Which causes deflation. Specifically in this case wage deflation. And then because people have less money, they can't use their cars and crops and skills because people don't have as much money to pay for gas or food or the services of others.
The resulting deflationary spiral is self-reinforcing. Fear of this state is why central banks try to create a consistent level of inflation.
In fact, the system is bistable. Inflation has the same self-reinforcing spiral, and we're living it! The moneyprinters' metric (CPI) has become the goal unto itself - anything technological keeps getting ever-cheaper, so anything that can be financialized (the quickest feedback path where printed money returns to the CPI) shoots through the roof.
But you're right that the system has some bistability. A deflationary spiral with declining production and lifestyle can sustain itself for a long time. It is also sustainable to maintain a moderate inflationary spiral with ever increasing production and improving lifestyle.
Given that choice, isn't it obvious why bankers try to keep the latter option going?
But it is not actually bistable. Keeping moderate inflation going requires continual intervention. It is easy to fall off the rails into a hyper-inflationary disaster. It is easy to fall off the rails the other way into a deflationary disaster. And continued success creates the moral hazard of overconfidence in the stability of the system. This overconfidence leads to risky behavior which in the end WILL result in disaster.
We came close to that in 2008.
It is unclear to me whether it is better to have regular smaller disasters, or occasional large ones. But pushing off the next disaster is always better in the short run.
I'd say we're in the making of a hyper-inflationary disaster, as central banks continue to apply their top-down prescription of "productivity", forcing people to work full time make-work jobs (eg FIRE) rather than letting the majority slowly build up savings and create economic conditions that naturally lead to working less (as one would expect from uh, technological progress). The message just won't be received until the petrodollar has completely disintegrated though.
So it isn't necessarily a problem if you can wait a year and then buy a better computer with the same money. But it IS a problem if your best investment strategy for that year would have been to put the money under the mattress instead of loaning it out, investing in stocks, or some other activity that keeps money circulating.
As for a hyper-inflationary disaster, the exact monetary injection you use to stave off deflation can also create inflation. This is why central banks have such a challenge on their hands. They are trying to balance the economy between nasty extremes, while trying to satisfy contradictory goals.
Hoarding causes general deflation; to capital, as well as wages. Its effect is the same as distributing the value of the hoarded money across the money supply.
Deflation causes people to feel as if they have more money, not less. Money that is more valuable (deflated), purchases more value.
And while deflation has knock-on effects that are problematic, I'll add that the government backing any fiat currency has ample tools to combat it (creating inflation by printing currency).
Eventually causes general deflation. The whole problem with deflation is that it isn't evenly distributed. If the price of everything whatsoever increased or decreased by the same percentage at the same time then there would be no trouble.
The problem is the period of time between when people start being paid less and when things start to cost less. Or between when things start to cost more and when people start to be paid more. And during that period of time, companies hoard yet more cash which perpetuates the cycle.
How?
How is this specifically wage deflation?
That's a hell of a quantum leap.
If anything, wages are much more resistant to downward pressure than goods. (People really don't like getting a paycut.) So even if the value of dollars increase, most people keep the same wage. In extreme cases, in can even end up in layoff, because people are now paid too much in comparison of everything else in the market.
I would take deflation over inflation any day. Inflation eats away anything you try to keep for a rainy day, while at the same time reducing the value of your paycheck. This means that you must constantly negotiate (or beg, depending on your position) for a raise or you fall behind.
You're asking how hoarding cash instead of paying higher wages causes wage deflation?
> If anything, wages are much more resistant to downward pressure than goods.
Wage deflation relative to CPI. Wages remain stagnant or increase less than prices.
We would have overall deflation if The Fed wasn't printing money to offset the corporate hoarding. Which is almost certainly better than overall deflation but is still quite bad for people who are paying more for things but not getting paid more.
> I would take deflation over inflation any day.
Deflation was a primary cause of the Great Depression. Deflation is very bad.
> Inflation eats away anything you try to keep for a rainy day, while at the same time reducing the value of your paycheck.
Inflation doesn't eat the value of stuff. If you own a home or stocks then inflation causes their value to increase proportionally.
The problem is when there is price inflation without wage inflation. Which is caused by corporations hoarding cash instead of paying higher wages.
