Quote from: dinofelis on March 10, 2015, 01:47:42 PM

Quote from: tee-rex on March 07, 2015, 10:44:12 AM

By the way, the prices of i-phones going down in half a year have nothing to do with deflation.

They have to do with the Bogey man argument against deflation, namely that people would postpone consumption if they knew that prices are falling. i-phones and personal computers indicate that this is simply not true. People buy NOW, at higher prices, rather than wait for a year, to buy THE SAME thing at a lower price.

It is that last hypothesis that warns against "the deflationary spiral". The argument is stupid, and is empirically shown to be wrong.

Of course, "i-phones lowering in price" is NOT the same as macro-economic deflation. That's clear. But that's not the argument to "show" how a little deflation would induce a deflationary spiral.

That argument goes as follows, and is based upon hypothesis (H):

1) people are used to certain prices and wages
2) there is a mild deflation (say 2% a year)
3) people holding money, realize that if they wait to spend their money, they will be able to buy more with that money next year
4) ===>>>> (H) people will hold their money and spend next year
5) this increased hoarding of money makes the velocity of money go down
6) a lower velocity of money means still lower prices
7) the deflation increases: instead of 2% a year, we have now 4% per year
Cool

people realise that the prices will STILL be lower next year
9) =====>>>> (H) people will hoard even more
10) etc...

Given that the falling price of the i-phone 5 hasn't pushed people to postpone their buying of the i-phone 5, (H) is wrong.

In fact, you could tell the dual story against inflation:

1) people are used to certain prices and wages
3) there is mild inflation (say 2% a year)
3) people having money will know that things will be more expensive next year
4) they will spend everything right away !
5) this increased spending increases V
6) that increases prices even more
7) inflation increases: instead of 2% we now have 4%
Cool

people realize that the prices will still be higher next year
9) they spend even more right away
10) etcc...
HYPERINFLATION.

With light inflation of 2%, no hyperinflation is in sight.

With light deflation of 2%, no deflationary spiral is in sight.

Smartphones are a terrible example. These things naturally depreciate.

Use housing or real estate as an example because they are usually purchased w mortgages and they are affected by interest rates. Either that or use stocks and bonds as example.

In your example if inflation gets too high the CB can raise interest rate but when deflation occurs we can hit the zero bound on interest giving us no easy fix. QE hasn't shown to be effective