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Salary is somewhat elastic if nothing else fire and rehighering works. The real issue is debt is not elastic. So it becomes an unbound risk durring deflation.

Yup, also a great point. In the small, anyone holding a mortgage during a deflationary spiral is steadily squeezed. In the large you'll see businesses and government penalized for taking out loans to invest in capex, market expansion, etc, and existing loans become steadily more and more expensive.

Firing and rehiring destroys morale. A perfectly stable and functional company can destroy itself by trying something like this. Employees will start to realize that no matter what they do they're getting shafted and their productivity will drop. Some will seek employment elsewhere, but those are often the ones you want to keep. You'll be stuck with mediocre and bad employees. When you try to fill in positions with new employees, they see a dysfunctional shop and start looking for the exit.

That greatly depends on overall economic conditions. In many places unemployment approaches 50% at which point wages become far more elastic.

PS: Talking about economics goes beyond software developers or illigal day labiors in the US. It includes peasants in the middle ages, factory workers in ‘Soviet Russia’ and even gally slaves on a Roman warship.

Yeah man, super true!

For example if prices were to start falling I'm going to start putting off the following purchases:

1. New computer

2. New TV

3. New stereo

4. Toilet paper

5. Food

6. Gasoline

7. Rent

8. A new-to-me used pickup truck

9. Clothing

10. Several dozen other things which I can't really wait for but which I will pretend I could for the sake of making a point

EDIT: Yes guys, I do realize that it's a marginal effect and that people aren't going to STOP buying TP. The point I'm trying to make, though, is that the "deflationary spiral" told as a story isn't entirely accurate either. People don't STOP buying things, they simply reduce their consumption ever-so-slightly and if EVERYONE does that, it cuts growth.

My point, though, is that there are a whole bunch of things which aren't really elastic or which already have falling prices but don't cause general malaise. Yes TV purchases do get put off for the next best model, but eventually people do buy TVs and the industry has models that work even given this reality.

In my personal opinion it's not that deflation itself is bad it's that it takes a long time for the deflation to work through the economy and for expectations to readjust. And given the maniacally long maturity of mortgages it takes half a lifetime to reset expectations and it's simply unrealistic.

Something tells me the average HN commenter living in Silicon Valley making six figures doesn't represent the average American.

While there are certainly fixed costs to being alive (like toilet paper), most people do cut back and this behavior is observed. And when it gets very bad, even those "fixed costs" start being cut - cheaper toilet paper, moving in with mom and dad, etc. Not because they want to save now to buy more TP later, but because when discretionary spending falls, people lose jobs, which further reduces discretionary spending, and more people lose jobs, wages fall (because of the surplus of labor), and eventually it all starts affecting you.

While there are certainly fixed costs to being alive (like toilet paper), most people do cut back

But why, if things are getting cheaper?

It's not cheaper right now, it will be cheaper tomorrow.

EX: http://buyersguide.macrumors.com/ note the 'don't buy' recommendations.

Yes, but Amezarak said it was "not because they want to save now to buy more TP later", which is what you're describing.

The gap between getting a new phone every 18 months vs 2 years is fewer purchases over the long term. (~1 fewer phones every 8 years.)

The same thing works for durable goods not just improving goods like PC's. Consider if you wait 1 month when buying a chair it's 1 month newer so you’re likely to wait an extra month before replacing it. Multiplied by 100 million a people and even just 1 month becomes significantly lower consumption.

'This' starts a vicious cycle where fewer durable goods are produced so make fewer goods and thus have less money which reduces consumption of durable goods and non-durable goods. Using the TP example if your broke you can slightly cut back on TP use.

Because by the time people are looking at cutting TP costs, it's because their household income is down probably substantially, or they're afraid it will be in the near future.

But why would their income be down (in real terms) in the first place?

Because someone in the household lost their job.

Deflation makes employees more expensive even as demand slows. Even in some kind of ideal economy without downward nominal wage rigidity (which leads to people getting outright fired instead(, their wages get cut. But that can end up being almost as bad: almost everyone has mortgages, student loan debt, car notes, or credit card debt, and suddenly that debt is consuming more of their annual income, forcing them to cut back.

