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Originally Posted by alexamenos
price deflation is a royal pain in the hiney????
like falling computer prices, that's a travesty. Or hdtvs....can't have prices of those dropping, can we? Or health care costs....oh, wait, those costs are going the other way.
Certainly price deflation is a pain in the ass if you're borrowing, but it's not so bad if you're saving....I guess we can't have a monetary environment that encourages savings and investment and discourages borrowing. Not here in the good ole USA where people are notoriously inclined to save and invest rather than borrow and spend.
Sorry for the sarcasm, but it's not at all self-evident to me that a little deflation here and there is a bad thing. anyhoo....
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well, thats all fine and dandy until you account for the single most important price: wages.
if ALL prices simply slid up or down by 10%, and everyone was well iniformed and rational enough to simply make the mathematical adjustments and deal... then price levels (up OR down) would have no effect on the economy. However, they do NOT move in unison AND people do not view changes in all prices the same way.
By the way there is a difference between prices dropping in a specific industry because manufacturing has become more efficient , and economy wide prices dropping, because of the macroecon factors. Enough of the first could TEMPORARILY lead to the second, but it wouldn't bother anyone, but when macro is the CAUSE of defaltion, then you are in a bad place.
So back to normal deflation... prices are dropping for the goods firms are selling, not because they are making goods more cheaply, just there isn't enough demand for the goods. What does the firm do? it cuts costs. Either it fires people or it reduces their wages (the OTHER half of deflation)
unfortunately people are not to keen to see their wages cut (when was the last time YOU accepted a salary cut?) and instead people tend to get fired, until enough people are out of work tht THOSE people are willing to accept jobs at lower wage rates and the wage rate is slowly, painfully wrenched down. Of course this leads to a general reduction in demand which depreses product prices further, leading to more layoffs or wage decreases... etc etc etc...
defaltion has BOTH a recessionary element to it AND a self propogating element. It is both caused by a recessionary environment and contribute TO making recessions worse.
On the other hand with inflation you have slack bulit into the equation. when both goods prices and wages are going up, purchasing power is essentially unchanged. Unfortunately inflation gets embedded into the economy because people set their demand for wages going frward based on what they have seen in the past, so if they say 10% infaltion last year, they expect to see it again and they want a 10% raise for the next year (which forces firms to raise THEIR prices 10%) and so on. BUt the GOOD thing is that people are much less resistant to seeing their wage only go up by 5% even though general prices are going up 10% than they are to seeing their ACTUAL wages going down by 5%. so this is the slack.
a little bit of inflation allows firms to adjust to changes in demand for products by slowing the INCREASE in wages, rather than CUTTING wages, which gives the slack I was talking about...
I gotta go, but you get the general idea? no?
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and how is it again that the Feds maintain a "non-zero" level of inflation???? Is it by increasing or decreasing the money supply? Increasing, decreasing???
bueller?
bueller?
It's by increasing the money supply. What were we arguing about, again?
Oh yeah....
regardless of whether an increase in the money supply is "inherently" inflationary, at least we agree that the Fed deliberately increases the monetary supply at a rate sufficient to cause inflation.
Fair Enough????
Actually it's not the uncontrollable volatility, but instead it's the lack of a "monetary authority" that I cite as a strength--in large part because "monetary authorities" are a greater source of volatility than the vagaries of the market place.
and it may comfort you to know that I finished my tour some time ago, and I did use both hands at all times while typing this post.
cheers[/QUOTE]