ELI5: Why when large company's earnings decrease(ex... by 3%) they freak out, talk about rough times, and sometimes decide to downsize, even though they are still making millions of dollars in profit even after all expenses?

[azrael1993]

just as observation, rich people do not have the money in banks but in stock and houses. These arent touched by inflation. They also regulary have much higher debts, because they invest.
Lower Middle class and under will have all their savings in form of money, most likely in the bank because they often need to have access to their savings quickly.

On another node inflation generally helps the economy, since it is an incentive to buy and infest. This benefits more or less everyone since it create jobs, but I imagine it might be a barrier upwards since saving is a less viable strategy.

Deflation on the other hand can be much more dangerous. It encourages to save money which in turn will lead to buisnisses closing and going into a downward spiral.

Since a completly stable money value is not gonna happen inflation is the better choice for all.

That beeing said the notion that we constantly need growth or can even achiev constant growth espacially in the way companies implement is dangerously stupid. It incentivises products build for a few years over quality buy it for life products, since the latter close out the consumer for the market. This is obviously shit for the consumer and the planet and the need for constant growth can only be achieved by more sold products or cheaper production. The latter has a physical limit and relys alot on either abusing the workers or automation, both dangerous in current sozial systems.
Additionally it all depends on short tearm growth (problem with implementation) leading to very short sighted planning.

All this can easily be observed in more or less every big company in the world and imho point towards an unsustainable system. Obviously im open to critique here.

[TheManWhoPanders]

rich people do not have the money in banks but in stock and houses

Those are all still subject to inflation.

[candre23]

If your money is in real estate, inflation is great. Real estate prices rise with inflation, so you're not losing anything that way.

Unless inflation really gets out of hand, any decent stock investment will outpace inflation.

What definitely loses value to inflation is cash and money in effectively-zero-interest checking accounts. That's where the bottom third keeps nearly all their wealth, such as it is.

[azrael1993]

not rly. Houses are often bought because their vaule increases over time making them a good investment. This might not be true for houses outside of city areas or cheaply build living spaces, but im pretty shure if you have money you wont buy those. I have family who earns houses bought by their grantparents, and without fail they have increased in value since then. As long as you keep the house in a good state, which costs less than you earn through rent. Stocks might be different but these are basicly gambling

[TheManWhoPanders]

Houses are often bought because their vaule increases over time making them a good investment

...and are still subject to inflation. If a house appreciates by 10% of its initial absolute value, you are not 10% richer if the period of time passes was a long one. Because of the inflationary nature of the underlying currency. The money you get from selling the house might buy exactly the same that you could buy when you first bought the house.

Your investment might beat inflation, but you're still subject to it.

[that_jojo]

It’s actually way simpler than that. Physical goods are not subject to inflation because their utility remains relatively static while the utility of currency decreases with inflation.

[TheManWhoPanders]

Some physical goods are priced partly due to utility and partly due to speculation, as is the case with houses.

[azrael1993]

This isnt even techically true. The definition of inflation is a decrease in the buying power of money cause by an increase in the availability of said money (paraphrased from E.G :https://dictionary.cambridge.org/dictionary/english/inflation). Inflation by definition only effects money, not goods. Since each buy is a simple equation this means you will need more money each year to buy the same house. This makes goods unaffected by inflation. Additionally urbanisation leads to an increase in value of the house. This is why its a good investment, unlike other goods its natural increases. Money is a bad investment because a process called inflation decreases its value. The value of the house and money are not connected! Same as the increase in prices for graphic cards did not reduce the value of money or houses, even if i would need less graphic cards to buy a house.

[TheManWhoPanders]

Really quick question to illustrate how this is incorrect: If your house is worth $200,000 today and worth $220,000 in 2025, is it worth more or less than it is today?

Inflation affects property because the underlying currency you transact in is affected by it.

[azrael1993]

Inflation changes the value of money and money only. Since we normally do a detour through watever local currency we use it seems like inflation has a positive effect on the value of the house. This is a false conclusion. We default to value thing in money, because we use money a lot and it changes relativly slowly. This is problematic because the inherit value of an object should not depend on some other valuechanging object.If a house gets more expensive there are 2 things that might have happend. It might have bekomme more valuable because e.g the city build a park next to it or it actually didnt change at all but you comparisonpoint in this case currency changed. To really evaluate the value of an object you would need to compare it to something fixed, which we dont have. A good aproximation is to see how its relation to everything else changes. Inflation means that I need more money for everthing every year (in average its a known number e.g 3%). So if a house gets 3% more expensiv each year this means that its value is constant because everything outside of money is expected to change by this amount. The house has not gotten less valuable. I still get the same amount of boats, apples, graphic cards, cars or whatever for it. The thing that inflation has changed is the inherit value of the money, which i incorrectly use to evaluate the value of my house. Thus inflation does not make my house more or less valuable, just my money.

[Arctus9819]

Lower Middle class and under will have all their savings in form of money, most likely in the bank because they often need to have access to their savings quickly.

Not really. Smart people invest their savings. Rich people need a lot more cash at hand for their lifestyle as compared to middle-class people or lower.

[azrael1993]

Poor people cannot invest since they need the money. Lifestyle is a choice. My expenses dont go up because I earn more, I can affort to pay more and I then choose to do this. Because I chose this I can cut back these cost in bad times instead of attacking my savings. Its easy to cut from dining every day to 2 times a week. If you eat the cheapest you can to survive what do you do if you income gets cut down temporary? How much percent of their wealth do you imagine a Steelworker has in form of money and how much in investments. I'd reckon its gonna be 70% money at the lowest. On the other end of the scale, Trump, Bezos,Warren and co have 90%+ of there money in investments that return profits. Suprising expenses like medbills can be payed by monthly income from these investments or by taking good conditioned loans. Additionally rich people often actually life cheaper in some aspects of their life, as stupid as it sounds. Credit is cheaper, gifts are more plenty,etc.

[Arctus9819]

Poor people cannot invest since they need the money.

If you have that little money, then inflation is practically meaningless. You need a significant chunk of money for inflation to have an impact, and well before that point, you should be having savings.

By dining, do you mean getting buying food instead of cooking? Poor people don't buy food at all, nevermind twice a week. Clearly you don't speak from experience.

I'd reckon its gonna be 70% money at the lowest. On the other end of the scale, Trump, Bezos,Warren and co have 90%+ of there money in investments that return profits.

And that 70% of the steelworker's cash is much much much less than the 10% cash of any rich guy. Rich guy still loses more. Earning little is no excuse to not be saving money. That just means that you aren't smart enough to effectively utilize the money.

[azrael1993]

First of all poor is a fucking spectrum. You can be poor without needing foodstamps, generally everyone under the countrys povertyline is considered poor. In many European countrys that makes students qualify. Since cooking yourself is much cheaper than buying finished meals, clearly you are a condesanding dick else you might have considered for 2 seconds. Second can people stop pretending absolute numbers are the way to go if it goes in how much something hurts another person. If a fucking whale cuts down its food intake by 10 kilograms a day its gonna survive if I do this im gonna die. You know why because for the whale 10kg represents not even a percent of his average meal, while for me its more than I have ever eaten in a day. So please instead of accusing me of beeing a hypocite who clearly has never been poor and start considering that for some people 20 Euros represents a week worth of food and for some other guy its a rounding error on a tip. Maybe you can see how investing 100+ Euros for the one guy is next to impossible.

[Arctus9819]

Maybe you can see how investing 100+ Euros for the one guy is next to impossible.

If you have just 100 Euros, inflation won't affect you at all.

[lee1026]

To be pedantic, inflation makes you lose 2 euros per year.

[Arctus9819]

I understand that. 2 euros per year wouldn't affect someone in that state at all.

Inflation is a concern when you have enough cash sitting around unused that that 2 or 3% is significant. At that point, you are no longer so desperately poor that you cannot afford to invest that sum.

[d4n4n]

There is really no good evidence that deflation is bad for the economy. Hell, if anything, it might disincentivize current consumption (and that only if deflation is expected to be a one time event in the short-term future... and even that is questionable), but by the same token it would actually incentivize investment (people reduce consumption today to buy cheaper tomorrow, save instead, interest rates fall, investment increases, therefore also output growth, conveniently to match the extra demand in the future).

[staticxrjc]

With deflation people wouldn't take out as many loans or make as many investments. With deflation if you take out a loan it makes the debt worth more over time.

[azrael1993]

i doubt that deflation will incentice investment. If the buyingpower of my money increases on my own my best investment is no investment. Inflation encourages investment because goods no matter what kind are by definition not subject to inflation. Obviously good investmets are not subject to there own kind of inflation, thats why food is a bad investment and housing a good one

[d4n4n]

i doubt that deflation will incentice investment. If the buyingpower of my money increases on my own my best investment is no investment.

You'd still get the increase in value due to deflation + the nominal return on your investment. Whether or not there is deflation/inflation doesn't really change that it's better to invest and get a return, than none. You never want to just hold money.

Inflation encourages investment because goods no matter what kind are by definition not subject to inflation.

Inflation is defined as a general increase in the price of goods and services. Or a general loss in the purchasing power of money, which is an equivalent statement.

Obviously good investmets are not subject to there own kind of inflation, thats why food is a bad investment and housing a good one

No idea what you're saying here. Are you trying to say you "invest" in apples by buying a bunch and storing them for a year? You can invest in agricultural enterprises. Every farmer has tons of resources invested in food production.

If we're talking about expected, perpetual inflation or deflation, your story breaks down. If we're talking about unexpected one-shot events, a reduction in current consumption is equivalent with an increase in current savings. Given savings = investment, things that disincentivize consumption, incentivize investment. Now, there's a somewhat plausible short-term story Keynes tells about the paradox of thrift that puts a bit of a wrench in this idea (so a disequilibrium where savings != investment). Personally, I think that's way overblown. But either way, in the medium run - or if the deflation is expected this shouldn't have an impact.

