The last time this happened, voters didn’t credit Bill Clinton. That may be a bad omen, or a good one.
If the stock market chose presidents, Joe Biden would be a shoo-in for reelection in 2024. The market rallied this month amid growing optimism about the economy, with the S&P 500 zooming 1.9 percent Tuesday on news that the consumer price index rose only 3.2 percent in October (compared to 3.7 percent in September). Stocks rallied again Wednesday on news that the producer price index fell 0.5 percent. Commentators are no longer debating whether the economy will experience a “soft landing” (i.e., a reduction in inflation without recession). The only question now is when it will arrive. The S&P 500 seems to have decided it’s already here.
But the stock market doesn’t choose presidents. Voters do, and polls continue to show they think the economy is in terrible shape. A Financial Times–Michigan Ross Nationwide Survey conducted November 2–7 is absolutely brutal on this point.
A lot of people want prices to return to what they were before the pandemic. But that would be deflation. While the prices would get lower, if you actually managed to push the economy into deflation it would be an economic catastrophe. And the lower prices at the grocery store would be little comfort with massive job losses and the economy in free fall.
What people should want is for inflation to return to its steady slow rate. Which it has. The month to month inflation was 0.2% compared to a month prior on September 2023. Going forward that would imply a rate of 2.4% over the course of the next year, very close to the 2% inflation target. For October the month to month rate was flat or slightly negative. The inflation number reported in the news always is very misleading, that tells you the total amount of inflation that occured over the past 12 months (3.2%). But it was actually 0 from September 2023 to October 2023. When people hear those headlines they think it means prices raised 3.2% again over the last month, which is not the case.
The remarkable thing is that inflation was slowed to this extent without the economy going into freefall with soaring unemployment or other problems that can happen with raised interest rates. They seem to have struck the perfect balance to wrangle inflation but prevent a recession at the same time.
Wage growth has also increased and is now growing faster than inflation. That’s what you want! For the wages to catch up and make the higher prices a moot point. A deflationary spiral that lowered prices would be devestaring for the economy and most people would actually end up way worse off.
Outside of a socialist centrally managed economy with price controls and production control etc which has its own issues, I don’t know how they could have done a better job than this coming out of the inflation problems created by covid and doing it all without going into recession. But the popular perception is just, why isn’t everything cheaper again, I want everything cheaper again, must be Biden’s fault, I guess. Even though things getting cheaper again isnt realistic, and would likely be devestating for lots of other reasons that would hurt people if it actually was happening.
I hear about how deflation is supposedly the death knell for an economy, but have never heard an actual explanation for why. Inflation just seems preferred since it gives an invisible paycut to workers and allows holders of assets and debt (e.g. overwhelmingly the rich) to benefit at the expense of the value of money.
The idea is that with inflation, money today is worth more than tomorrow, with deflation it’s the opposite. So, in an inflationary regime, you’ll spend money before it loses value, either by buying things, or buying stocks AKA investing. In a deflationary regime, money gains value, so people keep it, nobody buys, nobody invests, and the economy starts shutting down.
Okay but I’m still gonna buy groceries if they’re cheaper because I need to eat
Sure, but you’ll buy them even if they’re not cheap, because you need to eat. But on a large enough scale, the effects are, well, large.
Pretty sure everybody needs to eat.
…I’m not entirely sure what you’re trying to say.
The world does not stop because prices fall, people still have needs and wants. Just because money will be worth more down the line does not mean people will suddenly stop impulse buying or purchasing necessities. It means superfluous spending would drop. Billionaires would loose enormous wealth as people stop playing with futures, it would not kill an economy it would kill the wealth gap and wealth classes. The biggest problem is the US sells its debt but in a deflationary time said debt loses value not gains it. But even that you can reverse to still encourage growth. The biggest “issue” is the common man drives the economy in a deflationary period by purchasing nessacities instead of bullshit waste to drive growth numbers.
I swear to god, it’s like you cranks are completely illiterate, both economically and actually. The question was:
I give an answer, and you come in with “Wrong! Only superfluous spending would drop”. Yes, genius, that is the death knell of the economy. The economy is set up to sell shit, if shit stops selling, moneyed classes pull the plug and everyone gets fired, and then the salary that buys you more stops existing. And then when the market collapses and everything grinds to a halt, you will spend what money you have on groceries, while Bezos will spend his buying shit up on the cheap, and will walk out of the ordeal owning everything. That’s what happened in 2008, and you’re deluded if you think it won’t repeat. And you people will buy it hook, line, and sinker, because you can’t understand an explanation that doesn’t have a bad guy.
Technology gets cheaper and better every year. It’s inherently deflationary and yet people still buy computers, TVs, phones, etc.
Because new models come out constantly. If they didn’t, nobody would rush to buy. In fact even now the most common dillema is “Do I buy now, or wait for the next gen to come out?”
Alright, then what would people be waiting on to buy in a deflationary environment that they don’t wait for in an inflationary environment?
“Econ 101”? Anything that I can get you to not buy by convincing you it’ll be on sale in a month or two. New car, a house, electronics, IDK, cookware?
