Deflation & Savings?? What effect?

dungeness

In1978, when I did A level Economics, we were in a period of stagflation, which meant low growth & high inflation. This was not supposed to be possible! The worst effect as it appeared to me was high unemployment. One of our textbooks was called "Limits to Growth" which extolled the virtues of a theory which I think was quite popular in the '70's that it was possible to have zero growth in the economy & everything would still be OK. I seem to remember one of the Scandinavian country was trying it. This was all on the basis that growth could not continue into the future at the same rate that it had been.

All this went slightly over my head at the time, but I often think about those ideas. I believe the problem has been that our growth has been built on credit & this is not a solid foundation. I believe there was deflation in the '20's & '30's. This resulted in forced wage cuts - if you didn't accept, there was a line waiting for your job.

Whether it's inflation or deflation, it seems to me that it will always lead to high unemployment which does mean that almost everyone suffers, if not you personally then members of your family & friends. Benefits would I believe also be cut.

tomstickland

kennyboy66 wrote: »

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 ?

Can you clarify what you mean by this?

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.

Why will the economy contract? Providing that people understand what deflation means, an annual pay cut can still be a real terms pay rise providing that it is less than the deflation rate. They also have to realise that for the period just before the pay cut they have been overpayed in real terms.

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.

Cause and effect though. Deflation is generally avoided for various reasons, so when it does happen it is because things have got out of control.


Do you think a 0% inflation economy would work?

tomstickland

I don't see why we can't have a society where there's zero growth, or growth proportional to population size. How can we have positive growth indefinitely?

I was talking to some work colleagues the other day and we liked the idea of a stripped down economy. Why do we assume that all of the adult population can ever be employed full time? As environmental and energy concerns become more pressing we will have to question why we need to manufacture novelty gifts, nasal hair trimmers, disposable cameras etc.
We could move to a situation where we work 2 days a week, just enough time to keep our core survival systems ticking over at zero net growth. ie: food, energy, shelter. Then spend the rest of the time doing whatever we want (within reason).

1echidna

Forgive me for being a little bit confused. Printing money is often said to be highly inflationary, why doesn't the gov't do this if needs be? OK would affect the exchange rates also adding some inflation. But why not in moderation if deflation became a serious problem?

isofa

tomstickland wrote: »

I don't see why we can't have a society where there's zero growth, or growth proportional to population size. How can we have positive growth indefinitely?

I was talking to some work colleagues the other day and we liked the idea of a stripped down economy. Why do we assume that all of the adult population can ever be employed full time? As environmental and energy concerns become more pressing we will have to question why we need to manufacture novelty gifts, nasal hair trimmers, disposable cameras etc.
We could move to a situation where we work 2 days a week, just enough time to keep our core survival systems ticking over at zero net growth. ie: food, energy, shelter. Then spend the rest of the time doing whatever we want (within reason).

I understand your points re manufacturing novelty items, but they are only manufactured to meet a demand, if there isn't demand, they wouldn't exist.

But would you earn enough money in 2 days work a week to pay for fuel and the essentials? And would anyone just want to live on the essentials alone? What a boring life that'd be!

I suspect society as we know it would totally break down too.

tomstickland wrote: »

Naughty Russell. Naughty Jonathon.

PS It's Jonathan not Jonathon... :beer: