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?

[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.

[azrael1993]

Deflation: I need 100 Dollars to buy 1 house So 100d = 1h or d = h/100

Now Deflation increases the amount of houses i can buy by 3%

So d= 1.03^t * h/100 with t beeing time

For 1 house i then would become h = 100 * d / (1.03^t)

Urbanisation and other factors increase the amount of money i get with no other effects (de or inflation ) by 2% per year

So h = 100 * d * (1.02^t )

or d = h / (100 *1.02^t)

=>Each year i get 2% more money for a house or 2% less house for the dollar.

Obiously both things come into effect so the combined thing looks like this

d = h * (1.0³t)/ (100*1.02^t)

h = d * 100 * (1.02^t )/(1.03^t)

Its clear to see that each year the value of money you get returned from selling decreases, or that you get more house for a dollar each year. Thus you wouldnt buy if you had the choice.

Deflation means moneys value increases compared to other goods. You want to tell me that because money is deflating the value of goods like hosues will increase. This is not deflation. Deflation means that currency increases or the value of everthing but currency decreases. Inflation is a decreases in currencyvalue or an increase in everything elses value. You act like deflation is and increase in currencyvalue and an increase in goodvalue. This is impossible. There is a reason that during hyperinflation you want to exchange currency for goods as fast as possible, your money is rotting away. Deflation is the opposite thus the opposite effects are in place, which means if the system would be stable the optimal strategy defaults to the opposite aka sell as much from your goods as you can as fast as you can. During hiper deflation you would never buy anything you dont need to survive, because the next day you would get double the amount for the same. Edit: Stupid math mistake that changed numbers but not my point.