Actual stock market example? Investment is when you put money in now, in the hope that what you get in the future will be worth more than the money. If the value of money goes down, anything that doesn’t follow the money as it falls is a good investment. If the value of money goes up, any investment has to not only rise, it has to outperform the currency to be worth it. The idea is that inflation makes saving pointless, so money moves from the piggy-bank into the economy, and is spun into growth, while deflation makes saving pretty smart, and pulls money from the economy into savings. That’s why the recession in the seventies was such a big deal: “stag-flation” saw both inflation, and stagnation of the market, which is not typical.
“Econ 101” is an oversimplification and doesn’t explain how the economy works practically. People don’t put off purchases because their money is supposedly worth 2% more after a year. Similarly, people don’t spend just because their money is supposedly worth 2% less after a year. According to you, people would only buy when there is a sale, unless it’s an essential good, but it doesn’t work out that way. Tell me how well the car and housing markets are going under inflation.
Yes, the “Econ 101” example is an oversimplification, it’s why it’s the “Econ 101” example.
Inflation is better for people in debt since it makes it easier to pay back; a lot of farmers in the late 19th and early 20th century pushed for inflationary policies in part to make it easier to pay off bank loans.
Deflation is bad for two reasons. First, as mentioned, is that it doesn’t encourage people to spend sooner in the market. Second is that it encourages investors to pull out their money from the market, since they may get better returns stuffing it in their mattress.
That only works for loans already taken out. A fresh loan will adjust to whatever the inflation/deflation rate is. Juicing the economy by helping out people who took out more money than what allows for a margin of error means we’re just encouraging risky behavior. The reason for taking out a loan is that you expect that the money now will give better returns that just letting it sit. Let’s say the deflation rate is 2% and you take out a loan at 1% interest. If you can’t put that money to use better than growing at 3%, then it sounds like your business isn’t viable anyway. It’d be like taking out a 5% loan at 2% inflation rate and failing to beat that.
If I buy stocks, I’m not technically investing in a company unless it was an initial sale of stock by the company and that usually isn’t the case. Instead it’s just speculation. So how is that different from letting it sit under a mattress economy-wise? Also, if you buy a stock and it goes nowhere, you’ve actually gained by whatever the deflation rate is, but under inflation, you’ve lost by however much the inflation rate is. Seems like inflation would only encourage people to pursue more aggressive (i.e. risky) returns.
No one is going to lend you money at an interest rate lower than the deflation rate, ever.
Every stock purchase is an investment in a company, always. That’s literally what you’re buying
The money then gets spent, which does not happen under your mattress.
You’ve got some very foundational aspects of this entire process quite wrong.
Why wouldn’t they lend you money at 1% when the deflation rate is 2%? Their money is worth 2% more plus they get 1% more from you.
Not every every stock purchase is an investment in a company, because you’re buying off someone who is not the company. The company doesn’t make that money. It’s kind of like used sales vs new sales. Again, only when the company issues new shares or does an IPO do they make money off stock sale.
If I buy a stock and sit on it, that’s essentially money sitting there. Whether it’s cash or a digital record claiming I own X number of shares in a company, it’s not doing much.
If I’ve gotten foundational aspects of this process wrong, you’ve yet to demonstrate how.
There are only a set amount of shares. Shares being in demand increases their price. I am sure you can see him w this does financially benefit the company.
Yes an IPO is when the most stock is sold, but new shares happen all the time. It’s disingenuously pedantic to suggest purchasing stock is not an investment in a company, by both literal and figurative definitions.
Sure, bud, in a regulated market without exemptions for market makers who can naked short sell (crate synthetic shares that do not exist) for the sake of liquidity. Or how about 90% of our market being traded off the tape without affecting prices?
He is pointing out past ipo you are speculating on growth, which is what trading is speculation, not guaranteed returns.
GameStop ruined the brains of a generation
Purchasing stock off a secondary exchange is about as much investing in a company as purchasing a used game and hoping to resell it for a higher price. The company gets no money from these transactions. It’s just glorified gamblers making money.
That’s a gross over simplification to the point of being untrue. Besides the obvious facts that many companies continue to issue new shares on a regular basis, companies absolutely care about their stock prices for a variety of reasons, and not just so stockholders make money.
Start here if you really want to know more about how a company leverages its stock price, even when not selling more shares at the moment.
https://www.investopedia.com/investing/why-do-companies-care-about-their-stock-prices/
https://www.usatoday.com/story/money/columnist/krantz/2012/10/14/falling-stock-price-hurt-investors-company/1624761/
https://fairmontequities.com/how-does-a-decline-in-share-prices-affect-companies/
https://www.economicshelp.org/blog/1888/economics/deflationary-spiral/
https://www.investopedia.com/terms/d/deflationary-spiral.asp
This is a good explanation. And the great depression involved deflation if that gives you an idea of how bad it can be. What happens basically is if you need something in an inflationary environment, it’s best to buy it now. It’s likely going to be slightly more expensive over time anyways.
