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Does anyone think that the current massively inflated prices will ever fall? I'm still so pissed off about it, a year later. Due to the fact that much of my income is based on the company's stock, which massively fell the same time inflation went nuts, I make less money now than I did a few years ago, despite having been promoted and working harder than ever. Couple that with inflation making my money worth less, and it's a wonder I can afford any non-essential spending at all. Every single good that I buy has increased in price by very noticable amounts. Generally, many people may not have the same problem as me, where their income is based on stock, but still, most people's cost of living has greatly increased and their income has stayed the same. Prices have been so out of control lately.
Is it just the Russia-Ukraine war that's keeping prices so high, or is it more than that, like aftershock from the pandemic, lockdowns, and COVID relief spending upending the economy? What's the best to hope for? If the war ends, is all we have to look forward to a reduction in inflation, meaning that prices will stop going up? Or is deflation a possibility, to bring prices back down to previous levels? I know close to nothing about econ, but I always hear deflation talked about as if it's this terrible thing. I don't really know why, I guess just because it destabilizes the market, and makes outstanding debts larger. To me right now, my dollar being worth more sounds great. Is deflation immediately following inflation a bad thing if it just brings prices back to previous levels?
If I have a fixed long term contract to sell oil at $X and there's suddenly inflation, am I not equally screwed? There's a danger in the stability of fixed long term contracts going both ways.
Say the price of energy fell, that would cause deflation. Energy is used to make nearly everything and run every business. Why should energy getting cheaper be bad? That would be a good thing, lower costs for everyone, more money to buy other things, more production! Machinery should be improving, we should have widgets that can make more steel or cars with fewer inputs.
Investopedia suggests that deflation is bad in so far as it pops bubbles:
That might be bad for those flying high on printed money but it's not necessarily bad for the economy in the long term. Deflation as a result of Depression is another matter. Putting deflation to one side, we can see how people might pull out from investments if the economy is crashing, worsening the crash. But if deflation comes as a result of rising productivity, the economy should be growing and there shouldn't be a problem.
Through a more conspiratorial lens, the power of central banks is that they print money. The more money they print (up to a point) the more power they have. When they print money, they redistribute wealth from productive industries and savers to their buddies in the government and financial sector. If the money supply needs to grow, there should be fair rules about how it expands and a cost for expansion. Either dig out gold from the ground or mine bitcoin or whatever, just don't have a system where a single well-connected body can print as much as they like arbitrarily.
Deflation is good actually, as long as it's from increased productivity, not a giant fall in demand due to the collapse of an asset bubble, which are usually propped up by reckless monetary policy.
Whatever happened to economists discounting future value? Many people are riddled with debt because they absolutely need the latest Iphone or a shiny new car. Why would they consume less and hoard money if products were going to get slightly cheaper next year? We do not have a problem with people hoarding money, quite the opposite. And why hasn't this happened in electronics, where the price of memory or processing power falls very rapidly? People have things they want to do now and they'll pay money to do it now.
They just need to promise any level of profit. A profit in a deflating currency includes the profit plus the deflation. The issue is deflation in a recession, only then do you have problems.
It used to be that you didn't need to take on 30 or 40 year loans for the privilege of one day owning a house. It's good when products people need like energy, food and housing are cheap. Turning them into a debt-ridden investment product is harmful for most, beneficial to few.
The gains of low interest rates are passed on first to banks and well-connected investors who can tap into that low-interest capital. For much of the last decade we had a wide range of totally unprofitable companies backed up by cheap money, immense amounts of speculation. Or it goes directly to the irresponsible bankers who mismanage customer deposits and lose it in these great big bubbles. The bubble-bailout economy privatizes gains and socialize losses. And why should the government know what a good interest rate should be anyway? They routinely get it wrong, fuelling bubbles and then popping them.
How is this going to work when our economies are drenched in debt that we encouraged with constant inflation? Raising interest rates means imposing more stress on a fragile housing market (effectively raising the price of houses still further by increasing repayments), reducing the value of houses (since we made them into investment products that are bought and sold with borrowed money), lowering demand and costing governments more in interest on the absurd amounts of money they've borrowed.
First off, these people aren't buying anything like that on credit during a deflationary spiral because the banks are worried enough that they'll be able to pay off their existing debt (which is worth more now) let alone buy something now that's going to be worth less in a year. In a recession, luxuries and positional goods are usually the first sectors to take a hit. Second, this kind of spending has a relatively small impact on the economy at large. A bunch of idiots buying iPhones they can't afford is a drop in the bucket compared with a business that cuts back on purchasing after the financial people tell them that they can save 5% if they can hold out another 6 months, which they can because nobody is ordering anything anyway.
Because that's the result of increasing productivity and not of processing power. If the price falls because the company is able to produce it for a lower cost and passes on the savings in a competitive market it's much different than if the company is forced to sell the product for below cost because the market is unwilling to pay the price the company anticipated due to a drop in the money supply.
Any significant deflation almost always accompanies a recession. We had slight deflation around 2015 but few people noticed. If we had the kind you could notice we'd be in a recession. When prices go down companies can't get as much money for what they sell. Some companies may be able to hang in there as normal but others are going to be more sensitive to the market and will have to cut fixed costs somewhere. If the company has debt that's a fixed cost that's not easy to get rid of. It's much easier to either cut pay or, more likely, lay people off. And layoffs and pay cuts across wide swaths of the economy mean that consumers can't afford to buy goods and services, which means further price decreases, and the spiral continues. SOme companies go out of business entirely, and accordingly, fewer people are willing to invest because the risk is too high. Hence, companies that are in trouble can't find investment capital to stay afloat and are more likely to fail. The cycle only ends after a bottoming out period, or with significant financial stimulus that may or may not be effective. Inflationary price increases are tough for consumers to swallow but they generally don't come with the knock-on effects of unemployment so the Fed tends to err on the side of a little inflation.
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