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Thread: Why don't price go down during a recession?

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    Default Why don't price go down during a recession?

    Why Don't Prices Decline During A Recession?

    [Q:]When there is an economic expansion, demand seems to outpace supply, particularly for goods and services that take time and major capital to increase supply. As a result, prices generally rise (or there is at least price pressure) and particularly for goods and services that cannot rapidly meet the increased demand such as housing in urban centers (relatively fixed supply), advanced education (takes time to expand/build new schools), but not cars because automotive plants can gear up pretty quickly.
    First, do you agree with this and if not, how do you see it?

    Second, when there is an economic contraction, supply initially outpaces demand. However prices for most goods and services don't go down, and neither do wages.

    My main question is why don't prices go down for goods and services? I expect for wages, it's just stickiness from the corporate/human culture... people don't like to give pay cuts... managers tend to lay off before they give pay cuts (though I've seen exceptions). Why don't prices go down for most goods and services?

    [A:] Great question! Your analysis is spot on. Now on to your question:

    In my article titled Why Does Money Have Value we saw that changes in the level of prices (inflation) was due to a combination of the following four factors:

    The supply of money goes up.
    The supply of goods goes down.
    Demand for money goes down.
    Demand for goods goes up.

    In a boom, we would expect that the demand for goods to rise faster than the supply. All else being equal, we would expect factor 4 to outweigh factor 2 and the level of prices to rise. Since deflation is the opposite of inflation, deflation is due to a combination of the following four factors:

    The supply of money goes down.
    The supply of goods goes up.
    Demand for money goes up.
    Demand for goods goes down.

    We would expect the demand for goods to decline faster than the supply, so factor 4 should outweigh factor 2, so all else being equal we should expect the level of prices to fall.

    From my article titled A Beginner's Guide to Economic Indicators we saw that measures of inflation such as the Implicit Price Deflator for GDP are procyclical coincident economics indicators, so the inflation rate is high during booms and low during recessions. The information above shows that the inflation rate should be higher in booms than in busts, but why is the inflation rate still positive in recessions?

    The answer is that all else is not equal. The money supply is constantly expanding, so the economy has a consistent inflationary pressure given by factor 1. The Federal Reserve has a table listing the M1, M2, and M3 money supply. (To learn about these definitions, see How much is the per capita money supply in the U.S.?). From Recession? Depression? we saw that during the worst recession America has experienced since World War II, from November 1973 to March 1975, real GDP fell by 4.9 percent. This would have caused deflation, except that the money supply rose rapidly during this period, with the seasonally adjusted M2 rising 16.5% and the seasonally adjusted M3 rising 24.4%. Data from Economagic shows that the Consumer Price Index rose 14.68% during this severe recession. A recessionary period with a high inflation rate is known as stagflation, a concept made famous by Milton Friedman. While inflation rates are generally lower during recessions, we can still experience high levels of inflation through the growth of the money supply.

    So the key point here is that while the inflation rate rises during a boom and falls during a recession, it generally does not go below zero due to a consistently increasing money supply.

    And we are in the era where M2 grows by 16% in Indonesia |& India, 13% in China, 9% in Singapore
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    Look at US history, whenever there is recession, money will grow even faster, faster and faster and faster

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    and what is a bubble?

    an asset bubble happens when the growth rate of that asset far exceeds growth rate of M2 e.g. share price of EMC gone from $4 to $120 during NASDAQ boom, price of HDB gone from 100k to 400k during last property bubble

    from 2005 to now, M2 in Singapore has doubled ... property psf also doubled on average

    therefore ... we are not in bubble, at least NOT YET
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    China's broad money supply rose 15.9 percent year on year to 99.21 trillion yuan (about 15.8 trillion U.S. dollars) at the end January, compared with 10.4 trillion U.S. dollars of outstanding M2 in the United States, data from the Chinese and U.S. central banks showed.

    Zhou explained China's M2 will expand relatively fast at the beginning of the year due to the New Year and Spring Festival.

