From e.g. Moneyweek:
Ben Brettell, senior economist at Hargreaves Lansdown... adds: “If deflation becomes entrenched and consumers begin to expect prices to fall, it can be dangerous. Spending decisions will be deferred in expectation of lower future prices and economic stagnation could result.
What a load of drivel.
Most of the stuff you buy because you need or want it now, today, this week, this month. You can't just go without food to eat or petrol for your car for a year, even if you are 100% sure that the price of food or petrol will be significantly lower in one year's time.
Consumer electronics is the perfect counter-illustration to this, people have been merrily buying new stuff every year, even though by now most people assume that what comes out next year will be bigger, better, cheaper etc.*
Further, the sort of price deflation they are talking about is minimal, a percent or two a year. If you are planning to buy a new car for £20,000-ish sometime in the next year or two, is that £500 potential saving from deferring your purchase really going to make much of a difference? Methinks not.
This effect can only happen if...
a) You are thinking of buying a speculative asset, such as land. Your total land consumption doesn't change (you are renting instead of owning in the interim) and land rents are not an addition to the economy, they are a transfer.
b) the benefit you'd get from having something for a year is less than the amount by which you expect the price to fall. And I struggle to think of an example for that, it can only apply to completely non-essential things, like a high-powered telescope for star-gazing or something which you'd only use once or twice a year.
UPDATE: now I think about it, this myth is quite similar to the myth that the government can boost the economy by pushing down interest rates. It's the same fallacy in a different guise, and of course has to be perpetuated as an excuse to prop up 'asset' values (i.e. capitalised rent and monopoly income).
* This is not actually true any more, I reckon we have passed the point of peak technology in many respects. Nowadays even Apple can't resist adding on extra bits and extra pieces, none of which really work properly.
Mobile 'phones reached perfection about nine years ago with the Nokia 1110. Everything since then was bullshit, and given how small UK housing is, there's no need for a TV bigger than 40". But most people still believe it.
Thursday, 8 January 2015
From e.g. Moneyweek:
My latest blogpost: Economic Myths: Deflation leads to a downward spiralTweet this! Posted by Mark Wadsworth at 13:29