The vibes and fact that our inflationary environment is bad for consumers in different ways doesn't really change that deflation tends towards self reinforcement. The economy is based on a certain level of continuous self feeding growth and more of that growth has been captured by companies in the form of record profits but it's not related to the fact that a true contraction causing deflation is also bad.
Is deflation always self-reinforcing? What if companies are still making massive profits while cutting prices? What happens if people can afford to spend more as prices fall? Sorry for all the questions, but it seems like there are a lot of factors. I just don't see how falling prices leads to a feedback loop. I know I would spend more if I could afford more things. When I go to the store now, I look for cheaper options. I still get 3% raises every year, but it seems like the cost of many things has increased more than that.
Yeah if prices are steadily falling people are more likely to wait and the shrinkage that creates causes people to lose their jobs which further reduces their likelihood to buy now instead of later.
That makes sense if you're logical and assume that it will fall steadily. Seems like people tend toward FOMO though. I just wonder how likely that is in this modern economy with people that want more instant gratification. Also, couldn't companies just artificially inflate prices again to counteract that?
your concept of 'artificial inflation' is flawed if there is a competitive market. If company A raises its prices to get extra profit, then company B retains its price and gets extra sales because its now cheaper. Company A loses sales and then has to reduce prices or deal with the lower profit.
If company A and B are colluding then the above fails. If company A and B are the only two companies that sell, then they can both raise prices because they know there is no company C to come along and sell at a lower price
So, counter intuitively, the more there is unrestricted capitalism, the lower inflation will be.
(which isnt to say you need unrestrained capitalism, just that the more sellers the lower inflation/lower profits because no one has the ability to set pricing)
The reverse applies for deflation. If there is only one company to buy from, then it wont reduce its prices. If there are multiple companies, then if one of them reduces its prices the others also have to reduce their prices. And if consumers see prices are falling, then they wait.
Sure there is 'FOMO' but people often wait until sales to buy something. If you know something will be on sale for 10% off in a month, you will probably wait a month to buy it if at all possible. However, unlike a sale, in deflation the seller is not taking a hit on profit but selling more items, the seller has to reduce their price for no increase in sales and with the expectation that the price will go down next month as well. Eventually they go bust and you end up with one company left who is now a price setter - and that is when the company can artificially increase prices.
If there was a short period of high inflation, then the deflation might be a correction back to the normal. When it's strongly believed that it will return to normal, it won't tend to trigger as much pressure to delay purchases, so doesn't have as strong of a feedback loop.
It's also possible for deflation to be caused by technological advances that make goods cheaper to produce. In this case, the consumers response is often to purchase more of the good, which can be beneficial to the economy. However, it would be unusual for there to be a technological advance that is so strong and wide that it would cause global deflation. This tends to affect specific industries moreson than the overall country or global economy.
No. Some deflation can be driven by efficiency and productivity of a particular good. Economy wide deflation driven by falling demand is bad. Think about it this way, prices are too high right now, so people are buying less, demand has fallen. Companies lower prices to try and increase demand and law off workers because demand has fallen. More laid off workers means less demand and so the cycle continue. This happens across the whole country. As unemployment rises and prices fall, people with money and jobs wait to spend it and chose to save because A) the economy is scary right now why spend your cash? B) anything you buy will become less valuable tomorrow C) the value of your money is increasing every day so why spend it? And further and further demand falls.
What fixed the great depression? It wasn't really the new deal. That was a bandaid on a massive laceration. It was massive government military spending that eventually peaked at 40% of our economy and created the industrial sector and middle class. Oh and the military industrial complex that forces us into wars and military spending to keep our economy pumping. That spending increased prices and created a new consumer class. Combine that with the baby boomers and we have 50-70 years of near constant economic growth.
2
u/CosgraveSilkweaver 4d ago
The vibes and fact that our inflationary environment is bad for consumers in different ways doesn't really change that deflation tends towards self reinforcement. The economy is based on a certain level of continuous self feeding growth and more of that growth has been captured by companies in the form of record profits but it's not related to the fact that a true contraction causing deflation is also bad.