The reason deflation is so highly feared is because it increases the value of debt. In particular, government debt. China owns large parts of the debt of the US. Deflation makes them stronger.
Not exactly. Deflation basically slows down the economy. If you think your money will worth more tomorrow, then you are less likely to invest/spend them.
But the whole purpose of money is to be used. Money is a tool, the oil that facilitates trade and keeps the economy going. And while too much money(oil) can overheat the economy(inflation), too little money can straight up bring the economy to a halt(deflation).
Deflation, even in small amounts, is more dangerous, thats why ideally you prefer having a small amount of inflation.
If you think your money will worth more tomorrow, then you are less likely to invest/spend them.
I see this argument being thrown around a lot. How does it work when a fair share of people are not doing investment at all, and are unable to spend the bare minimum to live, to begin with?
I ask this because the argument of “people will spend less” only works with people that spend extra money on unnecessary things, which is becoming less and less of a thing.
Because no matter what proportion of the population they are, many many businesses are kept afloat by discretionary spending. Be that TVs, laptops, clothing, grooming, beauty products, heath+fitness, cars, holidays, tourism, travel, even house moves.
These are all things that can be ‘put off a little while’ if there’s serious prospect of your money going further. Which, as OP says, slows the economy and makes deflation worse… The thing that suffers in the meantime is cash flow in these businesses (and dependent businesses) and an extended period of slow trade with no prospect of it ending would see many of them go to the wall. See: covid. Had governments not acted it would have naturally led to deflation. That’s not the reason they acted though, they pumped money into the economy because long before deflation/inflation would have been a worry bankruptcy would have cut deep into thousands of regular ‘good’ businesses. (So they over inflated and then we had globally crap price inflation but still the risk of an economy wide shut down was that bad…)
Technology is inherently deflationary in that superior versions come out for the same or even less money all the time yet people still regularly buy TVs, phones, laptops, etc.
“The economy” in this instance being a playground for the rich.
People won’t stop paying for food or rent just because their money might be worth a little more tomorrow. They won’t skip buying minor entertainments just because maybe their meager salaries might be worth a little more next week.
Deflation is poison for the owner class, not the working class.
“The economy” in this instance being a playground for the rich.
People won’t stop paying for food or rent just because their money might be worth a little more tomorrow.
Indeed, people won’t stop paying for everyday necessities, but the economy consists of more than just individual people: there’s the state and there are businesses too. You conflate the latter with “the rich”, which is generally true for corporations, but corporations are not the only form of business; there are cooperatives, partnerships, and others which can distribute profits more fairly. In any case, deflation affects all businesses, including fair ones, and the state itself. As another commentator suggested, money is meant to change hands and should never become an asset worth holding.
If you have debt, inflation eats away at that debt. If you’re paying 5% per year on that debt, but inflation goes up 3%, you’re actually only paying 2% on that debt. That’s good for people who have debt, and bad for the people who invested the initial money for that debt. With deflation, it’s the opposite.
This assumes your wages go up with inflation, though. Over the long term, that does tend to happen, but there are certainly periods where that is not true.
That became something of a meme post-2008 financial disaster, and it was true then. It’s not true anymore. That’s what I meant by it not being true in certain time periods. It depends on where you put the start and end dates.
1982-84 CPI Adjusted Dollar - aka, a measure that eliminates housing, healthcare, and energy costs. Like, the two main drivers for CoL in the US.
And, it’s still more than kinda true now. Ever wonder why homelessness is jumping up? Or why healthcare bankruptcies are extremely common? Is it because the wage growth outpaces those costs?
I don’t believe so.
Oh, that also only tracks “Full time workers”… Something like 60% of Americans are NOT full time workers. They work 39.5 hrs, just enough to put them under “full time”.
If money should never become an asset worth holding, how can inflation be better than deflation for the working class?
It’s deflation that turns money into an asset worth holding and thus slows down economies. Too much inflation isn’t good either, for different reasons. A slight and stable inflation is the sweet spot.
