If inflation is bad, why is deflation bad?

Is that what they're calling it now?

I just love all the new words. Like "market adjustment".

 

<div class='quotetop'>QUOTE(burritos @ Aug 19 2007, 12:29 PM) [snapback]498666[/snapback]</div>

Printed money has little to do with the money in circulation. Most money is electronic, and is controlled by the cost of borrowing.

Inflation benefits debtors, who get to pay back with lower valued money. The problem with "deflation" is that it doesn't occur unless a country has serious economic problems. It's like losing weight because you have cancer. You might ask: "What's wrong with losing weight? I though it's healthier to weigh less."

Tom

 

Inflation is good. Deflation is bad.

You should try to keep your Prius tires anywhere between 35/33 to 43/41. Inflate or deflate to keep your Prius running at optimal condition.

Same goes for the economy.

 

<div class='quotetop'>QUOTE(burritos @ Aug 19 2007, 10:29 AM) [snapback]498666[/snapback]</div>

Some inflation is good and works for every. Deflation is bad... here's an example.

You buy a house and have a shiny new, 30 yr mortgage. Let's say you pay $500/mo. With modest inflation, 15 years later, you're still paying $500/mo, but that payment is a lot less of your take home pay, so you're actually ahead because you're paying the same debt with inexpensive currency.

Now, look at deflation. Same payment, but after 15 years $500 is worth a lot more! Now you're paying with expensive currency that is worth a lot more! You can see how that's a bad thing.

 

<div class='quotetop'>QUOTE(burritos @ Aug 19 2007, 04:31 PM) [snapback]498800[/snapback]</div>

Well, if you've got an APR then your interest and payments are going up. But because of the subprime meltdown the value of your home is going down. So some people owe more than their home is worth.

 

Deflation is bad (if you're an executive) because if a company charges less for a product, they make less money.

It's not that inflation is bad (if you charge more, you make more money) - it's just too high of an inflation is bad (if you have to pay more to make your product...).

Just like unemployment. A really low unemployment might be great for the average Joe on the street, but to Mr. Executive, it's horrible because they have to work harder (including...*shudder* higher wages and more benefits) to keep their workers.

 

With deflation the dollar you earn is worth less. But the cost of everything else will go up, so your paycheck won't go as far. The cost of everything else goes up because this is a global economy, and it will take more U.S. dollars to pay for the foreign goods and manufacturing. Our dollar is worth less, they'll want more of them to pay for their goods and services. That cost will be passed on to us, the consumer. And we consume a lot of foreign related stuff.

 

<div class='quotetop'>QUOTE(Godiva @ Aug 19 2007, 07:01 PM) [snapback]498917[/snapback]</div>

No, that is inflation.

Deflation is defined as:

In other words, people have no money to spend on goods so sales decline, prices come down and manufacturers, sellers and service providers suffer and some of them go out of business.

The Great Depression is a prime example of a deflationary economy.

 

<div class='quotetop'>QUOTE(burritos @ Aug 19 2007, 03:31 PM) [snapback]498800[/snapback]</div>

Those are supply/demand related, not due to inflation. Though, the supply of something can cause inflation, I suppose. The price of oil can have that effect. Though, in the case of the former (houses) I think interest rates had a lot to do with the housing boom, and interest rates are often used to control inflation, though precisely how I'm not certain. I'm no economist.

 

<div class='quotetop'>QUOTE(tripp @ Aug 19 2007, 08:43 PM) [snapback]498958[/snapback]</div>

Higher interest rates equal a tighter money supply. People borrow less money, because they do not want or unable to pay higher interest, and have less of it to spend. As a result, they buy less and that keeps prices in check. It is classic supply and demand as taught in Econ 101. If the tightening of the money supply is overdone, prices start coming down and that results in deflation which has an adverse effect on the economy.

 

<div class='quotetop'>QUOTE(IsrAmeriPrius @ Aug 19 2007, 10:40 PM) [snapback]498955[/snapback]</div>

Sorry, I was thinking of devaluation. Where the dollar is worth less compared to other currencies.

I think the bottom line is still the same. People have less money to spend on anything beyond essentials. And is some cases don't have money for the essentials either.

But they're supposed to pay for their own health insurance.

 

<div class='quotetop'>QUOTE(IsrAmeriPrius @ Aug 19 2007, 09:52 PM) [snapback]498962[/snapback]</div>

interest rates also have an effect on the value of currency. Low interest rates devalue the currency on the global market, right? IsrAmeriPrius?

 

<div class='quotetop'>QUOTE(tripp @ Aug 20 2007, 10:34 AM) [snapback]499206[/snapback]</div>

Oh, yes. When the yield is up, people from all over the world flock to buy U.S. government and corporate bonds. That drives up the price of the dollar and cheapens the cost of imported goods. That still does not help the average Joe with obtaining the bare necessities of life.

I still remember the late seventies and early eighties when the interest rates on first mortgages were in the 15-18% range. There was parity between the US dollar and the GB pound and I got 10 FF for a dollar (that was before the advent of the Euro). Dom Perignon was only $25 at Trader Joe's. What was Marie Antoinette's famous saying to the peasants who had no bread? "Let them eat cake"?

I could not afford to buy a house in those days, but I sure could drink and travel in style.

 

<div class='quotetop'>QUOTE(IsrAmeriPrius @ Aug 20 2007, 11:15 AM) [snapback]499231[/snapback]</div>

And drinking and traveling "in style" prevents many people from being able to "afford to buy a house" . . . then, and in the future.

I chose not to drink and travel in a style so many spoiled Americans are accustomed to.
Nowadays, I can afford to drink and travel "in style" if I so chose to . . . because I didn't chose to drink and travel in style back when I really couldn't "afford" to. But I could afford to buy a house back then.

It's all a matter of lifestyle choices for the vast majority of Americans.
Some chose to party now and pay later.

 

<div class='quotetop'>QUOTE(IsrAmeriPrius @ Aug 20 2007, 12:15 PM) [snapback]499231[/snapback]</div>

I was in France in '85 and we were getting 10 Francs to the dollar. I went back in '89 and it was just over 6 francs. If I recall, petrol was a little over 6 francs per litre.