Partially true. It’s also an attempt to run away from deflation, which destroys economies. Holding a stable position with no inflation or deflation is not really possible in the real world.
Important to distinguish two types of deflation from each other.
Type one is the deflation that is caused by contraction of the money supply. In the current system if the M2 aggregate shrinks it causes deflation. Slowing economy causes bankruptcies which cause shrinking of M2 which looks as a deflation and forces more slowing down of economy as money gets scarce. Central banks inflate money supply to fight this kind of deflation. If you are not rich already, you will never see any money from these money bags.
Type two deflation is natural and happens organically with progress. We saw natural deflation for years in electronics, where it beated the inflation targets by central banks. And prices of electronics were going down in the whole sector without disturbance. Savings allows you to eventually buy more efficient products.
Type 2 in this case is not an overall deflation in the economy, just for one sector. It also seems hard to me to measure the inflation/deflation there since the sector doesn’t have the same products over time, constantly innovating. Are people spending less money on electronics now than they used to? I find that hard to believe.
M2 is one way to measure the total amount of money in the economy. M0 is all cash money in circulation. M1 is M0 plus all money that can be spent at will, for instance in checking and savings accounts. M2 includes M0 and M1, plus stuff like short term deposits and money market funds.
When M2 shrinks it means there’s less spendable money in the economy, so people spend less. Businesses tend to have to lower their prices to get people to buy. The value of a dollar (or a yen or whatever) goes up, which sounds awesome except for a few huge catches. Now it’s always better to hang on to money rather than exchange it for goods and services. It also weirdly increases the value of debt, so anyone who borrowed anything going into this is screwed. If you’re still reading there’s other stuff that happens like it becomes almost impossible to avoid mass layoffs and monetary policy basically implodes but this shit is boring and I want to go back to getting high and watching the Simpsons
Exactly, which is why poor people go bankrupt during deflation, while the rich can just save their money and get richer and richer without even taking risks or investing (no investment, no jobs)
The core of the problem is that deflation encourages and enables wealth hoarding. The rich get richer by doing nothing but sitting on the wealth they already have.
There is a balance though or else the system feedback breaks the economy. Too much deflation and the “progress” stops because it starts making more and more sense for people to hold off on spending their money as much as they can. As an extreme example, if you know you can buy twice as much of something for the same dollar tomorrow, you must really need that thing right now to justify not waiting for a day. Scale that behavior across the entire population and it can start producing real problems.
It would break the economy if people stopped buying shit they didn’t need. I really wish these numbers didn’t correlate to whether or not people had food or housing or healthcare, otherwise that sounds like a wonderful way to slow the erosion of the natural world at the hands of overconsumption
Partially true. It’s also an attempt to run away from deflation, which destroys economies. Holding a stable position with no inflation or deflation is not really possible in the real world.
Important to distinguish two types of deflation from each other.
Type one is the deflation that is caused by contraction of the money supply. In the current system if the M2 aggregate shrinks it causes deflation. Slowing economy causes bankruptcies which cause shrinking of M2 which looks as a deflation and forces more slowing down of economy as money gets scarce. Central banks inflate money supply to fight this kind of deflation. If you are not rich already, you will never see any money from these money bags.
Type two deflation is natural and happens organically with progress. We saw natural deflation for years in electronics, where it beated the inflation targets by central banks. And prices of electronics were going down in the whole sector without disturbance. Savings allows you to eventually buy more efficient products.
Type 2 in this case is not an overall deflation in the economy, just for one sector. It also seems hard to me to measure the inflation/deflation there since the sector doesn’t have the same products over time, constantly innovating. Are people spending less money on electronics now than they used to? I find that hard to believe.
M2?
M2 is one way to measure the total amount of money in the economy. M0 is all cash money in circulation. M1 is M0 plus all money that can be spent at will, for instance in checking and savings accounts. M2 includes M0 and M1, plus stuff like short term deposits and money market funds.
When M2 shrinks it means there’s less spendable money in the economy, so people spend less. Businesses tend to have to lower their prices to get people to buy. The value of a dollar (or a yen or whatever) goes up, which sounds awesome except for a few huge catches. Now it’s always better to hang on to money rather than exchange it for goods and services. It also weirdly increases the value of debt, so anyone who borrowed anything going into this is screwed. If you’re still reading there’s other stuff that happens like it becomes almost impossible to avoid mass layoffs and monetary policy basically implodes but this shit is boring and I want to go back to getting high and watching the Simpsons
Dunno, maybe some other agregate. Long time no see the economic theory. One of the Mx…
Money buying more goods/services than it did 2 years ago is called “progress” and is literally the entire point of human civilization…
Money being worth more than it was 2 years ago also means any debt you carry is suddenly worth more than it was when you borrowed it…
Exactly. Nobody is gonna say “I won’t buy food today because it will be cheaper tomorrow.” A man’s gotta eat.
Exactly, which is why poor people go bankrupt during deflation, while the rich can just save their money and get richer and richer without even taking risks or investing (no investment, no jobs)
The core of the problem is that deflation encourages and enables wealth hoarding. The rich get richer by doing nothing but sitting on the wealth they already have.
it will change what you eat and how you eat and how frequently you do it.
There is a balance though or else the system feedback breaks the economy. Too much deflation and the “progress” stops because it starts making more and more sense for people to hold off on spending their money as much as they can. As an extreme example, if you know you can buy twice as much of something for the same dollar tomorrow, you must really need that thing right now to justify not waiting for a day. Scale that behavior across the entire population and it can start producing real problems.
It would break the economy if people stopped buying shit they didn’t need. I really wish these numbers didn’t correlate to whether or not people had food or housing or healthcare, otherwise that sounds like a wonderful way to slow the erosion of the natural world at the hands of overconsumption