Posted by: Dirk | November 18, 2008

Real economics at work

One falling price doesn’t mean deflation, but here is what happened to me today. I was called by my telecom, they wish to extend my contract offering me the current lower price. In Germany, you are normally bound to a telecom for 2 years, but this is changing. As competition is increasing, price competition follows. Now that the business barometer points southwards, firms seem to be competing by lowering prices. This will probably also happen with cars, already I have seen Fiats driving around which can be rented for as low as 99€ a month (so, at least, the fat stickers on them claim).

Inflation is also falling since petrol prices have gone down to €1,17 after being close to €1,50 only some months ago. But the big question is: do I feel wealthier now? Do I spend the money that I have saved through the decline in prices? I doubt it. If people like me start saving without explicitly thinking about it, we might end up in a situation where spending falls down and then output contracts as the result, producing unemployment. This would be the paradox of saving. Not all hope is lost though. Santa’s coming, maybe he can make us bail ourselves out.

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