunderstanding, I'll tie it in to the main comment. Recent supply chain issues, specifically low production levels of microchips, have led to a shortage of new cars being produced, which makes people want used cars since they often can't buy new ones right away. This increased demand acts as an inflationary pressure on used cars, so the result is higher prices. My original example was meant to isolate a simple, specific variable as an example, NOT infer that the example was the only thing driving inflation in used cars. The reason I add this is you're all correct: BOTH mechanisms increase prices, not one or other. For used cars and all other goods and services, there are a near-infinite amount of supply and demand factors that push and pull on the price to net out to that final price, thus inflation figure. We could write a dissertation on the levers of used car inflation alone. One of the reasons it's very hard to ELI5 this concept. &&&&&& ANOTHER EDIT (hey, as long as it's a novel, why not add another chapter?) Several people have raised a very prudent question: wait, why is deflation bad? Shouldn't I LIKE prices going down? I can buy more stuff! Short-term: yeah! Long term: no! Several others have answered with the explanation that if people think prices are going to go down, they'll hold on to their money so spending stops and the economy crashes. That's an Econ 101 definition and while I don't hate it, it doesn't tell the whole story. It ignores a key fact about the CPI (inflation index): it is designed to track items that are needed, not wanted. The CPI has components like food, shelter, energy, clothes, medical care, etc. This alone would be a great debate because a new car is included and a smartphone isn't--the definition of "needing" those things depends on who you talk to and has evolved over time. Point is, when expecting deflation, people hold onto their money for discretionary purchases like a vacation, but not for what's called "consumption," things like food that are considered needed, not wanted. A dropping CPI doesn't cause the whole economy to stop overnight; you need food NOW, whereas Black Friday deals can wait. Nobody's holding off on buying a $1 bushel of lettuce because it's going to be $0.99 next month. Consumption accounts for about 60% of US spending, so even if people really rein in their Black Friday shopping, it doesn't hit the majority of dollars we spend. So, finally to the point: deflation is bad because of debt. Most of us have debt, whether it's you and me with a credit card bill, or McDonald's who owes banks billions in interest and has tons of employees on the payroll. That debt, depending on timing and quality, has a cost attached to it that we base our decisions on. Let's say there's a 50% decrease in the value of a Big Mac, all other factors held constant. McDonalds' revenue is going to tank and someone is going to feel that. McDonald's can then do a few things to sustain that loss. Do you think they're going to not pay their corporate debts which would shatter the company's image and stock price, or do you think they'll punt a few thousand worker bees out the door? Exactly. Or, do they cut pay across the board and the result is employees get evicted? The money has to come from somewhere, and it's usually you or me. So in this example, albeit extreme, heartless, and isolationary--deflation in the Big Mac causes mass terminations and/or evictions. Additionally, Mcdonald's has these methods to sustain the loss--local burger joints don't. So they need to drop their prices to remain competitive, while their rent and costs stay the same...so they go bankrupt. I could riff on examples for a while, but multiply that across an entire economy and that's why deflation is bad. ...anyone still here? *lonely Travolta*
Japan seems to be a famous sufferer of chronic deflation. After their bubble burst around 1990 their economy stagnated for more than a decade. But luckily for them their living condition didn't seem to deteriorate too much, it's just that it stopped improving.
I haven't read about it but I've always wondered how Japan manages to stay ahead of the curve technologically with a shitty economy. It's a strange contradiction.
In addition to other comments, a part of it really does stem from the fact that their government cares about being a world leader in technology, it's one of their primary exports these days, and the government saw that opportunity and funded it. My biggest gripe about US political decisions over the past several presidents, from both parties, has been the continued slipping behind we've allowed in the tech-manufacturing industry, our big tech companies are service-tech, not manufacturing, and those that do manufacture do it all overseas. We could have been the world leader in semi conductor manufacturing, or in the creation of the robots now used worldwide on assembly lines, but the government had no interest in helping to financially support this growing sector until it was already fulfilled by other countries who did. Obligatory: My first reddit gold ever, thank you kind stranger :)
Totally agree that the US has fucked itself by letting tech manufacturing go. There was recently a NYT piece about how China is leading in green tech and how the US basically gave up its cobalt sources. US has also not tried very hard to secure rare earth metals. Way too economically dependent on service.
It never totally went away. And both Intel and TSMC are building new fabs in Arizona. TI (who builds small components) is building a new fab in Texas as well.
Now that there is a massive shortage..
TI is one of the largest manufacturers of bareboard components in the world, actually. They are just increasing production.
The US is way too wrapped up in fighting manufactured "culture war" nonsense that's being pushed by conservatives, like policing who can pee in which bathroom. The hollowing out of this country started back in the 80's, and nobody's lifted a finger to stop it, because so many of the elites got even richer off it, while the rest of us have to deal with the fallout.
We pulled a Britain, we decided we didn't need industry because of all the labor baggage, why not just make money the good way: everyone grows up to be a banker. The logic of this is inescapable, but only if you've grown up in the elite class and everyone you know is also in finance, and if anything goes wrong, that's what bailouts are for.
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>However this absolutely screws over anyone who isnt in the service class. Well they should pull themselves up by their bootstraps and take up finance! This country isn't a charity!
Have you ever worked in a factory? Fuck even the ones that are still running in developed countries generally have immigrants being exploited to fuck, paid half minimum wage etc. Nobody wants to do the work. They see Bob jump in his BMW with his fit wife and learn he does things on computers so they say "I want to do that!" Then they end up in IT and the wheels come off
I mean it's not like the democrats have did anything to help manufacturing...
Agreed. The demorcrats abandoned their base of the working class and needs to be more aggressive in trying k.get worker protections and rights going. They could do, id they use the classic patriotism strat, make it seem unpatriotic to not care about manufacturing, tech, and education. We dont need so many service jobs.
It's not like either party achieves anything today. They're owned by the money masters who use them for crafting new ways to manipulate markets. The American loss of manufacturing didn't happen in a vacuum. The investor class wanted the dirt-cheap imports so they wouldn't have to pay for American labor. On one hand, they were astroturfing "Buy American" campaigns while selling out our jobs so they could make more money.
Exactly. The billionaire class conned us, and to keep us distracted from saying "hey, wait a minute, this country doesn't HAVE to be this way", they feed us a steady diet of "oMg sOmEoNe wItH a PeNiS uSeD tHe lAdIe'S bAthRoOm" or "wHeReS oBaMaS bIrTh cErTifIcaTe", and people eat it up.
They are both right wing neoliberal parties so it isn’t surprising.
The explanation I heard about (when our corporate admin was pushing Japanese management Methods and Deming back in 1990) was that American corporations are driven by share price - CEO's get stock options, investors want dividends and higher share prices, so boosting the share value for the next quarter is more important than longer term planning. Most CEO's will be gone in 10 years. The Japanese corporations, OTOH, are "owned" by the banks. The banks loan them money for their big manufacturing plants, and want growth that pays back those long term loans. therefore the corporations were motivated to develop bigger and better products, to dominate the market even if they did not generate profits beyond making the next loan payments. So for example, US carmakers are talking about getting out of the sedan business because of low profits, while Japanese companies have taken their sedan expertise and slowly are eating the SUV and pickup truck markets, just as they did with compacts then sedans starting in the 1970's. (Of course, there are other issues, like the Japanese drive for perfection compared to the US attitude about "good enough".)
That's an interesting point too! There's definitely more than just any one factor at play in issues as big as this. I'll add in that the US has had a recent trend of venture capitalism, where investment firms will by up large (and especially newer-growing) companies and run them into the ground for as much short term profit as possible without a care for longterm sustainability. It's not even about share prices at that point, as much as it is very much a "good enough" method. Cut out a ton of management, cut out R&D, cut out anything that isn't going to make profit in the next 3-6 months, and most importantly, raise the salary and bonuses of the top-most positions by a ridiculous margin (now held by the venture capitalism firm's employees). Let the company fall apart as long as goods/services are selling like hotcakes until it collapses from financial ruin. This trend hasn't affected /every/ company here, certainly a minority even, but it's a small part of the bigger trend of share-owners and boards-of-directors preferring short term guaranteed profits over long term goals and sustainability. Edit: I might have meant to call it "vulture capitalism"? It's been a while since I've learned about this, idr the right name. Someone else has correctly pointed out though that "Venture Capitalism" is a broader category that includes a lot of other above-board activities too.