Proportionately, the rich hold a lot more money assets than the poor, who generally don’t hold any or very little.
Indeed, the rich do proportionately hold a lot more money than the poor, but it isn’t much. The rich mostly have shares in corporations, bonds and real estate.
Inflation is generally worse for workers because the rich have more pricing power. If both your living expenses and your income after taxes increased by 20%, you’d even end up with more money than before, assuming your living expenses were a fraction of your income. Unfortunately, prices haven’t risen equally; the cost of living increase has generally outpaced real wage growth. The rich have been able to set higher prices; workers haven’t been able to extract high enough wage raises.
Neither high inflation nor deflation are good for workers. What workers need is pricing power through strong unions and political support.
My understanding is that a slight and stable increase in the money supply is beneficial regardless of the monetary system in use, because it incentivizes economic activity. That said, I’m only somewhat familiar with our current fractional-reserve banking system and don’t know enough about other systems, historical or hypothetical, to present my understanding as fact.
That just shows how broken the system is, though, doesn’t it? It’s geared towards benefitting the haves over the have-nots. Yes, it probably hurts the people further down the line from the shareholders and board members… but mostly because they can’t countenance not having their numbers going up. So they pass along losses to the people who can tolerate the least.
I’m sure you’re just approaching this from a sterilized, clinical approach “that’s just the way things are”… but it’s not particularly beneficial to people to consider things exclusively that way.
I think we both agree that capitalist logic is inherently extractive, exploitative and generally unhealthy. What I’ve been trying to point out is that we should not cherish deflationary tendencies in China or seek deflation in our own economies as a solution of sorts to the cost of living crisis, but rather pursue the power to increase our wages to at least match our ever rising productivity. In my opinion, unionizing –hard as it is– is more feasible than changing our monetary system –necessary and desirable as that would be– or overcoming capitalism.
You conflate the latter with “the rich”, which is generally true for corporations, but corporations are not the only form of business; there are cooperatives, partnerships, and others which can distribute profits more fairly.
And if those other types of business don’t place “Profit maximization” as their primary focus, then a deflationary period wouldn’t be bad for them, either.
Again, it’s only bad for people with debt. And the more debt you have, the worse delfation is for you.
Debt, is really only “good” if you are a corporation. Because debt lets you spend a load of money that ain’t yours, and getting the working class deep into debt is a good way to ensure you have a decent slave labor force.
Complete layman’s take on deflation, but wouldn’t trading basically stop with deflation?
Say I buy a product for 4$ and the next day due to deflation I can only sell it for 3$, why would I then go and try to trade said product?
It would be bad to have anything on shelf for a prolonged period. Food would probably not be affected due to its short shelf-time, but hardware stores, electronics, basically anything else would have the risk of significant losses. These stores would simply close, no?
That also extends to global trade - big cargo ships are sailing for weeks before they can distribute their goods. The whole time the products would loose value.
Probably I’m wrong, but if that’s true, deflation would really make the shit hit the fan.
Say I buy a product for 4$ and the next day due to deflation I can only sell it for 3$, why would I then go and try to trade said product?
That $3 is worth as much as that $4 was now because deflation made the value of the dollar go up. So the only change is that “number go up” didn’t happen on a purely psychological level. If your trade provides value then you can trade for more value.
True, the sentence about the items loosing value is incorrect.
However, my argument is still valid, why would I go and buy the thing in the first place, if I just could have waited for today and still have 4$?
I would have „gained“ a dollar by doing nothing instead of taking the trouble of procuring the item.
Because deflation isn’t going to be at that rapid a pace. If inflation was such that an item priced at $3 today gets priced $4 tomorrow, that means a daily rate of change of ~33.33% which is an insane rate of inflation and would be a problem as well, but nobody uses that to claim inflation is absolutely bad.
Who is going to hold off on buying something if it’s 2% “cheaper” after a whole year? People certainly don’t put off buying phones even though phones still get way higher than 2% increase in performance every year or two.