    "I can't tell whether we can achieve this year the expected 13-percent growth in M2 or not, it all depends on developments in the coming months," said 65-year-old Zhou.
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    wow you guys so high tech .... just observed that lesser people wants to sell, more people wants to buy during recession

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    Quote Originally Posted by phantom_opera
    and what is a bubble?

    an asset bubble happens when the growth rate of that asset far exceeds growth rate of M2 e.g. share price of EMC gone from $4 to $120 during NASDAQ boom, price of HDB gone from 100k to 400k during last property bubble

    from 2005 to now, M2 in Singapore has doubled ... property psf also doubled on average

    therefore ... we are not in bubble, at least NOT YET
    er... does that means if one's salary didn't double from 2005 to now, then is actually suffering pay cut?

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    Quote Originally Posted by taggy
    er... does that means if one's salary didn't double from 2005 to now, then is actually suffering pay cut?
    didn't u see many complain about stagnant lower tier salary due to competition from foreigners??

    but beware hoh ... all along we "make use" of cheap foreginer labors to maintain lower prices in kopitiam, town council, food court ... be prepared for huge inflation when all foreigners are gone and a cleaner salary is 2k pm
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    They asked for minimum wage as well, more inflation.

    Quote Originally Posted by phantom_opera
    didn't u see many complain about stagnant lower tier salary due to competition from foreigners??

    but beware hoh ... all along we "make use" of cheap foreginer labors to maintain lower prices in kopitiam, town council, food court ... be prepared for huge inflation when all foreigners are gone and a cleaner salary is 2k pm
    Affordable means small

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    Quote Originally Posted by phantom_opera
    didn't u see many complain about stagnant lower tier salary due to competition from foreigners??

    but beware hoh ... all along we "make use" of cheap foreginer labors to maintain lower prices in kopitiam, town council, food court ... be prepared for huge inflation when all foreigners are gone and a cleaner salary is 2k pm
    thats when i reenter the workforce

    perfect mitigation of risks.

    btw you should start a youtube channel. econs for dummies. use v layman terms to explain.
    click: 🏢shoeboxmickeymousehouse 🏢

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    I feel compel to share some insights about money supply in macroeconomics. During recession, when people are spending less, more monies are being 'held up' through saving. During boom time, people spend more and hence money supply is lossen up within the system.

    Central banks use interest rate and most recently (Fed in 2008) money supply to manage inflation and unemployment. There is evidence to suggest that there is caustion between large money supply and price due to inflation. That is the reason why the FED has undertaken to reduce money supply (hence increase interest rates) the moment inflation hits the United States.

    Price is more of a function of supply and demand and the price elasticity of supply and the price elasticity of demand in microeconomics.

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    property in Sg is supply inelastic, made worse by low productivity, unlike cars

    u really think us fed will shrink m2?? how accurate is their CPI also in question .. gas price has gone up from 2.5 to 3.5 and airlines all fold due to high jet fuel price, oil is supply inelastic

    money printing causes goods with limited supply elasticity to go up fast n furious but goods with supply side elasticity still under control with lower velocity of money in G7

    if not because china has seemingly unlimited supply of cheap labor from rural west, iPhone price would have doubled
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    Soon we will see $2 coins as a norm.

    Bak chor mee and chicken rice minimum $10.


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    Quote Originally Posted by phantom_opera
    property in Sg is supply inelastic, made worse by low productivity, unlike cars

    u really think us fed will shrink m2?? how accurate is their CPI also in question .. gas price has gone up from 2.5 to 3.5 and airlines all fold due to high jet fuel price, oil is supply inelastic

    if not because china has seemingly unlimited supply of cheap labor from rural west, iPhone price would have doubled
    Prices of Singapore's properties are largely managed through either the supply side or the demand side. All the CMs are targeting the demand curve while it takes time for the supply to increase.

