Comments on: What’s the Deal with Deflation?

By: Gerard

Gerard — Mon, 08 Dec 2008 02:12:25 +0000

JLP, while the American public may not defer purchases, in this market, it is more likely they will simply reduce spending and increase saving. This will have exactly the same effect with a reduction in production and employment leading to less money leading to less demand and lower production and employment.
While the printing of money may reduce the impact, even that is unlikely if banks are using the money to shore up their balance sheets as opposed to lending it out to customers.
I think deflation is a serious issue, especially if credit card debt blows up in the same way as the mortgage debt leading to further financial strife…
But hey, that’s just my opinion

By: Curt

Curt — Thu, 04 Dec 2008 20:06:40 +0000

The deflationary period that we are experiencing it going to be temporary, until the assets are liquidated (houses, cars, etc).

Then, we are going to see a major uptick in imflation because of the massive increase in money supply that our government is creating.

It’s not going to be a good story to tell our grandchildren. First, deflation is causing us to lose our assets (houses, cars) and jobs. Second, we are going to have major inflation as the dollar sinks.

By: JLP

JLP — Thu, 04 Dec 2008 19:18:43 +0000

Adam,

I understand what you’re saying but somehow I just don’t see the general public looking at deflation like that. Maybe I have too little confidence in the mindset of Americans but I just don’t see people putting off purchases because they will be cheaper in the future.

By: Ken

Ken — Thu, 04 Dec 2008 18:56:04 +0000

I don’t see any way we will enter a deflationary period given the government is printing money around the clock to keep up with the bailouts.

Look for inflation over the next 18 months simply because of the influx of cash.

By: Servius

Servius — Thu, 04 Dec 2008 18:24:14 +0000

Deflation is the necessary result of inflation. Banks and government having created money out of thin air (inflation) have to stop when their actions start to devalue the dollar (runaway oil and gold prices) and foreign investors threaten to divest themselves of dollars and use more stable currencies. (that would be a bad thing)

Inflation has artificially bid up some assets (more dollars chasing fewer goods). When the inflation stops demand stops and asset prices begin to fall. The money having been created out of thin air returns to thin air and there is less money. This is what causes the drop in prices.

So deflation is bad but without inflation there would be no deflation and inflation is a willful act by government and the banks.

By: Adam - Natural, Personal Finance

Adam - Natural, Personal Finance — Thu, 04 Dec 2008 18:18:28 +0000

Deflation means that your dollars (cash) can buy more stuff. This leads people to the thought “why should I buy this ____ now when I know it will cost less in the future?” This causes spending to decrease, leading to less money available for salaries, then layoffs, and back to less spending.

This is the reason that (mild) inflation is more preferable. As an aside, deflation leads to the rich (people with lots of cash) getting richer (can buy more stuff); while inflation leads to the poor (people with debt) becoming richer (cash used to pay off debt is worth less). Thus inflation is a form of tax on cash while deflation is something like a poor tax.

By: Joe

Joe — Thu, 04 Dec 2008 18:02:00 +0000

I would urge anyone who thinks deflations sounds great because their “stuff” costs less to ask themselves one simple question:

How would you feel if your salary went down as well?

One of the reasons home ownership is such a good financial move (provided you can afford it…) is that inflation will make that mortgage payment cost less over the years. You’ll likely be making more in 10 years than today (with inflation) but your fixed rate mortgage payment will have stayed the same, and now take less of your income. That doesn’t happen with deflation. Deflation would make your mortgage more expensive.