Only nonessential purchases. The poor generally don’t have a choice to not pay rent in the US, you can get evicted after being 3 days late in most US states.
Yes, that’s what I’m talking about. Do you think the lower class only spends money on food, rent and gas? Some may but there are a lot of “non rich” people who buy nonessentials.
As someone in the lower class, yes. A decade ago you might have had a point, but unless they’re maxing out credit cards no one below median income is spending on non essentials.
Credit card debt is at an all time high, more people are living paycheck to paycheck than ever before, Americans rejected Biden explicitly because of his gaslighting about how good the economy was, union membership is up, and nearly all Americans celebrated the death of that CEO.
People aren’t in a good spot. They don’t have disposable income unless they above median wage. The great depression had better ratios in terms of money spent on essentials.
Not because of deflation, but because they’re looking for “The deal”. More akin to the dopamine inducing tricks many microtransaction games use these days.
Deflationary periods may be helpful to those with large amounts of cash or cash equivalents, which generally isn’t the working class. Wage growth outpacing inflation helps the working class more.
Why do you think there is a push to get people back in the office?
Because the corporate realty market is a bubble, and companies have to find a way to justify big spends if they can’t get out of a lease, and plenty of corporate landlords can’t let people out of their leases because then their buildings would be underwater and likely forclosed?
Deflationationary phases are very helpful for the working class, as their dollar now buys MORE things. Like food. And housing. And health care.
What kind of braindead take is that? The working class? The same working class that majorly lives paycheck to paycheck and can’t even afford an unexpected $500 expense?
What dollars do you think they are going to have in a deflationary economy after they get laid off?
You know in what form those paychecks generally come in? Cash, so their paycheck is now literally worth more without wage increases (which aren’t horribly stable for those generally loving paycheck to paycheck).
It’s not just consumer spending that influences inflation,/deflation but also institutional spending. The consumer price index is a lagging indicator. Decreases in institutional spending precede unemployment and the eventual reduced demand for consumer goods and services. And increases in the fed rate (and/or other forces which cause the cost of borrowing money for institutions/investors to rise) generally precede that.
Institutional spending will decrease as credit markets seize up. If deflation is predictable at, say, 1-2%, then it shouldn’t be a factor since credit would account for that.
The working class? The same working class that majorly lives paycheck to paycheck and can’t even afford an unexpected $500 expense?
Yes, that working class. You know the people whose pay has pretty much been frozen in time since the 80s, even though the cost of everything is always going up faster than the paycheck they get?
What dollars do you think they are going to have in a deflationary economy after they get laid off?
Depends. I mean, I’m not going to offer solutions to try to make an exploitive system friendlier to the wage slaves… I’d prefer not having wage slavery anymore.
But, perhaps, we need to guarantee everyone the right to the basic requirements of life? Then we don’t have to make sure billionaires get more billions, just so they can try to survive the hellscape we have created?
But, perhaps, we need to guarantee everyone the right to the basic requirements of life? Then we don’t have to make sure billionaires get more billions, just so they can try to survive the hellscape we have created?
Sure. But that is outside of the scope of your original take and in no way validates it.
Yes, every time you move the goalposts, you change the scope.
But sure, I’ll bite, again.
What does infinite growth have to do with deflation? You don’t have to have one or the other. You can also just have stagnation, which is arguably more sustainable than the unemployment caused by deflation.
I agree on the money thing. I view money like potential and kinetic energy and its only in use that it has real value and at rest it basically has potential value that will only be determined when used. It annoys me the government only does half of what keynes advized. The downturn activity and never do the good times activity.
China owns large parts of the debt of the US. Deflation makes them stronger.
I don’t follow you here. How does deflation in China make the debt of the US stronger? Am I understanding you wrong?
If the renminbi appreciated over time against the US dollar, any dollar-denominated debt held by the People’s Republic would yield less and less, wouldn’t it?
