Central banks have a target inflation of about 2% and actively try to prevent deflation (much more so than inflation). In general moderate inflation is a good thing as it puts some pressure on keeping the money in circulation instead of hording it.
The dollar got about 25% stronger…during the Great Depression. $100 in September 1929 had the same buying power as $79 in September 1935. Systems built on the concept of infinite growth do not like to shrink.
This is because inflation isn’t a bug it’s a feature.
Anything that transfers wealth up the chain, from working class to middle class and from middle class to upper class, is a feature of the western economic system.
For example, in England and Wales the Bank of England is charged with keeping inflation at a target of around two per cent. This means that the pound in a workers pocket is supposed to devalue. The advantage is that the government borrows money in its own currency so inflation means that its debt goes down (in real terms) when inflation goes up.
In other words, it’s similar to a tax in that the money you earn today, by the time you spend it, is worth less by design.
Inflation does has have a positive feature of encouraging investment and spending, rather than hoarding under a mattress. The money is put back into the economy because every day it isn’t, it loses value. If money were getting more valuable over time (called “deflation”), you’re incentivized to treat it like an asset—not a currency—and hold onto it as long as you can (like Bitcoin), rather than reinvest or spend.
Yes, this is true but you also have to factor in the marginal propensity to consume, or in plain English, the poorer you are the more of your income you have to spend on necessities like rent or groceries.
There are always high interest investments available to people with a large amounts of spare cash floating about even when inflation is low.
If your rent + utilities + food = your income then you ain’t hoarding money even in a deflationary spiral.
No, but you are more likely to get fired and lose your income as demand for labor drops.
Always. If inflation runs away, the poor suffer. If we get stuck in a deflationary cycle the poor suffer. Apparently it is impossible to construct an equitable system that works without gross inequality (spoiler: it isn’t but some people love inequality and will do anything to prevent things being distributed more equally.)
Well, yes but no. The typical worker (sadly) has zero real savings and ideally their union manages to get at least an inflation adjusted raise each year. So those people are actually not effected by inflation at all.
It’s mostly a tax on upper middle class savings and a way to sneakily decrease wages if there is no strong labour representation preventing it.
Which union secured their members a 10% wage increase in the past year?
The poor are the most affected by inflation. Just because their spending pattern doesn’t shift doesn’t meant they aren’t affected. The shift in spending patterns is a way to avoid the effects of inflation. A person whose income cannot be diverted is the most effected.
It’s like a plane is crashing and one person ejects while the other person doesn’t. Yes getting ejected from a plane’s cockpit is a high energy event. But crashing in the plane is an even higher-energy event.
The people who you are saying are “most affected” by inflation are experiencing those effects in the activation of anti-inflation mechanisms in their life. Those anti-inflation mechanisms while they do represent an effect are not as big as the effects felt by those without access to those mechanisms.
Some managed to do so, but 10% inflation is exceptional anyways.
Otherwise I don’t agree. Obviously the poor are effected “the most” by any adverse economic effect due to their low coping capacity / economic buffer. But that they are especially affected by inflation is not universally true.
You need to drill down a bit further what inflation actually entails. The common “basket” used for calculating “the” inflation is far from perfect and depending on your consumption pattern you might hardly see any inflation in your personal expenses if it is mainly driven by an increase in energy costs as was the case in Europe during the last year.
Classic inflation aka devaluation of money only effects those that have money (savings). Of course if you have an increase in certain prices due to some external shock this can have a much broader effect, but it is actually wrong to call that “inflation”.
increase in certain prices due to some external shock this can have a much broader effect, but it is actually wrong to call that “inflation
So what should I call it when my food budget balloons, because the grocery stores are calling it inflation?
Most likely “greedflation” 😅
There are a ton of issues with our economic system, and there are a ton of structures in place to funnel money up, but keeping a moderate inflation is not one of those things.
Inflation is a specific counter-measure against people who already have a ton of money. It provides a reason for them not to just “take their ball and go home” once they have a pile of money.
