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Rory
Post  Post subject: Why are Deflation & Inflation both bad? [Split from Oil Prices]  |  Posted: Sat Jan 10, 2015 11:27 pm
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Another one for the economists: why are both inflation and deflation bad news for the economy?

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iNow
Post  Post subject: Re: Why the price of gas?  |  Posted: Sun Jan 11, 2015 2:32 am
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Rory wrote:
Another one for the economists: why are both inflation and deflation bad news for the economy?

Short answer: Inflation means people cannot afford to buy as much because each dollar/pound has less purchasing power and cannot be stretched as far. This slows the economy because when people don't spend then others income and revenue (shop keepers, service people, manufacturers, etc) falls and then they too spend less and it becomes a self-reinforcing downward spiral.

Deflation is bad because wages tend to be cut and layoffs tend to increase in a deflationary economy and lower wages mean less money for people to spend. Also, when prices are dropping due to deflation people tend to delay big purchases. Maybe they need a new washing machine or refrigerator or car. Well, if they think the price next month or next year is going to be lower than it is today they will generally choose not to spend and to wait until they can get more for their money. When people stop spending their disposable income it's bad for the same reasons and in the same ways that I described above for inflation.

http://www.brookings.edu/research/opini ... ion-wessel

It's really all about balance... Trying to find it, keep all of the countless many variables where they need to be (inflation, deflation, money supply, unemployment, interest rates , trade surplus/deficit, fiscal policy, deficit spending, etc.), and through all of that manage to somehow maintain some degree of stability and growth.

That said, many economists suggest that one of the best things we can do right now is to have a bit of inflation (in the US, anyway). While it hurts creditors (those who have lent money), it would help debtors (those who have borrowed and owe money) and would enable them to get more quickly out of debt and on to more stable financial footing... Move out of the parents basement, buy a car or a house, that sort of thing. As it stands today, too many people are working two and even three jobs only to have the entirety of their pay checks going to pay debts and bills.

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Rory
Post  Post subject: Re: Why the price of gas?  |  Posted: Sun Jan 11, 2015 10:49 am
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But in one sense, surely deflation means that the consumer may purchase more goods per dollar?

Why is it that the debt-ridden are always pandered to economically? Poor home owner with too many commercial loans for luxury items, let me cry a river! How about helping those whom have never acquired commercial debt and who are losing out on savings due to the poor interest rate. I wish there were a nation to join whose economy were exclusively built by and for those who say "no" to debt and to risking tax payers hard-earned money.

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kojax
Post  Post subject: Re: Why the price of gas?  |  Posted: Tue Jan 13, 2015 2:49 pm
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Rory wrote:
Another one for the economists: why are both inflation and deflation bad news for the economy?


Both of these affect investors. Which means they affect investment. And when investment is impacted, everything is impacted.

During a period of high inflation, saving money starts to mean nothing. There's just no point in bothering to save it because it won't maintain its value. However, money lenders still will ask a very high interest rate, because they want to make back enough money to keep up with inflation.

On the plus side, it is easy for a business to generate a profit because if they pay for their merchandise one month and sell it the next month, the inflation will tend to add slightly to making the sale price slightly higher than the buy price.

Deflation is even worse.

During a period of deflation, keeping cash on hand is a good investment. Your money just keeps getting more valuable. Money lenders will lend at a very low interest rate, but only to someone who is guaranteed to be able to pay them back.

Nobody wants to invest in business ventures, because the items you buy to set up a business immediately start to depreciate after you buy them. If you're buying merchandise one month and selling it the next month, deflation will slightly lower the value of your merchandise during that month before you can sell it.

But, the worst effect of deflation is that collateral used on loans may become to be worth less than the outstanding balance on the loan. So people will simply default on the loan and give up their collateral, rather than pay it.


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Rory
Post  Post subject: Re: Why the price of gas?  |  Posted: Tue Jan 13, 2015 4:49 pm
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Quote:
kojax wrote:
During a period of high inflation, saving money starts to mean nothing. There's just no point in bothering to save it because it won't maintain its value. However, money lenders still will ask a very high interest rate, because they want to make back enough money to keep up with inflation.


