Deflation Explained in One Minute

A one-minute video explanation of deflation. Now as a consumer, you might think it's a good thing that prices are going down but deflation can end up becoming a huge drag on the economy due to the vicious circle it frequently generates.

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[RishabDhar]

A lie. Germany had deflation from 50's to 70's and it powered to as the strongest economy in Europe. The economy goes down because US is a debt based economy, unlike countries like Germany and Austria which are cash based economies.

Here's the Austrian view:

Let's say there is deflation, and you saved money, the value of your money keeps going higher and higher, and you can buy more and more, because the price of goods keeps falling compared to your savings.

The companies, if they are debt free, can buy more and more stuff from international markets (because elsewhere raw materials are cheaper), build factories (because cost of land and machinery falls), and employ more people (because wages of people are lower). Heck they will even invest in local economy for the sheer reason of price stability (big mega projects take several years to build, and as a company in a deflationary environment you do not risk having to pay 10X more sometime 2 years later because prices went out of control).

Furthermore, as a business, if you know prices will fall in future, you will want to release your product now, instead of delaying your project, because the price you get today for that product will be higher than what you get in future.The other consequence of this is, it drives massive innovation at companies to build superior products (as they can afford to, and they have to make them superior to convince the people to buy the product now). As a result, your products are superior and more advanced than anything out there in the market, which is why "Made in Germany" and "Made in Switzerland" are bigger brands than "Sold by a Harvard graduate". I haven't event heard someone say "Hey I bought a new car that was told to me by a Harvard graduate". This is why German made stuff, even though more expensive than Made in China stuff, still sells - because quality has a price, and in many cases only Germany has the technology for that thing. Heck Germany even ran trade surplus versus China. lol

Furthermore, the consumers, because there is deflation, will wait long enough until they have savings to buy that product, instead of in an inflationary environment where they have to buy the product now (thereby getting more debt from banks). This improves the life of common people over time, and they can build their retirement nest by saving. The direct result of this is that even when companies fail, people have savings to rely on. And ironically, it's the indebted companies that fail. I've never seen a cash rich company fail. :D

This is how Germany achieved 0% unemployment rate for 2 decades!

The consequence of that is Germany is an export powerhouse, with some of the most advanced industrial products in the world, and it's people have low debt.

America on the other hand has a pile of debt, makes nothing or whatever it makes is of substandard quality (Ford, GM, McDonalds, KFC, Starbucks, General Electric, Facebook, Google, Uber, public transport, roads).

The only problem with deflation is that it is unforgiving to people who run on debt, because the amount of debt remains constant, and because with time the value of currency increases with time, it become harder and harder to service that debt. In other words, debt is unforgiving under deflation. But hey it's your irresponsibility that you got yourself into debt, because you could have saved money and spent that money later.

Keynesianism

The whole idea of Keynesian economics is that, debt can never be paid back in honest way (for example there is no way US can pay back $21 trillion of debt + unfunded social security and Medicare liabilities), let's just inflate our way out. And because people are also so indebted in US, you need constant wage increases to pay off that debt. Debt is a by product of Keynesian economics, because the inflation reduces the value of your currency, and it becomes harder and harder to make ends meet even with savings, like buying a car or a house, so people naturally buy those things on debt. And as debt increases money supply, the value of currency drops more and more, thereby forcing even middle class, then upper middle class into debt. The huge wealth and income inequality is a result of Keynesian economics of debt.

Debt is the equivalent of modern day slavery, because you can never take that vacation you needed, never quit the job you hated, never retire when you wanted, never buy the car or the house you dreamed off, never go to the school you dreamed off. The whole cycle is kept up in US and many countries that the poor never work hard, are not educated, and therefore need to be shunned away. You as a society even loose compassion towards others, without looking at the root cause.

The only winner in this is the banks here, because they make interest on the debt. Need I share that with the huge money printing in last 40-45 years, the top 1% in the world now own 50% of the wealth.

In other words Keynesianism is more like trickle up economics.

[LC-qppr]

"Lower prices may seem like a blessing."

That's because it is.

It's a dark trick that has been played on us to ignore this obvious fact.