To shelter their money from inflation, they need to either risk it on the open market, allowing that capital to do things like pay worker salaries, or buy things like GICs which are essentially loaning money to the government so the government can do things like build roads or fund social programs.
In either/all cases, inflation is designed to do the exact opposite of funnel money upwards, it’s a mechanic to wrench that money out of the hands of the wealthy.
I feel like this story is essentially propaganda at this point- at least in the USA where the ‘risk’ for the rich never plays out.
The rich don’t actually risk their money. They risk the government’s money and other’s lives and livelihoods. When they fail, they get bailed. Bailed out by the banks. Or they simply don’t pay their bills and lay off all their employees and let everyone else take a bath.
Rather than inflating everything, why don’t we tax the shit out of their held wealth? Seems more direct without all the side effects of making FOOD, HOUSING, AND HEALTHCARE UNAFFORDABLE
There isn’t anything wrong with the mechanic of inflation as a means to encourage money to be reinvested into the economy.
You’re right about cost of living not keeping up with wages. You’re right about fucked up taxes on the ultra wealthy. You’re right about a massive erosion of social services. you’re right that the USA healthcare system is fucked up.
These are all issues that are distinct from the plan of maintaining a moderate (2%) inflation rate.
Yes, we SHOULD get living wages, unions and legislation should do that. The top tax bracket SHOULD be taxed at 70% that’s tax policy. We SHOULD reinvest in social services that’s government poicy. You SHOULD get universal healthcare, that’s a government program. Inflation isn’t the thing keeping you from any of these things.
It provides a reason for them not to just “take their ball and go home” once they have a pile of money.
If that’s the reason for it it’s not doing its job. Investments are much like savings to high net worth individuals and their investments are managed by someone else and they simply lay in the cut and collect dividends. Yes there is a risk to investments but if you’re in a good wealth fund then over time you’re almost guaranteed to win even if you have disastrous months here and there.
If they’re invested in businesses, the capital gets recirculated in the economy and becomes someone else’s income.
Yes, and the people at the top do keep their money in circulation, and as a result their wealth stays constant across inflation while workers’ wages and savings go down.
I have no idea why you don’t see that as a transfer of wealth.
You say it incentivizes the rich to not hoard cash. Well, they don’t. In fact, it incentivizes everyone to not hoard cash, but the rich are the only ones with sufficient cash to trade that cash for income-generating assets.
It incentivizes everyone by punishing everyone for holding cash, but only the upper class is able to evade that punishment by converting their wealth. Poor people don’t have though cash to transform it into wealth. Their cash is only useful to them as cash.
This is why the poor are feeling the inflation the worst. People who own no stock are the ones hit hardest when the government printed a bunch of money and injected it into the stock market.
What you describe would be worse without inflation. The rich would still have most of the capital, but they also wouldn’t bother investing it either, which at least recirculates the money and becomes income for others.
Or just buy gold and bitcoin and other things that aren’t tied to the value of the dollar.
This is exactly how inflation is a tax on the poor: there are ways to counteract inflation, which only become available at a certain level of wealth.
Basically disposable income is safe because you can convert it; and non-disposable income is not safe because you can’t convert it.
yup, that’s exactly how it is, idk why ppl downvote me but upvote you, it’s saying the same thing lol, crypto bad i guess.
Gold is a shiny bauble material, but never grows. It can be a good investment for that part that you want to put aside and will just sit. Bitcoin is invaluable for money laundering, but very unstable for saving/investing. Look at how many have been fleeced when someone gets their keys, or lost their coins by a hard drive failure. It is costly in electrical use to mine.
There are far better things not tied to the value of a dollar. I would suggest very low-fee indexed mutual funds as one better alternative. They offer an accessible way for people to get a share of the means of production. My experience is that for people who can can learn to not be ruled by fear or greed can, over time, build enough wealth to live better lives.
Which are these far better things not tied to the value of a dollar?
