Ze, 'Ow you say, Deflation Watch. Eurozone edition

Graham_Devon

Thrugelmir wrote: »

If you want to cut costs then wages / headcount is the easiest route. Try breaking a property lease or obtaining a reduction in business rates.

Understood.

But were not talking about obtaining a reduction.

Were talking about deflation. The pressure would be on anyway. We have actually had reductions in rates and taxes in the last few years, so it's not like it can't happen.

The price is the price. With inflation prices generally go up.

I'm just struggling to figure out ow we can have deflation, yet no costs to business decrease?

Surely the definition of deflation is prices decreasing. Therefore, why do people keep suggesting prices can't or won't decrease....yet we'd have deflation (prices decreasing)!? It doesn't seem to tally.

Generali

Graham_Devon wrote: »

Anyway. I don't mean this to be rude, though it may come across as such.....on asking what the disadvantages are, we appear to be down to hairdressers or companies with high debt levels and procurement credit accounts. It doesn't sound that scary to me.

I don't think that's rude.

I just use hairdressers because it's a simple example of a business. Really you're talking about pretty much any company with debt and/or high staffing levels so that's all of retail, most manufacturing companies, catering (pubs, restaurants etc), service companies, mining/gas/oil, farming. The list could go on a lot longer.

As with any calamity, someone will make money out of it. In Japan, a woman made an absolute fortune with a series of newspaper articles and books on how to live on JPY100/day. For most people deflation is bad news or at least the bad sort is.

purch

Especially in the post Thateriteismology world where we are all Asset owners

michaels

There seems to be some misunderstanding about whether funds come from retained profits or borrowing making a difference. Almost every company in operating will have to make an investment in both stock (inventories) and capital goods (factories, vehicles etc). Whether the money to finance these things comes from debt or retained earnings, in a deflationary environment these things will fall in value and therefore there is likely to be a strong incentive for the company not to invest its money in these things as doing so will result in a loss, thus deflation will reduce economic activity in the same way for companies as it does for consumers - Why buy or make something now when you can do so at a later date more cheaply.

This is all because there can not be a negative interest rate on holding cash so the company makes £0 holding on to its cash but a negative return if it invests in production, note nothing to do with borrowing.

Kennyboy66

Graham_Devon wrote: »

Understood.

But were not talking about obtaining a reduction.

Were talking about deflation. The pressure would be on anyway. We have actually had reductions in rates and taxes in the last few years, so it's not like it can't happen.

The price is the price. With inflation prices generally go up.

I'm just struggling to figure out ow we can have deflation, yet no costs to business decrease?

Surely the definition of deflation is prices decreasing. Therefore, why do people keep suggesting prices can't or won't decrease....yet we'd have deflation (prices decreasing)!? It doesn't seem to tally.

There is a saying that in the long run all costs are variable, but then again in the long run we are all dead.

Rents in the UK are typically fixed for 5 years and have upward only reviews. The only way to get out of this is normally administration.

Graham_Devon

michaels wrote: »

There seems to be some misunderstanding about whether funds come from retained profits or borrowing making a difference. Almost every company in operating will have to make an investment in both stock (inventories) and capital goods (factories, vehicles etc). Whether the money to finance these things comes from debt or retained earnings, in a deflationary environment these things will fall in value and therefore there is likely to be a strong incentive for the company not to invest its money in these things as doing so will result in a loss, thus deflation will reduce economic activity in the same way for companies as it does for consumers - Why buy or make something now when you can do so at a later date more cheaply.

This is all because there can not be a negative interest rate on holding cash so the company makes £0 holding on to its cash but a negative return if it invests in production, note nothing to do with borrowing.

Agreed.

However, don't vehicles, stock and any used goods depreciate in value anyway even in an inflationary environment?

Were only really talking about investments, maybe the buildings and land which appreciates when it comes to assets of a company.

Most stock sitting on shelves today is depreciating, even in an inflationary environment. Hence why companies in the main don't like stock (not in terms of excess stock anyway).

ILW

Kennyboy66 wrote: »

There is a saying that in the long run all costs are variable, but then again in the long run we are all dead.

Rents in the UK are typically fixed for 5 years and have upward only reviews. The only way to get out of this is normally administration.

I believe that is changing with tenants refusing to sign such agreements in many cases. Any contract is negotiable.

Graham_Devon

Kennyboy66 wrote: »

There is a saying that in the long run all costs are variable, but then again in the long run we are all dead.

Rents in the UK are typically fixed for 5 years and have upward only reviews. The only way to get out of this is normally administration.

You say that....but how much use is an empty building to a landlord?

We've actually seen that rent for business premises can be re-negotiated. It's happened quite a few times over the last few years, especially with companies like JD Sports. Landlords have been forced to renogotiate as they face the danger of sending the tenant over the edge and having no rent at all.

Circumstances overtake the idealism's sometimes.

Infact, it's happened in a town near me. The landlord faced losing 5 business owners, and reduced the rate for all mid contract.

Why we have to assume this is all impossible I really don't know.

Prudent

Love the title of the thread

Apologises if this has been discussed, I am just in from work and haven't read the whole thread. What happens to savers deposits with deflation?

tomterm8

Prudent wrote: »

Love the title of the thread

Apologises if this has been discussed, I am just in from work and haven't read the whole thread. What happens to savers deposits with deflation?

It depends.

In theory, they should increase in value.

In practice, in deflationary environments banks often go bankrupt and it turns out you don't get your money back.