I don’t really believe that anyone who looks at inflation in house prices in the UK can claim that it is a good and necessary thing, or that it is driven by real inflationary effects like increases in the wages of people who build houses. It is speculation, and as consequence a huge portion of peoples’ income is being wasted for no good reason, and a small number of people are getting rich. If house prices in the UK were stagnant I think the effect on jobs would be a lot lower than you are suggesting, since the price spirals we saw have nothing to do with economic activity that makes jobs. And I think a lot of inflation in the west is of this sort, to do with easy money fuelling speculation and a culture of rip-offs, rather than real macroeconomic phenomena (like supply constraints) pushing up costs. My rice cooker is not 8 times more in London because the cost of making it was 8 times higher, so why should dropping its price to 6 times more than reasonable cause a whole bunch of people to become redundant?

As I’ve already said, it would be nice if the world could bring prosperity a little closer to the average worker, but deflation is not the way to do it.

For example, Japan has had 10 years of deflation/stagnation but the Japanese are renowned (somewhat unfairly) as consumer-obssessed. How come they love shopping if they’re always putting it off? I would have thought decreasing prices would lead to an overall increase in consumption when people think that things are getting cheaper…

… also, my rice cooker example has me buying a rice cooker for 8 times more than it is worth. Surely the company can afford to cut the cost of that rice cooker without laying off any staff. The prices they are charging are extortionate, and it is that attitude which has caused the inflation in the first place.

On top of this there is the problem that whereas expectations of rising prices encourage consumers to buy now rather than later (hence frantic cues outside shops with emptying shelves in a hyperinflation), deflation has the opposite effect, causing people to hold on to their cash, expecting a better deal manjana.

I think sg is perhaps confusing the question of inflation/deflation – i.e. changes in prices – with the level of prices relative to earnings at any one time. London could be made more affordable by prices coming down – except that this has the knock-on effects described above. It could alternatively happen if prices rose slower than incomes – nominal prices becoming inflated at a suitably slow rate such that real incomes (affordability) increase.

Of course it may be that a country turns out to have been living way beyond its means (however broadly one construes the means of the country) and real incomes cannot therefore be increased or maintained. In this case it seems better that the requisite decline in real income happens through inflation (and a falling exchange rate) rather than a massive deflation-induced depression.

I can’t help feeling that the reason so much personal credit is keeping the economy going and we are all so soaked in risk is that our economic geniusses were busily trying to maintain an inflationary economy. But why? Because “deflation is bad”? Here I am, being asked to pay 8 times what I should pay for a rice cooker, being told that deflation is a bad thing in an economy which is about to collapse because of the unreasonable attempts of our so-called leaders to keep it afloat through inflationary policy. Low interest rates, inflating house prices, continuous consumption on asset bubble finance… all these things kept inflation high, drove up the price of my phone bills, and simultaneously wrecked the economy, but I am meant to believe that deflation is bad?

There’s something missing in this story.

Eh, you pay for it but you don’t want to buy it? Do you buy a lot of stuff you don’t want? What’s your point?

The larger issue is that there are not many people any more whose jobs are not in some way tied to the “asset bubble”. Given how much personal credit is keeping the economy afloat, given that the public sector is paid from tax-receipts which are in decline, given that we are all now thoroughly over-informed about risks in the economy, and too much information is a dangerous thing… It would be nice to think that by some miracle under the current circumstances deflation could create a rebalancing in the economy between the earners and the owners, but I cannot adjust my perception of reality enough to think that it’s a likely outcome.

Also why do people make a decision to buy now under inflation? Wouldn’t they simply judge the price to be too much and refuse to buy at all? Currently so much of what I pay for in London is so overpriced that I simply don’t want to buy it at all, because it’s not worth it. It seems like inflation as a sign of economic growth is tied in at some point with asset bubbles, which aren’t real growth, just fantasy money. But fantasy money which makes the wages of anyone whose job is not tied to the asset bubble worth less and less. Whereas mild deflation makes those wages worth more and more – as I think they are in Japan.

(I have read GoW btw).

However, bailing out people who spent much more than I did and the companies that enabled this is a very hard pill to swallow, especially when the deck seems stacked against everything I’ve done to try to save. Deflation has serious problems, but it will increase the value of what cash I kept out of the market. At the very least, if we have to bailout everybody and their dog, I’d like to see it accompanied by bitterness/arrests/incumbents unelected/bonus clawbacks/etc. The harder the bailout is to get, the less likely somebody will be to think of a bailout in the future.

Or maybe not, maybe it’ll all be fine. Who knows. Anyway, you should still read GoW.

But in more normal circumstances, why is deflation of, say 2% worse than inflation of 2%? Particularly when you have already massively inflated prices? My experience of a deflated economy is that noone was starving and everything was cheap. Here in London everything is overpriced, sometimes by a factor of 5 or 8 compared to Japan, but the wages of most people are nowhere near that much higher than in Japan. So it seems like a lost decade in London might help the bulk of the British population live a better lifestyle. How am I wrong?

Given this experience, I wonder if anyone can tell me why deflation is so scary?