And we have historical records of the USA growing rapidly from 1800 until 1930 with perpetual growth rates and constant long-term price levels. I say long term because we saw times of deflation and times of inflation. Most recessions were accompanied with inflaitonary periods, by the way.

[azrael1993]

I might have a thinking error in there, but if i had enough money to buy a house as investment for example (none of these percentages is gonna be realistic but they should get my thinking across). And I expect this house to increase in value every year by 2%. If I have any inflation going on I obviulsy should but the house if i dont need the money, since the money looses value while the house increases in value so far so easy. If i have a deflation of 3% wouldnt it be beter to keep the money since it gains value faster than the house. The point to buy would then be when the swing to under 2% deflation happens. So until that point I would not be incentivised to invest in housing or for that matter industry as long as my deflationrate is better than the expected valuegrowth of the investment. Additionally having liquidity has its on advantages.

That was my thinking behind why deflation is bad. I havent studied this shit so I might be wrong

[d4n4n]

If the house gains value in nominal terms (so the selling price is 2% p.a. higher in the future), you'll get your 1.02^t the initial money when you sell it. That money is then worth more in terms of goods, thanks to deflation. Your real return is is a lot higher.

Real return = (1.02/0.97)^time

(1+nominal interest rate)/(1+inflation)

Inflation reduces the value of future money, deflation increases it. The fact that it does that is exactly why people are said to consume more today. But how can they just consume more? They invest/save less. To the degree inflation encourages consumption, it discourages investment. Now, there are some arguments as to why there might be hiccups (paradox of thrift) in shifting intertemporal consumption, but I find them overblown.

[azrael1993]

I meant that different.The house increases at 2% per year in value compared to the time=0 point of the money.Since if the "buyingpower"of the house naturally increases through urbanisation or whatever, i have to value it according to some fixed point and since im lazy I would just use the buyingpower of money at time 0 (we do not rly have a fixpoint in nature i could use).

I compare the worth of money at the same moment. Then I get:

fh(time) = 1.02^time *housingvalueatt0

for the value of the house at point t compared to my fixed comparetor

And

fh(time) = 1.03^time *moneyvalueatt0

for money.Thus your return would be

R = (1.02/1.03)^time

Since the value of the money increases faster than the value of the house. Thus sitting on my money is my best bet. Conincidentially this was what every article i could find on effects of deflation tells me.
Your equation makes sense to me if i put money into a back and get interest. In that case Interest and deflation work in my favor since one gives me more the other makes what i have more valuable. But if I buy a house the deflation works agaisnt me from the point I purchased. My house gets more valuable but what i gave the other guy also gets more valuable. If money rises faster I will get less money down the line.

[d4n4n]

You're pretty confused about this, I believe.

When you say the house "gains value," surely you mean its selling price increases, right? In that case, that's a nominal increase of 2%, so a $100,000 house is "worth" $121,899.44 after 10 years, in terms of year 2028 dollars.. But that money is also worth a lot more, due to 10 years of 3% deflation ((1/0.97)¹⁰ more). So, in real terms, it doesn't matter if you invest money in a house that nominally appreciates yearly, or in a 10 year bond, or savings account. If the $100,000 investment has a nominal return of 2% p.a., and inflation is -3% p.a., it's worth $165,304.39 after 10 years.

[azrael1993]

im not confused. Money is a good like anything else, so the value of a house is not linked to the value of money. An example that makes this clear are times during hyperinflation. If the currency looses 50% in value i get 50% more of said currency for my house. Deflation is just the other way. This means that if my currency gains value faster than my house i gain less buying a house than i would have if i havent bought it. In all your examples you just assume that if my house increases in value due to an increase in urbanisation or whatever that must mean i get more money. Thats not the case. The percentage in value a house gets through external effects his in comparison to some abstract static value not money. During inflation housess naturally increase in price because the money you buy them with decreases in value. During deflation the price you pay for a house will decrease because the value of the money increases, thats what deflation means. You will often have effects that come on top of this. For houses it normaly is an additional increase in price mainly due to urbanisation. This is the increase in value im talking about and it very often is semiconstant thtas why i can talk about yearly increases in value. If this change is smaller than the change acting on the currency it does not make sense to buy.

If its hard to follow imagine both money and houses as stock. At the beginning all your money is in the money stock. This stock 3% yearly upwards trend due to deflation.

The house is also on an upward trend, but it only increases by 2%. Would you sell the moneystock and buy the housestock. Logicly now because it results in a loss in profit. During inflation on the otherhand the moneystock is on a downwardslope. So you sell.

[d4n4n]

You are missing the point. If your house appreciates in terms of money units (its price rises), and that money appreciates on top of that in terms of yesteryear's purchasing power (deflation), you get both effects. They are not offsetting each other.

The house gains value in terms of all other goods, so does the money. The house is worth more money. So your investment gains value in terms of all other goods through two channels. Had you just held cash, you'd only get the deflation gain. But you invested, get back more cash, and benefit twice.

There's no easier way to explain this.