Imagine you have just finished college and landed a new job that pays you $48,000 per year. This is very exciting. Unfortunately you also had to take out a couple student loans to pay for your education, the monthly payment for your loan is $200. Well, the first thing most college students purchase is a new car. With the new car you have an additional $400 monthly payment. Don't forget housing. You are able to share an apartment with a college buddy but it still costs you $800/month. Rent in Seattle is not cheap. Don't forget all of the other fun things you'll have to purchase like car insurance, health insurance, cell phone, cable/TV, and utilities. This will probably vary person to person but lets just assume these additional costs total $600/month.
So now you have monthly payments that total $2000. But that's okay your gross monthly income is $4,000. So you still have half of your income left for fun. Well... don't forget taxes will probably take away 15-20% of your paycheck and you should contribute another 10% to your retirement account. So that leaves you with about $2800 per month. Sounds pretty good.
Now suppose you hear reports that inflation starts to decrease, in fact prices are actually decreasing (deflation was approximately 30% during the Great Depression). This is good... right? Look at your expenses, what is going to decrease? You signed a long-term lease, you already purchased your car, and took out your student loan years ago. Most everything you spend you money on is fixed... But what about your income? If prices start to fall, employers are going to cut your wage. Employers announce a 5% wage cut. So now you have even less money to spend on things you enjoy. Now put yourself in the shoes of someone only making $30,000 per year...So yes deflation really is bad see here and here.
(I did my best to estimate the expensive but have probably over estimated them slight... this is all for affect).
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ReplyDeleteIn 2012, I got a taste of deflation’s impact first-hand. My retirement accounts’ values were falling even though I maintain a fairly conservative portfolio. However, because of the slow economy, businesses were dropping prices as their bottom line began to dwindle. This impacted several of my investments. To “stop the bleeding” I closed these accounts and reinvested them into home improvements and more standard (safe) savings accounts.
ReplyDeleteDeflation is a really interesting topic to me as someone who enjoys history. The concept of deflation was first introduced to me in my AP US History class via studying the monumental ruling of Wickard v. Filburn. If my memory serves me, the case was about the government's ability to regulate commerce and in the late 1930s, there was a significant deflation in the price of wheat because a.) too many farmers were growing wheat and at increasing quantities due to technological advances and better methods, and b.) there wasn't enough demand. So, the government artificially inflated the price of wheat by restricting production, much like OPEC limiting oil production. However, one farmer, Filburn, grew wheat for his own uses and was promptly slapped with a significant fine. The case went to the Supreme Court and it ultimately decided against the farmer. The argument went that because Filburn was growing wheat for his own purposes and not selling it, he wasn't going to buy it from anyone else. This was seen as setting a precedent other farmers will follow, which would end up resulting in a deflationary spiral that would drive down wheat prices.
ReplyDeleteThis was very interesting to me. Since most of my jobs have paid me minimum wage, I never had to worry about my wages getting cut without there being a penalty for my employer. Because of this, whenever prices on things like gas went down I was happy and didn't think about the consequences for the greater economy. This article definitely caught me being selfish and not thinking about the good of our country as a whole. I'll have to be more careful when I think about who is really benefiting from lower prices.
ReplyDeleteI always thought inflation was bad, and the opposite, deflation, was good because it lowers prices. Like Kerri, I work for minimum wage, so I don't worry about my pay going down (it actually increases as new laws pass). Also, as someone who has no long term payments at the moment like rent or car payments, I never realized how people with payments like those that many college graduates face can be hurt by deflation. It is definitely interesting to think about how the flow of the market can affect people in different ways depending on their individual financial status.
ReplyDeleteAs a college student with a car who makes my occasional spontaneous road trips to Seattle, I’d say that I do see it as a celebration when gas prices are below $3 a gallon. I don’t necessarily take into consideration what this means for the economy, I am just pleased I can spend under $60 to fill my tank, and then spend that extra money on other goods and services. Yes, this might be a good thing for me, but not for economists. Deflation causes consumers to put off purchases and investments because they expect more and more falling prices ultimately causing the economy to become trapped. I am definitely a consumer to blame for this kind of situation. I have a broken iPhone and I continue to wait to buy a new iPhone hoping as times passes Apple will release a new edition and the price of the old edition will gradually drop and I’ll be able to afford it. Apple might not be a good example due to their loyal customers, but you know what I mean. Constant cost cutting means lower wages and less investment spending.
ReplyDeleteI never gave deflation much thought. It seems like everything is always undergoing inflation. It was interesting to get this perspective. I always look at gas prices as a way to gage where things are at in our economy; if I am paying nearly $4 per gallon I'm alarmed, but when I pay $3 or less I feel like things are in favor for our economy. I didn't think about the cuts this can cause to ones salary, but now I see how serious of a problem this is.
ReplyDeleteI never gave deflation much thought. It seems like everything is always undergoing inflation. It was interesting to get this perspective. I always look at gas prices as a way to gage where things are at in our economy; if I am paying nearly $4 per gallon I'm alarmed, but when I pay $3 or less I feel like things are in favor for our economy. I didn't think about the cuts this can cause to ones salary, but now I see how serious of a problem this is.
ReplyDeleteWhat about if you signed a contract with your employer that does not allow them to cut your wage?Wouldnt you be unaffected be deflation?
ReplyDeleteWhat about if you signed a contract with your employer that does not allow them to cut your wage?Wouldnt you be unaffected be deflation?
ReplyDeleteI never had really never thought too much about deflation, as I always thought inflation was the more common effect within our economy. With this perspective of a just recently graduated college student, it begins to put things into view. Although this is still a few years away, it makes me want to really consider the choices I make with my money. As others have said, I have a tendency to use gas prices as a method in which to gauge the condition of the economy. When prices reached $4.50 where I lived, I was stunned and I took that as a sign that the economy was doing poorly. But when prices hover around $3.00, I tend to feel as though the economy is stable and at normal condition (perhaps thats because that was roughly the price that was most common since I began driving and paying for gas when I got my license as 16).
ReplyDeleteI never had really never thought too much about deflation, as I always thought inflation was the more common effect within our economy. With this perspective of a just recently graduated college student, it begins to put things into view. Although this is still a few years away, it makes me want to really consider the choices I make with my money. As others have said, I have a tendency to use gas prices as a method in which to gauge the condition of the economy. When prices reached $4.50 where I lived, I was stunned and I took that as a sign that the economy was doing poorly. But when prices hover around $3.00, I tend to feel as though the economy is stable and at normal condition (perhaps thats because that was roughly the price that was most common since I began driving and paying for gas when I got my license as 16).
ReplyDeleteHow suddenly you killed the joy with all the necessary stuff been mention? It’s sad that there is so much we need to give out, but that’s the cost of gaining experience, if we are done with it then we could definitely make it far, but of course we need to have determination to do it. I do part time work in Forex trading which easily covers all my stuff and allows me the freedom and I must say I am lucky to have OctaFX broker with their daily market updates which keeps on helping me out.
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