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user-inactivated  ·  3454 days ago  ·  link  ·    ·  parent  ·  post: The Democratic Tea Party

Your purchasing power depends on far more factors than simply making Snickers cost a nickel again. As tripperday pointed out consumers will delay purchases in anticipation of falling prices. This is a downward spiral which leads to further depressed prices.

Banks can not function well when deflation happens because they will be unable to match, with an interest rate, the value of money's ability to grow on its own by simple hoarding. Even more, they will become much less likely to borrow money as they can just sit on the cash until they can afford a Cadillac with the same amount.

In the current system of inflationary pressure which most economists, and not just the evil boogey men of the mainstream media think is the best scenario, taking a loan for a house is possible and advantageous to the borrower. If someone can afford to pay $800 a month on a thirty year mortgage in 2015, by the time that mortgage comes to fruition in 2045, $800 a month is nothing. The borrower is paying on principal that is essentially worth much less, but the bank is able to make the loan because they get their money at the beginning when it's still worth a lot. The consumer gets to own a house. Win/Win.

In deflation, which you argue is a good thing, bread will cost less. And then your $800 mortgage payment will cripple you with its increased worth, but equal utility. It's the same house, but now you are paying a huge portion to the bank with dollars worth much more than they used to be. If you refinance, the bank is going to charge you to re-write the loan in recent dollars, and you'll go through the same process again and again.

This will repeat itself over and over in every market where capital borrowing is necessary. But Snickers will cost a nickel again. So that's totally worth it.

The best part of paying the same nominal amount for your mortgage payment, but with dollars worth more, is that your dollars can't go to something else. You don't get to buy a PS4 because you have to make your house payment. You don't get to buy anything with a long-term loan in deflation because you will eventually be losing your shirt everywhere. Those who do will negatively impact consumption with the cutbacks they make elsewhere.

If you think that understanding how banks and economics work is trolling you, I invite you to go back to Reddit.