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We keep measuring everything's value with something that continuously loses value over time
(self.showerthoughts)
this post was submitted on 29 Apr 2024
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A "Showerthought" is a simple term used to describe the thoughts that pop into your head while you're doing everyday things like taking a shower, driving, or just daydreaming. The most popular seem to be lighthearted, clever little truths, hidden in daily life.
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Short answer: Inflation encourages spending, because if you don't spend it, it will be worth less in the days, weeks, years ahead as inflation eats away at the value. If your money is worth more by saving (deflation), then you wait to spend because the thing you want to buy will be cheaper tomorrow, and cheaper yet the next day. If people stopped spending the economy grinds to a halt. Everyone loses their jobs.
It's funny that people always talk about inflation vs deflation and never mention what would happen with a fixed price for everything... No urge to spend but no urge to save for later either, spend money if you want, don't if you don't, doesn't matter, you'll be able to purchase the same thing for the same amount months from now.
Its mentioned pretty early when learning economic theory, and its disastrous, which is why it isn't suggested as a policy to put into place, though from time to time some governments do, and its, as expected, disastrous.
Lets imagine you're a livestock farmer and there is a fixed price for two types of meat you produce: Beef and Frogs. In our theoretical country of FakeLand, we use the SuperCoin (SC) currency I just made up.
Now, you (and most people) like eating beef and very few people like frog. So the start of the Year 1 opens and your beef sales are VERY busy, and you're selling just a tiny tiny big of frog. If this keeps up, you're going to be out of beef very quickly, and you're going have LOTS of spoiled frog meat. In a normal economy, you would reduce the cost of frog from 8 SC, to possibly 5 SC making it half the cost of beef, so you could clear out your inventory of frog before it goes bad, BUT YOU CAN'T IN FAKELAND, because the prices are fixed! So for Year 1, nearly all your frog meat goes unsold and spoils and you lose 4 SC for every unit of frog you didn't sell. You sold all your beef, but with your losses on frog meat, you're near poverty because you essentially only earned 1 SC when you sold a unit of beef because you had to cover the losts of 4 SC for a unit of unsold frog meat.
So next year, you learn your lesson, right! Less frog meat, and more beef!
Year 2
You still can't do anything with the prices you sell for, because Fakeland sets the fixed prices.
So you're all ready to make tons of SC on beef, except there is a disease that wipes out 90% of everyone's herds before it goes to market. In a normal economy supply and demand would make the cost of beef rise to maybe 20 SC or 30 SC to recognize the scarcity of beef, but here in Fakeland the prices are fixed.
In the first month of Year 2 selling, you sell out of beef lightning quick because beef is still relatively cheap at only 10SC! Because of the shortage of beef, people also willing to buy your frog meat. Since you only made 1/10th of that this year, you don't have that much of it either. In a normal economy supply and demand would let you raise prices on frog too way above 8SC to maybe 10 SC or 12 SC to help you cover your beef losses, but in Fakeland prices are fixed, so you can't. You sell out of frog in the first month too.
So, you now have another 10 months or so with nothing to sell. Further, you have money, but there's no food to buy from anyone because it all sold cheaply from fixed prices.
This is how government setting fixed prices on things that the cost and popularity vary on can play out. If you want to see real life recent examples. Here's where the Venezuelan government in 2020 fixed prices on foods and how disastrous it was.
Isn't price fixing different from 0 inflation though?
I suppose looking through some very narrow lenses perhaps, but practically speaking I don't think they're different in their effect on consumer behavior. Inflation occurs when sellers control their prices. Price fixing technically doesn't allow inflation. I say technically because nearly all systems where strict monetary policy occurs, economics is still active and buyers and sellers resort to black markets or the barter system. So in those places inflation can still run rampant even if official prices are fixed.
Do you have a different take?