Why is an economic depression bad for consumers even though prices are cheaper?
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Lets consider the “Goldilocks scenario”. The economy is booming, but not so much that its getting out of control. We have modest inflation. This means that there is a small but significant over time pressure on those with savings to invest it. The need to put one’s savings somewhere, in order to not lose out to inflation actually creates a demand for opportunities, it drives the creation of new companies with new jobs. This creates demand for labor, raising wages and creating individual opportunity for everyone.
Prices going down and shrinking opportunity, go hand in hand. Do you know why you don’t hear about as many strikes in a recession as you do in a boom? Its because when there is no money to share, there is no leverage in demanding more. Workers strike when they have leverage to make demands, and that is when the company is making money, when the economy is going up… when inflation is putting pressure on everyone to take risks.
Prices only go down when demand is massively reduced, usually because tons and tons of people lost their job.
If there’s a small drop in demand, margins are thick enough that the company can face tank the hit, waiting for the market to go back up. They don’t want to give people the impression that X product should get to be a reasonable price after all. So if they lower the prices it means that they aren’t making any money and don’t see it changing any time soon. Which means that the 10c less that the item costs probably doesn’t make up for the fact that you lost your job and can’t find another one.
Because those consumers typically will have less money to spend during an economic downturn. And prices aren’t necessarily cheaper during a depression, in fact the precursor for an economic depression is typically very fast growth of prices (inflation).
To explain more in depth (but still very generally as economics is a complex subject):
In basic terms and when we hear what’s good or bad for the economy we consider regular people with little savings who rely on monthly wages to make ends meet.
If you think about it you’ll realise that growth in the prices of houses isn’t as bad for someone who has 10 houses. But it is bad for someone who doesn’t have a house and is looking to save for one from putting away a part of their monthly wage. So typically we say inflation is bad because it’s bad for the majority of people but not necessarily as bad or bad at all for everyone. So just keep it mind – we (and everyone else) are talking about those working class people and their perspective.
Anyway what happens during an economic depression is businesses close down due to lack of profits (caused by many possible factors from natural disasters to markets changing to even workers wages becoming too high for the market). When businesses close they let people go, making those people go look for a job in a now smaller job market (because there are less businesses). This is hard to do and many don’t manage obviously. More unemployed people means less people with money, this means less spending. This means even more businesses closing down and so on.
A regular person will have a very hard time living unemployed since they don’t have any other assets to live off. They won’t pay their rent or bills making it worse for the landlord and whatever business bills them too. Making them lower their spending and making other business close down too.
It isn’t bad if you keep your income stable, it’s bad for those who lose their jobs. If you have a secure job, it’s a great scenario to be in for personal gain.
Because $5 milk when you have a job is cheaper than $2 milk when you are unemployed and can’t find a job for 12 months.
The prices being cheaper isn’t bad, what’s bad is that in an economic depression a lot of people lose their jobs, which in turn drives down wages as people get more desperate.
If you make $250/day, paying $25 to feed your family is probably affordable.
If you make $0/day, $15 to feed your family is not affordable, even though it’s cheaper than $25.
What matters is the ratio of price to income, not strictly price.
For individuals with iron ricebowl jobs immune from retrenchment (for my country: govt jobs, education, non-elective healthcare) it could be a good thing. For people with massive amounts of cash ready to sweep up businesses and property at extremely low prices it could be a good thing.
My parents work govt jobs and during the 08 crisis i admittedly didnt feel much of an impact if at all, admittedly i may also have been too young to notice.
Have you heard of “*fractional reserve banking*”? Basically banks are allowed to lend 90% of their customer’s deposits.
So Mister A puts $500K on his account, of which the banks lends $450K to Mister B, who uses it to buy something from Mister C, who puts it in his account, of which the bank lends $405K to Mister D, and so on…
Before you realise it, the bank has artificially put into circulation $4.5 million out of Mister A’s seed $500K. The bank acts as the heart of the economy, and pumps cash through the arteries. This creates what is called the “*velocity of money*”. How fast money changes hand.
With that established, when you have an economic depression, two things happen. The bank might decide that lending money to Mister B is too risky, or Mister B. might consider it wiser to not purchase from Mister C.
Before you realise it, the velocity of money drops like flies, and the total that the bank artificially created is no longer $4.5 million. Maybe it’s only $2.5 million.
Even if prices drop, everyone has less money that they can get or spend. This causes businesses to close and people to loose their jobs, which makes an already bad situation become worse.
If you losse your job having no income and cheaper prices means you are worse off than having income and higher prices
Labour is a “price.” So basically it means salaries will also be cut or people will be fired.
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