Hacker News Reader

Comment by danenania | Hacker News Reader

"There's a difference between some goods -- electronics -- getting cheaper every year and all goods getting cheaper every year."

Which is what exactly? People buy electronics even though they get cheaper every year but they wouldn't buy Xs if they got cheaper every year? Can you give me an example of some Xs?

View on HN

If houses got cheaper every year, very few people would want to buy them, and people stuck with mortgages would have a powerful incentive to walk away from them. If cars got cheaper every year, then people would put off buying new cars for longer. If gold got cheaper every year, then a lot of gold coins would be dumped on the market.

If everything got cheaper every year, then people with money in the bank (or under the mattress) have an incentive to reduce how much money they spend, in general. This would lead to factories reducing their production and laying off employees, giving the remaining employees an even more powerful incentive to hang onto their savings.

The flaw in your argument is that currency is subjected to demand pressures as well. How so? When demand for housing, food, electronics is high, then it automatically implies demand for currency is low. That is another way of saying people are willing to give up currency for real goods; which is another way of saying people are putting less value on the currency over physical goods; which means the barter power of the currency is decreasing; which means lower buying power with respect to the currency. That is key point. This means that there is rise in prices (without monetary intervention) when there is preference to own goods. And we all want goods and services in the end game. But this rise in prices do not spiral out of control because there is demand for currency as well - which really is demand for time preference, that being the choice to consume later on. We also know the demand for time preference is not unlimited because ultimately have to consume to make good of the money. Therefore, with greater population, comes with greater demand for money, but also comes with greater demands for owning/consuming goods. So that is why price levels will not absolutely decline over time because money supply is fixed. In fact, history proves this point -- look at the USA data in pre-federal reserve era.

> This would lead to factories reducing their production and laying off employees

Trade imbalances resulting from an economy run on bitcoins would also decimate most domestic production, so sethg's statement is doubly true. It's the same reason you hear members of congress railing against China's currency peg that artificially deflates the yuan; it makes Chinese exports cheaper to the rest of the world.

Does "deflates the yuan" mean the yuan is deflationary?

In that case its value should get higher and exports should decrease, as happened with the Japanese Yen.

A deflated Yuan allows you to buy more Chinese goods for the same USD[1]. Regarding the second half of your question, you must look at the supply of the currency versus the demand for that currency. It's common for governments to intervene in foreign exchange markets as a means to an end. This makes it a difficult market to invest in, as artificial forces can move the market. Just because there might be a fundamental economic reason for the Yen to appreciate, that doesn't mean the Japanese (or some other) government won't intervene in order to improve their trade balance.

The mechanism that the Chinese government uses to keep the Yuan pegged to the USD, is the purchase of U.S. treasuries[2].

Here is some additional info:

http://fpc.state.gov/documents/organization/65773.pdf

http://www.nakedcapitalism.com/2010/03/on-chinas-currency-pe...

  --------------------

[1] http://en.wikipedia.org/wiki/Fixed_exchange_rate_system#Mech...

[2] http://www.treasury.gov/press-center/press-releases/Pages/js...

I actually do postpone electronics purchases because of falling prices. Electronics have low resale value and resale/upgrade is time-consuming. I tend to just wait for a price drop and then buy last year's best thing, rather than worry about having the fastest computer on the block.

If it's for work and there's some measurable benefit to the latest and greatest (rather than just showing off), that's different. But as a matter of habit, I only build a new PC once every 3 years; for about the same amount of cash, I get a roughly 400% speed boost.

Electronics don't get cheaper every year because the dollar strengthens. They get cheaper every year because the production process becomes more efficient.

Some things can't really get cheaper every year (without some exogenous shock) -- anything with really high fixed costs of production OR a requirement of some level of quality by purchasers.

For example, it takes a ton of land to grow corn. As the population grows, the demand for and value of land will rise. That means that for the farmer to keep growing corn on his land, instead of selling it or using it in a new profitable venture, the corn needs to be producing a higher level of income for him than it had previously when land was cheaper.

Similarly - grass fed beef is not going to get cheaper. In addition to land requirements, there is the quality requirement also. If someone demands higher quality food, higher standards need to be followed, higher quality inputs need to be used, and a third party needs to ensure that those requirements are being followed.

Houses are a one example. Suppose you're looking at buying a house that's $200k. Then assume that you live in a deflationary environment where all goods get cheaper every year, say by 10%. The immediate conclusion is that in 1 year, the house you want will cost $180k. If you can wait 2 years, $162k, and so on. So while you may eventually buy as the house still has utility, you are likely to delay the purchase as long as possible to avoid losing money to deflation.

(The opposite of this scenario is housing inflation, and causes people to buy houses sooner and for more money than they would ex-inflation. This makes some sense if the inflation continues as buyers expected.)

This scenario is different from single goods getting cheaper every year in that when the prices of all goods are going down, it's very clear that the value of money is also going down. Deflation slows spending primarily via expectation of future deflation, so across-the-board price declines will have more impact transmitting deflation expectations than mixed signals (electronics down, oil up).

Did you mean the "value of money is going up" in your last paragraph?

Electronics are a special market. I think people have in general come to accept and understand that the money they lose in buying electronics now, instead of later, is small compared to the utility they get now.

It also helps that constant development and improvements keeps the decline in pricing small. An iPod today, while much more impressive, I believe still has a similar price to 10 years ago.

Reply on news.ycombinator.com