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Rising Prices Are Bad, but Plummeting Prices Are Worse: Americans may envy China’s deflation. They shouldn’t (CW: The Atlantic) (archive.ph)
submitted 9 months ago by to c/chapotraphouse@hexbear.net
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Living in China is getting cheaper. Because rents in my neighborhood in central Beijing are dropping, my wife and I pressed our landlord to reduce ours by $140 a month in a new lease that we signed last month. He wasn’t too happy about it, but he’s lucky that we didn’t move out. Given the desperation of local landlords, we probably could’ve saved another $500 a month had we switched to a comparable apartment nearby.

BUT AT WHAT COST?

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[–] 5 points 9 months ago (1 child)

Couldn't debt servicing get cheaper?

The savings rate was already high in China and deflation is encouraging even more saving, so the supply of lendable money is up so the price to lend (interest) would go down to reflect that. That would be counteracted by the loss in ability to pay the loan as revenues go down. So the true cost of servicing debt could land on either side of that equilibrium depending on what force is stronger.

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  • [–] 3 points 9 months ago* (last edited 9 months ago)

    That's the loanable funds model, and it's not the reality. In reality banks lend according on profitability, yes even in China where priority lending is a thing because otherwise it'll need capital injections from the Government. Capitalists take loans on if they think they get expected profits.

    Also there are stocks of debts vs flows of debts, deflation mechanically makes servicing of existing debt difficult, your argument is whether it will lead to lower rates on future debt which may spur investment.

    Interest rate is set by the Central Bank, not the market. Reserves then adjust according to demand. Given the nonsense 'inflation targeting' (which isn't real, CBs can't target inflation reliably), in a deflation scenario, it may lower rates to zero and try QE, but QE failed and will fail to create inflation or raise demand because the only effect it has on the real economy is via lower long term rates (since CB buys up a significant amount of long term gov securities). Regardless, fiscal policy will be needed, and it must be one which replaces the income lost by workers (via employment or transfers). Which goes to my point "Will the state take over to create employment that's been lost?".

    Savings does not fund investment. It is investment that creates savings.

    You can rearrange the Kalecki profit equation as :

    Worker Saving = Investment + Gov Deficit + Foreign Surplus - Profits

    So investment via bank loans comes first, and that creates profits for capitalists and savings for workers.

    Page 45

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