Getting tired of the inflation/deflation debates. So many people still seem to think that either one or the other is going to happen. The problem is that many people think inflation and deflation are opposites. Not so. Inflation is the printing of fiat currency, diluting the money supply and devaluing the money people hold. Deflation is the absolute cost of goods dropping. Because both can happen simultaneously, the true effects of each can mask each other out with the illusion being relatively stable prices. To measure this I give an example. There used to be these things called silver dollars - a $1 coin with 0.7734oz of silver in it. Back then, a nice new car cost about $4,000. This was equivalent to 3094oz of silver, which today is valued at $100,000. So in effect, from inflation alone, a "new car" from the late 1960's would cost $100,000 in today's dollars. But deflation has also occurred. The absolute cost of a new car has gone down from 100k to about 20k. That's an 80% reduction in the absolute cost of a product (a better, more modern product I might add). Meanwhile, the value of the dollar has dropped to 2.5% of what it was back then. That's inflation. The only reason the price of the car is higher today is because the effects of inflation are about 8 times greater than the effects of deflation. Jobs pay more too, of course which is a result of both inflation and deflation but I think you'll find that it takes more work to pay for your cost of living today than it did in the 60's. Oh, and btw, if anyone still thinks there's not enough gold and silver in the world to use as a common currency, remember that (at least in America) all the commonly used coins down to the 10 cent piece were 90% silver, and everybody used them. Nothing forced the country to abandon its precious metals standards. The world could go back to using metals as a standard again, but the result would certainly be that stackers everywhere would suddenly be unbelievably rich.
There are two main forms of deflation - Supply Side Deflation and Demand Side Deflation. The first is generally good - over supply leads to prices dropping. Supply side deflation is why you can buy an angle grinder at Bunnings for $22.00. Demand side deflation is very bad, it is reduced prices caused by reduced demand. In Australia we have a situation where we have demand side deflation manifesting as reduced prices in retail stores because people are not spending, and vendors dropping the price of their houses for lack of buyers at the price they expect. Demand side deflation leads to a stagnant economy that cannot bootstrap itself. At the same time we have inflation as manifest in rising fuel, water, power, rates and food. The Carbon Tax is a classic example of both - It causes inflation by forcing up power prices along with the price of every consumer item that uses electricity in it's manufacturing or distribution, and it causes deflation because since it was announced people are so afraid of it's consequences ( and are having to spend more of their income on electricity) that they have stopped spending and are forcing the retail and wholesale sectors to drop prices and shed jobs. Inflation and deflation seem to happen together.
I think the inflation/deflation 'debate' that you refer to is the argument over whether the signs point to an eventual deflationary spiral or hyper-inflation. The 1960 vs modern car scenario is not necessarily deflation. Just because the price has come down to build a car does not mean it is purely deflationary. Prices have come down for a number of reasons including information technology, materials costs and automation. The fact you can buy a newer, better, safer, faster car now for less means there is more value in that item than there was 50 years ago - the net result is you are 'wealthier' because of it. The car scenario has been and is deflationary in a place like Japan where production far outstrips the demand for cars such that the government has intervened to make it much less attractive to keep a new car for longer than a few years thus hiding the deflationary situation. Talking about inflation and deflation without any reference to value and wealth is meaningless.
Why is this necessarily "very bad"? To use an example from your own avatar, the 5 1/4" floppy disk used to cost about $1 each. I know, I bought hundreds of them when I was in high school. Eventually the demand dropped and so did the price. Technology advanced and they become entirely obsolete. Would it have been better if somehow the demand for floppy disks was artificially raised to keep the prices from deflating? Think of all the jobs lost of people who used to manufacture such things. Strangely though, there seems to be products for sale which do have very low demand, and yet very high prices. I went to the store and saw a can of Dr Pepper for like $2.50. Used to be my favorite soft drink in the US and a can would cost maybe $0.25, but you can't get it here unless you pay through the nose for it. So in cases like this, a product becomes "novelty" and despite its low demand it holds a high price. I'd agree that technology certainly does seem to put an odd spin on economic analysis. Cars are cheaper to produce, and automation increases quality. So it takes less human work to make a car today than it did in the 60's. This would account for some of the price drop for sure. I suppose its also worth looking at the labor wages in gold and silver today vs the 1960's and see where any changes have been made there. I'm curious if people earn more or less than during those times in metals. I'm guessing less, since one man used to be able to work an average blue collar job and provide for a large family by himself, where today you need a highly skilled job to be able to do the same.
Recon you dont mention productivity and modernised manufacturing techniques in your sinopsis, these would enduce deflation somewhat over time. So my point is maybe the inflation deflation gap is not so stark after all?
I have never figured out why tiny Smart cars are so expense that they are really a toy for the wealthy. Go figure. The reason that I called demand side deflation very bad is because it leads to economic stagnation and job losses once it takes hold of a country that have proven historically to be very hard to pull out of. Falling prices mean closing retail stores which brings down wholesalers and all of the transport infrastructure that depends on them. This leads to job losses or hour reductions which then further perpetuates lack of spending.
