{"items": [{"author": "Michael", "source_link": "https://www.facebook.com/jefftk/posts/635962508912?comment_id=635963596732", "anchor": "fb-635963596732", "service": "fb", "text": "Wages and prices are \"sticky\". That is, they are not perfectly efficient in the short term and don't respond immediately to stimuli. Take the opposite example of inflation: If the money supply is suddenly increased evenly across the board, people will spend more money. It will take some time before that extra spending will convince companies to raise prices, and some more time after that before workers start demanding higher wages to compensate for an increase in the cost of living.
After some amount of time, there will be effectively no difference between the state of things before a single inflationary/deflationary event and long after, but there are short term effects caused by the delta. When a series of events causes a continuous change (a \"spiral\"), the markets are always behind and the stickiness effects persist.", "timestamp": "1384521750"}, {"author": "Arthur", "source_link": "https://www.facebook.com/jefftk/posts/635962508912?comment_id=635964310302", "anchor": "fb-635964310302", "service": "fb", "text": "The efficient markets hypothesis is false and therefore the market actually always is in the process of inflating or deflating. The new wave of economists who deny this and, premised on the idea of efficient markets, claim the \"real business cycle\" or \"real\" economic growth is the primary driver of market shifts are also wrong
The primary reason prices go up or down for anything is rarely actual real events but what Keynes called \"the animal spirits\".
I do not care to spend time academically defending this point of view, just pointing out quite a lot of educated people disagree with your basic freshwater Econ premises.", "timestamp": "1384522524"}, {"author": "Victor", "source_link": "https://www.facebook.com/jefftk/posts/635962508912?comment_id=635964564792", "anchor": "fb-635964564792", "service": "fb", "text": "It is rational to delay purchases during deflationary times. This is what leads to the spiral.", "timestamp": "1384522755"}, {"author": "Ralph", "source_link": "https://www.facebook.com/jefftk/posts/635962508912?comment_id=635970108682", "anchor": "fb-635970108682", "service": "fb", "text": "And to \"buy now, save later\" in inflationary times.", "timestamp": "1384527392"}, {"author": "Arthur", "source_link": "https://www.facebook.com/jefftk/posts/635962508912?comment_id=635970467962", "anchor": "fb-635970467962", "service": "fb", "text": "It's a collective action problem, essentially -- animal spirits could and would be instantly canceled out the way the EMH imagines they would if \"The Consumer\" really were one single rational economic actor that could make instantaneous decisions.
But The Consumer doesn't exist. As an individual consumer, it's kind of like a prisoner's dilemma -- sure, it would be better for the economy if NOBODY reacted to deflation and we all agreed to immediately adjust our pricing assumptions instantly as soon as we realized the money supply was shrinking. If NOBODY reflexively tightened their spending when deflation first happened then deflation wouldn't happen. This is what Bitcoin advocates argue when they claim that Bitcoin deflation can be indefinitely delayed by subdividing Bitcoins to the 10^xth power or whatever.
But if I, individually, refuse to tighten my spending and other people do tighten my spending when deflation happens, then I'm the sucker. Everyone else is profiting off of me, taking away my dollars that are getting more valuable while I'm letting go of them. So I can't refuse to tighten my spending in case other people do it and I end up being the chump. Result: Nobody is the chump, everyone does tighten my spending and The Consumer \"overreacts\" to deflation.
Seriously, think about it: In a Bitcoin economy, what kind of idiot would you have to be to be the chump who goes \"Well, clearly we are entering a deflationary spiral, so I will now be the first mover who devalues my own personal Bitcoin holdings and I will now treat all my Bitcoins as though they have half their original value\"?