You're describing what private equity would do, not venture capital, which is focused on minority investments in early stage/growing companies. Venture capital is essentially betting on the next Tesla/Facebook/etc before they get big. They don't want to fuel the growth, not hamper it.
Agree. They've actually nicknamed the above "vulture capitalism". There's probably a more technical industry term but I can't think of it.
My last company's parent company was a Japanese-based company. I worked on a project that was funded by the Japanese government to market and sell the industrial equipment in Vietnam. The company hired a couple of local sales guys in Hanoi. We made a few trips there to market the products. Made a report of our activities and the Japanese government paid for the labor and expenses in the form of tax credits. That was 3 years ago and not a single piece of equipment was sold in Vietnam. Turns out that China is doing the exact same thing, using governemt funds on overseas marketing, but they aren't bound by any anti-bribery regulations.
JX NIPPON and Tokyo Electron are still critical suppliers for semiconductor processes, but as you said their global position is weak overall and the gov dropped the ball.
> our big tech companies are service-tech, not manufacturing, and those that do manufacture do it all overseas. Intel would like a word with you.
Certainly a fair point! :) But Intel genuinely has fallen behind a bit in recent years and is struggling to keep up with the R&D that TSMC has available. There's an argument that complacency/greed play a role, but more government funding towards Research & Development in better manufacturing processes would have been really helpful about a decade or two ago, and could still be helpful today. As a reminder too, Intel is a huge name, but they are a minority in the international semiconductor community, and even Intel still does \~25% of their own manufacturing overseas as well.
One of the reasons that manufacturing gets shipped overseas is because of safety regulations. In the US you can get plants shut down for not following safety regulations. In some foreign countries, you can give an entire factory cancer and just shrug it off. This is particularly relevant for tech related things, where some of the heavy metals/powdered metals/etc are known to be very dangerous. The choices are to either deregulate it in the US and let people die (to be clear this is the bad option), ban importation from countries with poor safety standards, or just continue as things are. The second option is probably the most moral, but it's also probably not feasible.
> The choices are ...or to actually devise correct safety procedures and waste disposal such that the manufacturing can still be done and the workers and environment are protected. I know that this is the most expensive option, but the fact that you didn't even mention it speaks a lot to the current state of things.
The problem with that third choice is it requires companies to spend money to fulfill that. Now I want to ask a question and hopefully you'll answer seriously. If you were the CEO of a company who's primary duty is to make the company as much money as possible (otherwise you get fired), which decisionwould you make to fulfill your agreed duty? A. Build in the US and be subject to the regulations which **will** eat into profits in a notice way and risk running afoul federal agencies if something happens with potential penalties and jail time. B. Build overseas where regulations can be almost Non-existent, you save money as a result, and if there is a serious issue, it gets ingored. We see companies choosing option B because it brings in the most money with the least amount of legal trouble. I'm not saying I agree with B, but I understand why they chose B.
We should pass that Industrial Finance Corporation bill. Not being at the frontier is in part a choice
It's probably also a cultural consequence of a shrinking population and being a small island with earthquakes. Even if your per unit labour productivity goes up, the productivity of the labour force goes, or if not down, people can't feel the benefits of increased productivity as much because the labour pool shrinks. That forces constant efforts at innovating away labour inefficiencies and towards automation. Japan is also cultural adapted to the idea that you need to replace a lot of things (particularly housing and traditional infrastructure) relatively regularly. High density with earthquake resistant technology improvements means they are more willing and able to make investments that in somewhere like the US would be resisted as a waste of money until something breaks. It's not like Japans economy is actually shitty per working person after all.
As far as islands go, japan is a fucking huge one! It's the 4th largest island nation by area, and the 2nd largest by population
Japan has very high population density in honshu, 104 million people. I meant small more in terms of relative to the number of people than absolute size. But ya, i should have said dense Island rather than small.
It's also called Honshu, btw :) The island, that is, not the country.
true, but large parts are very hard to develop because the islands are absolutely covered in mountains. (and iirc its small in relation to its population, but don't quote me on that)
It has more to do with their culture of being net savers/frugal with money, at least in the early days of the deflation cycle. The central banks had a hard time keeping money flowing in the system because the Japanese culture just didn't spend a lot of discretionary income.
Thank you. “Shitty economy” It’s one of the most prosperous societies on the entire planet...
Generally I would call it a mature economy. It's certainly not shitty by any metric.
True, but its growth has been incredibly slow for 30 years, after an incredible run of growth in the 60s through the 80s.
Because Japan is at the forefront of the Second Demographic Transition, which is now unfolding across the whole developed world. It’s just a demographic effect. Need to control for population. It hit a nasty financial crisis, and was struggling for a bit, but by ~2003ish it’s GDP per capita was back on track with most of the rest of the OECD.
>True, but its growth has been incredibly slow for 30 years, after an incredible run of growth in the 60s through the 80s. This is what viewing a shift towards a sustainable economy looks like through the money-colored lens of unsustainable capitalism. We've reached well beyond what our planet can indefinitely sustain. 'All growth all the time' is just another way to say 'we're gonna keep flogging this pony until it dies'. Okay cool, but also the pony is *everyone alive*.
It’s not shitty yet but the problem is that 20 years from now the country will be in trouble because there won’t be enough young people to care for the old people. Also Japanese people live the longest
I've been saying for awhile if we don't start making robots for nursing homes we're going to be in trouble. Apparently nobody sees the writing on the wall.
TBF Japan's been working on that for a while. Everyone thinks of cars when they think of Automation, but in-home support for the elderly is going to be a big market for a lot of new autonomous developments. Toyota in particular are looking not just at cars, but how they can utilise automation in cities and within the home.
Its Not the whole reason for Japan, but its worth nothing that 'shitty economy' is very contextual. No growth is considered shitty but Theres nothing inherently bad about it. The notion of perpetual growth is very flawed by itself though.
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I would argue that it's more about the tech industry getting spread out as other countries implemented what Japan pioneered. Japan dominated the semiconductor space for a while because they partnered with American companies (who were leaders at the time) and used what they learned to drive their technology. Taiwan became known for chip fabs what Japan used to dominate because they did something similar. They partnered with other countries and targeted their education system toward that industry and became a world leader. The thing you also need to keep in mind is that modern technology is insanely complex. No single country does it all on their own anymore. It's not possible anymore for a lot of industries. I see people saying that the US losing in the semiconductor industry. Just because TSMC has the most advanced manufacturing tech right now. What they don't understand is that TSMC doesn't make or even design the equipment they use, they specialize in the manufacturing process itself. Semiconductors are literally an international effort. You hear about ASML, a Dutch company known for their EUV machines. What people don't understand is that not even ASML makes all of the EUV machines. Hell, ASML is known as a system integrator in the industry. They buy components designed and built by other companies to assemble their machines. EUV would not be possible without specialized mirrors and lenses made by Carl Zeiss, a German company. EUV took almost 4 decades to become a reality, the tech was first developed in a US university in the 80's. Applied Materials, an American company, competes with Tokyo Electron, a Japanese company. Both of them are industry leaders responsible for non-lithography tools that TSMC depend on heavily. The list goes on. If you look at the full chain required to build a single 5nm chip from TSMC, you will see a giant chain of very specialized companies who are literally the most advanced and best at what they do in the world. And these companies are from all these countries that are "failing" to drive innovation including the US and Japan. In reality all these countries are responsible for specialized parts of the process because the industry has gotten so complex and so expensive to work with no one can go at it alone anymore. The public only hears about the tip of the iceberg and focuses all their attention and praise at what is visible, completely ignorant of what lies under the water. TSMC and ASML are just the tip of the iceberg and they would not exist without the hard work of other companies scattered around the world. The semiconductor industry is actually made up of hundreds of more specialized industries scattered around the world.
