I love getting more for my money since we have had such a surge in prices over the last couple of years.

Deflation is awesome, it purges the crap from the economic system so we can get back to business.

I still don't get it.

I was just googling this actually to try and get an explaination after I read the original article.

From what I was getting the deflation of the 1930s was a completely different kind that was bad and this kind of deflation can be good or bad.

"what motivation is there to manufacture more stuff?"
Wouldn't it cost me less to manufacture it too? My motivation is that I'm going to be able to sell more of something thats costing me less to produce.

I wouldn't get my cost of living increase for the year but if I'm already able to buy more then I would of anyways with the COLI why does it matter?

Like I said I don't get it. I was hoping for a consumerist article (and the great posting pool) to explain it to me.

I don't understand- as consumers, how are we looking at a "tough holiday season"? It sounds to me like we will be (theoretically) able to purchase things at less expensive prices. And we all know, holidays are for buyin' stuff.

Buying things during the holidays is inevitable. You buy the gift, you buy the paper to wrap the gift in...even making gifts require buying supplies. There's just less buying right now. People will still buy, just not as much.

@weakdome: You can get more for your money but an increasing amount of people don't have the confidence to spend as they unsure as to how much longer they will be employed.
/over simplified

@weakdome: Yes but what about people with little money or perhaps not even a job anymore? Prices may be cheap but that only helps so much when you don't have a lot of money to go around.

Even with cheap prices, you still have to be careful with your buying.

@tande04: I was perplexed by this too. But I think that's because you and I have cash to spend, cash that's becoming more valuable (yay!). The problem is for people and businesses who have debt, debt that's becoming more onerous (eek!). Oh, and for economies like ours that have come to depend on those with debt (double eek).

To quote the Economist:
"A commodity-led fall in inflation ought to be good news for rich economies. It boosts consumers' real incomes and fattens firms' profit margins. Yet there is something pernicious about inflation falling too far, too fast. Because falling prices make debt more expensive, indebted households would be more anxious to pay off loans, even as other consumers were benefiting from a boost to their purchasing power. If deflation took hold, the gap in demand left by those fleeing debt would not be filled by cash-rich consumers, who tend to be less free-spending."
[www.economist.com]

Also, more generally, deflation means the Fed can't lower interest rates to juice the economy, since rates can't be below zero.

I am curious as to how much of this is caused by true economic factors and how much is caused by the "recession watch '08" the media has been cramming down our throats for, in some cases, 6 months. I wish I had a time machine to try out this little experiment...

If all deflation is bad then computer OEMs should be having serious trouble considering 20 years ago your average business computer could cost thousands of dollars, while today you can get them for a measly $500. And now with virtulization businesses will be buying fewer server, yet OEMs and hardware manufacturers are embracing it.

Deflation is bad if the amount of product you are selling is flat or going down. Deflation is fine if the amount of product you are selling goes up. The problem with deflation is certain areas is that a large amount of things sold are stuff people don't need, or are worthless trash that exists for the sole purpose of making the GDP go up.

Crazy sales indeed.

Recently I lost a bunch of weight and, QED, a couple sizes on my clothing, so I decided to treat myself to some new duds. I hit Old Navy first, as it's close to my house and I generally like their conservative styles and modest price points. I went armed with my re-usable 30% off coupon and cleaned up nicely. Not only did I get the coupon discount, but many items were marked down 25-50% of the tag price. And if that wasn't enough, they were handing out $5 gift cards (for next purchase) if you spend $40 or more. Needless to say, I broke up my purchases and made a few $40 visits that day.

All in all, I scooped up about $300 worth of shirts, pants, and accessories for about $150. Not bad at all.

Makes me wonder if it's a sign of things to come.

What if consumer buying was up really because of all the irresponsible people who were living beyond their means, getting giant mortgages, and spending money like it was sprouting from their sock drawers? And the responsible people who were paying their credit cards, managing their finances weren't making much of a giant consumer dent because the irresponsible people (we know now) are a larger population than the ones who were doing just fine.