This is easy to see. If this didn't happen there wouldn't be easily observable \"bubbles\" and \"panics\" in the market in the first place. The economy is driven by the animal spirits because a widely distributed profit-seeking economy acts as a POSITIVE feedback loop for blips in the marketplace, whereas a well-designed one would ideally be a negative feedback loop. (A well-designed incentive structure should RESIST change and make it harder to collectively move investment to a new sector until the new sector has proven its profitability/utility over a long time frame. This is what centrally planned economies try to do, in their imperfect and clumsy way. The fact that as a result they often miss out on massive booms is played up as a reason for their \"failure\" compared to market economies, ignoring the massive amounts of waste that market economies regularly create because they are set up to push investors into desperate short-term speculative rushes.)", "timestamp": "1384527703"}, {"author": "Jeff Kaufman", "source_link": "https://www.facebook.com/jefftk/posts/635962508912?comment_id=635970557782", "anchor": "fb-635970557782", "service": "fb", "text": "@Victor: \"It is rational to delay purchases during deflationary times.\"
Why is it more rational to delay purchases when money is becoming more valuable than when anything else is? On average the stock market grows several percent above inflation every year, and so by delaying a purchase and putting money in the stock market you can take it out later and generally buy something better.", "timestamp": "1384527765"}, {"author": "Jeff Kaufman", "source_link": "https://www.facebook.com/jefftk/posts/635962508912?comment_id=635970737422", "anchor": "fb-635970737422", "service": "fb", "text": "@Arthur: \"efficient markets hypothesis is false\"
For the argument here I'm only using a very weak form of the hypothesis, which is the idea that things everyone already knows are going to happen are already priced in.", "timestamp": "1384527897"}, {"author": "Jeff Kaufman", "source_link": "https://www.facebook.com/jefftk/posts/635962508912?comment_id=635974459962", "anchor": "fb-635974459962", "service": "fb", "text": "@Michael: \"If the money supply is suddenly increased evenly across the board, people will spend more money.\"
I'm less interested here in sudden changes to the money supply because I'm trying to understand how bad it would be if we were using bitcoin as the primary currency. Bitcoin has a money supply function that is known in advance, and pretty much incapable of sudden increases or decreases. So while I agree it probably does take people time to react to changes in the inflation rate, this is less of an issue here.", "timestamp": "1384528217"}, {"author": "Victor", "source_link": "https://www.facebook.com/jefftk/posts/635962508912?comment_id=635974484912", "anchor": "fb-635974484912", "service": "fb", "text": "Would you buy a washing machine today for $400, when you have good reason to believe that it will cost $300 in a few months? This kind of decision slows the economy(reduces demand)-hence the downward spiral.", "timestamp": "1384528229"}, {"author": "David", "source_link": "https://www.facebook.com/jefftk/posts/635962508912?comment_id=635975098682", "anchor": "fb-635975098682", "service": "fb", "text": "(As usual for me, after I post my comment I see that several new comments have been added, making some of my points....)
I should probably leave this one to economists, but I'll put my interpretation in. Victor is correct in describing the cause of the deflationary sprial: if you expect that prices will fall, then you hold on to your cash and don't make purchases that you can defer. This fall in demand causes prices to fall further -- the deflationary spiral.
\"If everyone knows that a dollar today will be worth twice as much in a year (deflation) then why doesn't the dollar become worth that much now?\"
My guess (and this is where I need the actual economists to fill in the details properly) is that there are still a lot of purchases that people need to make that can't be deferred, so the deflationary spiral only happens bit by bit. There would also be plenty of consumers who just hypebolically discount and buy a new widget today instead of waiting a year and saving $50. So there's still _some_ demand for products across the economy.", "timestamp": "1384528518"}, {"author": "Jeff Kaufman", "source_link": "https://www.facebook.com/jefftk/posts/635962508912?comment_id=635975253372", "anchor": "fb-635975253372", "service": "fb", "text": "@Victor: \"Would you buy a washing machine today for $400, when you have good reason to believe that it will cost $300 in a few months?\"
A transition from $400 to $300 in a few months (like 3) means dollars are becoming 32% more valuable every year. If everyone expected the stock market to grow 32% per year faster than inflation I would similarly expect people to delay some purchases in order to keep their money until it would be more valuable.
