Economists expect report of first deflation in 54 years

[MrFun]

Shut up, Ben.

He doesn't follow instructions very well.

[Victor Galis]

As long as prices drop, a decline in wages won't really matter. Money is not real. If you get paid half as many dollars, but each of those dollars buys twice as much stuff, you're as wealthy as you were before.

And God help you if you have any debt.

[Victor Galis]

I thought it was hyperinflation we were supposed to be scared of ATM, what with the barrage of federal stimulus money getting unloaded on the economy. Or are we supposed to be scared of both at once somehow?

Yes. I think you are supposed to feel the fear of someone trying to walk on a tight-rope. It seems fear is the emotion du jour.

[Agathon]

Yes. I think you are supposed to feel the fear of someone trying to walk on a tight-rope. It seems fear is the emotion du jour.

Our society is so full of fail and AIDS that I long ago stopped feeling fear. Even contempt was some time ago. Now I just laugh... like a pirate.

[C0ckney]

a prolonged spell of deflation would be great for me. i have no debt (except student loans, which don't really count), no assets and my income is inflation proof. however, i realise that it would be catastrophic for the economy as a whole.

[Felch]

So you want another great depression?

Why, yes Mr. Kenobi, that's exactly what I want. Thank you for taking my views and succinctly summarizing them.

I'm not sure you've thought this through.

The economy runs on credit and debt. How many people who form the core of the earning population don't have long term debt? Many of them have student loans, but more have mortgages. If their income deflates, their long term debt does not.

Their "debt" is not independent of my "credit". Their debt is my credit. They are one and the same.

In our societies "saving" is more like lending your neighbour money to buy a house. It's all very well to say that savers will benefit, but the savers' money has already been lent to the borrowers, and is contingent on the borrowers being able to pay it back. It isn't like my money is actually in the bank, because the bank has lent it to other people. If their income deflates, they won't be able to pay the bank back and the bank can't pay me.

At some point, it is going to be rational for a person to simply walk away from their house and/or declare bankruptcy. Then the bank owns the house, and by extension so do I. But since prices have deflated, the house can't be sold for as much as the original buyer bought it for, and thus my savings are borked.

It would be different if most people saved their cash in an old sock under their mattress, but they don't. It's in banks, and has been lent to people who can't pay it back.

I have thought about this. I think that it is natural and to be expected after the reckless lending of the past few years. I also checked the figures, which you and Victor can look at in the link I provided. There is, as of the latest figures, no deflation. This is purely theoretical.

The ridiculous actions that the government is going to take to try to control a natural market force are only going to be counter-productive. If you reward people who take on too much debt this time, they'll never learn their lesson. And in another twenty or thirty of hundred years we're going to go through another credit crisis even worse than the current one.

Unless people are held accountable for their private decisions, capitalism won't work.

[Felch]

No. Saving via bank deposit is lending the bank your money so that they can lend it to other people. If you just want to save wealth, then keep money or gold in an old sock.



The problem is that the deflation will cause the bank to lose money, because it will cause people to walk away from promises that are equal to the savings of others. It need not end up with nothing, but it will not be able to pay me the full value of my deposit + interest. Who will be able to lend money if that happens?

There's a risk with everything. Putting money in a bank returns interest because the bank is putting that money to good use. But if the bank loans it to anybody with a face and the ability to sign a document, then the bank is ****ing up. And if you put your money into a **** up bank, this sucks, but you don't deserve to get your money back.

That's capitalism. It's cold, it's hard, it's not fair, but it's real life.

It's entirely possible, under certain circumstances, that you should keep some assets in a sock. Or in multiple banks - diversify your banks the same as you would your stocks.

As far as the question of who will lend money, I'd say it's probably the creditor nations in Asia. They've got cash but no customers. I'd have no problem with an account in the Bank of Red China, so long as they are solvent.

[DanS]

The inflation figure was released this morning: zero over the last year.

Not too scary. Yet. There are some areas of deflation, of course. Housing, f.e.

[Agathon]

I have thought about this. I think that it is natural and to be expected after the reckless lending of the past few years. I also checked the figures, which you and Victor can look at in the link I provided. There is, as of the latest figures, no deflation. This is purely theoretical.

Deflation is predicted, not yet apparent. That's what the article says.

The ridiculous actions that the government is going to take to try to control a natural market force are only going to be counter-productive.

Markets aren't natural. They are sophisticated cultural creations. Anyone who has studied tribal economies knows this.

If you reward people who take on too much debt this time, they'll never learn their lesson. And in another twenty or thirty of hundred years we're going to go through another credit crisis even worse than the current one.

I agree. That's why I'm a Marxist.

Unless people are held accountable for their private decisions, capitalism won't work.

Yes, but if holding them to account means burning our own arms off, then we ought to reconsider.

[Unimatrix11]

´Unless people are held accountable for their private decisions, capitalism won't work.´

´Corporation (noun): An engineered device for obtaining individual profit, without individual responsibitlty´ - from Civilization IV

----

´That's capitalism. It's cold, it's hard, it's not fair, but it's real life.´ - as long as most people concieve and colport its laws as natural and unchangable.