Investing in a company puts your money in a non-inflationary asset. If inflation goes up, your land, machinery, buildings, raw materials as well as finished product just jumped in numbers of dollars of value, thus holding its real value. The same can be said of any hard asset, and dollars could also be switched with any country’s currency. I like large index funds because they are largely diverse. There are big swings, but I have gotten 9-12% average, over long periods of time.
Inflation is similar to a stock split. If you can understand stock splits, you have a rudimentary understanding of inflation.
Here is some extra information that may be too much info: Add in population growth, and realize how money supply has to at least increase to keep pace, for every worker to maintain the same pay. (in theory) Some nation’s citizens like the relative stability of the dollar’s value, and trade or have savings hedged with dollars. These dollars essentially drops out of money supply. Their trade velocity drops for these dollars. There are so many variables, that economists look at inflation measures to see how they are doing. These indicators are always 6 months or so behind, so they are always flying by only being able to look behind their plane.
I’ve been taught that inflation deincentivizes hoarding wealth too, but seeing how wealth is still hoarded, I’m not convinced it’s an effective tool.
That’s the difference, they hoard wealth and not currency. The value of assets do not go down when currency loses its value with inflation.
Wealthy have little to no cash that would lose value with inflation, they just buy everything on credit and have their wealth tied to assets and investments that probably gain value at least at the pace of inflation.
It’s still true that a deflationary economy would be a mess though. If we had deflation, the rich wouldn’t even bother investing and would literally just sit on a pile of gold like Smaug. I know trickle-down doesn’t work but an economy where nothing circulates would be hellish.
Wealth is hoarded; cash is not.
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Inflation happens when rich people find out you’ve got more money and rush to fuck you out of that too.
That’s why any kind of tax break, stimulus or welfare is met with “but inflation!”
Experts in pseudoscience may claim “it encourages people not to horde wealth!” but it’s just another lie that makes rich people richer when it fails to deliver for the 1000th time.
A little bit of inflation is a fuel for economic activity. If money doesn’t lose value people have less incentive to put it to work; if it gains value(deflation) people have all the incentive to hoard money.
Currency has no inherent value, it’s purpose is to facilitate trades(economic activity). Products and services are the real value in an economy.
That being said inflation is a real tax and disproportionately hurts the poor.
Less provocatively, economic growth “increases the size of the pie” but each individual piece makes up less of it. And those who can save, gathering up more pieces of the pie for themselves, can see gains from economic growth that those who can’t save won’t.
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All fiat currencies are designed to prevent hyperinflation and deflation.
Why is deflation bad for an economy? It encourages prior to hold off on spending money as money tomorrow is worth more than money today. It also means people are less likely to invest money, as you can get better returns by saving your money under your mattress.
Inflation is a tax on hoarding money. In an ideal world, it will push rich people and companies to reinvest their wealth in the economy, instead of hoarding it. Unfortunately, in the real world it doesn’t work on the very rich, so it only affects the upper middle class and the moderately rich.
Exactly. And deflation incentivizes hoarding money. Inflation is bad but deflation can be worse. If no one spends money because you’re literally making money by sitting in it the economy would crumble.
In a bad case the government would have to slash interest rates, maybe even slightly negative.
What I’m trying to say is that (in theory) moderate inflation isn’t bad; it is meant to discourage hoarding.
You don’t see high inflation and deflation much in the real world but you can easily observe it in online game economies when money is created out of nothing through grinding and the hoarding behaviour can depend a lot on what is available that is worth buying with that money.
We have seen high inflation recently, and it is exactly because we live in a system where they can make money out of nothing.
I was thinking more about hyper-inflation levels, 100%+ within weeks, not the 10-15%+ annually we have seen recently.
The developer of the MMORPG Eternal Lands wrote two articles about how to manage a game’s economy.
https://eternal-lands.blogspot.com/2008/03/mmorpgs-economy.html
https://eternal-lands.blogspot.com/2008/03/mmorpgs-economy-part-2.htmlRichard Bartle mentioned the topic in some detail in his book Designing Virtual Worlds as well.