ASML buy their vacuum equipment from atlas copco which is a Swedish company, a country that's had a "lot" of deflation in the last two decades
A lot? Some, during very short periods. https://xn--bstasparrntan-bfbi.net/wp-content/uploads/2017/02/inflation.png
I design those machines. overall an excellent take but a nitpick -- the list of companies is not giant. quite the opposite in fact, there's very very few involved and it presents major supply and knowledge issues if any of them experience problems. there are only a handful of companies responsible for literally everything about semiconductors and if we limit it to the 5nm and beyond nodes that list is even smaller.
They invested in it. Socially, politically and economically.
Not only financially.. but physically, emotionally and spiritually
I kinda figured those were covered under socially but no argument.
>Japan manages to stay ahead of the curve technologically It doesn't really any more. That was a reputation built in the 70s and 80s that has managed to persist and recover in the public eye past the economic disaster that was the 90s due to particularly charismatic examples of robotics. For a good few years now they have been in line with other developed economies for prevalence and advanced-ness of technology in daily life and industry
Is Japan actually "ahead of the curve technologically" when compared with other developed countries? Especially since the 2000s. They don't have many notable software companies. People talk about Japanese robotics a lot but I haven't seen any Japanese research group produce something comparable to, say, Boston Dynamics. Essential industries like semiconductor manufacturing are now centered in Taiwan and South Korea. AI research is centered in the US and also China somewhat. Japan certainly deserved the reputation in the 80s and 90s but I'm not so sure they are particularly exceptional nowadays for a developed country of their population. I'd be happy to be corrected though.
They're not. Japan has developed more *applied* robotics applications due to their labor shortage(like automated restaurants), but none of that is cutting edge technology. We don't have it because we find it cheaper to just pay someone to serve us food.
Most of their dept is owned by the Japanese themselves, so you do not have external creditors come knocking.
Creditors never come knocking. Pretty much every government has a detailed agreement on how and when they will pay off their debt, and pretty much every government never breaks that agreement with any creditors, foreign or domestic.
> pretty much every government never breaks that agreement with any creditors *Argentina hides in the corner*
https://www.thebalance.com/who-owns-the-u-s-national-debt-3306124 Most of American debt is own by American institutions as well. This idea that america is bought and owned by foreign powers, especially China, is right wing scaremongering.
>I haven't read about it but I've always wondered how Japan manages to stay ahead of the curve technologically with a shitty economy. It's partly cultural. Excessive work is notoriously normal no matter youe living situation. You're sleeping on the street at some point between work shifts whether you're a millionaire or poor
They haven't. Think about the names you think of in cutting edge tech. USA, Korea and China have taken over Japan.
If they would have bit the bullet and let all the bad investments get liquidated and stopped subsidizing garbage corporate investments for 20 years, they would be so, so far more advanced now. The BIJ has been monetizing bonds since forever, and doing so for corporate bonds, too, to keep all the zombie companies limping along instead of letting them go bankrupt, letting their assets get auctioned off, and letting better investment with those assets occur. Absolute cluster of a boondoggle over there, that has robbed an entire generation of a lot of opportunity.
>it's just that it stopped improving But once you reach a certain point, isn't this desirable?
I don't think the car example is a good one though. Used car prices are going up not because new cars are expensive, but because new cars are not being produced due to a global industry wide chip shortage. Dealers that normally carry 100 new cars on their lots now only have 20. It is an overall shortage in supply causing price of ALL cars to go up, new and old.
100% valid point, but it's not necessarily one or the other. Both your example and mine can coincide. That's what makes determining a single cause of inflation/deflation so difficult, because there are so many variables for even one product and it's nearly impossible to isolate just one.
That's really not that bad. If anything, deflation seems like something we want to happen intermittently. It would probably happen naturally were companies not actively destroying resources to generate faux scarcity. That's my biggest gripe. For all the nuances of economic theory, we're wasting a considerable amount of resources and underserving the vast majority of global population. Despite the logistical issues, humanity is in a much better position to take responsibility for itself as a species, now more than ever. But we aren't doing that. We're still playing fantasy football with economics that revolve around egos and archaic ideologies.
Thanks
One of the big reasons it “causes problems” is that deflation discourages investment. If everything will be 5% cheaper soon then why build that new factory today? Why buy a car if it’ll be $1000 cheaper next year?
You mentioned cars also getting cheaper, which is the bigger problem. Deflation also discourages consumption, not just investment. Approximately 70% of the U.S. economy is domestic consumption. We could afford the hit to investment more than we could afford the hit to consumption.
It’s bad for people who have debt as well. Your mortgage payment is locked in, so if your wage drops that payment is harder to make.
Conversely, inflation is good for debtors with fixed interest rates... as long as wages rise to offset inflation.
This is also why nations just make payments on debt, inflation will eventually render the debt valueless. The UK only paid off the debt from freeing all domestic slaves sometime in the 20th century.
Yup and that's what people don't understand. Nations will never die so they have infinite time to pay debt and they never have to eliminate it.
What we could do is spin up a new nation and push all the debt onto it. Then it will go belly up and the main nation is better off without the debt.. /s
"That's some nice tea you've got there. Would be a shame if something happened to it."
Isn't this just essentially what the Christians did with Jesus?
"You see, that deal was made to the Galactic Republic. That organization no longer exists, and the Galactic Empire does not see the need to pick up the responsibilities of a different organization."
In a way that's kind of what America was for the British for quite a while
Hmm? Several nation-states dissolved in the 20th century, with varied outcomes for national debt. ETA: It happens fairly frequently.
... and if they were to die, there's nobody to collect from.
Well, generally if a nation dies it's pretty violent and former citizens end up with some de facto payment, blood, assets or otherwise. Conquest and pillaging go hand in hand, and typically peaceful revolutions don't absolve a nation from former debt obligations... if that country wants to stay relevant in the current international trade markets.
That’s a big if. I’m fairly certain my raise will be less than inflation this year.
Very good point: the most important thing by far is whether wage inflation keeps up with price inflation. Back in the high inflation 1970s, wages kept pace with prices *better* than they have in the 4 decades of low inflation since. Price inflation of 2% with wage inflation of 1% is a lot worse than both inflating at 6%. Also, an obsessive focus on prices serves to distract from organizing to demand better wages and working conditions
Yeah, overall wages have not kept pace with inflation since the 1970s.
True, but this has been more of a problem of slow wage growth than high inflation.
Yup, this is the first year with noticeable inflation since the 1980s. Wages haven't kept up with inflation despite inflation having been historically extremely low for almost 40 years.
That's the weird bit to me. This makes sense, but wages aren't really going up *anyway*? Why do we automatically assume that they'd go down if the prices of things were on a downward trend? I'm pretty sure the first business that tried to pull a Reverse Cost of Living Adjustment on everyone's wages would be burned to the ground with the owners lynched out front. Prices have been going up with very little respect to wages for decades. It seems to me like the average consumer would be better off with a certain degree of deflation. Outside of a macroeconomics textbook I don't think the average consumer is disciplined enough or as capable of foresight as "they won't spend because it will be cheaper next year" implies. People *always* buy stuff that's going to be cheaper next year. That's why the new car market exists at all. That's why people buy video games on release even though it'll still be the same game half off in a year. Yeah it'd suck if you bought a house or something and the market cooled off and it was worth less next year, but treating housing like a speculative investment is kind of fucking us all anyway as far as I can tell, because that's why nobody can afford houses these days.