But this doesn’t matter to economically insulated small fry elements of the economic system – those receiving a guaranteed (if meagre) income, and who are not personally interested In either saving or borrowing.

Quote:
kojax wrote:
But, the worst effect of deflation is that collateral used on loans may become to be worth less than the outstanding balance on the loan. So people will simply default on the loan and give up their collateral, rather than pay it.


Again, this wouldn’t matter to small fry. Still, wouldn’t this affect the creditworthiness of the defaulter? And so act as a deterrent?

Basically inflation and deflation impact upon the broader ecosystem, and will affect the fortunes of different corporations and individuals differently, depending on exposure levels. However, if your (very low) income is guaranteed at a certain level, and if you are not interested as an individual in either saving or borrowing but merely breaking even month-on-month, then surely deflation would be a good thing?

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iNow
Post  Post subject: Re: Why the price of gas?  |  Posted: Tue Jan 13, 2015 5:44 pm
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Rory wrote:
But this doesn’t matter to economically insulated small fry elements of the economic system – those receiving a guaranteed (if meagre) income, and who are not personally interested In either saving or borrowing.

But it does. During periods of inflation, it means that each of those meager dollars/pounds are worth even less than they were before and consequently more of them are needed to make the same purchases. To oversimplify, it's like all of your $10 notes suddenly only being worth $5 when you try to spend them.


Rory wrote:
Again, this wouldn’t matter to small fry.

It would, though, especially since small fries tend more often to operate in deficit conditions and live on some type of debt cycle. If lenders are no longer willing to lend money to them, they suddenly have nothing to spend and their condition worsens farther than it already has.

Rory wrote:
Still, wouldn’t this affect the creditworthiness of the defaulter? And so act as a deterrent?

If they default on a loan, yes. It will affect their creditworthiness, but humans are notoriously bad at thinking long-term when making short-term financial decisions. We're just not evolved for it (see also: payday loans).

Rory wrote:
Basically inflation and deflation impact upon the broader ecosystem, and will affect the fortunes of different corporations and individuals differently, depending on exposure levels. However, if your (very low) income is guaranteed at a certain level, and if you are not interested as an individual in either saving or borrowing but merely breaking even month-on-month, then surely deflation would be a good thing?

Within reason. Remember that neither of those groups operate in a vacuum. What affects the corporations and fortunate also affects the individual and low income folks. It's one system with many parts, not two systems independent of each other as you appear to be suggesting.

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Rory
Post  Post subject: Re: Why are Deflation & Inflation both bad? [Split from Oil   |  Posted: Tue Jan 13, 2015 10:24 pm
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Oh, yes, inflation would adversely affect even those individual citizens at the bottom of the economic food chain - but deflation, not necessarily. If an individual citizen has no debt and is not interested in borrowing (so not debt-dependent) then deflation can only mean more goods per unit currency. And while the economic fortunes of the lowly individual are ultimately tied to the health of the wider economy, if that person's income is welfare payments or state pension, then if those provisions were to end due to financial collapse of the state then there would be a lot more to worry about than mild inflation or deflation. What I mean is, in the context of current conditions in the UK (at least, I don't know about the US) then deflation would actually help such an individual.

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iNow
Post  Post subject: Re: Why are Deflation & Inflation both bad? [Split from Oil   |  Posted: Wed Jan 14, 2015 2:01 am
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Perhaps the biggest impact of deflation on lower income families is how it tends to cause employers to decrease wages and cut jobs.

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kojax
Post  Post subject: Re: Why the price of gas?  |  Posted: Wed Jan 14, 2015 3:32 am
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Rory wrote:
Quote:
kojax wrote:
During a period of high inflation, saving money starts to mean nothing. There's just no point in bothering to save it because it won't maintain its value. However, money lenders still will ask a very high interest rate, because they want to make back enough money to keep up with inflation.


