Economic Fallacy IV: Buyers’ Strike during Deflation?

If buyers don’t buy during a period of deflation why would sellers sell during periods of inflation?

(See statistical material in our References section!)

Before we proceed let’s clarify our terminology here: inflation and de-flation are the Latin words for monetary expansion or contraction. Going down the route of attributing the word inflation to rising prices regardless of cause (scarcity, becoming a collector’s item, fashion etc., or even perceived future scarcity, a thing that drives today’s oil prices a lot) leads to intractable errors and circular reasoning. Equally, calling deflation the decline in prices is not very clever as lots of events cause prices to fall, like a glut in products, waning demand (cf. the buggy and whip) etc.

But in this post we will go along with the notion that falling prices are called deflation and in this context there is (probably a) majority of economists who maintain that falling prices would have dire consequences such as buyers holding onto their money in the hope of getting an “even better deal” tomorrow. And when tomorrow comes and prices still fall, they’ll wait another while. “No matter if we starve, we want cheap bread!”

There is no historic proof for this position, with the exception of allegations, such as “had the Fed not let deflation happen, then the Great Depression could have been averted” etc. – that’s not proof, as we have no access to the “parallel universe” where just that countermeasure was taken to find out if the allegation were true. But we have access to anecdotal evidence to the contrary: the computer industry has not deterred anyone from buying their product by constantly lowering prices and even raising quality and functionality with each new model. Well, these are even two incentives to wait … forever (the same goes for automobiles – buyers should again wait forever since they can only become better!). But it never happened, in fact computer and related sales as a rule have always increased year over year. Of course some theorists will always argue why the computer industry is different from the yacht industry or bread manufacturing. That’s an easy escape route that defies any scientific reasoning, let the moon be of cheese. However, the exact same “theorists” lump yachts, bread, cheese and computers together in their macro-economic “aggregates” – they can’t have it both ways though.

Similarly, in a housing market downturn, people keep buying all the time and if there is a certain reluctance it can more easily be attributed to general scarcity of credit and people feeling insecure rather than them waiting for “the best deal ever”. But there is another psychological moment at play: if you know Dutch auctions, where the auctioneer doesn’t bid up the price but begins with the highest price and every second or so goes down at a predefined interval until a hand goes up and the deal is closed, this is anecdotal “proof” that especially in an environment where prices fall people are tempted to buy at the earliest convenience before someone else takes advantage of the perceivedly low price!

So price “deflation”, if anything, spurs sales!

If bidders formed a cartel to wait as a crowd, granted, that could let prices fall forever. Instead they are independent competitors not knowing each others’ next moves! But you know what: if prices were falling all the time, but sellers were convinced they would eventually rise again, the danger would come from the exact opposite faction: sellers would then be loth to sell, not buyers to buy! Equally, if the argument about “deflationary procrastination” held any water and if we do not resort to polylogism and e.g. racial differentiation arguing sellers are a different breed of people than buyers (anyhow, every seller in one market is a net buyer in another!) then if “deflation” makes people wait to buy, inflation must make sellers wait to sell, as they’d be better off “selling tomorrow” rather than now! Either way an economy would grind to a complete halt while, in this “logic”, when prices are stable people would just sit on their hands to wait for future price moves in their preferred direction.

All this is ivory tower pseudo-economics.

Since under a stable money regime which was the rule under the gold standard, price “deflation” would be an economic law and necessity since productivity gains would always, all other things being equal, drive down prices, and as people thrived under such circumstances I have yet to see irrefutable proof of how a stable money base with ensuing falling goods prices (as a tendency) would harm an economy rather than benefit it while money inflation always is harmful and even the worst inflators at the helm of central banks wouldn’t dispute that. So this “fear of deflation” is just a ruse by central banks to keep inflating the money supply. Deflation does not keep people from spending – they always spend what’s necessary to carry on in life. And if some money is not “spent” on consumption but saved, it becomes credit to someone who invests it in capital goods etc. (hardly anyone stuffs it  under their mattress).

Thus it is again being spent, this time on capital goods, to e.g. build a future factory. That saved money never lies completely idle. And the recent defaults have even had an inflationary effect since the money extended as credit is still with those who received it in payments; only if the debtors had not defaulted would the credit eventually be retired. See How Bank Robbers cause Inflation.

P.S: There’s an avalanche of discussions starting to gather speed on the Internet if, or why not, CrisisMaven could be right. CrisisMaven has responded on several occasions. We all know, this inflation/deflation debate is driven not by those who might line their pockets by whatever outcome but rather those who fear to lose in either outcome or those who wouldn’t want to see their fellowmen suffer from such consequences. However, fear or the sentiments of crowds are bad advisors. CrisisMaven just wants to ask all contestants, before going down e.g. the route that “maybe inflation is bad, but deflation is worse” etc. to provide an answer to the one introductory question why it won’t work both ways: “If buyers don’t buy during a period of deflation why would sellers sell during periods of inflation?”. If someone still devises an explanation why sellers are different from buyers then he shall welcome (and try to refute) this and its follow-on arguments.