The kind of deflation I'm trying to understand is the kind you get when you have a roughly fixed amount of money and growing demand for it because the whole economy is using the same money. That's not 32% a year, but probably more like the annual growth in gross world product, or around 2%. As that's less than you could get by putting your money in the stock market, I don't see why people would delay purchases.", "timestamp": "1384528678"}, {"author": "Thomas", "source_link": "https://plus.google.com/110993380381592315078", "anchor": "gp-1384528710876", "service": "gp", "text": "1) I wouldn't necessarily include deflationary spirals as part of the standard economic view. \u00a0As\u00a0\nhttp://en.wikipedia.org/wiki/Deflation#Deflationary_spiral\n points out, their existence is slightly controversial.\n
\n
\n2) I think it is generally agreed that you need some irrational or at least non-traditionally rational behavior in order to get a deflationary spiral. \u00a0The standard culprit is sticky wages: \u00a0people get really unhappy when their \nnominal\n wages are reduced, and the resulting morale drop hurts productivity so much that employers are very unwilling to go there.\n
\n
\nThere is also a theory of deflationary spirals in which debt and non-clearing markets play the crucial role, but I don't really know much more than that about it.\n
\n
\n3) For your first bullet point, sticky wages are the cause of the link between falling widget prices and \"widget prices falling faster than the cost to make them\". \u00a0If, for example, the widget construction was completely automated, then the price of the widget inputs would be falling at the same rate as the price of the widgets and there wouldn't be a problem. \u00a0But if labor is an input, and the price of labor doesn't fall, the old way of doing things is no longer an option.\n
\n
\n4) For your second bullet point, I don't think the efficient market hypothesis specifically translates into \"you don't see values rise continuously\". \u00a0We do in fact see values rise continuously by about 1 to 3% per year: \u00a0it's called inflation.\n
\n
\nMore to the point, people do anticipate and take into expected deflation or inflation to the extent that they are able. \u00a0The \"to the extent that they are able\" part is key: \u00a0you might know that the $1 in your pocket will buy twice as may goods and services next year, but you still need to spend it today to buy something crucial like food or shelter.", "timestamp": 1384528710}, {"author": "David", "source_link": "https://www.facebook.com/jefftk/posts/635962508912?comment_id=635975557762", "anchor": "fb-635975557762", "service": "fb", "text": "\"As that's less than you could get by putting your money in the stock market\"
It would surprise me if you could get returns from the stock market during times of deflation, but I'll leave it for others to provide data on whether I'm right or wrong.", "timestamp": "1384528926"}, {"author": "Paul", "source_link": "https://www.facebook.com/jefftk/posts/635962508912?comment_id=635978541782", "anchor": "fb-635978541782", "service": "fb", "text": "A spiral occurs when people believe that the value of a commodity is sure to fall, so they attempt to unload it as quickly as possible. This increases supply without any increase in demand, thus driving the value down. In an inflationary spiral, the relative value of currency drops. In a deflationary spiral, the relative value of durable goods drops. Goods the purchase of which cannot as easily be deferred, such as food or energy, are less susceptible to deflationary spirals.", "timestamp": "1384531133"}, {"author": "Jeff Kaufman", "source_link": "https://www.facebook.com/jefftk/posts/635962508912?comment_id=635979300262", "anchor": "fb-635979300262", "service": "fb", "text": "@David: \"It would surprise me if you could get returns from the stock market during times of deflation\"
Back when a fixed supply of gold-backed currency would need to support a larger and larger economy there often was economic growth at the same time as deflation.", "timestamp": "1384531434"}, {"author": "Kelly", "source_link": "https://www.facebook.com/jefftk/posts/635962508912?comment_id=635980163532", "anchor": "fb-635980163532", "service": "fb", "text": "I'm not extremely well versed in economics but I expect that bitcoins being adopted would force people to determine their actual time discount rate. even if you know that your money will double in value every year, there IS some point at which you would rather have a washing machine than bitcoins.", "timestamp": "1384531948"}, {"author": "Michael", "source_link": "https://www.facebook.com/jefftk/posts/635962508912?comment_id=635980348162", "anchor": "fb-635980348162", "service": "fb", "text": "Money supply is just one of many possible stimuli that affects prices. I only gave that example because it was the simplest. That's why, for instance, we're rapidly increasing effective money supply through fed loans and inflation isn't going up. Our economy is so weak that the money supply is only preventing deflation, not causing meaningful inflation.
