Britain faces deflation !!!

ixwood

Chris2685 wrote: »

OK, call me dense here... But is deflation a bad thing?

If so, then why is inflation also a bad thing?

Staying still is better?

Help me out here guys... It seems whatever happens is bad news!

Deflation is bad for debtors, as the value of their debt is effectively increased.

Inflation is bad for savers, as the value of their savings is decreased.

Realy

ixwood wrote: »

Deflation is bad for debtors, as the value of their debt is effectively increased.

Inflation is bad for savers, as the value of their savings is decreased.

Surley that argument depends on what interest rates do?
They are saying rates could come down to below 2%

ixwood

Even if rates are low, during deflation. savers do well because the money becomes worth more anyway. And conversely, debtors are screwed as the debt becomes an ever bigger burden.

I think deflation will prevail myself, but the powers that be are doing all they can to prevent it.

The whole geared system is now working in reverse and money is disappearing rapidly. With the dodgy fractional reserve system, If a bank makes a £100m loss, that's £1bn of lending gone.

Trillions have been wiped off stock markets and there's not a single investment class going up. It could get nasty.

Pay down any debts, start saving and baton down the hatches IMHO. Who knows what will happen, but hope for the best and prepare for the worst as they say.

dopester

If you can't tell it is deflation - even now when it is right upon us - when it has been obvious already for 9 months.... you must not have a brain in your head imo.

Jonbvn

dopester wrote: »

If you can't tell it is deflation - even now when it is right upon us - when it has been obvious already for 9 months.... you must not have a brain in your head imo.

All I have seen is inflation, except house prices????

Please do provide some more insight into your superior knowledge & intellect.

m1ntie

dopester wrote: »

If you can't tell it is deflation - even now when it is right upon us - when it has been obvious already for 9 months.... you must not have a brain in your head imo.

I would take more water with it if I were you!!!

baby_boomer

All the headlines say that the 5.2% inflation figure understates the true effect of price increases.

However the big fall in the price of oil is going to have an impact, and the commodities market has turned because China's growth will have to be put on hold because of world recession & America stops buying because of their troubles. Twin deficits could = falling $ & even raised taxes = US imports become too expensive.

If banks don't / can't lend to businesses then they will contract.

But I still can't make up my mind. I've got to make some big investment decisions in the next two weeks and this is first key question about the future that I have to resolve . Please keep the thread going with input from both sides .

If deflation does take hold, how long might it last? A decade? Would it have to be world-wide deflation for it to stick around?

baby_boomer

MSE link to Wharty's other thread about deflation with a contribution from Dopester, but it might be best if we kept the discussion on this one rather than having two separate conversations

I've copied below all the material & comment posted there to date

wharty wrote: »

In common usage deflation is generally considered to be "falling prices". But there is much more to it than that. Often people confuse deflation with disinflation or with Depression (as in "the Great Depression"). These three terms are related but not synonymous.
According to Investorwords.com the definition of Deflation is "a decline in general price levels, often caused by a reduction in the supply of money or [COLOR=blue! important][FONT=Georgia, 'Times New Roman', Times, serif][COLOR=blue! important][FONT=Georgia, 'Times New Roman', Times, serif]credit[/font][/font][/color][/color]. Deflation can also be brought about by direct contractions in spending, either in the form of a reduction in government spending, personal spending or [COLOR=blue! important][FONT=Georgia, 'Times New Roman', Times, serif][COLOR=blue! important][FONT=Georgia, 'Times New Roman', Times, serif]investment[/font][/font][/color][/color] spending. Deflation has often had the side effect of increasing unemployment in an economy, since the process often leads to a lower level of demand in the economy. The opposite of inflation."
What Causes Deflation?

Although everything said above is true it doesn't present the true nature of deflation. It tries to define it by presenting several possible causes. For a true understanding of both Inflation and Deflation we need to understand Supply and Demand. Just like every other commodity there is a supply of and a demand for "Money".
In this article I am not going to address the issues of what true money is, for the sake of this article we will assume money is simply something other people are willing to accept in exchange for goods or services.
Price levels are the direct result of the relationship between the supply and the demand for any given item. But the value of the money used to pay for those items is also subject to the same relationship.
For the sake of simplicity let's assume that we are on an island and there are ten equally desirable goods in our universe and ten $1.00 bills available to purchase them with. We can safely assume that each item will end up costing $1.00 each.
If the quantity of money increases to $20 (without increasing the quantity of goods) the price of the goods will increase to $2.00 - that is inflation.
If, however, the quantity of money decreases to $5.00 the price will fall to 50¢ (deflation). This is what the first part of the above definition is referring to. The money supply can also be reduced if someone on our island hoards half of it and refuses to spend it on anything no matter what. This is the second part of the definition (reduction in spending).
So far we have only looked at part of the equation, the supply of money. But what happens if the quantity of goods available increases? What if instead of having ten items we build ten more? We now have twenty items and only $10. 00 so once again each item is worth 50¢.
This form of deflation is the good type. Everyone assumes that deflation is bad because the last major deflation that we had was during the "Great Depression" so deflation and Depression are synonymous in many peoples minds. In actuality if prices go down because the goods can be manufactured more cheaply this ends up increasing everyone's wealth.
This is exactly what happened in the late 1990s , with cheap productivity available from former Communist countries the quantity of goods is increased while the money supply increased at a slower rate.
What about Demand?

