No, people tend not to spend when there are deflationary pressures, preferring instead to save.
But the evidence is that people are prepared to spend on products even though they know the price will go down. Food is a good example - prices dropped for years and in that period the supermarkets boomed and we all ate well.
This takes money out of circulation which further increases deflationary pressures.
Saving only takes money out of circulation if you pile it up under the mattress. In theory the money I save in the bank is the money that the banks lend to businesses and individuals to keep the economy going.
We saw a good example of how spending is affected by price anticipation with the mini spending spree caused people trying to beat the VAT rises.
People are bound to move discretionary expenditure to avoid tax rises. Inflationary increases tend to be unpredictable and therefore have less effect.
Food is a good example - prices dropped for years and in that period the supermarkets boomed and we all ate well
Food is a bad example. If the price of bikes is falling (yeah, like that's going to happend) I'll wait until next year.
If the price of food is going up I'm not going to wait a year.
THere is also the counter-intuative effect of rising prices pushing up demand on occasion, the thought process being the price is going up, I'd better get one now/stock up.
In theory the money I save in the bank is the money that the banks lend to businesses and individuals to keep the economy going.
I was referring to money no longer going through the tills chasing goods/services. Inflation = too much money chasing not enough goods. Deflation = not enough money chasing too many goods.
Putting your money into the banks so that they can lend to businesses and individuals "to keep the economy going" is pointless during periods of deflation. If businesses can't sell their goods and services because people aren't spending, then they need to contract - not expand. You don't need to borrow money to do that.
Plus why would banks lend money to individuals at a time when individuals are depositing money into saving accounts ? Deflation is a truly horrendous state of affairs which without intervention, can snowball out of control with highly destructive consequences. Hence the need sometimes to consider quantitative easing.
TandemJeremy - Member
There is absolutely no reason why we could not compete ... it 1s scandalous that we don't make the same amount of stuff as we used to ... [b]Short termism from ... unions[/b] a lot of it...
bloody hell, are you feeling ok Jeremy?
X
If the price of bikes is falling (yeah, like that's going to happend) I'll wait until next year.
Really? Even if there's something new and flashy which you "need" now? I bet you can get an iPhone 4 for rather less money in a couple of years time, but that doesn't seem to have stifled demand for those.
