Quick, someone tell Intel and other semiconductor firms that their multi-decade deflationary price practices hinder economic growth:
Bloomberg — China’s consumer prices fell for the first time since 2002 as food, clothing and fuel costs declined, threatening growth in the world’s third-largest economy.
[...]
The drop in prices raises the risk that deflation will become entrenched, prompting consumers to delay purchases, squeezing company margins and triggering wage cuts.
It’ll be a sad day if Chinese policy makers buy the deflation “boogeyman” story.
{ 8 comments }
Ah! Tim, how about adding an entry to the Newspeak Dictionary?
http://www.newspeakdictionary.com/
Oh my god! If this keeps up the consumers will be buying big screen TVs and cars…….WITHOUT CREDIT! What is the world comming too?! How can government stimulate the economy by spending if the spending actually buys more not less? They’re going to prove us wrong!! Oh my god, oh my god, ohmygod.
(Krugman in a panic on the phone with Bernake)
“Don’t worry, we’re gonna issue Fed Low Interest Credit Cards through our new Fed Consumer Credit LLC and inflate the heck out of the money supply! Then we’ll securitize the consumer credit and sell it to the Chinese! You know they’ll buy it because it’s their stuff that the consumers are buying with it! If that don’t nip this deflation in the bud, my name ain’t Ben “Big Guns” Bernake”
(Krugman) “My Hero!”
(Bernake) “There’s more. Those credit cards can’t be included in Bankruptcy just like Federal Student Loans! (Make a note to call Pelosi and have her close any loopholes on this)”
(Krugman) “You DA MAN!”
Far from deflation, that’s the decoupling Peter Schiff has been insanely rambling about. As America ceases to drag the world economy, Chinese are actually going to start to purchase their own products and their standard of living will rise in accordance.
It remains to be seen whether their gov’t will allow this to happen, if they feel their control threatened by it. :-/
“The drop in prices raises the risk that deflation will become entrenched, prompting consumers to delay purchases”?
Why would consumers delay their purchases just because prices are dropping? Since when did people stop buying products because the prices would drop? Since when do people stop buying computers because the prices would drop in the next year? Do people stop buying Videogame consoles when everyone knows that price drops occur within a year or 2 of their release?
I never understood and still don’t understand where the idea came that consumers delay their purchases when prices are falling. Consumers are always purchasing all the time.
Theguy:
First, note that the Bloomberg article confuses deflation—a reduction in the money supply—with a fall in prices. They are entirely separate things.
The argument that a drop in prices causes consumers to delay purchases is a Keynesian argument: if prices drop, then businesses will be forced to react by reducing wages or laying off employees. Uncertainty about one’s employment (and thus income) will prompt consumers to increase and horde their savings instead of spending it, which in turn reduces demand and drives down prices even further, thus creating a vicious feedback loop. Keynesians refer to this phenomenon as the paradox of thrift.
This is why Keynesians, when faced with a severe economic downturn, are horrified at the notion of falling prices, and believe that the government must spend and inflate as furiously as possible to “break” the feedback loop and keep prices from falling.
The Keynesians believe that this feedback loop is what occurred during the Great Depression, because the government didn’t spend and inflate hard enough. That’s what Bernanke meant in 2002 when he said, “You’re right, we did it. We’re very sorry. But … we won’t do it again.”
Austrian economic theory entirely rejects the notion that consumers cause depressions. I suggest reading Robert Murphy’s Consumers Don’t Cause Recessions article; it is a superb debunking.
Actually yes, Theguy, people will delay purchases for nonessentials if they know they can get it for cheaper. Admittedly people have some sort of target price in which they will buy and not complain when the price falls further, e.g. most people didn’t buy consoles and games when they first come however I bet no one waited (even if they knew beforehand) for consoles and games to reappear as emulators and roms which can be downloaded for free.
However, declining prices in line with falling production or cheap, shoddy products is something to worry about.
Also, because the credit is tighter, people will wait a little and save for the the future, lower-priced item. This of course, is sans credit. No credit, no money creation. Bad for the Keynesian Economy, good for Joe and Mary Smith!
I don’t believe people are not buying because they expect to save another $40 next month on that TV or another $500 on that car. People are not buying because they fear they may be out of a job next month. That or they already have credit cards near the limit and their annual interest rate just went to 25%.
Comments on this entry are closed.