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0 pointsmillstone13y ago0 comments

> In order to get a real growth of 4% be it per year or per century in such a scenario, you need to find a better use of resources so that with the same resources you may produce an output which is 4% greater than before

Let's work through an example. I buy 100 seeds for $1 each. I plant them, let them grow, and harvest the result. I now have 104 seeds. My real growth is 4%!

Now I want to sell the seeds back to recoup my investment. But I discover that prices have dropped by 4%: seeds now go for 96 cents apiece. My 104 seeds now are worth $99.84! I would have been better off not buying seeds at all, and instead just holding on to my money. Real output is reduced.

This illustrates how deflation inhibits growth.

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5 comments · 2 top-level

anonymoushn13y ago· 3 in thread

Do you suppose that there is some sort of seed-factory producing the seeds at no cost and selling them into the market, or do the other seeds in the market come from plants which produce only 4% y/o/y growth in the number of seeds? In the latter case, has the entire seed-planting industry taken a loss over the last year? And if so, would less people plant the seeds this year, so that planting the seeds would again be profitable (assuming demand is static relative to decreased production)?

Do the seeds or plants have any purpose other than the production of more seeds to eventually be sold?

millstoneOP13y ago

I like using seeds as an example, because they make a nice toy model. They last a long time, and more of them can be produced through capital goods (that is, other seeds) and labor alone.

In this model, seeds have no inherent depreciation, and our hero would have bought them from a seller, e.g. a storefront. In a deflationary environment, the nominal value of capital goods decreases, so anyone holding seeds, whether as inventory (the seed store) or investment (planted in the ground), would take a loss.

You are correct that, given deflationary expectations, fewer people would plant seeds. That is exactly what this scenario is meant to illustrate. Fewer people doing work is called unemployment!

And to your last question, let us say that seeds can be used as food. As seed suppliers drop out of the market, this inescapable demand for food will indeed drive their price up. Deflationary spirals do not terminate in starvation: equilibrium is reached, because of basic necessities. But the equilibrium is at a lower output level, and with higher unemployment.

richcollins13y ago

If the market wants more seeds won't the price increase as a result of the increased demand? If it doesn't want additional seeds, should we create them just to "reduce unemployment"?

It seems like the market will price seeds in a way that incentivizes optimal production.

anonymoushn13y ago

Thanks. I found this helpful.

vrotaru13y ago

You are joking right?

But if you are serious, error is here: But I discover that prices have dropped by 4%

You do not simply drop prices, like that. Why did prices drop? (Price) deflation is just a descriptive name not a moving cause. (Price) deflation is not a knob which someone simple turns up and down.

Now depending on why exactly the prices did drop, and by how much you may be either in or out of luck.

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