Deflation & Savings?? What effect?

tomstickland

There are some very interesting articles out there. From what I've read, there is no real reason why you cannot have an economy with slight deflation that is still healthy.

I think what causes the confusion is that governments avoid deflation, and if it ever occurs, it's usually accompanied by a load of other bad things.

ixwood

Has it ever happened?

Nagiw

evenasus wrote: »

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.

I can beat you here - I've got 3 credit cards - 1 of which I always pay off in full, the other 2 are in case the 1st one doesn't work!
Never been in debt - except for mortgage which paid off ASAP.
Do you think we are the fools? Seriously.

Paul_Herring

http://www.guardian.co.uk/business/2008/nov/19/recession-inflation

The big worry these days is the possibility of deflation. At first glance, deflation might sound like good news, so let's stop at first glance. In times of deflation, your money will increase in value as it sits in your pocket. Hooray! Prices will fall. In fact, prices will fall so sharply that you won't know whether to buy an incredibly cheap thing or wait until it gets even cheaper. Deflation: what's not to like?

Deflation is only a problem if you're the one trying to sell the cheap thing, or if the incredibly cheap thing is your salary, and your boss can't decide between paying you peanuts and finding someone else who will do your job for even less. In these circumstances investment becomes a little bit pointless, and growth halts, and a deflationary spiral ensues leading - allegedly - to long-term depression.

john_s_2

LesU wrote: »

If RPI was measured as the average person's increase in normal day to day costs then perhaps it would be useful.

RPI is, in fact, exactly that! The 'average' rise in the cost of living. The trouble is, hardly anyone is average. For some, their personal rate of inflation will be more, for others, less. The trouble with averages is exactly this - although they are a good indicator of the population, they describe hardly any individual within the population. Most people reading this thread have more than the average number of legs for example! (The average being around 1.9999 - this being the mean average of course...)

As indicated in a previous post, I have a spreadsheet on which I forecast my income / expenditure to the end of next year (so at most it is two years, at the least, a year and a month). I've used it for about ten years now and have settled on using CPI times 1.2 (so the present 4.5% becomes 5.4%). This has worked for me for some years now. Most items (food, fuel, London transport, larger items like white goods, furniture, etc) rarely need adjusting although I do review them from time to time.

evenasus

StevieJ wrote: »

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

Very true.

We bought a Philips Aurea (the one with the led lights frame) this time last year. The cost was over £3,300 - now you can buy it for £2,300 :rolleyes:

ixwood

Deflation punishes debt and rewards savers. If it happens, chickens will come home to roost.

evenasus

Nagiw wrote: »

I can beat you here - I've got 3 credit cards - 1 of which I always pay off in full, the other 2 are in case the 1st one doesn't work!
Never been in debt - except for mortgage which paid off ASAP.
Do you think we are the fools? Seriously.

Probably we are. But at least we don't have to worry about eating and heating.

Just wish my two middle aged sons were a bit more thrifty. :rolleyes:

Still, with parents who paid of their mortgages (sons that is) :rolleyes:

Nagiw

ixwood wrote: »

Deflation punishes debt and rewards savers. If it happens, chickens will come home to roost.

But we'll all get basted. (sorry;) )

kennyboy66_2

I think people get confused between deflation and a temporay falling prices.
Just as inflation does not cause any problems between say 0 and 2%, then modest falling prices of a similar magnitude for a short period of time should not cause huge problems.

True deflation is when general prices spiral downwards persistantly. As nominal interest rates cannot be negative, why would anyone borrow to invest when your prospective future earnings seem likely to fall ?

Rather than invest in any productive assets why not just keep the cash in the bank. You could extend this to why invest in R & D in pharmaceuticals if there is no prospect of a financial return.

Deflation is also likely to lead to unemployment for two reasons.

1) Aggegate demand falls as the economy contracts.
2) It is normally easier to cut jobs than wages.

Just as it is very difficult to get hyper-inflation under control, the same problem exists with deflation.

There are economic theories that say deflation should not be too bad, however in practice every period of persistant deflation seems to coincide with poor economic growth and unemployment.

There seem to be a few out there who actually want deflation. Quite frankly they are mad.