Originally posted by nixie_nox
What kind of circumstances would start de-flation. What events have to fall in place?
Financial panics are not primarily financial, but emotional.
As an analogy, think about when you reach "the crest" on the stock market. You
know when the high price occurs? It happens when every last "bull" (person who thinks the market should go up) has bought every last share of stock
he can afford. At that point, there is literally no more buyers, and things begin to go south.
Likewise, the bottom of a stock market occurs when the last "market bear" (person who believes that stocks will go lower) sells his last share.
Then there is literally no more sales pressure, and the bulls take the market, driving it up.
Likewise, when the average consumer decides that prices will be lower, or that it isn't safe to spend money today
, you begin to see
I've said before, if you study the market from the summer of 2000 to about 2003, you'll see mild disinflation. Credit terms (not the government
"prime rate" but actual advertisements) are the best way to measure it. At that point, Ford was offering "zero precent interest for the life of
your loan. (!) That is disinflation, at least with car prices.
If there is a real war, or people feel worried enough about the future they quit spending money.
In the depths of the depression, when FDR made his famous speech about "the only thing we have to fear . . . is FEAR itself!" He also said in the
same speech, "get out there and SPEND, america!" He was trying to stop the deflationary spiral that had begun actually in 1928 with farm prices.
It didn't stop until at least 1933, and probably 1934.
But in sum, every panic or bubble is at it's core an emotional,
rather than an economic, experience.
So when you ask about what financial events . . . my response is, emotional events will cause it, and not the numbers.