Yes there has. The Great Depression was a deflationary spiral. Bank failures caused people to hoard currency. This hoarding led to decreased investment and economic activity. The decrease in economic activity led people to lose jobs, which caused them to hoard even more money.
In addition, the decrease in the money supply greatly increased the value of debts. You were getting paid less, but the your mortgage payment remained the same. This ended up being a crushing burden even for those who managed to keep their jobs.
> The deflationary contraction occurred between 1929 and 1933.
Sorry, but are you serious? For starters:
"By keeping industrial wages too high, Hoover sharply depressed employment beyond where it otherwise would have been, and that act drove down the overall gross national product," Ohanian said. "His policy was the single most important event in precipitating the Great Depression."
If you're counting peak annual rate rather than total deflation then part of 1920-1921 was worse than 1929-1933, but if we're talking about momentary deflation then neither was the worst deflation in US history.
Thanks. I was speaking about annual rate. BTW, a very instructional chart.
Can I rant a bit? Thanks again. It'll be about deflationary blips and deflationary spirals.
Have you ever noticed that the definition of a deflationary spiral self-contradictory? You know how it goes, people hoard money in order to spend them later, but when that later comes they do not spend them but continue to hoard even more in order to spend them later-later. Then later-later-later. Then... Well, the endgame is that everybody dies and zombies take over the earth. (Zombies are immune to hoarding, it seems)
Do people really act like this? Because if at any step of such an iteration the people will start spending (and the low prices and increases money balances will provide for an excellent temptation) then the vicious circle is broken, the spiral is no more, and we are contemplating here a deflationary blip. Or event if blip doesn't sound reputable enough.
Looks to me like a totally legit process. Exactly what the Walras Auctioneer will do in his search for a price equilibrium.
The problem is that people hoard money in anticipation of even lower prices down the road. Why should I buy good X for $Y today, when I anticipate that good X will be available for $(.85)Y tomorrow? If enough people think like I do, the quantity of X demanded drops, causing the market to create the very price drop I was anticipating.
In addition, deflation increases the value of debts - any spare cash I have is going to be soaked up by the increasing value of my debts, and will not be available for further consumption.
> Why should I buy good X for $Y today, when I anticipate that good X will be available for $(.85)Y tomorrow?
And why should you buy the good X for $(.85)Y tomorrow, if it will cost $(.7225)Y the day after tomorrow? Right?
I see that's why people never spend money on new phones and computers!!!1!!
Now seriously, the assumption that people will forever postpone consumption is absurd and wrong. But the whole deflationary spiral theory falls apart without that assumption.
Are a big topic, actually, but this one had nothing to do with a deflationary spiral. Hint: A one time deflationary event is not the same as deflationary spiral. Previous deflationary event of similar magnitude happened 1920-1921. The "Forgotten Depression", so to speak.
Of course the FR (fractional reserve) banks are inherently instable and that's a feature of the system. If you want the ability to inflate the money supply at bankers' will and whim, don't act surprised when it (the money supply) collapses to more a sustainable level.
> .. caused people to hoard currency.
Source? Genuinely curious.
> This hoarding led to decreased investment and economic activity.
There was decreased investment and economic activity. But because of hoarding? It's too self-serving argument as such. There were at least 3 other major causes as well, and I can name them.
> the decrease in the money supply greatly increased the value of debts
Sure. So it means that the creditors are wealthier and can afford themselves to spend and invest more. Not what I'd call an economic horror.
Anyway, the most vivid evocation of horrors of a deflationary event is not a example of a deflationary spiral, and that's exactly what I was asking for.
Sure, if for whatever reasons the amount of money in an economy decreases then the prices had to adjust and it can be painful but.. what are options? But what this has to do with a deflationary spiral?