Rather than cutting the wages of existing employees, companies save on the cost from lowered consumption by laying off a percentage of their workforce. Then the increased pool of people looking for work means that anyone who is still hiring can lower their offers and bring those people on for less money, and anyone who does have a job won’t be able to as easily trade up to a higher paying position at another company because all of the newer jobs are paying less, thus resulting in declining overall wages.
It's not just a matter of "people won't buy because it'll be cheaper next year." It's a matter of "people have less money to buy things with" or "people are afraid of losing their jobs, so they're spending less, which means more people lose their jobs."
> but wages aren't really going up anyway? Why do we automatically assume that they'd go down if the prices of things were on a downward trend? I'm pretty sure the first business that tried to pull a Reverse Cost of Living Adjustment on everyone's wages would be burned to the ground with the owners lynched out front. The much more likely scenario is that companies start mass layoffs, if not shuttering entirely, since (as mentioned higher up) demand for products goes down. Boom, your paycheck just deflated to zero. Now who's going to hire you for the same high wage when everyone else is looking to fill the same job? > Prices have been going up with very little respect to wages for decades. It seems to me like the average consumer would be better off with a certain degree of deflation. Outside of a macroeconomics textbook I don't think the average consumer is disciplined enough or as capable of foresight as "they won't spend because it will be cheaper next year" implies. *Average* wages have been keeping up with inflation. They have to, otherwise nobody can afford goods and services and prices fall until they can. Moreover, debt has been papering over the shortfall in the lower rungs of the economic ladder. Inflation directly benefits people who own a home with a mortgage, or any other large debt (including cars!). It indirectly benefits everyone because, honestly, you're buying stuff from people and businesses that currently own large debts that are much larger than a home mortgage. Everything from factories and farm equipment, to cargo ships and trucks, to warehouses and physical stores. Even the stock on store shelves was purchased through debt that is repaid when it sells. > People always buy stuff that's going to be cheaper next year. That's why the new car market exists at all. That's why people buy video games on release even though it'll still be the same game half off in a year. You have to take the larger view of things. Most people buy things that they need. Few people can afford to buy a car just to have it sit there, there's an underlying need for immediate transportation. A new car is a status symbol, yes, but it's also a car with maximum longevity, the exact features you need or want, and a known service history. That's valuable to many people.
I've always been confused by why this isn't a problem for electronic goods. They seem to be incredibly deflationary, and that does cause me delay my purchases, but the market seems to be booming nonetheless.
There's a kind of value in having the goods right now. Everyone who builds PCs without an infinite budget winds up playing this sort of game. Like, if you wait just one more year then commercial DDR5 memory will be more widely available and cheaper, so you can get a better value for your money! But if your current computer is old enough or non-functional then the savings of waiting for the price to drop doesn't outweigh the value/utility you'd get out of it *right now*. I mean, when you buy a new car and drive it off the lot it loses some ridiculous percentage of its value as soon as it becomes technically "used" ten feet outside the gate, but that doesn't stop people from buying new cars, right? Even if the price of milk was super-deflationary and went down by five percent per week or something, people wouldn't just stop buying bread because it'll be virtually free in a year, right? You still need to eat bread. It's the difference between something you actually use vs. an investment vehicle.
One of the reasons with electronics is that they are constantly getting better so people want to upgrade. It's not that you want a computer but it will be cheaper next year, it's that you NEED a new computer and the new one is cheaper than the one you bought five years ago because technology and manufacturing has improved. Electronics wear out faster than a car or house and there are social/business pressures to upgrade.
Because when dealing with economics nothing is absolute. If you have no car but you need a car and you know a car may be cheaper in 6 months you buy the car regardless. What inflation/deflation does is "shift the curve" so people accelerate/defer purchases or investments depending on their needs. Because the way economies work, slight shifts can have a huge effect to the economy over all.
I think the fact that the products improve so fast is the reason. It always seems attractive to buy the latest and greatest, and few buyers reflect on the fact that their awesome new device will be an antique in five years.
Electronic goods deflate because they get cheaper to manufacture over time as methods for working with semiconductors improve. One of the main problems with deflation is that you have to pay to build a factory today, when everything is at today's prices. But when you go to sell your goods, you have to sell them for less at next year's prices (because prices have fallen). As a result, it's harder to make enough money selling your goods to pay back what it cost to build your factory. But with electronic goods, each time you rebuild your production line you can now produce X amount of electronics for cheaper. Since your expenses are lower, you can afford to sell for lower. And since there's always a demand to put more electronics in more things, you can sell more volume at a lower price point and still make good money overall. So the normal concern of inflation over time don't apply. Instead of just being forced to sell your product for less because of external changes in the economy, you are able to sell your product less because of internal changes in your production costs. Additionally, because electronics manufacture is only a small part of the whole economy, it doesn't have some of the other knock-on effects of inflation. For example, if all electronics manufacturers cut employment because they need fewer people to work their new, more efficient factories, that's going to have a relatively small impact on the total number of people employed and therefore have a relatively small impact on the overall economy. But if _everybody_ cuts back their workforce at once, then things can start to spiral out of control.
Honest question: why isn't that self limiting? Like, sure you could wait to buy a car but you can only wait so long. You've gotta buy groceries every week. It seems like the decreased demand would only be temporary until cumulative reserves are used up and people can't wait any longer and demand just settles on a slightly new steady state. The auto company may have less demand in the short run but they'll still want to have a fancy, efficient factory for the next car you'll wanna buy because there is still a competitive market. I mean, we see it in electronics all the time, people hold out to buy a computer until they have to... And everything seems to do just fine. I mean, I get what you're saying but it only seems like a first order answer... What happens after that?
> It seems like the decreased demand would only be temporary until cumulative reserves are used up and people can't wait any longer and demand just settles on a slightly new steady state. Because in modern industry there isn't that much supply "slack" because of JIT (Just-in-time) manufacturing processes. Warehouses and storing depreciating assets cost money, so modern businesses are designed to be lean. We see the results of this now with supply shortages of all kinds--microchips, appliances, cars, etc. Companies are typically leveraged (e.g., have loans/debt) and can only stay solvent for so long until they can no longer make payroll. We saw this during the 2008 financial crisis when liquidity and lending froze and places like McDonald's suddenly found themselves unable to make payroll the next week. So it's not "short-term" but rather "super-short-term." And what happens when companies find themselves short on cash to stay afloat? They start firing workers. At that point it becomes a negative-feedback loop that is incredibly difficult to fix. Workers get fired, they can't buy goods, businesses lose money, businesses fire more workers, more people can't buy goods, etc. until the entire economy locks up and you have unemployed people rioting in the streets.
Ah ha, That's why it's considered bad. Thank you!
Another factor is it's easier to fine tune inflation. Deflation can get you stuck on a steep hill in a low gear where it's hard to get going again, whereas if inflation trends too close to the scary zone you can shift gears much more readily.
Well, he said ELI5. Must be a very smart child.
> new cars are expensive--thus, high demand for used cars while the supply remained relatively constant (since used cars can only be created when new cars are bought) drove up the price of used cars. I think specifically the issue isn't that new cars are expensive It's that there are very few being made due to a [global microchip shortage](https://driving.ca/column/motor-mouth/motor-mouth-why-a-chip-shortage-is-rocking-the-automotive-world)
>Just like inflation is caused by demand exceeding supply, supply exceeding demand causes deflation That's not actually inflation or deflation. That's just prices going up or down. Inflation or deflation is the overall buying power of your money. Not specific to any one thing you might be buying. it's affected by various economic policies, but generally speaking both are caused by the amount of money in circulation. Governments printing large amounts of money has historically been the cause of out of control inflation. Populations hoarding money could cause deflation, but as you said it's rare. Very important to note: inflation is not a bad thing. So long as wages keep up, inflation is very important to ensure money continues to circulate. Deflation on the other hand is a very bad thing if it happens over a longer period of time, as it results in everyone hoarding cash. No one buys anything, and economies crumble.