[MaloureTV]

stopped at 0:15
the prices go down, the profits go down (as if it was a bad thing)
you actually dont need to profit as much as before because... yes, you guessed correctly... PRICES WENT DOWN

[lbsquat]

when prices go down, profit margins dont go down, because the price of goods goes down more. this video is more Keynesian propaganda and is completely wrong in its premise

[arabbkenny]

I'd argue that inflation is reduced purchasing power and deflation is increased purchasing power. Deflation in and of itself is not a bad thing cause it makes it more profitable to save rather then spend. The reverse should then be true of inflation. Ofc you want to spend if your savings will have less and less purchasing power over time.


Deflation does not mean that people have less money. Just as inflation does not mean that you have more money.

[SupremeTycoon]

A much easier way of explaining it:

Inflation = Value of the dollar FALLING

Deflation = Value of the dollar RISING

Rather than talking about "the price of everything"

[jamesrevell]

Inflation is good for bankers and deflation is bad for bankers. I'll take deflation no matter the cost. I'm inclined to save and not borrow. I'll do just fine in a deflation economy.

[RocketRaven]

if prices are falling doesnt that mean the currency is worth more?

[valentinoferraro]

saying that deflation makes businesses earn less is like saying that business earn more thanks to infaltion.


worker would need to accept "lower" wages but their purchase power wouldnt be affected because the money they receive is worth more.


products dont cost less, money is worth more.


businesses are the consumers of their providers, so costs would go "down" aswell.

[oxmkcrh]

This is the biggest economic myth of our time. Deflation is good and should be welcomed, depending on the circumstances. Deflation makes us able to afford and consume more. Imagine if the price of eating at restaurants would drop. Then people would eat out a lot more often, because they now can afford to do so. The demand for eating out increases. The restaurants hire more workers to cover this increased demand.

[sinanilteber]

Lower prices --> lower wage --> purchasing power stays as it was. So no worries.

[Victoryoverourdarkness]

When people can’t afford your services they won’t pay a arm and a leg for it therefore deflation that makes prices go down actually works because it helps with the demand of that product to be more affordable

[profitmix]

Deflation is actually good for the country.. you won’t consume less cause things will be cheaper so you still consume at the same pace percentage wise, even if you’re unemployed

[NA-pbpi]

Another point is that deflation is a contraction of the money supply. This video improperly defines it as falling prices...Falling prices occur as a result of a contracting money supply (i.e. deflation) but they are indeed different.

[stayanddrown]

I don't agree with this at all. It does mention wages could go down, with lower prices, lower wages would equal out. I also don't buy into the idea that with an increased purchasing power, people would purchase less instead of more. Companies who could increase production would actually benefit greatly. Look at the prices of technology, companies get more and more productive every year, but does anyone wait to buy their tv, laptop, or gaming counsel? Did a massive decrease in cell phone prices since they first came out in the 80's lead to consumers not buying cell phones? No, they becam more affordable and widely available, and thus more people bought them. Same thing with LASIK eye surgery, it initially cost $10k, and now only 3k, yet people still get the service, instead of hoarding their money to see if prices fall further in a few years. I think the deflation theory incorrectly diagnoses the human psychology aspect. It also ignores that savings is good for the economy, as savings is key to capital investment. And savings as well as steady deflation are good for people who are trying to save for things like retirement. The money you save now, will be worth more later.
Although I will agree that rapid deflation would be bad. I strongly believe steady deflation would be greatly beneficial and increase consumption AND savings. Some people will spend more, and others will save more, leaving more savings for capital. So I personally believe steady deflation would be very beneficial.

[sulli]

I'm pretty sure this is "deflation" as profit loss applied to only one business as a micro economic system. However if applied on a Macro level where the prices to all trades are decreased, nothing should change except for the output numbers. The macro application is a bit Utopian but technically if the overall value of a currency increases it will require less of it to maintain the same functions as the inflated currency. People would be consuming just as much but the overall numbers will go down, just as inflation means the overall numbers increase even though consumption has remained the same. This concept was properly explained in your Inflation video so its odd that the deflation one makes such a strange mistake.

[Amateur_Pianist_]

Expect if there's deflation that means the dollar is more valuable so no people wouldn't be getting poorer. Their work would be the same value it's just the number goes down cuz the value of the dollar has gone up. If you have savings then it's wonderful.

[huszaratraktor]

"What happens when people consume less"

Like that's a bad thing... Imagine a technology based world where things cost 10 times more, but phones last decades, cars a hundred or more years. The only people who are terrified of a world like that are billionaires and oligarchs, not 'us'

[z]

hi i just wanna say this helped me a lot for my research on college so yeah thank you!