Would Deflation Be a Good Thing or a Bad Thing?

George Washington’s Blog
Thursday, Nov 20, 2008

A headline from Associated Press today reads “Dow slips below 8,000 on growing fear of deflation“. See also this and this.

But would deflation be a good thing or a bad thing?

Well, lower prices are good for consumers. As Business Week puts it:

“A bit of deflation that boosts real wages may be the best way to get American households out of the hole.”

(higher “real wages” means that people’s wages will go further because the prices of things we buy will be lower).

But Nobel economist Paul Krugman argues that deflation would be bad because it would drive up the cost which corporations have to pay to borrow money.The Guardian points to other adverse effects from deflation:

Another effect of falling prices is to increase the burden of any given amount of debt, even as banks and households are sharply paring debt, or deleveraging, in reaction to financial turmoil and a wave of bad economic news.

“The problem with negative inflation is that the real value of your debts is increasing,” Societe Generale economist James Nixon said. “In a deleveraging cycle you need negative inflation like you need a hole in the head.” ***

Deflation would be problematic because, if sustained, it could lead consumers and business to curb spending further, shrinking economic activity and reducing demand even more, and pushing prices lower still.

So its a mixed bag. On the one hand, lower prices would bring some relief to consumers, at least in the short-run. But consumer and corporate debt would be more burdensome, and deflation would lead to a further economic slowdown, which could eventually lead to salary cuts and further layoffs by employers, and – ultimately – a depression.

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6 Responses to “Would Deflation Be a Good Thing or a Bad Thing?”

Alex Says:
November 20th, 2008 at 7:20 am
Without inflation the governments $70 trillion SS and Medicare obligations will have to go into default. No way this is going to happen.
Tod G Says:
November 20th, 2008 at 10:56 am
Deflation is being caused by a rise in the value of the dollar. Stocks move at multiples of dollar moves, currently in the inverse direction. Big move up in dollar now = massive crash of markets. All for cheap gas and potato chips?! Not a good trade.
optomist Says:
November 20th, 2008 at 12:53 pm
Markets fluctuate. I prefer the cheap gas and potato chips myself!

And if a crash happens I can move in and make a killing!
Thom Allen Says:
November 20th, 2008 at 1:28 pm
One of the greatest eras of economic growth in US history was the latter part of the 19th century. This was a deflationary era. Prices trended downward, but real wages, the standard of living, and profits trended upward.
kenn Says:
November 20th, 2008 at 7:20 pm
Isn’t it remarkable how deflation which increases the value of your money and earnings a ‘bad thing’ while inflation which decreases the value of money and earnings a ‘good thing’

We’re so conditioned we can’t even think critically. Example: Social Security requires inflation to cover obligations.– With deflation the obligations are reduced because the money becomes more valuable so less is required to do the same thing.

How about considering the same people that have been wrong every step of the way trying to fight this Tiger THEY created are also the ones giving us the $70 Trillion figures for SS and Medicare.

It is stupefying to me how ‘we’ believe every word they speak even though every word has been WRONG!

For you Inflationist’s, not to worry, you will probably get your wish in a few months. 4.5 Trillion these morons have pumped in has to end up having some effect.

Just think, soon we may all be billionaires!! Just like our Zimbabwe friends.

Wonder what Optimist considers a crash…
Paulson is an idiot Says:
November 21st, 2008 at 3:08 am
You don’t have to worry about deflation for very long. You see, eventually, when you print TRILLIONS upon TRILLIONS of dollars, you get a rapid and sudden thing called HYPERinflation.

We can all look forward to having a lot of “money”. We will all be very “rich”. Just ask those guys with the wheel-barrels of money in 1923 Wiemar Germany. They were “millionaires”.

The “experts” are of course caught up on all the little nitty-gritty details as the bottom continues to fall out.

They keep blurting the same, tired old mantra of, “Markets go up, markets go down”.
They consider debt, “GDP” or a “product”.
They consider gambling and speculation an “evolving market” or a “service economy”. A SERVICE???

These guys are truly fantastic.

They say that they have a very “well considered”, “thought out”, “comprehensive” plan to buy toxic paper, and then a WEEK later they change their minds and say, “ah, well, the situation is ‘evolving’ and we have to be ‘flexible’ with our approach.”

Lol. They just bullshit and bullshit. Paulson has NO IDEA what he is doing or WHY this crisis is happening or WHERE it is going. He is just a dope who understands how to play the “game”, in other words, he knows how to make money with money.
He doesn’t understand physical economy or anything else for that matter.

The other lie they spout, just to save face is, “Nobody could have known this was coming”.
HA! Ha ha ha…
Now THAT is funny…
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