So once those people dropped out of the picture because they could no longer spend, spend, spend, doesn't the economy just reflect the fact that responsible people kept being responsible by either cutting back or not spending at all, and the bad eggs were just taken out of the equation?

@IHaveAFreezeRay: I disagree with your assertion that the irresponsible people outnumber the responsible ones. Statistics show that most consumer debt is held by a small percentage of people.

@PJCS: Yeah, one article I was reading called deflation "a tax on borrowers and on holders of illiquid assets" and inflation "a tax on currency holders and lenders (savers) in favor of borrowers and short term consumption."

I still can't wrap my head around it though. If I have the same amount of money and things cost less don't I have more money to put toward any debt I have (like in the economist article you posted)? Why is that a bad thing?

What I'm starting to get is that people who were more likely to spend are going to use the chance to pay off debit and thus have less to spend on "stuff". People who weren't likely to spend in the first place (and thus little to no debit) aren't going to use the extra money to spend on "stuff", they're just going to put more in the bank every month. That just seems to assume a lot.

@PJCS:
Think about it this way: if you take out a $100,000 loan with a rate of 5% for one year, you pay back $105,000 in one year. BUT if the inflation rate over this time is 6%, you actually borrowed the equivalent of $106,000 a year from now, but only have to pay back $105,000. The lender actually lost purchasing power.
Now let's say there is significant deflation, say 6%. Now you have to pay $105,000 back and the amount you borrow in terms of dollars a year from now is $96000. You've now lost $9000.
With this, you can see why if firms expect high deflation, they'll be hesitant to take out loans and will produce less. They want to get rid of all their inventory now since it will be worth less tomorrow. To further the problem, their workers will probably not respond well to a decrease in wages. Perhaps farther out there you could decrease wages, but for now it's a fixed cost. This means that the firm can't lower their production costs in the short run even though prices are falling. It's now more expensive to produce, so they don't want to produce much now.
On the consumer side, if I have loans and I expect high deflation, I won't spend as much since I'll save to I can pay off my now more expensive loan. This will lead to a fall in aggregate demand.
Now we come to our trade balance. Initially, there will be a surge in exports as American goods become cheaper to foreigners. However, American consumers will not buy as many foreign goods, leading to a decrease in the supply of dollars to the rest of the world and in turn a fall in our exports.

This is all still somewhat simplified and ignoring several issues, but hopefully it helps explain why deflation can be a problem too.

@CountryJustice: I was pretty happy with that 30% off coupon too. I thought it was going to be like most sales and it wouldn't count on sale items or clearance etc. and everything would of been marked up anyways but it wasn't.

Should of bought some pants though. Got lots of shirts and sweaters but I didn't get any pants. Having lost some weight myself (more importantly lost some fat) my pants look ridiculus being held up more by the belt then the waste band.

@CountryJustice: Share! Where is this fabled magical coupon?

@RockLobsterNet: That makes sense now.

Thanks.

Deflation may be bad for the country/economy as a whole, but for anyone who has a job in a non-retail industry, it's great! With falling oil prices, a strong dollar, and lower consumer goods, this sounds like good times for me!

Well it's not happening with food prices. We were looking through the grocery ads this morning to plan our big family Thanksgiving feast and were a bit surprised. Other than the handful of loss leaders, the vast majority of advertised sales really are not the bargains we expected or have seen in past years.

I feel bad gloating about this because it's bad economically, and certainly my 403(b) is getting killed by it, but I got a major raise and coupled with dropping gas prices and consumer prices, my standard of living is significantly improved from pre-recession. I have a very secure job, but who knows, maybe that'll change next year (it very well could), and even though this economic downturn is worrisome for us here, our numbers this year are stronger than ever. That could all change in March - May.

But yeah, I feel for those who are getting screwed by it.

@Party Boy: Agreed there. Milk prices have come down since the Spring and Summer, but many products are still high. I can understand it to a degree, as food distributors and producers are trying to comp some losses that they took with the hike in transport prices. But I'm hoping food prices go back down to pre-ethanol-subsidies level.

@IHaveAFreezeRay: If its the same one I was thinking of its over :(

It was their give and get promotion (a percentage went to a charity you chose) and ran Nov 13-16th.

