Deflation & Savings?? What effect?

ipri

Hi...just listening to comments on the effect of deflation on savings...can someone explain the relationship?...I thought if the cost of goods went down it would be of benefit to people with savings??? ian

Nagiw

ipri wrote: »

Hi...just listening to comments on the effect of deflation on savings...can someone explain the relationship?...I thought if the cost of goods went down it would be of benefit to people with savings??? ian

It might "benefit" savers in a small way but it's awful for the economy and the country as a whole. Have a look at what has happened in Japan in the last 15-20 years.

The economy would shrink, the pound would get even weaker than now, unemployment would rise, house prices would plumet much further than they have to date.

You might be a tad better off as a saver in deflation but you'll feel a whole lot worse!

Hope this helps.

ipri

Thanks Nagiw...Can you explain the mechanism behind this thinking?...BTW I have no Mortgage or other debts....I'm hoping I'd be ok in such a situation?..soon to retire.....I can work longer if I have to but had planned to go soon if possible....!!

Nagiw

ipri wrote: »

Thanks Nagiw...Can you explain the mechanism behind this thinking?...BTW I have no Mortgage or other debts....I'm hoping I'd be ok in such a situation?..soon to retire.....I can work longer if I have to but had planned to go soon if possible....!!

The mechanism is very complicated and I'm no expert!
If you think about stagnation in deflation then it's obvious - if you know that something will be cheaper next week then you won't buy until next week - but then the following week it might be even cheaper so you wait - bit like what's happening in the housing market now. This causes the economy to literally grind to a halt.
It's worse if you have debt as this will still increase, only faster. But it can effect pensions as they are worth less (equities etc) and don't forget, the government will REDUCE the state pension if inflation is negative.
You'll probably be OK - but your kids may not be. (sorry for the assumption).

john_s_2

On the other side of the coin...

When your socks get holes in, you need to buy new ones (or darn them, but who still does that??)

When your telly breaks you buy a new one. Etc etc etc...

I fully understand and dig the argument why deflation is bad, but it shows up the fact that our economy is based on people buying loads of stuff they don't need, or probably even want particularly. (Who NEEDS a television??)

I've always been very frugal (except when it comes to darning socks) which is why I take an interest in this particular board :-)

So I guess if everyone was like me the economy would have ground to a halt ages ago. But the way I see it, I'm going to spend my savings eventually. I just take the attitude that I'm not going to borrow money for stuff I can save up for. Like, I know my roof is going to need replacing in the next 50 years or so (it was replaced a few years ago) so I have a column on my spreadsheet for exactly that eventuality (OK, extreme example, but point made).

We're buying ourselves a 42" telly this Christmas out of our savings. We've saved up for it! We didn't go on holiday this year (not on purpose, just didn't) so our holiday budget has been used for other things and there's some left over for this telly.

So am I right in saying that the economy depends on other people maxing out their cards to buy stuff they don't need?

Cos if that's the case then this is one effed up world.

EDIT: Actually, I probably don't FULLY understand the deflation argument ;-)

EDIT2: The leftover holiday savings are going towards the new telly. Our holiday budget isn't THAT big!

Nagiw

john_s wrote: »

On the other side of the coin...

When your socks get holes in, you need to buy new ones (or darn them, but who still does that??)

When your telly breaks you buy a new one. Etc etc etc...

I fully understand and dig the argument why deflation is bad, but it shows up the fact that our economy is based on people buying loads of stuff they don't need, or probably even want particularly. (Who NEEDS a television??)

I've always been very frugal (except when it comes to darning socks) which is why I take an interest in this particular board :-)

So I guess if everyone was like me the economy would have ground to a halt ages ago. But the way I see it, I'm going to spend my savings eventually. I just take the attitude that I'm not going to borrow money for stuff I can save up for. Like, I know my roof is going to need replacing in the next 50 years or so (it was replaced a few years ago) so I have a column on my spreadsheet for exactly that eventuality (OK, extreme example, but point made).

We're buying ourselves a 42" telly this Christmas out of our savings. We've saved up for it! We didn't go on holiday this year (not on purpose, just didn't) so our holiday budget has been used for other things and there's some left over for this telly.

So am I right in saying that the economy depends on other people maxing out their cards to buy stuff they don't need?

Cos if that's the case then this is one effed up world.

EDIT: Actually, I probably don't FULLY understand the deflation argument ;-)

"So I guess if everyone was like me the economy would have ground to a halt ages ago" - Correct!

"I know my roof is going to need replacing in the next 50 years or so (it was replaced a few years ago) so I have a column on my spreadsheet for exactly that eventuality" - This is rather sad!

"So am I right in saying that the economy depends on other people maxing out their cards to buy stuff they don't need?" Yes!!!:eek: That's the way the economy has been run for the last 20 years at any rate. Hence the credit crunch. Pretty depressing isn't it?

"Cos if that's the case then this is one effed up world." - I hope you are wrong - but I fear you could be right. Oh, and us frugal savers (for I am one) will be the ones who ultimately lose the most!

Take Care.

john_s_2

Nagiw wrote: »

"I know my roof is going to need replacing ... so I have a column on my spreadsheet for exactly that eventuality" - This is rather sad!

Is a bit isn't it? ;-)

In fairness to myself, it's actually headed "House maintenance" and is intended to cover all sorts of major eventualities. And it's only targeted to be about £7000 or so in about six years' time. So maybe there's hope for the planet yet! (Maybe I shouldn't buy that telly...)

Glad I'm not the only one who thinks like this! Cheers.

evenasus

I am of the same ilk as john s & Nagiw...never bought anything we hadn't got the money for.

Got one credit card, which we've had for 30 years and which is paid in full every month.

It's people who are the opposite to us that have helped to bring about the credit crunch.

I occasionally have a look at the debt boards and am amazed at some of the SOA posted.
One had several credit cards, each in the thousands of debt, plus numerous catalogue debts.:rolleyes:

What on earth have they bought I ask myself.

LesU

It depends on how you measure cost of living.
I've tried putting off buying food, heating, electricity, petrol, water, taxes, insurance, train fares and car tax for a few months on the basis they are eventually going to go down, but it doesn't seem to have worked. I'm cold and hungry!
If RPI was measured as the average person's increase in normal day to day costs then perhaps it would be useful.

When inflation falls, in my own experience, down to 2% or less, then I will believe that deflation might be round the corner.

ed123_2

......deflation is their greatest fear as people will get out of the habit of buying stuff they don't really need which is the key to the capitalist system. The boe would drop base rate to zero, I think they will cut by 1% in december and it could go to 1% by spring 09. This is what has happened in Japan....people don't spend....

StevieJ

Ironically if you buy a TV today, the same model will almost certainly be cheaper in 12 months as a norm.