Quote from: dinofelis on March 27, 2015, 06:36:01 AM

Quote from: twiifm on March 26, 2015, 06:05:18 PM

I agree. What you described connects to Keynes "sticky prices" and "sticky wages".

In deflation period firms can't automatically adjust prices. What they do is cut expenses. Usually the first is layoffs

Ah, the ultimate argument when it is shown that all principal effects of inflation and deflation are economically essentially neutral and mirror of each other if you take all effects into account.

Point is, stickiness of prices are only valid in the short term. Otherwise, nobody would even be willing to pay $1.- for a loaf of bread, given that we are used to 10 cents for it !

Stickiness of prices is just as well an argument against inflation as against deflation (and in fact, implies that inflation and deflation should be MILD). Consumers DO adapt to higher prices in inflation. They are not holding on to any "stickiness" in the long run. They adapt to the market: if there ain't any more at the old, lower prices, they are willing to pay higher prices.

The stickiness of prices in wages and so on only comes about because of LEGISLATION which does some kind of price fixing. If those prices were just as free as a loaf of bread, and the labor market would be fluid, then wages would adapt just as well as the price of a loaf of bread.

If you have an inflation of 2%, you have an effective wage drop of 2% a year, and you have to negociate a wage increase to keep the same effective wage. If you have a deflation of 2% a year, you'd get an automatic wage increase of 2% a year. First of all, that is not so terribly uncommon. And second, there could be wage lowering negociations from the side of the employer. They would in times of deflation be just as natural as wage increase negociations in times of inflation.

There is no long run stickiness of prices.
Markets always impose prices.

Wages arent negotiated down. Layoffs happen and you see increase of unemployment.

Were you asleep the past 7 years?.

Stickyness of prices doesn't mean market doesnt control prices. It means the adjustment lag behind and explains why deflation can spiral.