In a deflationary environment, the logical thing for any one person to do is to wait as long as possible to make any purchase of an item or service. Why should I buy it if it’ll get cheaper over time? I’ll just wait. So this is a problem, any transaction that involves the transfer of money, people are avoiding if possible. So revenue to employers is plummeting, they start firing people, they don’t need as many now. People have even less money than before, prices sink lower to try and attract business because everyone is running low on cash now, and around and around it goes. Businesses are going bankrupt and closing up, leading to more job losses. There’s tons of people looking for work and not many jobs, so pay decreases because there’s way more workers than needed.
If you have any sort of debt (face it most of us do), deflation is also devastating. Normally inflation helps with debt by making the debt value decrease relatively over time, it gets easier to pay. In deflation the opposite is true, and it gets harder and harder to pay over time. If deflation was like 4%, well then add another effective 4% interest to any rate to get the true interest rate on debt you already own or any new debt you take out. So now it’s extremely difficult to get credit or loans. People are mass defaulting on loans. More people losing jobs. Housing, cars, new businesses, storefronts, retail space, building projects, government projects, anything that relies on financing collapsing because no one can afford the debt. Even less money flowing into economy, etc etc. There’s more problems that crop up too.
It’s a feedback loop of an economic death spiral that can be hard to break out of, as seen in the great depression. Barring a radical restructuring of the entire world economic system or something, the best place to be in for most people is where we are now, a small amount of yearly inflation (~2%) with workers highly in demand so wages are rising.
Any economic downturn will involve the risk of deflation because lack of demand will cause prices to go down, but that is merely a symptom, not the cause of the great depression. While you talk about the logical choice of waiting for purchases, this doesn’t work out the same way in real life because people generally just buy when they want something. A key example is technology. Technology is inherently deflationary because it’s designed to be cheap to manufacture, so initial high prices are mainly to recoup R&D costs plus profits and it should only get cheaper from there, plus technological advances mean that you get a better product than before. However, people and businesses don’t just wait around forever to purchase computers, TVs, phones, etc. Technology is the largest sector of the S&P 500.
As for debt, if deflation is expected then it’ll be factored into the interest rate. What’s the difference between a 4% loan at 2% inflation and a 0% interest rate at 2% deflation? The 2% inflation rate target is completely arbitrary, so why not target a 2% deflation rate? Consistency is key.
You pointed it out yourself, deflation is a symptom of bad economic downturns. How would you propose causing deflation without an economic downturn or some kind of intrusive economy wide price controls and rationing? A deflationary environment is deflationary because no one can afford to buy anything so prices are dropping to try and compensate. And once deflation is established it’s very hard to break out again (see how long the great depression lasted). It’s a terrible situation.
If they kept driving interest rates even higher until they got deflation, the reason would be because they got interest rates so high the entire economy has gone into a giant recession. You can’t just “set a 2% deflation target.” When the fed is talking about an inflation target, it’s adjusting the interest rate to get there. I mean you could set that target, but you’d be waiting until the interest rate got so high the entire economy had crashed before you got there. You’d be shooting yourself in the head to fix a headache.
You’re also ignoring all the many existing debts with fixed interest rates, a deflationary environment would be devastating for student loans. The corona virus period inflation has actually helped them and devalued any debt from prior to this period, making it easier to pay off in the future.
You can cause deflation through tighter controls on the monetary supply. The fed is so scared of deflation that they had been lending out money to banks very cheaply and this has caused the crazy asset bubbles we’re grappling with now. You’ll get spiraling deflation because of crazy heights of inflation. A more controlled process would temper risky behaviors and smooth things out instead of having to deal with stark boom and bust cycles. Cheap money is actually how the great depression happened. Banks would lend money willy nilly and people would throw it at the stock market or other frivolous purchases. These risky “investments” set up the deflation spiral as things had to come back to reality. Deflation was the medicine and you’re pointing at it as if it was the cause. Yes, the transition will be painful, but putting it off will only make it more painful when the piper comes to collect.
Inflation only helps you pay down debts if you make more money to match that inflation. Instead, people are paying 50-100% more for groceries, housing, and vehicles, among many other things. Meanwhile their paychecks are not necessarily matching inflation.
Yeah, they decrease the money supply by rasing interest rates, that’s what they’re doing. And if they go too far they’ll cause a recession. It would be the recession that causes deflation. But now you have a recession. And 50-100% inflation is just simply untrue. And it’s also untrue paychecks aren’t matching inflation right now. Wages have been growing faster than inflation since January.
Comparing my grocery bills to a couple years ago, 50-100% inflation over that period is absolutely true. From what I’ve seen in the housing and vehicle markets, the same holds true. The bulk of the inflation happened in 2022, which is why they changed the inflation calculation from comparing two years back to comparing just one year back. Inflation is apparently slowing down, but it’s still higher than target and wages have quite a bit of catching up to do to reach the total amount of inflation since covid.
Boy are you underselling those problems.
Oh I know, tons of issues. It wasn’t supposed to be the primary topic of the comment, was just pre empting the “well actually” comments from the relatively high amount of communism and socialism proponents on lemmy. I’m speaking about how this all works within our current capitalist economy and system. I don’t think instituting price controls is a good idea. There are better ways.
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