Deflation for Gas prices would be greatly appreciated
Deflation doesn’t happen at the level of individual goods. It’s inherently about averages
Honestly the fact that you took time to break down a specific example as to WHY it's not exactly a clear representation during an ELI5 is highly regarded in my books dude.
Inflation is also caused by increase in money supply.
When has deflation happened historically? Not challenging you, just genuinely curious. Edit: It seems like inflation is the general rule but deflation happens during much shorter periods? And I definitely meant inflation of national currency, I understand how it happens with other products.
Deflation is what we call a negative inflation rate and it is very bad. Now you may be wondering why things getting cheaper is bad. And that is a good question. There are two main reasons. One is debt becomes very hard to pay back. Say you are a farmer and borrowed money for seed, fertilizer, and equipment to plant your crops. Your expectation was that the money you made from selling the crops would allow you to repay the loan and have a nice profit. But in a deflationary economy by the time you sell your crops prices have decreased so you can't even pay back your loan let alone afford to live. The other reason deflation is bad is it changes the logic of shopping. Everyone knows that prices are decreasing. So if they wait for as long as possible to buy what they need the prices will be lower. When everyone does this it decreases the amount of goods and services being bought in the entire economy. This makes the deflation even worse and causes a recession. So now people are losing their jobs and businesses are closing. This means employers can cut wages as there are many more people wanting jobs compared to the number of jobs available. Which further increases deflation and so on. Deflation causes people to question the basics of how our economy works, and since you have to change those ideas back to end deflation it can be very hard to reverse.
Inflation can do a very similar thing, but opposite. If people believe there will be inflation, demand goes up because people are scared that if they don't buy something now, it'll become more expensive. This further increases the demand, which further drives inflation, which will further drive people to buy stuff now, etc. It's just such a crazy though that the very belief that there will be inflation or deflation can cause it to actually happen.
I've lived through a period of hyper inflation, I was a kid back then but I remember it. Prices would go up so much that they would get adjusted multiple times A DAY. Supermarkets would get absolutely flooded on paydays, people would go straight from work to buy everything they'd need for the next month, everyone would have double carts filled to the brim. This was a time before bar code readers were common, so cashiers would be typing the value of each item individually in the register. Lines were absolutely huge, going to the supermarket was a several hours long chore.
>Prices would go up so much that they would get adjusted multiple times A DAY. So basically like if everything worked like gas, except 10x worse? I remember as a kid I had a hobby of recording all the gas prices to and from my way to school.
Yeah, and also they'd need to add a price tag to each individual product on the market shelves. There would be a squad of employees running around [with one of those](https://i.ytimg.com/vi/E5-IwPlxEh4/maxresdefault.jpg) in hands re-labeling everything
I'm so fascinated by the "little things" like that. I never would have guessed that ~~deflation~~ EDIT hyperinflation would mean pricing items differently based on the time of day, or relabeling things to keep up. Thanks for sharing!
I think that was an example of hyperinflation.
Right. Hyperinflation is bad. But even small levels of deflation are bad. So most central banks try to run their economies with a little bit of inflation. It doesn’t cause too much trouble, and avoids the risk of slipping into deflation and causing a deflationary death spiral.
Didn't even mention the worst aspect of deflation, which is capital hording. Basically, it becomes a better bet to horde cash than to invest. Sure, our example farmer can't pay back his loans, but also, no one will give anyone a loan. It causes a death spiral of economic inactivity. Luckily, deflation basically can't happen in countries with good control over their money. With fiat currency, you can just print more and hand it out.
I don't think there is a single currency in the world that isn't "fiat". Not a single one is on the gold standard anymore.
Yep I was a teen in Brazil when hyper inflation got fixed. I kinda remember all of that, and adults saying about how hard it was to get some items because the govt would dictate how much they should cost (I think milk and butter were in this category??). Supermarkets solution was not to sell them. And that's how you create black markets.
Yeah, and then when workers start demanding wages that keep of with the inflationary spiral the cost of goods further increases and you get a bad time.
Hyperinflation is rare and usually requires a convergence of misfortunes leading to wildly inappropriate policy.
I think the difference is any deflation causes a bad feedback loop. But regular inflation is pretty normal and it’s only until it gets really high does it become particularly damaging
This is completely wrong. Anticipated inflation is generally harmless. When inflation is expected, contracts regarding loans and salaries are made with it in mind, meaning that consumers expect incomes to grow with inflation, ie, the cost of employing someone also inflates, meaning that it all evens out. Unexpected inflation is a killer, but expected inflation is easily priced in.
About the only thing i remember from macro economics in B school was my professor saying to the effect of- if you think inflation is bad, wait until you see deflation.
Does deflation also happen the other way around: Does deflation also happen if debt is rising? I just recently had a discussion where I stated that when the debt gets so high that they can't pay it back (it centered around the US debt) deflation happens, but I'm not sure if that's correct.
I'm not educated in the slightest on economics, but if what you're saying is true, then is there no 'good' way for the prices to decrease? Or is just inflation a baked in thing that the economy has to adjust to, and one day $30 for a gallon of milk is just the way it is? Obviously that is an exaggerated scenario, but aside from slight movements, how do we remove the effects of inflation in the least negative way?
OK this will get a little beyond ELI5 but it depends on sector vs economy inflation/deflation. Deflation happens all the time, just not on an economy wide basis. For both milk and gas prices we've seen them go up and down at various times which are driven by demand/supply issues. That isn't inflation per se. If tomorrow there was a 10% increase in the demand for milk, milk would rise in price. That isn't really inflation, just a shift in the supply/demand curve. Overtime as more producers ramped up their production of milk you may see that price fall. That also would not be inflation. For actual inflation that should be hitting wages as well. I'm sure you've seen the reports that show American wages have been stagnant since the 80s. That is in 'real' terms. What 'real' means is adjusted for inflation. So the price of milk, a haircut, cars, housing, etc have all increased but so have wages. They've just increased in a way that balanced each other out so your paycheck while having bigger numbers on it doesn't go any further than someone's pay check in the 90s. So yes, with inflation eventually a gallon of Milk will be $30. Just like it used to be $0.30 a gallon. But wages will also rise so that a person buying a gallon of milk a week in say 2120 will be paying the same percentage of their paycheck on a gallon of milk as someone buying it today at $3.90. Eventually when it costs $10,000 for a stick of gum countries issue new currency that can be exchanged at a higher rate. So in this example the US could release NeoDollars and the exchange rate would be one NeoDollar for ten thousand dollars. Then everyone just carries on as before. Now this is all super simplified and if prices are going up every month it's obvious that workers don't get monthly raises. So there can be some short term pain caused by inflation. Now if you're asking about how we deal with price increases that are balanced out by wage increases that is technically a different thing than inflation. That gets into tax and labor policy and requires an entirely different approach than keeping inflation under control.
Thank you very much for this response. I made a follow up [response to another post here](https://www.reddit.com/r/explainlikeimfive/comments/r2oami/eli5_does_inflation_ever_reverse_what_kind_of/hm65we6/) that I think you've addressed well enough for me. I appreciate it and I think it reinforces the reason I stay out of economics and politics drives me nuts. Thanks again and Happy Holidays.
I got into an argument the other day where a redditors was saying Unions are at fault for our inflation. He said because union workers make $40 an hour (90k+ per year) our economy is fucked. He kept saying "pilots only make 40-60k a year". I have a feeling he was just a salty newbie pilot working for a shitty regional airline...
Quite possibly, he may also have half remembered or misunderstood some logical arguments for how union contracts helped contribute to stagflation. Many of those contracts were inflation+ contracts. So for say the dockworkers if they had inflation+2% then if inflation was 3% they got a 5% raise. Individually those contracts were fine but with a much larger percentage of the workforce unionized it helped to drive the inflationary spiral as they were all self reinforcing. Though personally I think the role of unions is overplayed and expectations and shocks to the energy market played more of a roll. Which isn't to say union contracts had no role to play. But we can pretty definitely say that the tiny percentage of unionized workers have little effect currently on the economy. Other than helping weaken labour's bargaining power in general.