Better yet, look at crypto, where people believe inflation is all about monetary supply and restrict it on purpose. The result? Wild volitity, huge crashes, and low velocity of money because everyone hoards it instead of spending.
I don’t feel crypto is a good example because it is used by so many people as more of an investment and most spending was never really feasible due to high transaction costs and slow transactions.
It’s what happens when people treat money as an investment and don’t spend it. Money that’s useful as money would be a bad investment.
Yeah it only works on the money. Holding income-generating assets isn’t affected because people can increase rents to maintain the same income stream.
Income-generating assets are doing something to generate that income, which is presumed to have some beneficial effect on the economy more than cash sitting under your mattress does.
all these takes kinda suck.
The people most affected by inflation aren’t the rich at all. Theirs a whole generation inflated out of housing. Some might understand that as modern serfdom.
Inflation is a tax on hoarding money.
It’s a tax on my savings and my retirement. My savings lose 2% a year, on purpose. This means I have to play in the investment game to so much as break even. I’d rather not have to play the stock market game and just save my money for retirement without it losing value.
I’d rather not have to play the stock market game and just save my money for retirement without it losing value
Which is exactly what they mean by hoarding money. Everyone would prefer that, and if everyone did, all that money would be taken out of the economy. Instead we’re all motivated to invest in things, which keeps the economy growing and healthier for all of us.
Because once a corporation increases prices due to “supply and demand” or whatever bullshit reason they make up that week, those prices never go back down if the reason changes. conveniently.
Every corporation will say “we need to increase the price on “x” because the primary supplier in Bolivia is facing economic turmoil…blah blah blah.” But once that turmoil is over and supply returns to normal, they don’t bother taking the prices back down and rely on the fact that modern society is too distracted by their “conveniences” to care.
“The people will not revolt. They will not look up from their screens.” – a stage play based on George Orwell’s 1984
They (the super-rich) have created a class of people beneath them who don’t notice or care that they’re being fucked over so long as they are provided with more and more vapid content to consume.
“The people will not revolt. They will not look up from their screens.” – a stage play based on George Orwell’s 1984
Striking line–now we just have to figure out how to get people off their screens and onto streets.
Actually, inflation by itself is a natural phenomenon,
associated to the growth of the population. Deflationary trends are actually symptoms of something far worse happening.In order for inflation not to exist, growth and access to natural resources should match the growth of populations.
In a Utopian society, a la Engels, the growth and access to those natural resources would be controlled to match the growth and access needs of the population, thus helping humanity not to experience inflation. But of course, that also denies humanity, and humanity’s ambitious nature.
In reality, the growth and access to those resources is controlled for many reasons, which in many cases, have nothing to do with ambition. For example the geographical access to certain commodities can be used to barter for resources or commodities inaccessible in that community.
And of course, there’s ambition and the discovery that owning a resource gives us the power to demand more for it, and not only have a better live, but have access to anything we want.
When there’s a disruption in one resource, as far as accessibility to it, it has a chain reaction that affects everything else.
Take the war in Ukraine and it’s repercussions across the world. The two resources that have been disputed right now is wheat and oil. Two of the major suppliers of indispensable commodities in the world are at war and their commodities are inaccessible or hard to obtain. Just the shortage of wheat has significant implications in the food that is processed for consumption around the world, because it’s not only used to feed humans, but other sources of meat for humans.
But what happens in a deflationary trend? One would think we just produced more of something and we have to sell it at a lower price, until we get back to an equilibrium of supply and demand. But it’s not that simple. Causes of deflation could be:
A) Lower numbers of population. While access to the natural resource is there.
B) Overproduction of a certain good.
The first one, indicates that either people are dying, leaving or not reproducing. And the demand is lowering constantly.