    Quote: "The Federal Reserve on Wednesday agreed to keep a key short-term rate near zero until the 7.7% unemployment rate is 6.5% or lower.
    The short-term rate will also stay unchanged at 0.25%, the Fed said, until the current 2.2% inflation pace hits 2.5%. Tying the one rate it controls to unemployment and inflation targets is unprecedented, economists said." Unquote USA Today 12, Dec 2012

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    Quote Originally Posted by azeoprop
    Soon we will see $2 coins as a norm.

    Bak chor mee and chicken rice minimum $10.

    agree, our cheap foreign labor helped to make kopitiam 3 dollar chicken rice sustainable .. now our xenophobic citizens want to chase the
    out.. wait till u see 10$ chicken rice to repent

    live to repent
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    Leeds what is yr point ?? What is so "compelled" about ?
    "use monetary policy ... to manage unemployment "... ?
    phantom observations are far more realistic and to the point

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    it is further complicated by china US strange relationship as factory of the world vs consumer of the world, China M2 increased 25pc in 2009 following QE1 in US has set the stage of a new kind of capitalist system where central bank is Godfather of market
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    Singapore is overwhelmed by the Kiasu Syndrome.
    Quote Originally Posted by Leeds
    Prices of Singapore's properties are largely managed through either the supply side or the demand side. All the CMs are targeting the demand curve while it takes time for the supply to increase.

    Quote: "The Federal Reserve on Wednesday agreed to keep a key short-term rate near zero until the 7.7% unemployment rate is 6.5% or lower.
    The short-term rate will also stay unchanged at 0.25%, the Fed said, until the current 2.2% inflation pace hits 2.5%. Tying the one rate it controls to unemployment and inflation targets is unprecedented, economists said." Unquote USA Today 12, Dec 2012

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    Quote Originally Posted by Leeds
    Prices of Singapore's properties are largely managed through either the supply side or the demand side. All the CMs are targeting the demand curve while it takes time for the supply to increase.

    Quote: "The Federal Reserve on Wednesday agreed to keep a key short-term rate near zero until the 7.7% unemployment rate is 6.5% or lower.
    The short-term rate will also stay unchanged at 0.25%, the Fed said, until the current 2.2% inflation pace hits 2.5%. Tying the one rate it controls to unemployment and inflation targets is unprecedented, economists said." Unquote USA Today 12, Dec 2012


    The US economy is now in bull run, the 7.8% unemployment can drop to 6.5% in less than 6 months.
    狮子王 (formerly blackjack21trader): READ MY LIPS: NO MORE CRASH FOR 60 YEARS.

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    Quote Originally Posted by amk
    Leeds what is yr point ?? What is so "compelled" about ?
    "use monetary policy ... to manage unemployment "... ?
    phantom observations are far more realistic and to the point
    To answer your question, you need to ubderstant the roles of central banks. Please goggle and you will appreciate my writing. It is quite complex which I tried to simplify in layman terms here.

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    Quote Originally Posted by Leeds
    To answer your question, you need to ubderstant the roles of central banks. Please goggle and you will appreciate my writing. It is quite complex which I tried to simplify in layman terms here.
    On the contrary, your postings are full of superficial "economic" theories that you so proudly proclaimed,without even the slightest idea of the way market operates. Complex is not the word, "beating around the bush" is. As put forward once by a member here , "A level" style economics writing.

    So what is so "compelling" about phantom's theory ? I failed so see anything that is so "compellingly" wrong.

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    Quote Originally Posted by amk
    On the contrary, your postings are full of superficial "economic" theories that you so proudly proclaimed,without even the slightest idea of the way market operates. Complex is not the word, "beating around the bush" is. As put forward once by a member here , "A level" style economics writing.

    So what is so "compelling" about phantom's theory ? I failed so see anything that is so "compellingly" wrong.
    Is is perfectly fine if you take on the other views. I am presenting the basic of economics which are well supported. Please goggle to understand more.

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    teddybear is offline Global recession is coming....
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    Really? Let's see then....
    On the contrary, I expect US to achieve 6.5% unemployment earliest by early 2016... So it means many more good years or many more bad years depending on which side your interest is in. So which side is your interest in? From what you said, I think it is very obvious...

