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I wonder why economists are so afraid of deflation?

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pawelk1986
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12 Apr 2015, 1:06 pm

I wonder why economists are so afraid of deflation, what's wrong with that prices are falling?

it's probably better than the increase in prices, at least for ordinary people like the fuel prices for example?

https://answers.yahoo.com/question/inde ... 043AA0GyKj



ooOoOoOAnaOoOoOoo
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12 Apr 2015, 1:14 pm

They are really afraid of price of oil per barrel falling because it could indicate energy companies may default on loans and that could mean ripple effects throughout the economy. In order to keep this from happening, such companies will lay off employees first and it means less people with good paying jobs.



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12 Apr 2015, 1:43 pm

Deflation is hated by debtors.

Inflation your debt shrink, and deflation makes your debt bigger.

Deflation does have a negative consequence on the economy ... e.g. spending can decrease, jobs may be lost and so on but this the pain that you must suffer for trying to cheat yourself to utopia.



Awesomelyglorious
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12 Apr 2015, 8:46 pm

So, the issue is that there IS a real difference between inflation and deflation. So, with inflation the price of everything rises, but that can usually be accounted for by simply adding interest. So, if an interest rate starts off at 8%, and then there's inflation of 3%, you can just add these together to get 11%.

Well, the issue with deflation is that deflation gives an incentive to simply hold on to money. So, if there's a deflation rate of 3%, if you simply remove your money from the system, you'll get some return. The problem is that the more people who remove their money from the economy, the worse the economy works, as the more money that is removed, the more extreme deflation gets. This is called a deflationary spiral, and some economists believe that the Great Depression was largely due to a deflationary spiral. Some more information can be found here: http://www.investopedia.com/terms/d/deflationary-spiral.asp



ooOoOoOAnaOoOoOoo
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13 Apr 2015, 6:02 am

Awesomelyglorious wrote:
So, the issue is that there IS a real difference between inflation and deflation. So, with inflation the price of everything rises, but that can usually be accounted for by simply adding interest. So, if an interest rate starts off at 8%, and then there's inflation of 3%, you can just add these together to get 11%.

Well, the issue with deflation is that deflation gives an incentive to simply hold on to money. So, if there's a deflation rate of 3%, if you simply remove your money from the system, you'll get some return. The problem is that the more people who remove their money from the economy, the worse the economy works, as the more money that is removed, the more extreme deflation gets. This is called a deflationary spiral, and some economists believe that the Great Depression was largely due to a deflationary spiral. Some more information can be found here: http://www.investopedia.com/terms/d/deflationary-spiral.asp

Yup when people take money out it creates huge, huge issues. Right now so much of the US monetary units simply vanish into offshore accounts.

Then we got cartels laundering many millions, perhaps billions of dollars into the US economy. No wonder things is so messed up!

When discussing the economy, these serious issues are often ignored like they don't exist and yet we see so many problems with our economy. Money just seems to disappear replaced by mountains of debt. There just never seems to be enough money.



Humanaut
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13 Apr 2015, 8:15 am

pawelk1986 wrote:
...what's wrong with that prices are falling?

Nothing. That's a good thing. It raises the general standard of living. The fear of deflation has no bearing in reality. The only thing they fear is not being able to confiscate this increase in the general standard of living through inflation. They need it to pay for all the freebies they promised you in exchange for your vote.



kraftiekortie
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13 Apr 2015, 8:22 am

Economists are afraid of deflation because it is frequently associated with economic depression.



Magneto
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17 Apr 2015, 10:05 am

From my reading, all I've been able to ascertain is that they don't like it because it increases real interest rates, making it more expensive to service debt. When your economy is based on debt, both personal (to fund increased consumption) and stae (to fund higher spending)... well, you can see the problem.

I think the fear that it would result in people not spending is overblown, though. As long as the deflation rate is less than people's discount rate, there shouldn't be a problem - that is, if they're willing to pay 5% more to have something *now* rather than in a years time, and the deflation rate is less than 5% per annum, then they'll buy it now rather than delaying consumption.

As far as interest rates go, I think people (with the exception of central bankers) will correct their nominal interest rates to maintain a steady real interest rate, so I don't think it's that much of a threat to anyone who isn't planning on fueling their economy on debt.