Now, think about why would people leave a community. A quick example: crime. Two examples: People leaving their towns in rural Central America for the US, or in Africa for Europe because their home towns are overrun by warlords, gangs and drug cartels. Likewise, communities in the US that are run by drugs and crime is rampant. You have a choice to flee or die.
The second one speaks about the over production of something. By default, companies don’t try to over produce, because the costs associated to storage and maintaining an inventory could eat up on their earnings. But there are times when overproduction happens because of a bubble. The easiest example for this, is the Tulip crises of the 1400s. Tulips became a sought after commodity that the prices started going up. Suddenly Tulios went from a nice flower to an investment. A bubble was created. People decided that it was a better investment to buy and sell tulips, than plant wheat, or sell meat, which drove the prices of food up; some people even mortgaged their home or land to invest the money in Tulips. For a time, that created wealth and people spent it in luxury. And then, Tulips were over produced and came out of style. Demand disappeared almost instantly. And then people didn’t have money to pay their debts, to buy food, live in a safe place. Famine and plagues started…and prices went down because there was no demand for anything.
So…that’s why you don’t want to see a lot of either, inflation or deflation, but it’s also why you see more inflation than deflation.
But of course, that also denies humanity, and humanity’s ambitious nature.
Man, I hope you’re wrong about that, because Earth isn’t growing any bigger. We did live in rough balance with things for about a million years, so I have hope.
Earth isn’t growing any bigger, but we have surpassed “limits” described by scientists without the collapse they predicted.
The actual capacity of Earth isn’t a fixed value.
Which limits are you thinking of? We’re past the carrying capacity on certain fronts, but that was never a “will collapse” thing as much as a “we’re going into debt” thing, and I think they were first calculated after we had passed them.
There’s some ways in which we can stretch the Earth, but there’s some that are set in stone. Energy budget comes to mind; we only get so much sunlight, and even if we start doing fusion to sidestep the sun we only have so much ability to radiate waste heat. Energy use on Earth will have to plateau within the next few centuries.
A few good comments and quite a few… not so good. A lot of explanations that focus on 2nd order, downstream effects and the machinations of economists and politicians. Price is one of myriad ways to measure the past & current state of the economy and to make guesses about its future.
“Inflation” is what we call it when it costs $1.00 to buy a dozen eggs last year and $1.10 to buy a dozen of the same eggs this year. "Deflation"is what we call it if the price goes down to $0.90 this year. Just to set some terminology.
No one person or group or policy or activity causes inflation or deflation. It’s just a measure of buying power.
But there is one key difference between inflation and deflation: the latter has a limit. Prices can go up forever, but they can only go down to $0.
So when all the people are trying to craft policies that influence the economy, they don’t want the economy to go in the direction of the brick wall of $0 prices.
It’s probably the case that inflation is the only thing that can happen and have a functioning economy over the long term. If that’s the case, then keeping it low is the best approach, which is why the American economic establishment has a target of 2% inflation.
There are many reasons for inflation, but the biggest in Capitalistic economy is the interest and that there is no Gold the money is tied to. Basically, they can print out as many dollars as they want. There is no Gold standard.
It depends on how you define things on if it has a lower bound. If you’re talking percentage, it’s infinite. It’s Zeno’s Paradox. If you decrease by half, then decrease it again the second halving is less than the first, and this continues forever, never reaching zero. It approaches zero as we take the limit to infinity, but we can never reach infinity obviously, and yes, we could divide a penny if we need to. Since inflation and deflation work on percentages, not descrete values, deflation could never reach zero.
Inflation is a useful tool though. It makes it so spending money now is better than saving. Deflation makes saving money better, which slows the economy. Basically, things have to go very wrong to make deflation happen because tools will be used to prevent that.
The two largest central banks in the world, the Federal Reserve and the European Central Bank, have explicit mandates for keeping inflation under control.
The European Central Bank is tasked with
the achievement of a high degree of price stability; this will be apparent from a rate of inflation.
The Federal Reserve has the “Dual Mandate” of price stability and achieving the maximum sustainable employment.
