Pigou! Bless you.
The Pigou effect in economics describes the theoretical cause-and-effect relationship between deflation and other factors, like wealth and consumption. Let’s take a look at what Pigou was pigging on about.
During deflationary times...rare times, indeed...the poor man is suddenly rich! Well, richer. Deflation means prices go down, which makes your hard-earned dollars worth more than they were before. That’s kind of the same thing as if your income went up, like if you got a raise. And what would you do when you get a raise? No, you’re not going to be a responsible person and put it all in your retirement accounts. Arthur Pigou believed you’d spend...at least a bit more than before.
So deflation means increased wealth, and therefore increased consumption. What about employment?
The same logic applies: employers have more dollars to spend, too, which means more workers to buy. And they’ll be needing to hire more workers, because increased consumption means increased demand for stuff. Supply’s gotta meet that market demand somehow.
This whole thought process is pretty anti-Keynesian, since Keynes thought the Fed should do something during deflationary times. Arthur Pigou said we can chill during deflationary periods, since the market will self-correct: prices go down, wealth goes up, spending goes up, employment goes up, naturally.
There are anecdotes for and against the Pigou effect, but a funny one happened in Japan. It was thought that people weren’t spending more when prices fell in the 1990s because, like short-term traders, they thought prices would keep falling. Why buy now when you can buy later, if prices are continuing to fall?
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Finance: What is Recession?15 Views
finance a la shmoop what is recession well here's one here's another and
another and well here's an economic recession so technically when GDP [Set of teeth appear]
declines for two sequential quarters that is a recession and you can glean
enough from this most excellent chart that in most years GDP grows not
massively but relatively steadily and with compounding the US has grown GDP
from a trickle to a torrent in a recession economic activity declines [Recession definition appears]
maybe a half a percent a percent maybe two percent and you might not think
that's a big deal but we're a nation living on credit that is plastic these [Man using credit card]
things mortgages car loans bunch of other credit II kind of things so a
decline of even 1% when we were expecting growth of two is a delta of 3%
and that change is exacerbated with leverage when people fear for their job
safety they stop buying those extra pairs of earrings at the mall they get [Woman biting her nails]
one less tattoo and they stop making appointments at Botox Depot so all of
the sudden activity in given quote luxury sectors or otherwise unquote just [Person receiving a tattoo]
stops dead and there's a multiplier effect here as well because a wealthy
banker who used to throw 20 parties a year now only throws four so all those [Calendar displaying party days appears]
bartenders and oboe players and ice sculptors yeah they're all out of work
as well and then they buy less beer and that new ice pick the sculptor was gonna
buy yeah well she'll just sharpen her own and make do with it you know until
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recessions they're dangerous and credit high credit makes them all the more
dangerous so be wary
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