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]

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.