Price stability is about controlling inflation. It’s complicated, but high inflation both affects the direct price of goods and services and expectations of their future prices. So, in a high inflation environment, what costs $10 now may costs $12-$14 in the future.
We saw this after COVID, when supply chain issues became a huge problem and it was difficult to say how much goods and services would cost. Multinational corporations bragged about their ability to “price-take”, or raise prices in response to supply chain delays and have consumers continue to pay it.
This demonstrates, at least in part, why our buying decreases far more often than it increases: large companies can “pass through” inflationary costs to consumers. You need soap to clean yourself and food to eat? Well, Proctor and Gamble and Tyson Foods bet they can raise prices on soap and chicken and that you’ll pay it. And you do. Because what choice do you have?
In the U.S. specifically, there is the flip side of inflation: the maximum sustainable employment rate. If too many people are employed, the labor markets get hot. You know what that means? Mo’ money for you! Mo’ money for me! Mo’ money for everybody!
You know what that also means? Demand for goods and services is going to go up. Supply is going to lag behind. It’s like a bunch of isolated people with jobs wanting a lot of stuff during and after a pandemic that decreased the supply of goods and services. This causes…inflation. All those people are going to be willing to pay more than the next person (up to a point) for the same Nordictrack Treadmill.
This also demonstrates another reason companies can pass through inflationary costs: under a hot labor market, consumers are willing to pay higher prices.
So, there are at least two reasons why consumer buying power decreases more often than it increases. Conditions are such that either
- Consumers must pay more because what choice do they have?
- Consumer want to pay more because the value a good or service higher than the next person up to a point.
In contrast, the primary way consumer buying power increases is if they make more money. (That happens in a hot labor market…but then the consumer gives the surplus away if they’re not careful). However, that raise must be greater than the rate of inflation. If you get a 1% raise and inflation is 2%, well, your buying power decreased, even though you’ll still see a higher number on your paycheck. If you get a 3% raise and inflation is 2%, your buying power increased.
The challenge for businesses is handling inflationary increases in capital and labor. It’s easy for capital: you need stuff to produce stuff. And it’s likely you can pass through those costs to consumers.
In contrast, labor has all sort of demands like…water/bathroom breaks, mandated over time, safety regulations, etc. And workers don’t see a decrease in their chances of being maimed at work as an increase in value from their employer. If a company is going to invest in its employees, given a certain dollar amount, workers would generally prefer to see that money go into their pockets rather than be invested in stricter adherence to safety regulations or more breaks while at work. But companies can’t often make that choice, the law changed and they must adhere to safety regulations. So, no raise for you!
Now, it’s certainly more complicated than that. Businesses have a lot of financial demands, of which employee compensation is a small, though often significant, piece of the pie. It’s harder to give raises than it might seem. Unless your CEO makes one hundred thousand dollars a second, as some do, then wage increases comparable to inflation may be difficult.
Below this, I’m going to suggest some other ideas for increasing buying power that are…unconventional.
Tldr our economy is designed this way. The federal bank sets monetary policy to maintain inflation.
I just took an econ-102 course intro to macroeconomics that covers this. It was free at my community college. I recommend doing it!
And then you learn how they manage inflation, and become radicalized
hints :
- inflation increases the nominal amount of tax on added value, good for countries balance sheets
- inflation decreases the real value of sovereign debts
- a company will never lower its prices as long as sales do not plunge
- energy actors only look at natural gas prices when it raises, never when it comes down
you could add your own items to the list, it’s a long one.
The two largest central banks in the world, the Federal Reserve and the European Central Bank, have explicit mandates for keeping inflation under control.
The European Central Bank is tasked with
the achievement of a high degree of price stability; this will be apparent from a rate of inflation.
The Federal Reserve has the “Dual Mandate” of price stability and achieving the maximum sustainable employment.