It's a problem with aggregate behavior and feedback loops. As long as you're zoomed in on the individual level, it doesn't make sense.

This is exactly what happened during the 2008 recession. Once triggered (in that case by the housing bubble, subprime mortgages, etc) it spreads through the economy and it's hard to break out of - we still haven't really done so. The Fed is still failing to meet the target inflation rate despite extraordinary monetary measures.

I'm not the average HN commenter then because I don't live in Silicon Valley nor do I make six figures.

Does that mean my rebuttal carries more weight then?

If you better represent the average American and what you would actually do in a deflationary economy, yes. Most Americans even in boom times don't just buy new flatscreens and computers on a whim, because they can't afford to.

But since the average American (or, well, citizen of any country) has been consistently observed over centuries not to behave in the manner described by that rebuttal, it doesn't matter. To be fair, the article is simplistic and almost encourages that kind of rebuttal. Your edit essentially addresses that and I don't disagree with it - anyone who is saying that spending "stops" is clearly being silly. It begins as a marginal effect that worsens over time, and TV purchases are the first to go while TP and rent takes a while longer.

It's a marginal effect. The point isn't that you as an individual are going to put off buying all those things, the point is that buyers in aggregate will put off buying those things (or perhaps, immediately shift to a new, lower price that they are willing to pay for them).

"So you get broad based increases in unemployment." I know it sucks to go from making 70k to making 60k but in a world where prices are going lower someone will still be able to have a similar quality of live at 60k. What kind of economic "Theory" would assume that people would rather starve to death than take a salary cut at another job?

Except they won't keep the same quality of life, because their mortgage payments are not going to go down, even though the value of their house will. Renters won't get a break, either, because their landlords have to pay their mortgage with the rent money. Deflation equals disaster for our economy.

Except they won't keep the same quality of life, because their mortgage payments are not going to go down

Why not? They did these past few years in the EU. Are most mortgages in the US not pegged to some reference rate like Euribor?

Can you point out what they did in the EU with this?

GP is referring to the idea that, under deflation, your debt grows in real value while retaining its nominal value, but the nominal value of your income will be decreasing.

If I take out a $100k mortgage and can put 10% of my salary to it each year, say I make $100k as well for easy math. I'll pay it off in 10 years if my nominal salary remains the same. (I'm ignoring the interest on the loan, it changes the timeline but not the fundamentals.)

If we have inflation, my salary will likely go up over time so each year I'll be spending the same nominal ($10k) amount, but its a smaller percentage of my income and a lower real amount.

If we have deflation, my salary will likely go down over time (assuming its consistent it'd likely be negotiated into employment contracts, like cost of living adjustments are now for inflation). So each year I have to pay the same nominal amount ($10k), but its an increasing real amount and a larger percentage of my income each year.

But how can you ignore the interest? If the interest drops to along with your salary, you won't have to pay the same nominal amount each year - which is exactly what's been happening in the EU.

For the calculations I ignored it. The discussion was inflation/deflation. Putting it in only changes my example by adding more arithmetic (calculating interest paid per period), but doesn't offer any insight into paying debts under inflation or deflation. EDIT: For the sake of this discussion pretend that the $100k paid includes the interest if you really want it to be there.

So in the EU interest rates are pegged to salary? Can it go negative? Because that's what needs to happen for loans under deflation to make sense. Your effective interest rate in a deflationary economy is deflation rate + interest rate. If you take out a 2% loan with 2% deflation your effectively paying 4% rates. The higher the deflation, the worse your rates become.

Now, if interest can go negative, then borrowing under deflation makes sense. But lending doesn't. Because the lender would be handing over money that would be more valuable kept under a mattress than loaned out at a negative interest rate.

Your loans would become more expensive, certainly. It's still not correct to say that the "mortgage payments are not going to go down", which is what I replied to. They would - to a certain point, at least.

> If the interest drops to along with your salary

With deflation, interest rates might be low [0], but they aren't likely to decline over time (unless the rate of deflation is increasing), whereas salaries will decline over time. So the interest rate won't drop along with your salary. Your salary will drop, and while the interest rate might (with the caveat noted previously) be low, its not likely to go down over time (if it does do so constantly due directly to deflation, that means your salary is likely not only declining, but doing so at an accelerating rate), your salary will be dropping both in nominal terms and proportional to the interest payments on your debt.