Inflation makes the purchasing power of a dollar smaller
Deflation makes the purchasing power of a dollar larger
I owe you $100. Over time the value of that $100 debt goes down with price inflation. You charge me interest to make up for this fact and make some profit also.
If prices deflate the value of the $100 debt goes up, but you’re still going to charge me interest. When I pay you back, not only can you buy more with the $100 than I could when I borrowed it, you’ve charged me for the privilege.
Thank you for expanding on your point. What I did not and still do not understand is the following part of your original comment:
China owns large parts of the debt of the US. Deflation makes them stronger.
Deflation in China –that’s where deflation might occur or even be occuring– would not make the US Treasuries held by China more valuable, would it? Only deflation in the US, with the dollar appreciating, would have that effect, right?
The price of goods going down is not contained to one country. […] Deflation would be global.
That contradicts both present reality and future expectations as far as I understand both.
In the past two years, China has been grappling with deflationary tendencies at the same time that much of the world has been experiencing extraordinary inflation.
China’s current deflationary tendencies stem from a combination of relatively low domestic demand and an ongoing decrease in exports. This decrease in exports was mostly caused by US protectionism, which is set to expand in both rates and scope under Trump.
Looking forward, the divergence I aluded to –deflation in China, inflation elsewhere– seems poised to continue. Further protectionism and the looming tariff war –not only with China, but possibly with Canada, Mexico and others– are expected to both fuel inflation in the United States and further reduce imports of Chinese goods. That would strengthen deflationary tendencies in China unless the government pulls off a stimulus package for their domestic economy more effective than the ones deployed thus far.
Up until the 20th century it wasn’t uncommon to have cycles of inflation and deflation.
https://iamkate.com/data/uk-inflation/
The reason deflation is so highly feared is because it increases the value of debt. In particular, government debt. China owns large parts of the debt of the US. Deflation makes them stronger.
Not exactly. Deflation basically slows down the economy. If you think your money will worth more tomorrow, then you are less likely to invest/spend them.
But the whole purpose of money is to be used. Money is a tool, the oil that facilitates trade and keeps the economy going. And while too much money(oil) can overheat the economy(inflation), too little money can straight up bring the economy to a halt(deflation).
Deflation, even in small amounts, is more dangerous, thats why ideally you prefer having a small amount of inflation.
I see this argument being thrown around a lot. How does it work when a fair share of people are not doing investment at all, and are unable to spend the bare minimum to live, to begin with?
I ask this because the argument of “people will spend less” only works with people that spend extra money on unnecessary things, which is becoming less and less of a thing.
Because no matter what proportion of the population they are, many many businesses are kept afloat by discretionary spending. Be that TVs, laptops, clothing, grooming, beauty products, heath+fitness, cars, holidays, tourism, travel, even house moves.
These are all things that can be ‘put off a little while’ if there’s serious prospect of your money going further. Which, as OP says, slows the economy and makes deflation worse… The thing that suffers in the meantime is cash flow in these businesses (and dependent businesses) and an extended period of slow trade with no prospect of it ending would see many of them go to the wall. See: covid. Had governments not acted it would have naturally led to deflation. That’s not the reason they acted though, they pumped money into the economy because long before deflation/inflation would have been a worry bankruptcy would have cut deep into thousands of regular ‘good’ businesses. (So they over inflated and then we had globally crap price inflation but still the risk of an economy wide shut down was that bad…)
Technology is inherently deflationary in that superior versions come out for the same or even less money all the time yet people still regularly buy TVs, phones, laptops, etc.
True, they’re poor examples. But discretionary spending, on the whole, is not on depreciating items.
Humans are not rational actors. We never have been and we never will be. There are different gradations of “necessary”.
“The economy” in this instance being a playground for the rich.
People won’t stop paying for food or rent just because their money might be worth a little more tomorrow. They won’t skip buying minor entertainments just because maybe their meager salaries might be worth a little more next week.
Deflation is poison for the owner class, not the working class.