No, I'm asking how deflation in general causes wage deflation. Your post was in answer to deflation caused by hiding/destroying cash.
> Wage deflation relative to CPI. Wages remain stagnant or increase less than prices.
So it's not related to the increase of value in the currency caused by hiding away 1 billion under a mattress. You used the same term but for different context/meaning. The weird thing is how you phrased it as if it was a causal relationship.
> Deflation was a primary cause of the Great Depression. Deflation is very bad.
There's many factors for the US Great Depression (such as previous inflation). There's also the relative speed at which those things occur. Both can be destabilizing in high enough magnitude. But deflation is the natural result of a growing economy and better efficiency. If it was bad, civilisations would have self-destructed every time they came up with a better way to do things. Imagine a new technique that would reduce food prices by 50%. Would this be a good, or a bad thing?
> inflation doesn't eat the value of stuff. If you own a home or stocks then inflation causes their value to increase proportionally.
Sure, I never said to the contrary. What's your point? People should stop saving money and buy everything around them instead? There's a huge cost to that, especially in real estate.
Deflation most affects the party who would otherwise have first received the money that was removed from the economy.
> But deflation is the natural result of a growing economy and better efficiency. If it was bad, civilisations would have self-destructed every time they came up with a better way to do things. Imagine a new technique that would reduce food prices by 50%. Would this be a good, or a bad thing?
Costs are different than prices. Reducing the cost of producing food is good. Reducing prices is generally bad -- it's better to increase the price of everything else by creating new money and leave the price of food constant. Because reducing prices creates an incentive to hoard currency, which is very bad for the economy. It makes currency an investment that competes with actually productive investments and reduces the speed of money which reduces economic activity.
> People should stop saving money and buy everything around them instead?
That's already what people do. Who literally hoards cash?
> Inflation doesn't eat the value of stuff. If you own a home or stocks then inflation causes their value to increase proportionally.
The paper-value of one's home does not matter. Everybody needs a place to live - the next liquidity event will be after they die. You're advocating the fallacy behind the continual housing bubble (and all these renovations people do for personal comfort but lie to themselves about it being financially beneficial, but I digress).
Stocks are one of the least-worst places to park savings. Which forms a bubble of dumb money "investing" in things it knows nothing about, but simply following the herd to safety (and then following it out).
Savings are what gives individuals power and autonomy. Debt creates an obligation which must be continually serviced. If one is reliant on their income, they lose the power to walk away from their job. The only bit of flexibility they have is to play different masters off one another, but given what's at stake the employers certainly know this game and compete as little as possible.
Analyze your own position. Calculate out how many months per year you have to work for previously-rare survival goods of food/clothes/electricity, versus how many simply go to paying (a bank) rent on housing/etc. Then look into how much it would actually cost to build a dwelling, versus how much of that cost is solely due to being financialized. Running from the bogeyman of deflation, we've basically recreated indentured servitude for the modern day! It's no wonder the middle class is fading - when your personal autonomy is the difference between two large numbers, the only answers are go big or go home.
It's the monetary policy that creates ever-more rope for people to hang themselves with. The debt<->collateral relationship is circular - every cut to interest rates / down payments directly increases the capital value by the corresponding amount. This has destroyed the idea of ownership, making it impossible to permanently get ahead of the treadmill.
(IMHO this economic weather is directly tied to the centralizing trend of communications technology growing the asymmetry of power that is ever-better at siphoning surplus away from individuals. Giving individuals the power to repudiate a mortgage while avoiding eviction would also correct prices)
If you make more money available then housing prices go up to consume essentially all of it. But that's how markets with highly inelastic supply behave. Yet we can build arbitrarily many housing units. So why haven't we built more? Urban housing prices have been high for many years. Plenty of time for the market to react. Something must be preventing it.
> If the monthly cost of housing actually started tending towards the amortized cost of construction, the builders would immediately stop just as they did during the last mini-crisis.
Of course they stop when it becomes unprofitable. What would you expect them to do?
The problem is this: Increasing the supply of housing can cause housing prices to fall very quickly. From a social perspective that's what we want, but from a construction company perspective the last thing they want is to pay a lot for land that loses its value while they're holding it.
The way to mitigate that risk is to buy less land and build more housing on it. But if zoning regulations don't allow that then they build nothing. Hence the problem.