In other words, even if the supply of bitcoins remains fixed (or on a fixed inflation), swings in economic prosperity would cause large changes in our valuation of that currency (i.e. spirals). The advantage of a federal bank is that we can alter the monetary supply to to temper those swings in valuation. It is perhaps more autocratic, but it is massively more stable.", "timestamp": "1384532045"}, {"author": "Nathaniel", "source_link": "https://www.facebook.com/jefftk/posts/635962508912?comment_id=635981261332", "anchor": "fb-635981261332", "service": "fb", "text": "Delaying purchases by putting money in the stock market during inflationary times is not the same as keeping it in a savings account during deflationary times. Money invested in stocks is not actually removed from circulation, as the company whose stock you bought gets to spend it, so spending is not reduced.", "timestamp": "1384532595"}, {"author": "Marcus", "source_link": "https://www.facebook.com/jefftk/posts/635962508912?comment_id=635981880092", "anchor": "fb-635981880092", "service": "fb", "text": "There's a couple differences between deflation (and cash hoarding) and the existence of alternate investment opportunities like stocks.
1) Debt: for example, if you have a mortgage on a house, which is larger than your savings, then if deflation strikes, you get hit on all sides: your income drops, so you can't make your payments, and the value of the house drops, which may lead to you being underwater.
2) Lending: Banks can lend from anywhere between infinite interest and 0 interest. Normally, with positive inflation, lending at a rate between inflation and zero means your money is losing value, but more slowly than it would by just holding it, so there's always an incentive to seek out lending opportunities. But since there is rarely any value to lending at negative interest rates, then in a deflationary environment, lending can dry up. This is why Krugman keeps on ranting about this zero lower bound that hobbles the Fed from being able to goose the economy anymore.
3: With the stock market the value of a given dollar investment drops with more investment (e.g., dividends and underlying company value per dollar of stock drop as stock price rises) so in theory you can't have a positive stock spiral (yes, bubbles happen, but...), whereas with deflation, the more people hoard, the higher deflation gets, and the more it makes sense to hoard.
4: I think sticky wages matter, but I can't articulate it at the moment.
5: I think the fact that a stock purchase means someone else is getting money to spend/invest, whereas cash-hoarding does not have that effect also matters;.", "timestamp": "1384533018"}, {"author": "Jeff Kaufman", "source_link": "https://www.facebook.com/jefftk/posts/635962508912?comment_id=635982104642", "anchor": "fb-635982104642", "service": "fb", "text": "@Nathaniel: \"Delaying purchases by putting money in the stock market during inflationary times is not the same as keeping it in a savings account during deflationary times\"
It's not the same, but if the delaying purchases effect were real we would expect to already be seeing it. And people would only move from substantial delaying via the stock market to substantial delaying via holding currency when deflation got really high.", "timestamp": "1384533125"}, {"author": "Victor", "source_link": "https://www.facebook.com/jefftk/posts/635962508912?comment_id=635982134582", "anchor": "fb-635982134582", "service": "fb", "text": "When there is inflation, people are motivated to invest their money to avoid the loss in its value. The opposite applies during deflation-the motivation is to hold cash and realize the increase in value without risk. This is an additional reason that the stock market will plummet during deflationary times, besides the decreased profits.", "timestamp": "1384533137"}, {"author": "Wayne", "source_link": "https://www.facebook.com/jefftk/posts/635962508912?comment_id=635983372102", "anchor": "fb-635983372102", "service": "fb", "text": "", "timestamp": "1384534118"}, {"author": "Maxwell", "source_link": "https://www.facebook.com/jefftk/posts/635962508912?comment_id=635984499842", "anchor": "fb-635984499842", "service": "fb", "text": "As fun as crowd-sourcing is, Wikipedia lays out three pretty clear reasons why deflation can happen:
- Growth leads to price competition and so prices fall (demand side) -- this isn't really what's going on today though!
- Hoarding of money reduces the velocity of money (demand side; mentioned above about washing machines)
- Banks lend less reducing the amount of money in the system (supply side; can be because banks fear borrowers will default, because the banks have failed, or because the Fed reduced the money supply)
http://en.wikipedia.org/wiki/Deflation
This last one is really important right now! Currently the Fed is injecting money into the financial sector, but banks are still afraid to lend (perhaps irrational animal spirits, perhaps due to a rational assessment of risk), so they hoard the money and it doesn't actually circulate in the economy or raise the price level. My understanding is that's why inflation has been very low the past few years despite massive injections of money from the Fed.