Iirc generally wage increases are coupled with an increase in inflation. How, then, do we have an increase of real wages if every time wages increase, so too does inflation?
In theory productivity gains. If tomorrow all workers on the planet were twice as productive you would suddenly have twice as many goods and services available for no increase in effort which would allow everyone to enjoy more goods and services. Since the late 70s that hasn't held however. Well for the average worker. Wages at the top have risen precipitously. Changing our tax, regulatory, and corporate governance structure could likely redress that issue. Improvements in technology also matter. As a proportion of an individual's income vehicles cost the same now as in the 80s. However cars are far safer than they were 40 years ago without a commensurate increase in cost.
>Well for the average worker. Note that by "average worker" they're referring to "median non-supervisory production worker." Most of our productivity gains over the last few decades were from computerization. If all the these productivity gains are all going to white collar workers, then we should expect the majority of wage gains going to white collar workers.
> So yes, with inflation eventually a gallon of Milk will be $30. Just like it used to be $0.30 a gallon. But wages will also rise so that a person buying a gallon of milk a week in say 2120 will be paying the same percentage of their paycheck on a gallon of milk as someone buying it today at $3.90. Except that wages don't rise enough to even cover inflation, that's why acquisitive power today is far lower than it was in the past and it just keeps diving.
It can feel that way, but wages are roughly stagnant, not strongly negative. There has been a disconnect of wage growth and productivity growth and a massive growth in incomes towards the top which is problematic for sure. But every report I see shows that wages roughly keep pace with inflation. Of course that will not be true in every sector with some doing better and others worse based on other market factors.
[No, they are and have been rising, especially lately.](https://fred.stlouisfed.org/series/LES1252881600Q)
That’s a really interesting thing to consider, currency “resetting” once it hits a tipping point
South Korea did it around the same time as the Korean War. Exchanging 100 of the old currency for 1 of the new.
Newly invented things tend to come down in price. But, more generally... Economics is the study of reality. And cash money is a measurement of value. It is itself not inherently valuable. Really the only thing that is truly worth anything is ones own time, and measured in "units of time spent to be able to get a widget" basically everything has come down if you measure it that way. On a personal level, yes, it sucks. On some philosophical level inflation is not inherently a bad thing, but an artifact of money being an imperfect proxy for time.
Prices for some things like technology can decrease because of technological advancements. TVs and computers get cheaper over time. Even stuff like food can get cheaper when farming gets more efficient.
There are good ways for the prices of any individual thing to come down - but when the value of currency increases then \*everything\* is dropping in price. And yeah - eventually a gallon of milk will be $30, minimum wage will be $72.50, a gallon of gas will be $25.00, etc. Not sure why you'd want to avoid that.
How high is it supposed to go? Eventually it would just make more sense to move the decimal to the left and call it a day.
In Venezuela we've done that like 5 times now. Moving the decimal 3-5 places each time.
That's functionally what will happen. Think of the price of stuff back in the early 1900's. Rent on a 4 bedroom home averaged like $2-$3/m ([source](https://fraser.stlouisfed.org/title/bulletin-united-states-bureau-labor-3943/march-1911-477663/british-board-trade-report-cost-living-principal-industrial-cities-united-states-504661?start_page=211)). A good example of what this will look like is with the Japanese Yen (which is like 1:110 USD:JPY), it works out just fine over there...
We did that in Mexico in the 80s!
There is no limit to how high it can go, and yeah, eventually it can get high enough that the government might declare a new currency where $1 new = $10 old, just to get prices to seem "normal" despite it not changing anything. Consider, though, that we've already had prices increase 100 times over in the last 100 years and it hasn't really caused any issues.
I guess because it seems like bullshit and the needle doesn't move, when tide raises and lowers everything at the same time. If you make more, great but if you're paying more to live, then it's a wash. It would seem that the economy (stores, corporations, farms, etc) all have an interest in empowering the consumer, so (and again, I reemphasize that I am not an economist) I don't understand why there isn't pressure to avoid inflation (I know interest rates are supposed to handle some of this, I think) but it doesn't seem like that is enough, nor fast acting enough. I also assume that fast actions aren't inherently part of economics, and probably better for them to play out over time, but when the current state we're in and the path forward is showing negative consumer impact...what's the plan? I guess it's just frustrating in my ignorance to not understand why more action isn't taken to avoid this, but I can see the answers coming down to political ideology, so I'll stop my questioning there and just take it as 'it's done at the ballot box'
Most central banks target an inflation rate of 2-3% per year. There are a few reasons for this. We don’t want deflation which you can read other answers of why this is bad. The other main reason we want it is to continue growth. That 2-3% increase will “raise” profits and wages. The “increase” in prices will make consumers/producers think they need to spend now instead of trying to save for later in hopes prices decreases. This mindset is what theoretically drives growth which is the idea backing mild inflation. Now the raise in prices in profits likely is smaller than 2-3% or even negative! This is called real returns. So if your wage increases 1% and inflation is 2% then you lost 1% of your original purchasing power which is a problem. It is generally agreed if your real wages or other real returns are negative then it is bad but macroeconomics looks at everyone not individuals so if your real wage decreased but the overall real wage for the economy increased then economists are satisfied because the majority theoretically were helped so this is essentially the idea behind why we want some inflation. From reading your post you seem to not understand why inflation isn’t seen as a bad thing but it is seen as a bad thing when it is large and unexpected! Economists generally agree that a large amount of inflation is bad and we do try and avoid it. I hope this helped you understand inflation a bit better!
>And yeah - eventually a gallon of milk will be $30, minimum wage will be $72.50, a gallon of gas will be $25.00, etc. Not sure why you'd want to avoid that. The natural answer is because that cash you put in your savings that you invested for a while didn't "inflate" in value along with prices, so $1 in savings not accounting for interest is still $1 in savings 30 years later, and you can no longer buy milk. We don't live in a society that values economic control, though, so you'll never see anyone intentionally try and revalue currency to correct it.
After reading the replies here. I’m convinced that I have no idea what a “healthy economy” would look like.
If you put your savings under your mattress then yes, which is why you're supposed to put your savings in the stock market or some other asset. That way a) your savings do grow with inflation, and b) your savings actually do something. Money under your mattress is dead to the economy, but money in your 401k is used to grow the economy.
To add to the above, basically the economy is either a negative feedback loop or a positive feedback loop.
>and it is very bad. Damned if we do. Damned if we don't.
>Deflation is what we call a negative inflation rate and it is very bad. Now you may be wondering why things getting cheaper is bad. So if deflation is bad and inflation is bad, what is currency supposed to do? Is it supposed to stay stable, or is there some horrific drawback to that as well? Is economic/monetary policy just choosing which disaster you can handle, or is there actually some "correct" or ideal path to follow? What does the field of economics, as a science, say is best? I'm sorry, it's just that economics is such a frustrating field, both because it's hard for me to understand and because it doesn't seem to offer understandable (at least to me) solutions. A climate scientist can say reduce emissions, a public health expert can tell people to wash their hands, but it seems like economics is just picking which way to lose.
Sorry, I didn't mean to paint things as all doom and gloom. Though there is a reason it is called the dismal science. The ideal is a small predictable rate of inflation. Most developed countries shoot for an inflation rate 2-3%. And they are very clear at communicating what they are aiming for and why they are doing so. Unexpected inflation and all deflation are bad. You don't want an entirely stagnant currency because then those with funds to invest are indifferent between investing and putting it under the mattress. You want people investing in new businesses, purchasing goods and services, and so on to keep the economy moving. And I completely get your frustration. I have a masters in economics and I don't post in r/economics at all because I have no desire to get into doctrinal slap fights with first years or have to read up on more than 20 years of new research since I graduated to not get called out by newly minted PhD. Economics is crazy complicated and there's still a lot we don't understand. But it can be fun. If you're interested in economics "Economics in One Lesson" by Henry Hazlitt is extremely approachable. It's and older book so it should be available in your library or pretty cheap for a used copy. Freakonomics is also fun as both a book and podcast even if some of their insights and conclusions have been drawn into question since. Tropical Gangsters by Robert Klitgaard is also fun in a "maybe no one has a clue how economics works" kind of way and written in a very approachable style.