But this doesn’t matter to economically insulated small fry elements of the economic system – those receiving a guaranteed (if meagre) income, and who are not personally interested In either saving or borrowing.


How many people are recieving a guaranteed (if meagre) income?

Your wage as a worker depends on the availability of jobs. When investors are reluctant to invest, businesses start to close. Most businesses need a loan now and again to keep their doors open through rough times, or to upgrade their infrastructure, or expand their operation into a new market as old markets dry up.

As jobs get scarce, your employer is likely to ask you to take a pay cut, or forgo increases in pay. There is always a little bit of inflation (at least in the USA), so if you don't get increases in your pay from time to time you're really taking a pay cut (because your existing salary begins to be worth less.)



Quote:
Quote:
kojax wrote:
But, the worst effect of deflation is that collateral used on loans may become to be worth less than the outstanding balance on the loan. So people will simply default on the loan and give up their collateral, rather than pay it.


Again, this wouldn’t matter to small fry. Still, wouldn’t this affect the creditworthiness of the defaulter? And so act as a deterrent?

Basically inflation and deflation impact upon the broader ecosystem, and will affect the fortunes of different corporations and individuals differently, depending on exposure levels. However, if your (very low) income is guaranteed at a certain level, and if you are not interested as an individual in either saving or borrowing but merely breaking even month-on-month, then surely deflation would be a good thing?


If you were truly insulated entirely from the bigger system, and had a fixed income, then yes. Deflation would be a good thing for you.

But most people's salaries will drop of the price of goods and services drop, because most people derive their salary from producing a good or a service of some kind. Very few people are immune to that.


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Rory
Post  Post subject: Re: Why are Deflation & Inflation both bad? [Split from Oil  |  Posted: Wed Jan 14, 2015 10:48 am
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Deflation would be bad news for employees but I'm referring specifically to those in receipt of welfare payments who are also not working - e.g. the unemployed, the chronically sick, and those over age 65 receiving only a state pension. For those welfare or state pension payments to be terminated nationally would mean the end of the state as we know it. So, my point is, that deflation would help these individuals by increasing their spending power.

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iNow
Post  Post subject: Re: Why are Deflation & Inflation both bad? [Split from Oil   |  Posted: Wed Jan 14, 2015 1:38 pm
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In the short-term, yes. Perhaps. I also suspect that welfare benefits are significantly better where you are than they are here in the US.

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Rory
Post  Post subject: Re: Why are Deflation & Inflation both bad? [Split from Oil   |  Posted: Wed Jan 14, 2015 4:18 pm
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Yes - in that respect I feel quite fortunate to be a UK citizen, and also because our healthcare is free at the point of entry.

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kojax
Post  Post subject: Re: Why are Deflation & Inflation both bad? [Split from Oil  |  Posted: Thu Jan 15, 2015 2:48 am
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Rory wrote:
Deflation would be bad news for employees but I'm referring specifically to those in receipt of welfare payments who are also not working - e.g. the unemployed, the chronically sick, and those over age 65 receiving only a state pension. For those welfare or state pension payments to be terminated nationally would mean the end of the state as we know it. So, my point is, that deflation would help these individuals by increasing their spending power.



It will help them so long as the state doesn't go bankrupt and decide to cut those programs. (Or reduce them, which is more likely than cutting them.)


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Rory
Post  Post subject: Re: Why are Deflation & Inflation both bad? [Split from Oil  |  Posted: Thu Feb 12, 2015 5:20 pm
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So what is negative inflation? I thought that would be equivalent to deflation?

Quote:
Inflation in the UK could temporarily turn negative in the spring because of falling oil prices, the governor of the Bank of England has said.

Launching the Bank's inflation report, Mark Carney added that prices were likely to rebound around the turn of the year, so this did not mean the economy had entered deflation.

But he said if low inflation persisted, the Bank could cut rates further.

Inflation stands at 0.5%, the joint lowest level on record.

That is well below the Bank's target of 2%, and prompted a letter from Mr Carney to Chancellor George Osborne explaining the situation.

