The problem with falling prices
With a nod to Charles Whelan[1]
Suppose the price of everything you bought and sold was cut in half. Today.
(That’s deflation by the way.)
The price of that mug of beer at Will Henry’s was $10, now’s it’s $5.
The price of your mani/pedi at Upper Hand was $50, it’s $25.
And so on.
Yay!
Right? Hmmm…
The company you work for is paid half for all the goods and services it sells. They’d pay you half what they paid you before.
That’s okay, right? All of your prices are cut in half, so you’re no worse off.
The sales value of your home would be cut in half too.
But wait! The mortgage company would still want to be paid what they loaned you.
“That’s okay,” you say, “I’m a renter, so my rent would go down by half too.” Maybe…
Say goodbye to your dreams of buying a home for a while, though.
We were upside down on our mortgage in 2008-2009. We owed more than we paid. We were going to pay off our mortgage and there was no way we were going to sell until after our home price increased again. A lot of Americans felt and acted the same. Some of you did too.
If we were in the situation again, we certainly aren’t selling then either, unless something dire happened.
Imagine the kind of house you could buy if the owners were in financial distress. Distress selling during the Great Recession happened often. By that point, most distressed owners had stopped maintaining their homes and yards.
And most renters aren’t off the hook even if you don’t want to buy a house. With your new lower income, how easy would it be to pay the loan on your car, motorcycle, or boat? The finance company still wants the money they loaned you back.
Oh, and last month’s electricity bill? Prices were the same then, so you’d have to pay them back at those older higher prices. Your natural gas bill too. And anything else you’d bought under a contract.
Do you still want prices to fall?
Hmmm…
I’ll continue the crash course on economics in January.
Thanks for reading,
Nikki
[1] Whelan, C. (2017) Naked Money, W. W. Norton and Company.
Nice summary of the issue. With all the hand-wringing about inflation, plus I suspect everyone is expecting prices to go back to "normal", we've all forgot that deflation would be its own problem.