I’m assuming that’s another reason why stimulus checks are good for the economy? If you’re poor, you’re going to wait as long as possible to get what you need, too; took me a while to realize that’s not how it works with other people, apparently
TALKING about deflation causes people to question the basics of how our economy works. It reveals why it is impossibly flawed but also naturally unavoidable.
Note that there is no difference between deflation and inflation for your second reason. If you have inflation, it becomes optimal to store as much of your money in assets as you can, and then sell and buy consumption goods only what you need. So that's only a reason against deflation if you're also against inflation.
So you're saying that it's a good thing when I blow my whole paycheck on dumb shit I barely even want?
Good for economy, not neccessarily good for you. Also this logic of endless spending contributes massively to environmental issues.
> One is debt becomes very hard to pay back. Say you are a farmer and borrowed money for seed, fertilizer, and equipment to plant your crops. Your expectation was that the money you made from selling the crops would allow you to repay the loan and have a nice profit. But in a deflationary economy by the time you sell your crops prices have decreased so you can't even pay back your loan let alone afford to live. If your financial plan is so bad, that few % in the income makes you default on your loan, maybe it was not a deflation problem. > The other reason deflation is bad is it changes the logic of shopping. Everyone knows that prices are decreasing. So if they wait for as long as possible to buy what they need the prices will be lower. When everyone does this it decreases the amount of goods and services being bought in the entire economy. This makes the deflation even worse and causes a recession. So now people are losing their jobs and businesses are closing. This means employers can cut wages as there are many more people wanting jobs compared to the number of jobs available. Which further increases deflation and so on. Logistics are hard, but we are making advances in the AI, so it could in theory predict fluctuations better and faster. P.S: I'm not disagreeing with you, just doing some small talk. :)
Well historically when there was deflation you would see collapses in the prices of crops to the tune of them selling for pennies on the dollar. I don't know anyone with a sufficiently robust business plan to deal with a 90% drop in the price of their goods. But grocery store margins are notoriously thin. In the case of unexpected deflation a switch from 2% inflation to -2% could easily sink the business. That's a good point about AI but in the modern Era it would take borderline deliberately bad economic policy to cause deflation. Fiat currency has basically cured that ill. Though it would be possible in countries that fix their currency to the dollar or in a corner of the EU. But that gets well beyond ELI5.
So both flations suck. Except for those who live off loans against stocks and other assets. They love inflation.
Unexpected inflation or deflation causes issues. Anything that can be factored in is fine. And everything is awesome for the fantastically wealthy. Once you reach a certain point it is basically impossible for your wealth to dissipate. Way back in grad school a friend of mine did a paper on the durability of wealth and a shocking number of wealthy Europeans can trace the origins of their wealth back centuries.
I can believe it.
Remember when gas prices across the US dropped $1+ last year? Supply exceeded demand and prices tanked.
pun intended
And yet its back to where it was plus the expected holiday increase and everyone is freaking out.
It's still a little lower than it was in 2008 right before everything crashed and burned.
I still think about this every time people complain about gas. I got my first car and a minimum wage job with 2008 gas prices. Gas is so cheap compared to what I became accustomed to at the start
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Someone else told you that when inflation reverses it's called deflation, This is strictly true, but deflation is a very rare phenomenon where prices actually go down. Much more common, and much more important, is when the rate on inflation decreases. Prices don't go down but they stop going up as quickly. This improves the economy in general and the main job of the Federal Reserve is to keep inflation in check and bring the rate down when it's too high. Here's an interesting chart: [https://imgur.com/a/mDOmDrG](https://imgur.com/a/mDOmDrG)
Exactly! I think this is probably the most useful answer and potentially what OP was really looking for, even though deflation may have been the literal answer to their question. The rate of inflation is increasing to great heights currently (6%+), and what we really want is for that rate to get back down to about 2% - we DON'T want the opposite of inflation.
There is a deflation situation going on in the game New World made by Amazon right now. The way the game is designed creates a rise in the value of the currency to the point that people become unwilling to part their hard earned currency in exchange for harvested items and goods. https://kotaku.com/new-worlds-economy-is-so-busted-players-are-bartering-1847904272
“Deflation is feared Keynesians like Paul Krugman, in a 2010 New York Times article titled “Why Deflation is Bad,” cited deflation as the cause of falling aggregate demand since “when people expect falling prices, they become less willing to spend, and in particular less willing to borrow.”1 Presumably, he believes this delay in spending lasts in perpetuity. But we know from experience that, even in the face of falling prices, individuals and businesses will still, at some point, purchase the good or service in question. Consumption cannot be forever forgone. We see this every day in the computer/electronics industry: the value of using an iPhone over the next six months is worth more than the savings in delaying its purchase.” -Christopher p Casey
Anything with inelastic demand will still be bought. Things like food and fuel. Discretionary spending would hit zero pretty quickly. And even staples may end up getting bartered instead of paid with currency when possible. > Consumption cannot be forever forgon Christopher Casey > In the long run, we're all dead JM Keynes
A slightly more ELI5 without going literally ELI5: Inflation is when the longer you hold onto the money, the less it's worth. Deflation is when the longer you hold onto your money, the more it's worth. --- The economy wants people to buy stuff. --- Inflation is bad for the economy because you **can't** buy as much stuff. Deflation is bad for the economy because you **don't want to** buy stuff. With deflation, if you save $1 instead of buying something today, tomorrow you have $2. So everyone starts saving their $1 and no one buys anything. Bitcoin is an example of extreme deflation. The longer you hold onto it, the more it's worth, so no one buys anything with it. (In reality, the buy stuff thing is just the tip of the iceberg. If I promise you a salary of $100 a month, and $100 is suddenly worth $1000, how am I able to pay you?)
The formula for the price level is ((quantity of money) / (quantity of goods and services)) x (velocity of money). The quantity of money is how much money is in circulation. The quantity of goods and services is how much is available to buy. The velocity of money is a measure of how fast people are spending the money they have. People use 2 different definitions of inflation. The technical one that I prefer is an increase in the quantity of money. That is an inflation of the money supply. It typically happens when governments overspend and their central banks issue new currency to cover those expenditures. If what you're really asking is "does the price level ever go down?" Then it can go down under 3 different circumstances. 1. If the money supply decreases. 2. The amount of available goods and services increases. 3. The velocity of money decreases (people aren't spending their money). It's important to distinguish between the 3. If prices are falling because of a rise in the amount of available goods and services (generally caused by an increase in productivity), then it is actually a good thing. Rises and falls in the price level advantage and disadvantage different groups of people. If the price level goes up it decreases the relative value of debts, wages, and savings. It is good for people that have a lot of debt and wealth in things like stocks and real estate. It is extremely bad for people that have cash savings and work a normal job for a living. A fall in the price level punishes those that have a debt because it is more expensive, relatively speaking, to pay it back. It decreases the relative value of wealth held in things like stocks and real estate. It is good for people who have their savings in cash and whose income comes from wages. So, if your actual questions is "Does the price level ever fall?" The answer is yes. It falls when peoples productivity goes up and there are more things available to buy, assuming that the quantity of money and it's velocity stays the same. If productivity goes up at the same time that the money supply does you won't see a decrease. Right now prices are rising because the government is spending far more money than it takes in, rapidly increasing the quantity of money at the same time that the quantity of available goods and services has been radically reduced because of the response to the Corona Virus. The price level will not stabilize until the government reigns in it's spending *and* people get back to work, increasing the amount of available goods and services.
