The popular idea that prices should fall to previous lows gives most economists chills. Deflation is bad for everyone, they say.
The popular idea that prices should fall to previous lows gives most economists chills. Deflation is bad for everyone, they say.
Deflation encourages businesses and people to hold on to their money instead of spending it. One person’s spending is another person’s income, so when spending goes down so do incomes. When people’s incomes go down, they reduce their own spending in response. This is a vicious cycle that leads to a lower standard of living.
Don’t believe me? It is what happened to Japan since the 1990s after their real state bubble exploded. It is called “the lost decades” and it was very much felt by the population.
Fair. The 2% inflation that the FED is pursuing by raising rates is because that’s the economic sweet spot. If we end up in a 10 year deflationary period then that would be catastrophic. I was moreso referencing a short term “return to 2019 numbers” type of deflation that I believe could be a good thing for people.
Since the FED is focused on a 2% inflation hedge and we’ve raised interest rates so much, they would just lower them again to prevent a repeat of Japan. They’re predicted to lower them next year because of this.
Are you saying that a 2%-ish deflation rate sustained for ten years would be catastrophic, but a return to 2019 prices would be a good thing? On what sort of time period would that be beneficial?
Because the accumulated inflation since 2019 is somewhere around 20%, and if we correct it over ten years that would approximately match the scenario you deemed as catastrophic earlier.
Well, that is what Japan tried to do and it wasn’t enough. The problem is that in the real world you can’t lower interest rates beyond a certain point, because as interest rates approach zero or even negative values (ZIRP), banks find it very difficult to make a profit from lending, which leads them to bankrupcy, which in turn slows the economy down, which is the opposite of what you are trying to achieve. Not to mention that on the way to ZIRP private debt balloons and when interest rates eventually revert to their mean the debt burden becomes unbearable, which leads to a recession.
In other words, macroeconomics is a tricky unstable system and simplistic takes have poor outcomes.
I think if you extrapolated from 2019 with a 2% inflation rate extended to 2025 or 2026, and managed to intersect with that, it would be kind of good, but I don’t know if you can without some harm somewhere. You have a very real disruption in the pandemic, followed by a large land war in Europe.
However you cut it, there is some pain to be spread around. It just seems that the Billionaires won’t be feeling any of it.
Still, a “soft landing” still might be kind of do-able, I wouldn’t be adverse to a few years of 1% inflation in the CPI with 2% pay raises. But macroeconomics is hard at the best of times. Hey, how about those housing costs?
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Well given we have limited resources and climate change is causing a lot of issues, we really should stop growing the economy and creating more inflation, because we’re going to see widespread deflation over the next few decades. Everything we build up now will come back down, as we refuse to build for the new world & cling to the old one.