[Agathon]

There's a risk with everything. Putting money in a bank returns interest because the bank is putting that money to good use. But if the bank loans it to anybody with a face and the ability to sign a document, then the bank is ****ing up. And if you put your money into a **** up bank, this sucks, but you don't deserve to get your money back.

It's not about desert, but about the consequences credit. We need long term credit in order to fund long term projects. For individuals this might be a home purchase, for municipalities, a school, for a country, a new highway.

If deflation hits, it means that people won't want to make long term investments, because the risk of default will be much higher. But if people don't do that, then prices fall further. Why would anyone take a loan, even at no interest, if the value of the money you were using to pay off the loan decreased markedly every year?

That's capitalism. It's cold, it's hard, it's not fair, but it's real life.

It also doesn't work if left to itself.

As far as the question of who will lend money, I'd say it's probably the creditor nations in Asia.

That's over. You can't pay your bills.

[Felch]

Deflation is predicted, not yet apparent. That's what the article says.

Inflation is being observed. I understand that deflation looks likely, and I understand the causes. But we've got enough problems without imagining new ones.

Markets aren't natural. They are sophisticated cultural creations. Anyone who has studied tribal economies knows this.

Markets are created by people, but they obey fundamental rules. That's the nature that I'm referring to.

I agree. That's why I'm a Marxist.

Well, that's one solution. I'd prefer to be a free citizen who is responsible for his own decisions. You know, an adult, unlike these whiny pseudo-capitalist *****es who want something for nothing. I respect your intellectual clarity and honesty.

Yes, but if holding them to account means burning our own arms off, then we ought to reconsider.

Not holding them to account is like giving in to a hostage taker's demands. That just encourages these punks to take our economy hostage again, and next time the demands will be even greater. I'd rather lose the hostages, and establish the precedence that we don't waver.

[Unimatrix11]

And there should be no doubt: A deflation would hit not only those who ´overextended´ themselves. You could have a perfectly fine credit (if there is such a thing), built a house, still be 100.000 in the reds with it (but constantly reducing it), and then massive deflation hits. You´re screwed badly. Given the fact, that deflation didnt really occur for some time now (the thread title suggest more than half a century), it would have required more than just cautious risk-assessment to account for the possibilty of it, when the credit was issued. And that goes for pretty much all the credits issued. Altogether the credits may have contributed to a raising risk of deflation, but i would assume that the risk of it wasnt taken into account on issueing most of them. Typical market failure by unintended results of masses of individual decisions taken independently only with a specific intention in mind.

BTW, i think the crisis is systemic, not caused by misbehaviour of anyone really. If the rules of the market are considered ´natural´, then it follows that greed is also ´natural´ and those people behaved only ´natural´ (by trying to make a maximum profit) given the system they operated in. It´s damned easy to project the shortcomings of capitalism onto a rather limited group of people. In that, the major difference between 1929 and 2009 in Germany is the fact, that today, we dont blame the jews, but the managers, bankers, speculants (basically what jews were stereotypically believed to be anyways in ´29). In both cases, the chorus of society went: ´Capitalism would bring heaven on earth, if we could just get rid off these sickening elements. You know, these ´jewish´ high finance speculants and no-work-profiteers.´ Fact is, this kind of people are the children of the system and it will always bring these kind of people to its top.

[Felch]

It's not about desert, but about the consequences credit. We need long term credit in order to fund long term projects. For individuals this might be a home purchase, for municipalities, a school, for a country, a new highway.

If deflation hits, it means that people won't want to make long term investments, because the risk of default will be much higher. But if people don't do that, then prices fall further. Why would anyone take a loan, even at no interest, if the value of the money you were using to pay off the loan decreased markedly every year?

That's the beauty of capitalism. If deflation occurred, borrowers would be free to borrow at negative interest from any willing parties. The free market is about freedom and responsibility. You're free to make any arrangement you want with anyone else who is agreeable.

It also doesn't work if left to itself.

The market is complex, and beyond the understanding of any individual. We're like blind men feeling an elephant. Your hands are just up his rear is all.

That's over. You can't pay your bills.

There's plenty of capital in Asia. It didn't disappear. Rates will be higher, but that's perfectly reasonable.

[Agathon]

That's the beauty of capitalism. If deflation occurred, borrowers would be free to borrow at negative interest from any willing parties.

That is very rare, and requires special circumstances. If you could make money simply by borrowing it, how would the banks keep any reserves? Everyone would just remove their bank deposits, because they would be being charged for keeping them in the bank. Then it's old sock time.

The market is complex, and beyond the understanding of any individual. We're like blind men feeling an elephant. Your hands are just up his rear is all.

This is pure faith based economics, and deserves no more time than a witch doctor's economic theory.

There's plenty of capital in Asia. It didn't disappear. Rates will be higher, but that's perfectly reasonable.

Why would they give it to you? You have nothing to give in exchange. You used to have a safe currency, but that is in jeopardy now.