Quote from: Wekkel on March 04, 2015, 05:18:32 PM

Quote from: Maegfaer on March 04, 2015, 05:09:22 PM

Depends on the cause of the deflation. Deflation due to a collapse in aggregate demand is bad. Deflation due to an increase in aggregate supply is good, at least in a healthy economic system. Any deflation is bad in the current system because there's way too much debt.

This sums it up better for me than the countless numbers of posts on this topic. A little monetary deflation is just the opposite of a little monetary inflation. Nothing dramatic.

I would really like people to finally put the non-argument of people postponing purchasing of goods due to falling prices to rest. No one has unlimited time on this planet so no one is going to walk for another year (and then again as in perpetuity) because a car would be 2% cheaper the next year.

We deserve better thinking.

Indeed ! The non-argument is easily wiped from the table when you look at one of the biggest markets on earth: consumer electronics. You know that the i-phone you spend a fortune on today will cost much less next year when the newer model will come out. Nevertheless, people cue in front of an Apple store to be the first to buy it at high prices when it comes available.
We've seen the same effect in the personal computer market for 2 or 3 decades now. People want to consume here and now, even if it will be WAY cheaper next year, for the same, or even a better product.

Nobody will delay much of his consumption because it will be 2% cheaper next year.

But a little deflation has a HUGE advantage over a little inflation: you do not need a bank any more if you want a modest interest rate on money. You can just KEEP it. A little deflation is a disaster for banksters, who are supposed to distribute part of the seigniorage that comes with the money printing necessary to sustain inflation in a growing economy.

What is problematic though (and especially for banksters) is that in a slightly inflationary system, you have an advantage if you live on debt. If suddenly the rules change, and you find yourself indebted in a deflationary system where the debt is expressed in the monetary asset that deflates (that rises in price), then you are in deep shit too.

So a little deflation (which you get on average with a supply stable currency) would avoid having a huge amount of banksters and be good for the economy simply because of that (all the resourses spend on banking can now go to do productive stuff) ; but a sudden change from inflation to deflation will make more than one go bankrupt, because of the debt spiral in which he finds himself.

People say that in a deflationary system there can be no loans. But that is not true of course. Only, loans will have only very small interest rates. A zero-interest rate loan will cost the debtor a real interest rate of the order of the growth of the economy (= the deflation rate). Indeed, if he borrows 1000 shinkels today, and will have to pay back 1000 shinkels in 2 years, then those 1000 shinkels to pay back can buy about 4% more (assuming a deflation rate of 2%) than what he borrowed. He has to earn about 4% more value to pay back the loan. In fact, that would be a normal return on investment: if you have your average Joe investment, you should at least produce the average economic growth on the capital, otherwise you better do something else, if people on average can have that ROI.

Point is, nobody is going to lend you 1000 shinkels to get 1000 shinkels back in 2 years, with the counterparty risk. If you have 1000 shinkels, you will just KEEP them. So if you lend out 1000 shinkels, you want to get somewhat more back, at least to cover the counterparty risk.

Which means that the borrower will have to have a higher-than-average ROI on the capital borrowed, in order to be able to pay back the loan. Which is a good thing. It means that people will only invest in "over-the-average" return activities.

In as much as this would slow down the economy, it would also slow down the (average) deflation, and as such, it would automatically lower the effective interest rate (which is the asked interest rate, plus the deflation rate).

It would stop encouraging people to invest with debt in lower-than-average efficient economical activities, and as such prevent misallocation of resources, which is the big problem with an inflationary system. There would still be debt, but much less, and only debt that has a high potential for investment and return.

Which would be the big disaster for banksters.