Indeed, people won’t stop paying for everyday necessities, but the economy consists of more than just individual people: there’s the state and there are businesses too. You conflate the latter with “the rich”, which is generally true for corporations, but corporations are not the only form of business; there are cooperatives, partnerships, and others which can distribute profits more fairly. In any case, deflation affects all businesses, including fair ones, and the state itself. As another commentator suggested, money is meant to change hands and should never become an asset worth holding.
Forgive my admitted ignorance. If money should never become an asset worth holding, how can inflation be better than deflation for the working class?
Proportionately, the rich hold a lot more money assets than the poor, who generally don’t hold any or very little.
If you have debt, inflation eats away at that debt. If you’re paying 5% per year on that debt, but inflation goes up 3%, you’re actually only paying 2% on that debt. That’s good for people who have debt, and bad for the people who invested the initial money for that debt. With deflation, it’s the opposite.
This assumes your wages go up with inflation, though. Over the long term, that does tend to happen, but there are certainly periods where that is not true.
Not in the US. We haven’t seen a real pay increase since the early 1980s.
That became something of a meme post-2008 financial disaster, and it was true then. It’s not true anymore. That’s what I meant by it not being true in certain time periods. It depends on where you put the start and end dates.
As of now, median wages are significantly better off in real terms than any time in the 1980s: https://fred.stlouisfed.org/series/LES1252881600Q
1982-84 CPI Adjusted Dollar - aka, a measure that eliminates housing, healthcare, and energy costs. Like, the two main drivers for CoL in the US.
And, it’s still more than kinda true now. Ever wonder why homelessness is jumping up? Or why healthcare bankruptcies are extremely common? Is it because the wage growth outpaces those costs?
I don’t believe so.
Oh, that also only tracks “Full time workers”… Something like 60% of Americans are NOT full time workers. They work 39.5 hrs, just enough to put them under “full time”.
It’s deflation that turns money into an asset worth holding and thus slows down economies. Too much inflation isn’t good either, for different reasons. A slight and stable inflation is the sweet spot.
Indeed, the rich do proportionately hold a lot more money than the poor, but it isn’t much. The rich mostly have shares in corporations, bonds and real estate.
Inflation is generally worse for workers because the rich have more pricing power. If both your living expenses and your income after taxes increased by 20%, you’d even end up with more money than before, assuming your living expenses were a fraction of your income. Unfortunately, prices haven’t risen equally; the cost of living increase has generally outpaced real wage growth. The rich have been able to set higher prices; workers haven’t been able to extract high enough wage raises.
Neither high inflation nor deflation are good for workers. What workers need is pricing power through strong unions and political support.
Only if you enjoy living on debt.
My understanding is that a slight and stable increase in the money supply is beneficial regardless of the monetary system in use, because it incentivizes economic activity. That said, I’m only somewhat familiar with our current fractional-reserve banking system and don’t know enough about other systems, historical or hypothetical, to present my understanding as fact.
The problem is “incentivizing economic activity”… Economic activity, honestly, shouldn’t happen unless it’s somehow benefiting human life.
Sectors like banking and ad tech do nothing to benefit human life. They serve to extract resources from people, and thats all.
That just shows how broken the system is, though, doesn’t it? It’s geared towards benefitting the haves over the have-nots. Yes, it probably hurts the people further down the line from the shareholders and board members… but mostly because they can’t countenance not having their numbers going up. So they pass along losses to the people who can tolerate the least.
I’m sure you’re just approaching this from a sterilized, clinical approach “that’s just the way things are”… but it’s not particularly beneficial to people to consider things exclusively that way.
I think we both agree that capitalist logic is inherently extractive, exploitative and generally unhealthy. What I’ve been trying to point out is that we should not cherish deflationary tendencies in China or seek deflation in our own economies as a solution of sorts to the cost of living crisis, but rather pursue the power to increase our wages to at least match our ever rising productivity. In my opinion, unionizing –hard as it is– is more feasible than changing our monetary system –necessary and desirable as that would be– or overcoming capitalism.