In it, he says that "the UK is not experiencing deflation" and that the "most important single reason for below-target inflation over the past year is the unexpected recent sharp drop in energy prices".

"On the assumption that energy and food prices stabilise, CPI inflation should pick up notably once earlier declines start to drop out of the annual comparison, towards the end of this year, " he writes.

Mr Carney said that the headlines on inflation masked an underlying stronger economy. He has revised up the Bank's growth and wage forecasts.

For this year and next, the Bank of England sees economic growth of 2.9%. The 2016 prediction is an increase from a previous estimate of 2.6%. Wages are forecast to rise by 3.5% this year, having risen by 1.75% in 2014.

is quite a big thing to exclude oil, energy and food where price falls have been significant and sustained. And those falls are in part linked to the weakness of the global economy.

The Bank also acknowledges that price pressures in general are feeble, especially from lacklustre wage increases.

But Mr Carney insists this should not be seen as "generalised and persistent declines in prices" of the sort that could be characterised (in his vocabulary) as "deflation".

In fact, the Bank's current projection is that inflation will rise to the target rate of 2% by the middle of 2017, without it having to take any evasive action.

If it is right, the Bank would be increasing interest rates - by a tiny amount, mind you - some time next year.


http://www.bbc.co.uk/news/business-31438213

Or is Carney just trying to hoodwink the populace out of delaying purchases?

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iNow
Post  Post subject: Re: Why are Deflation & Inflation both bad? [Split from Oil  |  Posted: Thu Feb 12, 2015 6:32 pm
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Rory wrote:
So what is negative inflation?

It's an example of how few economists also study english and/or communication skills. :lol:

Kidding aside, negative inflation (or disinflation) tends to refer to a slowing rate of inflation and doesn't come with a the same negative effect on prices and the overall economy in the way deflation does. Here's a good primer: http://econperspectives.blogspot.com/20 ... ation.html

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Rory
Post  Post subject: Re: Why are Deflation & Inflation both bad? [Split from Oil   |  Posted: Thu Feb 12, 2015 6:56 pm
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Quote:
iNow wrote:
negative inflation (or disinflation) tends to refer to a slowing rate of inflation


My brain is going to fall out :shock:

The primer says:

Quote:
Deflation occurs when the inflation rate is negative.

Disinflation occurs when the inflation rate decreases, but remains positive.


So disinflation and negative inflation are different states.

How then can negative inflation not equate to deflation?

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iNow
Post  Post subject: Re: Why are Deflation & Inflation both bad? [Split from Oil   |  Posted: Thu Feb 12, 2015 8:52 pm
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A negative inflation rate is not equivalent to an inflation rate that's simply growing more slowly.

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Rory
Post  Post subject: Re: Why are Deflation & Inflation both bad? [Split from Oil   |  Posted: Fri Feb 13, 2015 1:40 pm
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But you said above that the two are equivalent?

Beginning to think that what the UK is experiencing is deflation but that Carney does not want to spook investors by saying as much and implying the possibility of deferred consumer demand.

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iNow
Post  Post subject: Re: Why are Deflation & Inflation both bad? [Split from Oil   |  Posted: Fri Feb 13, 2015 4:35 pm
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I made a mistake. Had seen the two equated in an article recently, but realize that was in error.

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Rory
Post  Post subject: Re: Why are Deflation & Inflation both bad? [Split from Oil   |  Posted: Fri Feb 13, 2015 9:04 pm
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Think that's the first time I have known you to make a mistake, iNow ;)

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iNow
Post  Post subject: Re: Why are Deflation & Inflation both bad? [Split from Oil  |  Posted: Fri Feb 13, 2015 11:10 pm
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Rory wrote:
Think that's the first time I have known you to make a mistake, iNow ;)

Oh, my. Guess you haven't known me very long. :) Cheers!

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Rory
Post  Post subject: Re: Why are Deflation & Inflation both bad? [Split from Oil  |  Posted: Sat Feb 14, 2015 12:40 am
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Only... 4 years this August ;)

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