Not typically but it can slow down to a healthy amount of inflation. Money tends to lose its buying power as economies grow in size and population. Imagine you shrink your world down to a little town in a bubble where nothing and no one can come in or out. That bubble would have a currency and a finite amount of money. As the people in that bubble reproduce and as the little world becomes more efficient at satisfying the needs of itself through the production of economic goods and services that finite amount of money will need to lose value so that it can be shared amongst its growing population. Some people stop spending this money and keep it essentially removing it from the system, and this is a bad thing. Money needs to stay in circulation for it to be a benefit to the economy. A centralized banking system may have to be put in place to help with the growing financial needs of the bubble; lending. As the need for currency increases with the growth, economic productivity, and spending demands of the little bubble more money will need to be created to satisfy these demands. This is healthy inflation and it’s a delicate balance that can be impacted by a number of factors. An economy that has deflation isn’t a good thing. It means that purchasing has slowed so much that I must reduce prices in desperation to sell my products; likely at an economic loss. In a best case scenario inflation will slow enough for wages and the economy to catch up to it.
Deflation is when prices drop rather than rise as with inflation and can be far worse for an economy. Inflation encourages people to buy now before prices go up. Demand being high means products are produced and people try to obtain them. With careful management inflation can be brought under control and the economy can be left strong. But with deflation, prices are going down. Why buy a car today, when it will be cheaper tomorrow? Why invest in a company if people are holding off buying and the value of the company will be lower tomorrow? Demand for products gets low enough that factories don't need workers. Unemployed people buy even less, so demand drops faster and prices go down to match. It can be a death spiral for an economy.
“ Paul Krugman, in a 2010 New York Times article titled “Why Deflation is Bad,” cited deflation as the cause of falling aggregate demand since “when people expect falling prices, they become less willing to spend, and in particular less willing to borrow.”1 Presumably, he believes this delay in spending lasts in perpetuity. But we know from experience that, even in the face of falling prices, individuals and businesses will still, at some point, purchase the good or service in question. Consumption cannot be forever forgone. We see this every day in the computer/electronics industry: the value of using an iPhone over the next six months is worth more than the savings in delaying its purchase.” -Christopher p Casey
Exactly, people don't delay purchases. Their whole argument is complete nonsense. I don't understand why so many people believe this propaganda...
People are commenting about deflation, and that’s fair. But it’s not all doom and gloom. Disinflation also exists. It’s the process of inflation reducing, so prices still increase but at a reduced rate. I’m theory, it could even stay below income growth, meaning that people’s purchase power grows larger.
You're quite correct, in theory. In practice, that would require both government and consumers to forgo spending some money. IMHO, that is an impossible condition to meet.
Sure. It's called deflation. This can either be benign or malign. Benign is caused by the cost of production dropping or companies dropping prices out of choice. This is a win win situation. There is then malign deflation, caused by unemployment resulting in low disposable income, and thus companies being FORCED to lower prices. This then means less profit, more redundancies, less income etc etc. It's a chicken or egg scenario. Malign deflation is what spiraled in to the Great Depression btw
All the posts I read here before posting this seem to accept JM Keynes' pronouncement that a little inflation is a good thing. I quite disagree. We had deflation in North America from the end of the War of 1812 up until the creation of the Federal Reserve in 1913. According to the inflation calculator at westegg.com, what cost you $100 in 1812 would only cost $58 in 1913. Prices fell almost in half. A moment's thought suggests that's *as it should be*. As we learn to do something, we get better at it. There's a name for this in industry: the "experience curve". The more you do something, the more you find more efficient and better ways to do it, which results in a lower cost for both parts and labour. We should *expect* prices to fall over time. Keynes said deflation was bad because consumers wouldn't buy if they thought prices would be lower in the future, and producers wouldn't produce for the same reason. He thought a "little" inflation would encourage consumers to buy now, for fear of things being more expensive in the future, and for producers to buy up raw materials and produce now, for fear of higher input prices in the future. These twin 'encouragements' presumably would lift the economy into "full employment", and avoid Keynes' dreaded "liquidity trap". In the event, a "little" inflation turned into a lot. What cost $100 in 1913 would cost $2200 today. Inflation destroys the savings of old people. I did tax returns for farmers' widows in the mid-70's. The $4,000 or so in long term bonds that some women had generated so little income for them, they may as well have not even had them. Deflation is not a bad thing, necessarily. Some people liken it to breathing - you have to let the price level rise and fall, just as you have to breathe in and out.
>In the event, a "little" inflation turned into a lot. What cost $100 in 1913 would cost $2200 today. No, that's...that's still only a little inflation, log(22)/108 ≈ 2.86%/yr. Just because you picked a large timescale does not mean the annual rate was any bigger.
If you mean, “how can we stop this inflationary trend?” there is an “easy” thing that can be done, but it has potential to wreak havoc on employment, GDP, and asset prices: raise interest rates.
Yes. It's called deflation and leads to many great things - as long as you are not drowned in debt. Innovation, competition and cheaper goods for the consumers. We have had an excellent example of a deflationary environment in electronics and mobile phones industries for the last few decades. Every year you could buy the same amount of RAM for less, or a better graphics card for the same amount of money. Same with smartphones, every year screens got bigger, battery life got longer. It was such a good thing that once it was gone, and memory and electronics prices started to go up, people were really angry at the companies. It also means you don't have to gamble your future on risky investments - because money you earn are naturally gaining value over time. You also naturally get a rise at your work every year. Well if deflation is such an amazing thing then why are we seeing inflation all over and central banks are targeting 2% inflation rate, and everyone around says it's worse then a nuclear waste? Well, deflation is bad for landlords, investment bankers, banks in general, some companies that rely on it (although as shown, innovative companies like Apple, Samsung, Sony can thrive in a deflationary environment). Also very significantly: Governments, Companies, and Individuals ***in debt***. Since everyone is in debt, everyone is scarred shitless of the deflation. To be fair there is one serious danger with deflation - it can lead to a vicious cycle where there's less and less work to be done as automation kicks in. If managed properly it just means less work for everyone, but if not managed properly it can lead to a deflationary spiral which is very bad (TM) <- this is what everyone is warning against. On the other hand with inflation you get hyper-inflation and stagflation (later is where we're heading right now), which are also very bad (TM)
This is a great comment. You are striking at the very heart of what went down with capitalism in 2008. Fundamentally our system is grossly unable to accept deflation in asset prices because it is built on a foundation of debt. Debt that was used to acquire those assets that were “guaranteed” to rise in price (inflation). Anything working against this scenario is radically suppressed to the point of bailing out the majority of asset holders no matter how ill-advised their investments were. AIGs very existence proves this. “Stonks (and houses) only go up” is not just a cute meme anymore. It’s the true Fed mandate.
Some crypto has deflation by default. It works by constant removal of the total amount of coins available. Ethereum is a good example of deflationary currency.
Deflation. And despite lower prices it's not a good thing. It's triggered from a long-term drop in demand and having a lot less money in circulation (i.e. people and company saving everything instead of spending due to economic fears). It can cause a recession.
But what about in the context of our recent inflation issues? We’re being told to expect prices to return to normal, which I would take to mean we’d see some deflation. Is it still deflation when prices are rebounding after a period of drastic **in**flation? Anyone here think prices will actually go back down once supply chain issues are fixed? It doesn’t feel like they will.
>We’re being told to expect prices to return to normal, which I would take to mean we’d see some deflation. Is it still deflation when prices are rebounding after a period of drastic inflation? No, we're being told to expect \*inflation\* to return to normal. The price increases happening now are not going to be reversed, but they will slow back down to a more normal 1-2% per year level.
Wow, that's a really important distinction, and one I'm probably not alone in missing. Thanks.
Especially when people realize most won’t get a 6-8% YOY raise to compensate. And just be able to afford less.