The only industry that prices aren't dropping is Firearms and Ammunition. Prices are climbing almost everyday in that industry. Wholesalers are litterally selling out of all stock, leaving them with bare walls.

Why? Obama. He wants to institute another AWB and raise ammo taxes 500%, so people are stocking up before hand. And before you say he supports the 2nd A, like he has said, read what he wants to do. He supports the 2nd if you gun isn't black or scary looking with lights or scopes on it.

Anyway, buying some Armalite, Bushmaster or Rock River stock might not be a bad idea if you are looking for short term investments.

@RockLobsterNet: Well done. That's as good as a consumerist comment can get. Kudos.

This is funny, 3 months ago the sky was falling because energy prices were causing prices to rise too fast. Now it's falling because energy prices have dropped and prices are dropping too fast. WTF??

Seems to me both economists and the media like to scare everyone regardless of the situation.

It will be interesting to see if all those "energy surcharges" and extra fees added during the oil crisis this year ever go away, or if they just become additional "other income" on companies bottom lines.

You could almost say we're on the brink of a depression, even a major depression. But they probably won't say that until we've been in one for a year and a half and most of the country is in poverty.

@jodark: Those are all private companies so they aren't exactly dealing out the stock.

Not even going to touch the rest of it.

A few notes.

-- In general, deflation is bad. More on that in a moment.

-- In this particular instance, deflation is probably a good, because so much of recent price increases were tied up in energy prices that were artificially inflated anyway (gee, I wonder where all the "peak oil" crowd is not that gas is dropping back to a $1.50 again?).

-- That said, again, systemic deflation is bad.

Why? Simple-- deflation changes the cost/benefit analysis of debt holding. Not just consumer debt, but *all* forms of investment.

If your dollar is worth less today than it was yesterday, you're going to have less ability to pay down debts you previously incurred.

What's worse, is you predict even more deflation down the road, you're going to use your dollars today for their most cost-effective purpose: paying off old debt as quickly as possible. Leaving you with less money to invest.

In a deflationary environment, the urge to acquire new debt evaporates as debt becomes an increasingly costly bargain. This isn't such a bad thing for fixed income retirees with no credit cards to pay off, but for companies and small businesses, it's murder.

Of course, as deflation increases debt aversion, businesses start to go under, increasing unemployment.

Deflation is like G-forces: the human body can withstand about 9 times Earth gravity for a brief time before one blacks out, but only about 3 times negative-Gs before red out.

Deflation is much the same way-- we can suffer a lot of inflation and not be in a bad place, but only a little deflation goes a long way to being bad for an economy.

@tande04: Do firearm manufacturers have to be private companies?

I agree this isn't a place to discuss the 2nd, but I had to include the reason behind the firearm frenzy.

@Party Boy:
I so agree. I used to do all my grocery shopping at the local supermarket (Stop & Shop, a biggie in our part of New England). Now, much of the pricing takes my breath away and I just keep walking. I've begun buying meats and fish at a local fish market with excellent sale prices; dry staples (cereal, spices, etc.) at the nearby "job lot" saver store; and then I comparison-shop the ads for the best deals on fresh produce and dairy. Everyone says "use coupons!" but most of the coupons in our weekly circulars are for highly processed and junky foods that we don't eat. Where's that coupon for half-off a carton of skim milk or a pound of ground turkey, huh? *sigh*

@narq:
I agree. I've been trying to remember my late parents' stories about the 1930ish Depression and how their families got through it. Both of my parents ended up very cash-based penny-pinchers; we bought clothes at rummage sale (way before the advent of swanky consignment shops), and they paid cash for their last house. Neither ever owned a credit or debit card.

@RockLobsterNet: You are made of win. Thank you for this explanation.

@tande04: That's the one. It expired this past weekend. I believe it was also listed as a morning deal here last week (I could be wrong though).

I had printed the coupon out from an e-circular I received earlier in the week. As I was leaving the fitting room, the clerk was handing them out like a proud papa hands out cigars. The juxtaposition of how eager they were to give the discount against how little it was actually advertised beyond their own website befuddled me.