And if those other types of business don’t place “Profit maximization” as their primary focus, then a deflationary period wouldn’t be bad for them, either.
Again, it’s only bad for people with debt. And the more debt you have, the worse delfation is for you.
Debt, is really only “good” if you are a corporation. Because debt lets you spend a load of money that ain’t yours, and getting the working class deep into debt is a good way to ensure you have a decent slave labor force.
Complete layman’s take on deflation, but wouldn’t trading basically stop with deflation?
Say I buy a product for 4$ and the next day due to deflation I can only sell it for 3$, why would I then go and try to trade said product?
It would be bad to have anything on shelf for a prolonged period. Food would probably not be affected due to its short shelf-time, but hardware stores, electronics, basically anything else would have the risk of significant losses. These stores would simply close, no?
That also extends to global trade - big cargo ships are sailing for weeks before they can distribute their goods. The whole time the products would loose value.
Probably I’m wrong, but if that’s true, deflation would really make the shit hit the fan.
That $3 is worth as much as that $4 was now because deflation made the value of the dollar go up. So the only change is that “number go up” didn’t happen on a purely psychological level. If your trade provides value then you can trade for more value.
True, the sentence about the items loosing value is incorrect.
However, my argument is still valid, why would I go and buy the thing in the first place, if I just could have waited for today and still have 4$? I would have „gained“ a dollar by doing nothing instead of taking the trouble of procuring the item.
Because deflation isn’t going to be at that rapid a pace. If inflation was such that an item priced at $3 today gets priced $4 tomorrow, that means a daily rate of change of ~33.33% which is an insane rate of inflation and would be a problem as well, but nobody uses that to claim inflation is absolutely bad.
Who is going to hold off on buying something if it’s 2% “cheaper” after a whole year? People certainly don’t put off buying phones even though phones still get way higher than 2% increase in performance every year or two.
Have you never seen somebody wait for a sale to make purchases? Or cut coupons? “The poor” frequently put off purchases to save some money.
Only nonessential purchases. The poor generally don’t have a choice to not pay rent in the US, you can get evicted after being 3 days late in most US states.
Yes, that’s what I’m talking about. Do you think the lower class only spends money on food, rent and gas? Some may but there are a lot of “non rich” people who buy nonessentials.
As someone in the lower class, yes. A decade ago you might have had a point, but unless they’re maxing out credit cards no one below median income is spending on non essentials.
That’s a completely indefensible statement and you know it.
Credit card debt is at an all time high, more people are living paycheck to paycheck than ever before, Americans rejected Biden explicitly because of his gaslighting about how good the economy was, union membership is up, and nearly all Americans celebrated the death of that CEO.
People aren’t in a good spot. They don’t have disposable income unless they above median wage. The great depression had better ratios in terms of money spent on essentials.
Not because of deflation, but because they’re looking for “The deal”. More akin to the dopamine inducing tricks many microtransaction games use these days.
Because there is no deflation… Unless you’re living in China?
This is only accurate if you measure economic success by “Corporate profits”.
Deflationationary phases are very helpful for the working class, as their dollar now buys MORE things. Like food. And housing. And health care.
Deflationary periods may be helpful to those with large amounts of cash or cash equivalents, which generally isn’t the working class. Wage growth outpacing inflation helps the working class more.
Except, by design, that will not happen, not for longer than a few quarters or so.
Why do you think there is a push to get people back in the office?
Because the corporate realty market is a bubble, and companies have to find a way to justify big spends if they can’t get out of a lease, and plenty of corporate landlords can’t let people out of their leases because then their buildings would be underwater and likely forclosed?
What kind of braindead take is that? The working class? The same working class that majorly lives paycheck to paycheck and can’t even afford an unexpected $500 expense?
What dollars do you think they are going to have in a deflationary economy after they get laid off?
You know in what form those paychecks generally come in? Cash, so their paycheck is now literally worth more without wage increases (which aren’t horribly stable for those generally loving paycheck to paycheck).
If they still have a paycheck, sure. But historically, deflation leads to unemployment.
