Comment Re:You know whats ironic? (Score 1) 345
Remember, prices are a component of Wages + Rent + Profit.
In the short run, prices are sticky due to contracts, and as inflation is considered a rise in the price of goods over a period of time, We would not see it in the short run, as you describe.
Instead, what you are describing is deflation harming existing contracts in the medium run. While in the first scenario, the widget would STILL sell for 1.50 in period N, but in period N+1 due to wage and rent restructuring (remember, Price = Wage + Rent + Profits), the price level will fall. In the modern Keynesian approach, the velocity of money has fallen, and because the price level is equal to the money supply, multiplied by the velocity of money divided by the quantity of goods and services purchased, and as V is not constant, the change in V does not have a negligible affect on deflation. (dp/p=dv/dm*dm/m)
Now, these contracts will, now that they can get "more for less", enable businesses to pay a smaller wage to the worker (one part of price) and allow the suppliers of the input to renegotiate their wage contracts, which then allows for a lower price to the final manufacturer.
Now, this is bad NOT because of what you say, but because it truly screws the consumer and any holder of debt. In a deflationary society, even though the price level is falling, the worker will receive a lower wage, as is natural. However, if he holds a significant portion of debt, he is STILL obligated to pay off the debt at the pre-deflationary rate, which, needless to say, is bad as the owner is now shouldered with a significant extra level of debt. Also note, that ALL interest transactions are calculated with the assumption of low, stable inflation, if this was not true, then banks would be forced, in order to protect their money, to charge a much higher real interest in order to protect their money from the risk of unexpected inflation. Therefore, these debts were created with the assumption of approximately a 3-5% inflation rate, and NOT a 1-2% deflation. This is what causes businesses to go under, NOT a change in the price level.
In the short run, prices are sticky due to contracts, and as inflation is considered a rise in the price of goods over a period of time, We would not see it in the short run, as you describe.
Instead, what you are describing is deflation harming existing contracts in the medium run. While in the first scenario, the widget would STILL sell for 1.50 in period N, but in period N+1 due to wage and rent restructuring (remember, Price = Wage + Rent + Profits), the price level will fall. In the modern Keynesian approach, the velocity of money has fallen, and because the price level is equal to the money supply, multiplied by the velocity of money divided by the quantity of goods and services purchased, and as V is not constant, the change in V does not have a negligible affect on deflation. (dp/p=dv/dm*dm/m)
Now, these contracts will, now that they can get "more for less", enable businesses to pay a smaller wage to the worker (one part of price) and allow the suppliers of the input to renegotiate their wage contracts, which then allows for a lower price to the final manufacturer.
Now, this is bad NOT because of what you say, but because it truly screws the consumer and any holder of debt. In a deflationary society, even though the price level is falling, the worker will receive a lower wage, as is natural. However, if he holds a significant portion of debt, he is STILL obligated to pay off the debt at the pre-deflationary rate, which, needless to say, is bad as the owner is now shouldered with a significant extra level of debt. Also note, that ALL interest transactions are calculated with the assumption of low, stable inflation, if this was not true, then banks would be forced, in order to protect their money, to charge a much higher real interest in order to protect their money from the risk of unexpected inflation. Therefore, these debts were created with the assumption of approximately a 3-5% inflation rate, and NOT a 1-2% deflation. This is what causes businesses to go under, NOT a change in the price level.