@RockLobsterNet:
Good post!

Nicely explained.

@jodark: I think what tande04 is saying is that since they are private companies, you can't buy stock in them (which you suggested).

Prices are dropping? Really? I'm not seeing that much of it other than the gas station.

@wgrune: Completely agree.

Here's a thought experiment: say you completely ignore the news for 3 months (including Consumerist et al). Would your buying/saving patterns stay the same as they were before your media blackout? Absolutely, unless something actually happened to you during that time, like a layoff or a depression of your own investments' value.
As soon as you turn the news back on, you're inundated with warnings to stop spending, worry about your financial security, etc. because of general trends in the economy which may have no affect on you, ever. At that point you probably do start changing your habits, along with everyone else, which then fulfills the media prophecy. Ugh.

This would ordinarily be good news, since you could buy more stuff with the same money, negating some of the inflation that will result from the bailout money that the Treasury has to print. But, since EVERYTHING is bad now, this is bad news, and it doesn't really matter why. Inflation is bad, because it will trigger ARM mortgage defaults as interest rates rise. No way can rates go above 1% for the rest of my life, or the entire economy will collapse. But, if there's deflation like this, it's bad too because that means manufacturing will collapse and the economy will collapse along with it. Is this finally Mutually Assured Destruction in the economy with no way to stop it? I think we've finally crested an event horizon and are sucked into a black hole where there is no good news ever again.

"This is true, but the problem is that if everyone can buy more stuff with less money - what motivation is there to manufacture more stuff? Ah-ha. Troubling, isn't it?

Not really. Most Americans don't manufacture anything, and pretty soon, almost none of us will.

@HIV 2 Elway Resurrected: Right... which still doesn't mean THE CONSUMER is going to have "a rough time"... it means the COMPANIES are. Am I correct?

@B: Despite the inaccuracy in ratio of 'responsible' vs. 'irresponsible', I think it's a good point. If our economy was/is based on people (and companies?) spending beyond their means, is it right to perpetuate an inherently unsustainable and unstable system?

It says right in the article: "But prices have yet to decline noticeably for most goods and services, with one conspicuous exception - houses."

Consumers are not really seeing the effects yet.

But Christmas should be in-ter-esting, indeed.

@twophrasebark: I meant the deflation article.

@weakdome: Yeah, but a lot of us CONSUMERS work for those COMPANIES you speak of.

@AtomicPlayboy: Brilliant. Simply brilliant. And I mean that wholeheartedly. I've often wondered myself just how much of an impact media has when it comes to helping fulfill prophecies, so to speak.

@twophrasebark: I agree. I think that the Christmas "numbers" will be the straw that breaks the camals back.

@Party Boy: We are doing pretty good here due to 2 grocery stores having an all out price war even stronger than before even though these 2 stores have been in our area for some time now. They are really trying their hardest to get the customer's business since the economy is tough! Turkey's were advertised as .49 a pound but when we got into the store it was really .39, and no additional purchase required either. Needless to say we have the big freezer full of turkey now. The cost of Thanksgiving dinner for us is probably only up $1-2 from last year if that. We buy extra turkey's and cook them throughout the year, they will last up to 2 years in storage when properly wrapped and frozen. You can't beat a 10-12lb turkey for $5-6!

Easter was worse since the cost of eggs was so high earlier this year, we were being charged 2$ for a dozen of large eggs and there were no sales like there had been in previous years (previously .89 or .99 a dozen). Eggs are back down to about 1.25 a dozen now.

@RockLobsterNet: Someone's trolling for a well-deserved "star" :)

@IHaveAFreezeRay: Or... you just have a conversation with your family and friends and let them know that you are no longer participating in the purchase-a-thon known as "the holiday season."

I did this with my family over 10 years ago, and my life has been SO much better since then. I don't even really pay attention to the rat race which is the Christmas retail season any longer. Everyone spends their own money on things they know they want, and nobody is ever stuck with a gift they don't want or have to return.

Don't buy into it. Just because everyone else is buying gifts willy-nilly doesn't mean you have to join in.