[0] but probably not; availability of credit will be low because risk-free instruments -- cash -- with a positive expected real rate of return exist, so there is little incentive to lend. Low credit availability doesn't make low interest particularly likely (it does make high interest rate volatility more likely, though.)

The majority of US mortgages are fixed rate:

http://www.newyorkfed.org/research/current_issues/ci16-8.pdf

This is largely an intentional policy outcome, Freddie Mac and Fannie Mae were both intended to make mortgages cheaper (I think an interesting thing is that this doesn't necessarily make buying a house cheaper). It's increased since the recent crisis, part of the US response was to make money even cheaper (which favors locking in the rate).

> Are most mortgages in the US not pegged to some reference rate like Euribor?

There are both fixed and variable rate mortgages in the US, but variable rate mortgages usually have a minimum interest rate regardless of how low the index it is pegged to goes.

The renter will get a break actually because newly constructed apartments are cheaper than the older apartments so he can move to a newer/nicer/cheaper place.

Deflation is a big problem for highly leveraged businesses and individuals. But for savers deflation is not a disaster at all.

But the cheaper place will never get built unless the builder can finance it without any debt.

The wage issue isn’t that people are choosing unemployment over pay cuts. It’s that companies will generally opt for a hiring freeze over a pay cut. Most places aren’t going to cut the salary of every team member by $10k so they can hire a new person, they’re going to put off hiring a new person and try to make do with what they have.

That is only a temporary problem. Eventually employees will quit or die. And when that happens you will hire a replacement at current market rates.

Depending on your definition of temporary - as Keynes said “in the long run we’re all dead.” Eventually things will work themselves out, but how many years of self-imposed pain will it take? Employees are going to be much less likely to quit in a tight job market, especially if they’d be paid less at their new job (since, per your example, new hires would be paid less). If you’re waiting for employees to die (or retire, and they’re more likely to retire late in a tight job market), you’re talking about a price correction that happens once every several decades.

Ordering and cashflow matters. If someone is just above being able to pay rent/mortgage+food+commuting+heating, and they get a pay cut, what happens?

Totally right about downward wage pressure. The worst effect of all of deflation is that it increases the value of debt. So every company and household with debt will see their debt grow in relation to their earning potential. At any level of deflation, suddenly it's a terrible idea to ever borrow any money, which means no new housing, no new factories, no new cars.

Our economy relies on inflation to make it work. A lot of the persistent sluggishness of the current economy is due to the remarkably low inflation, meaning that all the debt people built up prior to the crisis in 2008 is still hanging around and will be for years to come. People are stuck under student loans and underwater mortgages, and unable to invest in their own future. With stagnant wages, digging out from under the debt will take a long time, and until that happens, the economy will continue to trudge along.

>At any level of deflation, suddenly it's a terrible idea to ever borrow any money, which means no new housing, no new factories, no new cars.

Why is this such a horrible thing though? Obviously, less lending is bad for the banks, but I fail to see how it would be bad for the consumer if they actually saved up money and paid cash for a car. Although I do understand why lending is important for starting a business; it would be hard in many markets to save enough capital to get off the ground. I'm talking about small stuff, like housing, cars, TVs.

I have little to no economics knowledge, but it does seem to me that this pervasive, cultural thinking that we need this now is the source of many problems. I know some retailers like Ford even attempted to curb the practice of buying on credit, but ultimately caved to pressure from customers wanting to live above their means.

So, can you explain, in a way that doesn't involve trickle-down economics, how borrowing money is a net gain for consumers? (I'm genuinely not being snarky here, just curious.)

Not "trickle down" but circularity: if you borrow money you get to bring forward consumption and the workers making your goods get paid earlier as well. Enabling them and the factory to pay off their loans. Ford uniquely went in the other direction of trying to push money round the economy by raising wages; that would be great but isn't happening at the moment.

Getting credit solves cashflow problems. If you're spending $10/week at the laundry, buying a $250 washing machine pays for itself very quickly. Except you can't save $250 because you keep needing to do laundry.

