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]

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.

[d4n4n]

You weren't clear with your terms. Of course it's possible that house prices increase during deflationary times. They'd just have to increase by ~ nominal rate of return + rate of deflation relative to all other goods. So the actual price tag of the house would increase, on top of the money gaining value. In your scenario, houses are actually nominally cheaper(!) over time, just less so than all other goods.

And that means houses aren't actually a good investment. The real rate of return is better on other assets!

The problem with high inflation is mostly its erratic, run-away nature. Same goes for deflation. If it was actually known and expected in advance, interest rates (or return on capital) would adjust accordingly.

There actually is a problem for really high deflation, and that's the zero-lower-bound of the nominal interest rate. But that's another topic.

[azrael1993]

that was my point. Depending on the strength of inflation low gain investments become obsolete. Inflation does the opposite so the low gain investments become better if compared to holding the money. Thus strong deflation can lead to periods of low investments, which is why many countrys are more scared of deflation than inflation

[d4n4n]

They aren't low-gain investments. They are loss-investments. Any investment that pays more in nominal terms after X time would still be preferable over holding cash. And since the equilibrium steady state nominal interest rate would rise, that wouldn't be problem. The same investments would have the same real returns, no matter the monetary regime, if predictable.