Price stability is about controlling inflation. It’s complicated, but high inflation both affects the direct price of goods and services and expectations of their future prices. So, in a high inflation environment, what costs $10 now may costs $12-$14 in the future.
We saw this after COVID, when supply chain issues became a huge problem and it was difficult to say how much goods and services would cost. Multinational corporations bragged about their ability to “price-take”, or raise prices in response to supply chain delays and have consumers continue to pay it.
This demonstrates, at least in part, why our buying decreases far more often than it increases: large companies can “pass through” inflationary costs to consumers. You need soap to clean yourself and food to eat? Well, Proctor and Gamble and Tyson Foods bet they can raise prices on soap and chicken and that you’ll pay it. And you do. Because what choice do you have?
In the U.S. specifically, there is the flip side of inflation: the maximum sustainable employment rate. If too many people are employed, the labor markets get hot. You know what that means? Mo’ money for you! Mo’ money for me! Mo’ everybody!
You know what that also means? Demand for goods and services is going up. Supply is going to lag behind. It’s like a bunch of isolated people with jobs wanting a lot of stuff during and after a pandemic that decreased the supply of goods and services. This causes…inflation. All those people are going to be willing to pay more than the next person (up to a point) for the same Nordictrack Treadmill.
This also demonstrates another reason companies can pass through inflationary costs: under a hot labor market, consumers are willing to pay higher prices.
So, there are at least two reasons why consumer buying power decreases more often than it increases. Conditions are such that either
- Consumers must pay more because what choice do they have?
- Consumer want to pay more because the value a good or service higher than the next person up to a point.
In either case the response of the Federal Reserve will be to raise the price of money, making both capital and labor more expensive. The Fed’s recent increases to inflation make you, as an employee, and the things you want as a consumer, more expensive.
In contrast, the primary way consumer buying power increases is if they make more money. (That happens in a hot labor market…but then the consumer gives the surplus away if they’re not careful). However, that raise must be greater than the rate of inflation. If you get a 1% raise and inflation is 2%, well, your buying power decreased, even though you’ll still see a higher number on your paycheck. If you get a 3% raise and inflation is 2%, your buying power increased.
The challenge for businesses is handling inflationary increases in capital and labor. It’s easy for capital: you need stuff to produce stuff. And it’s likely you can pass through those costs to consumers.
In contrast, labor has all sort of demands like…water/bathroom breaks, mandated over time, safety regulations, etc. And workers don’t see a decrease in their chances of being maimed at work as an increase in value from their employer. If a company is going to invest in its employees, given a certain dollar amount, workers would generally prefer to see that money go into their pockets rather than be invested in stricter adherence to safety regulations or more breaks while at work. But companies can’t often make that choice, the law changed and they must adhere to safety regulations. So, no raise for you!
Now, it’s certainly more complicated than that. Businesses have a lot of financial demands, of which employee compensation is a small, though often significant, piece of the pie. It’s harder to give raises than it might seem. Unless your CEO makes one hundred thousand dollars a second, as some do, then wage increases may be difficult to do.
Inflation occurs when the value of goods increase. This can mainly be caused by two things: An increase in consumption or an increase of production costs, which causes the vendor to increase prices in order to maintain profits.
Deflation would occur when the opposite happens, aka when the value of goods decrease. This can be caused by things such as new technological improvements (old hardware has become cheaper, because new hardware has been released and the older hardware is no longer state-of-the-art), a reduction in consumption or a reduction in production costs. Perhaps I’ve missed a few cases, but these are the main things I can currently think of.
Anyway, while deflation is generally useful for consumers (they have to pay less), it’s not very good for borrowers. Let’s take a mortgage for a house, for example. You want to buy a house for €200k and have a mortgage of €200k that will cover the house. If something bad happens to you financially (for example, you lose your job), you may end up in a situation where you’ll no longer be able to pay off your mortgage. Shit happens right? Usually, the bank would take control of your house, sell your house for €200k and use the revenue from the house to pay off your mortgage.