What about the demand for goods? If everyone on our island already has one of the items available and no one needs any more, naturally the price will also fall as sellers try to find someone to take them off their hands.
So far we have dealt with the supply of money, the supply of goods and the demand for goods, but what about the demand for money?
Is it possible that the demand for money could increase or decrease? Generally, the demand for money is measured by how much people are willing to pay to borrow it (i.e. interest rates). If inflation is high, interest rates will have to be higher to compensate for the loss of purchasing power. But also if the demand for money rises banks can charge more to [COLOR=blue! important][FONT=Georgia, 'Times New Roman', Times, serif][COLOR=blue! important][FONT=Georgia, 'Times New Roman', Times, serif]loan[/font][/font][/color][/color] it. Conversely, if the demand for money falls interest rates will also fall.
So there are four causes for Deflation.

1. Decreasing Money Supply
2. Increasing Supply of Goods
3. Decreasing Demand for Goods
4. Increasing Demand for Money

Note:
Increasing demand or decreasing supply of money have the same result i.e. "tight money" either way people want more money than is available.
Both could also result in (or cause) higher interest rates. But the higher interest rates should also tend to balance (or decrease the demand for money because it is now more expensive).
In other words as interest rates rise at some point the demand drops off because people don't want it bad enough to pay such high rates.
Is Deflation Good or Bad?

Actually, deflation itself is neither good nor bad. It depends on the cause of the deflation whether people will suffer or rejoice. As I said, if the cause is increasing supply of goods that would be good. Another example of this is in the late 1800's as the industrial revolution dramatically increased productivity.
However, if deflation is caused by a decreasing supply of money as in the great depression, that would be bad. The stock market crash sucked all the liquidity out of the market place, the economy contracted, people lost their jobs and then banks stopped loaning money because people were defaulting. The problem compounded as more people lost their jobs and money supply fell further causing more people to lose their jobs, etc. etc.
Note: During the Depression demand for money was high (but no one could afford it) because supply was low.
So deflation can be caused by several different things and thus can be good or bad depending on the cause.

dopester wrote: »

The money supply actually increased in the US Great Depression.

What the "print more money" idiots don't seem to be able to grasp is there is no demand for it - expect for giving it away free which would cause a destructive gilt/treasury sell off, push up interest rates and cut a country off from the credit-markets.

Money supply increased... but what decreased was demand for loans as people did not want debt. And increasingly banks only want to lend to good credit risks, who don't even want to borrow anyway and take on more debt, as they fear for their own jobs and income to repay debt. So credit was there only for those with already sound financial positions or standing, and few wanted it.

When there is less credit offered, or being taken, the amount of money in the economy is reduced. There is less money around, both real cash and credit, for all the goods, products and services in the economy. So businesses try their best to attract what good money is out there by promotions and lowering prices.

Not all companies are set up to withstand falling prices and reduced profits and ferocious competition so they fold in the downturn.

Walletwatch

dopester wrote: »

If you can't tell it is deflation - even now when it is right upon us - when it has been obvious already for 9 months.... you must not have a brain in your head imo.

Absolute nonsense in a thread that has had some rather forceful arguments so far. Will allow you the fact that you posted (or rather spewed) at 11:35 on a Saturday night, so were probably sloshed, but better come back and redeem yourselves with an explanation of exactly what you meant.

dopester

What I've seen a lot of people often ask is, why didn't companies and business put aside monies and profits during the boom times, and so can better ride out the downturn.

I argue that too many businesses gear up and expand in to the boom to try and take an even greater share of increasing profits going forward to better make fortunes, in the expectation that.. this time its different, boom and bust is over, modern world now, new paradigm, history is bunk, Kirstie and Phil, the good times will continue forever. [And the same is widely true for individuals as well. Spending away generous incomes and also going heavily in to debt with loans, credit cards or MEW-ing.]

One example, from a good range of BBC snapshot videos recently filmed, where the business took on increasing heavy debt to expanded in to the boom: And what a boom it has been. The contraction, the deflation, and the complete change of circumstances at such peak levels to the new world is so destructive.

THE ROOFING COMPANY OWNER
http://news.bbc.co.uk/1/hi/business/7675903.stm