Anyway, to answer the question about it being a cycle: deflation cuts consumption because of the reasons discussed above about washing machines. It also leads to lower investment from companies because fixed/\"sticky\" costs like wages cost more in real dollars, hurting the bottom line. For both reasons, aggregate demand falls, and so demand for money falls. This SHOULD right the ship and bring equilibrium to the money market, but if the fall in aggregate demand is really large, laid off workers will hoard more money because they can't find jobs, businesses will in turn do worse leading to even more layoffs, and banks will start to fail/refuse to extend more credit because borrowers are likely to default. The economic downturn becomes a vicious cycle, with deflation coming along as part of it.", "timestamp": "1384535274"}, {"author": "Jeff Kaufman", "source_link": "https://www.facebook.com/jefftk/posts/635962508912?comment_id=635990258302", "anchor": "fb-635990258302", "service": "fb", "text": "@Wayne: \"Borrowing activity ceases because borrowers face crushing real debt loads on repayment.\"
I think I see how this works: if I borrow $X from you at 3% over inflation I can go buy a house, pay you back over time, and everything is fine. If 3% over inflation means -2%, though, you're not going to lend to me because you'd rather just hold onto the cash.", "timestamp": "1384539326"}, {"author": "Jeff Kaufman", "source_link": "https://www.facebook.com/jefftk/posts/635962508912?comment_id=635990572672", "anchor": "fb-635990572672", "service": "fb", "text": "Why does anyone lend out money at less than the rate of return you'd expect from the stock market? A bit under to handle risk makes sense, but why can you get a loan at 3% today when stocks average 6%+? Some of this is that banks are not allowed to buy stocks but are allowed to make loans with people's deposits and people have a lot of money in deposits. But if people all take the standard economics advice and move most of their savings from bank accounts to index funds, does lending dry up?", "timestamp": "1384539586"}, {"author": "Maxwell", "source_link": "https://www.facebook.com/jefftk/posts/635962508912?comment_id=635990702412", "anchor": "fb-635990702412", "service": "fb", "text": "Jeff, on your penultimate comment, I think you have it backwards. People borrow at nominal rates. So if I owe you $1, but there's a lot of unexpected inflation, the dollar I owe you in the future (or $1.05 if there were say a 5% interest rate) is worth less than you had anticipated. This is good for borrowers and bad for lenders, and it's called inflating away debt. (This is why countries that have borrowed lots of money end up printing more money--their nominal debts are worth less due to inflation, to their lenders' chagrin). With deflation, on the other hand, the $1 (or $1.05) I owe you is worth more than we both anticipated. This means that I as a borrower have lost out, and you as a lender have won. Lenders love deflation! Borrowers hate it.
As for rates of return, the stock market is risky, so there's a risk premium. That basically ought to account for the entire difference in rates.", "timestamp": "1384539769"}, {"author": "Wayne", "source_link": "https://www.facebook.com/jefftk/posts/635962508912?comment_id=635992204402", "anchor": "fb-635992204402", "service": "fb", "text": "", "timestamp": "1384540245"}, {"author": "Phillip", "source_link": "https://www.facebook.com/jefftk/posts/635962508912?comment_id=635992952902", "anchor": "fb-635992952902", "service": "fb", "text": "Bitcoin will never become a reserve currency Real Reason) It will undermine the government's ability control the economy and to tax, Reason that will be used) Bitcoin is the perfect currency for nefarious schemes and terrorism, which has the advantage of being true.", "timestamp": "1384540296"}, {"author": "Maxwell", "source_link": "https://www.facebook.com/jefftk/posts/635962508912?comment_id=635993172462", "anchor": "fb-635993172462", "service": "fb", "text": "Also, if my understanding is that Bitcoin increases in supply at a fixed rate according to a formula, it's basically just a more dependable version of gold which also has a fixed supply but increases according to mining yields. Having a fixed amount of currency disallows monetary policy by central banks, meaning you're surrendering the economy to market forces without recourse to policy. We went off the gold standard because we came to realize that this laissez faire approach had serious