However, if deflation has occurred and your house is no longer worth €200k, but €150k, you still have €50k to pay off to your bank, after the bank has sold your house. Simultaneously, you’re unemployed, so how are you going to do that? If you declare bankruptcy, you will no longer have to pay off your debts and the bank has lost €50k.
Besides this, deflation can also be a symptom of something worse happening, such as high unemployment rates and a decrease in consumption, for example. When more people get unemployed, people will spend less, which reduces demand, which leads to a decrease of prices.
The value of things doesn’t really increase. One loaf of bread still makes my hunger go away the same amount that it does regardless of its price tag.
It’s the »measurement tool« that we are measuring/defining its value with that’s changing in alignment to the amount of supply of bread.
This can mainly be caused by two things:
You forgot expansion of the money supply.
Increase in the money supply does not in itself cause prices to go up. There’s an indirect mechanicism but it’s not automatic.
Tell me: if the Fed prints a one quadrillion dollar bill but looks it into a safe so that nobody can ever use it. How much inflation do we get?
How much does the money supply go up by? It can’t really count as supplied if it’s locked in a safe.
Aha. So the sheer amount of money is not important?
Just, as if the circulation speed is the crucial point. Damn. Good for you for noticing.
Yikes 😳
Everyone seems to be missing the most dangerous part of deflation: If prices fall year over year, collateralize credit becomes incredibly unstable. If you borrow a million dollars from the bank to build a house and then in five years that house is worth half a million…well you would be stupid not to walk away for your loan and leave the bank with a half million dollar hole in its balance sheet. If the whole market does this consistently year after year then banking becomes impossible and the whole system collapses. Weve had this happen before, such as during the Great Depression and very briefly during other market crashes like in 2008. If a central bank has to choose between inflation and deflation, they will choose inflation every time.
If you borrow a million dollars from the bank to build a house and then in five years that house is worth half a million…
I don’t understand much. What so bad about house losing value, if we never intended it as capitalistic investment?
Everything suppose to be “utilitarian” basis instead of ever-inflating “profit” basis that hurt majority, no?
Just my curiosity why deflation is a bad thing, other than monetary incentive system broke down and no one working (right now, monetary system still broke down on opposite spectrum due to purchasing power collapse, I assume?)
Edit: clarification
Profitable or not, a house is a shelter, not renting or trading item? (This is what I meant by capitalistic mindset, not about corporation, but the very profit mindset of human.)
Edit2: clarification2
Yes, same opinion on investment and passive income. All capitalistic nature. Impossible to earn passively unless someone or some machine enslaved, right? Yet everyone love passive income idea so much, pumping profit everywhere, more money more inflation, no? In the past, people might save years to a house, now, people earn endless passive income to no house, I think that’s the very reason to it. Passive income is somehow bad. (Not to be mixed with voluntary welfare system, passive income is auto sucking involuntarily, iinm)
Edit3: clarification3
So about the house worth dropping. In bookkeeping, historical cost don’t drop. However, future value inflation exist thanks to “profit future inflation”. So, we still have to settle book value of loan, I don’t get it how the value dropped though? A liability is a liability, not to be messed with “
inflatingfluctuating market value”, no?So you’re saying that deflation hurts the banks? Oh no! Not the banks!
Fuck regular people, right? A home is obviously an investment first and shelter second. Why would anyone need a home to live in, if they can just rent it out for obscene amounts of money, because banks have to have infinite profits?
Inflation (of the supply of money in circulation) is caused by an increase in the supply of money in circulation. As the number of US dollars in circulation increases, inflation (of the money supply) is experienced.
We experience inflation instead of deflation because the ones who control the supply of money have chosen it.
And while many commenters are defending inflation as good and necessary, there is an argument that inflation punishes individuals who save or are on fixed income. Inflation of money supply is also described as “devaluation of currency”- it is becoming less valuable over time. Inflation could also be described by a “loss of purchasing power” which means a person can buy fewer goods and services with the same amount of money as the currency loses its value.
