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re: Prices of goods we use every day are rising at their fastest pace in three years
Posted on 5/5/21 at 8:15 am to stout
Posted on 5/5/21 at 8:15 am to stout
At the risk of being the contrarian in this thread, I think a lot of folks are really failing to grasp the difference in consequences between inflation and deflation.
Rapid deflation means your money will be worth more tomorrow than it is today. This incentivizes saving over spending, which reduces both consumer demand and business investment. Generally speaking, this happens because the economy is producing more than it can consume. The low demand further reduces prices (more deflation) and ultimately leads to a reduction in supply - e.g. layoffs, and it can snowball as it did during the Great Depression.
Rapid inflation means your money will be worth less tomorrow than it is today. This incentivizes spending - not saving - both for consumers and for businesses. Generally speaking, this happens because the economy cannot produce enough goods to satisfy demand. Higher prices lead to more jobs (lower unemployment).
Historically, inflation is much less destructive than deflation as long as the overall economy is capable of increasing outputs enough to satisfy the demand for goods. Venezuela is the classic case of hyperinflation spiraling over many years, but one of the main drivers in Venezuela is their economy’s reliance on oil production. The oil crashes (1980’s and 2015-present) have decimated their economy. The US economy is much more robust and diversified.
My point is this: it’s easy to point to the stimulus, and the Fed’s actions, as the source of inflation. The part that’s not easy is determining what would have happened if those actions had not been taken. If inaction led to rapid deflation, that would have been worse.
Rapid deflation means your money will be worth more tomorrow than it is today. This incentivizes saving over spending, which reduces both consumer demand and business investment. Generally speaking, this happens because the economy is producing more than it can consume. The low demand further reduces prices (more deflation) and ultimately leads to a reduction in supply - e.g. layoffs, and it can snowball as it did during the Great Depression.
Rapid inflation means your money will be worth less tomorrow than it is today. This incentivizes spending - not saving - both for consumers and for businesses. Generally speaking, this happens because the economy cannot produce enough goods to satisfy demand. Higher prices lead to more jobs (lower unemployment).
Historically, inflation is much less destructive than deflation as long as the overall economy is capable of increasing outputs enough to satisfy the demand for goods. Venezuela is the classic case of hyperinflation spiraling over many years, but one of the main drivers in Venezuela is their economy’s reliance on oil production. The oil crashes (1980’s and 2015-present) have decimated their economy. The US economy is much more robust and diversified.
My point is this: it’s easy to point to the stimulus, and the Fed’s actions, as the source of inflation. The part that’s not easy is determining what would have happened if those actions had not been taken. If inaction led to rapid deflation, that would have been worse.
This post was edited on 5/5/21 at 9:00 am
Posted on 5/5/21 at 8:16 am to lostinbr
quote:
The part that’s not easy is determining what would have happened if those actions had not been taken. If inaction led to rapid deflation, that would have been worse.
I will be sure to let my mother on fixed income know that her dollars being worth less while commodities keep going up is actually a good thing for her.
Posted on 5/5/21 at 8:20 am to lostinbr
No no no. This is NOT the place for a multi-dimensional analysis prior to the formulation of a conclusion or prediction. Fear porn, hyperbole, and echo chamber political discussion are our currency here, not critical thinking.
Posted on 5/5/21 at 9:38 am to lostinbr
quote:
My point is this: it’s easy to point to the stimulus, and the Fed’s actions, as the source of inflation. The part that’s not easy is determining what would have happened if those actions had not been taken. If inaction led to rapid deflation, that would have been worse.
You are creating a false dichotomy: our only choices were stimulus or no stimulus.
That’s not true. The best solution was to open the economy back up so stimulus wasn’t even necessary. That’s what trump and SOME Republicans were fighting for.
Posted on 5/5/21 at 9:42 am to lostinbr
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