> Obviously, less lending is bad for the banks, but I fail to see how it would be bad for the consumer

Its not generally bad for consumers qua consumers (though there are ways that it can be, because it prevents large purchases that save in the long term), but its bad for the same people that are consumers as laborers because less borrowing by business and less investment in business (both effects of deflation) mean less paid work available, and less utility produced regardless of the distribution.

> So, can you explain, in a way that doesn't involve trickle-down economics, how borrowing money is a net gain for consumers?

It enables you to do things like buy a car to go to work at a job that pays well before you have amassed sufficient retained income from that job to pay for the car. Without the ability to borrow money, you may not be able to take (or, if you take it, keep) the job because you can't get to it.

The other responses are good as well. Key thing is that you're right that credit gets used for lots of wasteful things in our traditional consumer economy. Buying a television on credit is not a wise financial decision. However, purchases that improve efficiency or allow new kinds of labor can be good uses of credit.

If you can make $1000 more per month at a job that's inaccessible to you via transit, but you don't have $10,000 to buy a car, it would be worth it to get a loan with a $300/month payment, and say another $300/month worth of car-related expenses to net out $400/month income that can be used for saving up for that TV or what-have-you.

In terms of items that retain their value, like houses, apartment buildings, factories... no one would be wise to invest in those items in a deflationary environment because if you're interested in growing your net worth, you'd be better off keeping your money in the bank.

The increase of value of debt is the big problem, which is in the original op because banks get stuck with a lot of bad debt and many would fail.

While this is unfortunate, I see it as garbage collection for the economy. Once completed, there are new resources ready to go for the next phase of growth. If there is a deleveraging and saving phase, that provides the capital base for the next growth event. Keeping old processes running forever out of fear of a reboot is worse for the long term. Incentivising bad decisions during boom times with a Greenspan put creates moral hazard.

> What happens to the price of a single good over the lifetime of that good is not a useful lesson in what happens as a result of broad, economy-wide deflation.

True. But why then the article is titled "Why Falling Prices Are Actually a Really Bad Thing" and not "Why Deflation Is Actually a Really Bad Thing"?

I can imagine economy where you don't have deflation, prices of all products fall, and the economy is actually growing, because people produce and buy completely new products they could not afford before.

You're assuming macro-economics is concrete, peer reviewed science. Lot's of people disagree. The great depression lasted way longer than it should have because of the anti-deflationary measures put into place, like slaughtering millions of livestock to prop up commodity prices while starving, out of work people looked on in horror. If prices had been allowed to fall, wage rates could have come down to a price where hiring made sense.

Read Rothbard's "America's Great Depression" for a good overview of the case against macro-economics and deflationary interventionism.

Well, yes. But those who insist that deflation is terrible are hardly going to agree that the depression was made worse by all the ham fisted attempts to fix it.

> But those who insist that deflation is terrible are hardly going to agree that the depression was made worse by all the ham fisted attempts to fix it.

Pretty much everyone, everywhere on the political spectrum, irrespective of what they think about deflation, agrees that the depression was made worse by "all the ham fisted attempts to fix it".

There's some disagreement about which of the particular policy responses fall into the category of "ham fisted attempts", sure, but the Fed's initial deflationary policy is one of the most widely accepted (I mean, its a point on which Keynesians and Hayek agree.)

> Congratulations for confusing micro and macroeconomics.

This comment would be much better without this acerbic swipe. Please don't do that on Hacker News.

Hoarding is Keynesian fantasy, and can only exist if people stuff gold or cash in their mattress. Paying down debt or saving is a healthy base for a a economy to grow from.

Japan suffered a deflationary event, but has not had a deflationary spiral. The problems for japan have been exacerbated by following the madness of Keynesian policy prescription, to the point where they have increased their debt to 2x GDP over two decades, redirecting their resources towards building bridges to nowhere, instead of allowing entrepreneurs and innovators to allocate capital.

All while they have their demographic death spiral in place.

Plenty of other Asian countries have suffered large setbacks, particularly during the Asian financial crisis, but by avoiding the same path that Japan slavishly followed, have rebounded with strong growth ever since.

What is necessary is a short sharp correction, which will include bad debts and higher unemployment. This will be bad. This is still better than two decades of a zombie economy where an entire generation don't experience a growing economy and the benefits that entails.