You’ve got that backwards. People get laid off, can’t buy things, then prices go down because demand is lower.
It’s not just consumer spending that influences inflation,/deflation but also institutional spending. The consumer price index is a lagging indicator. Decreases in institutional spending precede unemployment and the eventual reduced demand for consumer goods and services. And increases in the fed rate (and/or other forces which cause the cost of borrowing money for institutions/investors to rise) generally precede that.
Institutional spending will decrease as credit markets seize up. If deflation is predictable at, say, 1-2%, then it shouldn’t be a factor since credit would account for that.
Yes. That is caused by corporate greed. Not deflation.
Yes, that working class. You know the people whose pay has pretty much been frozen in time since the 80s, even though the cost of everything is always going up faster than the paycheck they get?
Depends. I mean, I’m not going to offer solutions to try to make an exploitive system friendlier to the wage slaves… I’d prefer not having wage slavery anymore.
But, perhaps, we need to guarantee everyone the right to the basic requirements of life? Then we don’t have to make sure billionaires get more billions, just so they can try to survive the hellscape we have created?
Sure. But that is outside of the scope of your original take and in no way validates it.
Its not outside of the scope of “Demanding infinite growth isn’t sustainable”…
Yes, every time you move the goalposts, you change the scope.
But sure, I’ll bite, again.
What does infinite growth have to do with deflation? You don’t have to have one or the other. You can also just have stagnation, which is arguably more sustainable than the unemployment caused by deflation.
“Deflationationary phases are very helpful for the working class, as their dollar now buys MORE things. Like food. And housing. And health care.”
Shhh can’t be having that. Don’t worry, we beat inflation. Everything is just more expensive now. Deal with it.
Their dollar buy more until the company folds as the economy goes to shit.
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Shower thought. Economists by nature are professional dick riders to anyone with hoards of cash be they individuals or governments.
Yes and no. If deflation is at 1% or 2% investing your money should have significantly higher returns. What it does is make people more risk adverse.
They’re not entirely wrong about it increasing the value of debt and that being undesirable to some governments, though. I agree with you as well.
I agree on the money thing. I view money like potential and kinetic energy and its only in use that it has real value and at rest it basically has potential value that will only be determined when used. It annoys me the government only does half of what keynes advized. The downturn activity and never do the good times activity.
I don’t follow you here. How does deflation in China make the debt of the US stronger? Am I understanding you wrong?
If the renminbi appreciated over time against the US dollar, any dollar-denominated debt held by the People’s Republic would yield less and less, wouldn’t it?
I owe you $100. Over time the value of that $100 debt goes down with price inflation. You charge me interest to make up for this fact and make some profit also.
If prices deflate the value of the $100 debt goes up, but you’re still going to charge me interest. When I pay you back, not only can you buy more with the $100 than I could when I borrowed it, you’ve charged me for the privilege.
Thank you for expanding on your point. What I did not and still do not understand is the following part of your original comment:
Deflation in China –that’s where deflation might occur or even be occuring– would not make the US Treasuries held by China more valuable, would it? Only deflation in the US, with the dollar appreciating, would have that effect, right?
The price of goods going down is not contained to one country. We have global markets. Deflation would be global.
That contradicts both present reality and future expectations as far as I understand both.
In the past two years, China has been grappling with deflationary tendencies at the same time that much of the world has been experiencing extraordinary inflation.
China’s current deflationary tendencies stem from a combination of relatively low domestic demand and an ongoing decrease in exports. This decrease in exports was mostly caused by US protectionism, which is set to expand in both rates and scope under Trump.
Looking forward, the divergence I aluded to –deflation in China, inflation elsewhere– seems poised to continue. Further protectionism and the looming tariff war –not only with China, but possibly with Canada, Mexico and others– are expected to both fuel inflation in the United States and further reduce imports of Chinese goods. That would strengthen deflationary tendencies in China unless the government pulls off a stimulus package for their domestic economy more effective than the ones deployed thus far.