problems.", "timestamp": "1384540522"}, {"author": "Rob", "source_link": "https://www.facebook.com/jefftk/posts/635962508912?comment_id=635994015772", "anchor": "fb-635994015772", "service": "fb", "text": "Deflation doesn't mean everyone will invest in money, unless the rate is greater than the return on other investments.", "timestamp": "1384541275"}, {"author": "Phillip", "source_link": "https://www.facebook.com/jefftk/posts/635962508912?comment_id=635994275252", "anchor": "fb-635994275252", "service": "fb", "text": "Maxwell My understanding is that one can produce (mine) bitcoin using a lot of computing power. The idea being that the creating process is similar to gold mining in restricting demand. The obvious difference is that gold has industrial and fashion use beyond its store of value use.", "timestamp": "1384541428"}, {"author": "Phillip", "source_link": "https://www.facebook.com/jefftk/posts/635962508912?comment_id=635994534732", "anchor": "fb-635994534732", "service": "fb", "text": "Remember that markets have average behavior not uniform behavior. A certain percentage of people will defer purchase anticipating price drop. manufactures will have to adjust by cutting cost to allow them to cut prices. Historically that has meant cutting labor, which of course will reduce demand. This approach, of course, hits a limit.", "timestamp": "1384541655"}, {"author": "Wayne", "source_link": "https://www.facebook.com/jefftk/posts/635962508912?comment_id=635994809182", "anchor": "fb-635994809182", "service": "fb", "text": "", "timestamp": "1384541893"}, {"author": "Jeff Kaufman", "source_link": "https://www.facebook.com/jefftk/posts/635962508912?comment_id=635994884032", "anchor": "fb-635994884032", "service": "fb", "text": "@Maxwell: \"We went off the gold standard because we came to realize that this laissez faire approach had serious problems.\"
I think for more modern examples it would be helpful to look at countries like Ecuador that use a foreign currency and so may experience local deflation depending on conditions there. I think people in Ecuador mostly think switching to the dollar was a mistake, but I don't know what economists think.", "timestamp": "1384541965"}, {"author": "Jeff Kaufman", "source_link": "https://www.facebook.com/jefftk/posts/635962508912?comment_id=635995008782", "anchor": "fb-635995008782", "service": "fb", "text": "@Phillip: \"one can produce (mine) bitcoin using a lot of computing power\"
While you can mine bitcoin you don't actually change the total amount that's available. The way bitcoin works there's always a certain amount of new money created per time period, and by putting more processing power to work you increase the chances that you're the successful miner.", "timestamp": "1384542091"}, {"author": "Jeff Kaufman", "source_link": "https://www.facebook.com/jefftk/posts/635962508912?comment_id=635995093612", "anchor": "fb-635995093612", "service": "fb", "text": "@Robert: \"Deflation doesn't mean everyone will invest in money, unless the rate is greater than the return on other investments.\"
It's definitely more convenient to invest in money, though.", "timestamp": "1384542158"}, {"author": "John", "source_link": "https://www.facebook.com/jefftk/posts/635962508912?comment_id=636063581362", "anchor": "fb-636063581362", "service": "fb", "text": "I think a \"Deflationary Spiral\" happens when the money supply is not growing as fast as demand. The value of money goes up. People hold on to their money more, expecting it to be more valuable in the future, and that further shrinks the money supply. Hence a spiral.
I guess the spiral ends when prices go down, easing demand.", "timestamp": "1384606489"}, {"author": "Jeff Kaufman", "source_link": "https://www.facebook.com/jefftk/posts/635962508912?comment_id=636070003492", "anchor": "fb-636070003492", "service": "fb", "text": "@John: why would prices going down ease demand?", "timestamp": "1384614932"}, {"author": "John", "source_link": "https://www.facebook.com/jefftk/posts/635962508912?comment_id=636070422652", "anchor": "fb-636070422652", "service": "fb", "text": "Jeff Kaufman, Because even when people are saving more they have to spend money on necessities. When the price of those necessities goes down total spending goes down and the demand for money goes down.", "timestamp": "1384615305"}, {"author": "Gabe", "source_link": "https://www.facebook.com/jefftk/posts/635962508912?comment_id=636117498312", "anchor": "fb-636117498312", "service": "fb", "text": "Is this related to the paradox of thrift?", "timestamp": "1384637308"}]}