    Quote Originally Posted by sgbuyer
    The US economy is now in bull run, the 7.8% unemployment can drop to 6.5% in less than 6 months.

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    you can increase M2 anytime you want, but you can never shrink (look at the 25% increase in 2009) lol

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    anything supply inelastic will follow, from this inflation-adjusted graph u can see that normally oil price should be around 20USD only



    gasoline



    college education

    Last edited by phantom_opera; 24-03-13 at 12:38.
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    As what the Fed had said, M2 will be reduced through selling of gov's bonds hence reducing the money supply and increasing the interest rates once inflation and unemployment hit target.
    Last edited by Leeds; 24-03-13 at 12:41.

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    copper



    gold in AUD (as AUD is more stable)

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    Quote Originally Posted by teddybear
    Really? Let's see then....
    On the contrary, I expect US to achieve 6.5% unemployment earliest by early 2016... So it means many more good years or many more bad years depending on which side your interest is in. So which side is your interest in? From what you said, I think it is very obvious...
    confirm many more good years.. in 2016.
    There is no good or bad location. There is only good or bad price.

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    Quote Originally Posted by Shanhz
    confirm many more good years.. in 2016.
    Remember that property is illiquid. 3 or 4 years is consider short term.

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    Quote Originally Posted by Leeds
    Is is perfectly fine if you take on the other views. I am presenting the basic of economics which are well supported. Please goggle to understand more.
    You still do not get it , do you ?

    In A level, undergrad, you learn about demand, supply, "basic economic theories". Everything fits the basic economic theories.
    In postgrad studies, you learn about abnormality in basic demand/supply equations. The impact and hence modifications of the assumptions where your "basic economic theories" needs to be adjusted.
    In doctorate, post doctorate studies, you realize all you learned about "basic economic theories" esp supply/demand are wrong. Human process is stochoiasic, decisions are often not rational, all ppl do not have equal information, physical commodities are not demand driven, existence of governments dominates supply decision, etc. new idea of economics evolves every day. Ppl realize human behavior is impossible to quantified. Top economists disagree with each other all the time.

    So where are you ? Very much like step 1. Wheereas phantom's theories are step 2 onwards. While you are still arguing "basic economic theories", many members here already look way beyond that. So please stop thinking only you know "basic theories" and others know nothing,such that you are so "compelled" to explain. It is you that need to learn what real life economics is.

    Pty supply is not only inelastic, demand is also sentiment driven. And pty supply in diff areas are not fungible with each other. Nothing is simple here.

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    Quote Originally Posted by amk
    You still do not get it , do you ?

    In A level, undergrad, you learn about demand, supply, "basic economic theories". Everything fits the basic economic theories.
    In postgrad studies, you learn about abnormality in basic demand/supply equations. The impact and hence modifications of the assumptions where your "basic economic theories" needs to be adjusted.
    In doctorate, post doctorate studies, you realize all you learned about "basic economic theories" esp supply/demand are wrong. Human process is stochoiasic, decisions are often not rational, all ppl do not have equal information, physical commodities are not demand driven, existence of governments dominates supply decision, etc. new idea of economics evolves every day. Ppl realize human behavior is impossible to quantified. Top economists disagree with each other all the time.

    So where are you ? Very much like step 1. Wheereas phantom's theories are step 2 onwards. While you are still arguing "basic economic theories", many members here already look way beyond that. So please stop thinking only you know "basic theories" and others know nothing,such that you are so "compelled" to explain. It is you that need to learn what real life economics is.

    Pty supply is not only inelastic, demand is also sentiment driven. And pty supply in diff areas are not fungible with each other. Nothing is simple here.
    I only need to ask you the following question:

    1. Why does the FED increase money supply?
    2. Why does the FED set target to reduce money supply (increase interest rates) when inflation/unemployment hit target?

    To me the above are basic marco economics. I had answered the above questions.

    Did you google "the roles of central banks" that I suggested you to do? If you do not, then there is no way you can understand my writings.

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