4 ms·

I see your point. But I think if we have more rounds of QE and use the money for UBI, we'll get to Japan levels of disenchantment for 20 years (or perhaps more

by NTDF9 8y ago

I see your point. But I think if we have more rounds of QE and use the money for UBI, we'll get to Japan levels of disenchantment for 20 years (or perhaps more because we have far more debt to repay). What I would like to see is some bad actors really getting wiped out, our GDP reduce a bit, asset values go down. That will cost a few jobs in the beginning. But, in some time deflation will reach a plateau (because everyone needs to buy food, but that's not as low as we need to get). Once plateaued, it would allow savers and risk takers to start investing in businesses themselves (these are the guys today with non-speculative money but unable to invest in overpriced assets). Ultimately, bad actors from 80s, 90s and 00s are still alive and still investing right now. If the moral hazard is always solved by inflation, guess how many more speculative bubbles we will have.

AnthonyMouse 8y ago
> But I think if we have more rounds of QE and use the money for UBI, we'll get to Japan levels of disenchantment for 20 years (or perhaps more because we have far more debt to repay). What happened in Japan was gradual deflation -- certainly something we want to avoid, but the opposite of what creating money by fiat does. The problem we currently have is that some assets (especially housing) are overvalued. There are two quick ways out of it and a gradation of slow ones. The first is that we just force a housing crash by instantly setting interest rates above 5% and suffer the consequences. This is probably the worst option. Its primary virtue is that it revalues housing and interest rates to more realistic numbers right now. Its short-term costs are very high. The second option is better but still not great, which is that we do the first one and at the same time instantaneously create a few trillion dollars in cash by fiat and hand it out, so that housing prices crash in real dollars but stay the same in nominal dollars, and the price of everything else (including wages) has a big one-time jump to catch up. Then nobody is underwater on their mortgage, nobody defaults, banks don't fail, etc. But it would still be very disruptive and screw over one side of every fixed-price contract on anything, require all prices to immediately be renegotiated, etc. The third option is to do the second option in slow motion. Eliminate the mortgage interest tax deduction, slowly raise interest rates, generally encourage people to take out smaller mortgages, all while creating new money (and transferring it to citizens without obligation) to offset 1:1 the destruction from the net debt reduction. The faster you want this to happen, the higher an annual rate of inflation you need. It may or may not cause nominal housing prices to actually go down depending on the pace, but real housing prices would decline until they're reasonable again. It's much less disruptive but takes longer. This is still the best option even if you demand quick results, because even doing it at an accelerated rate could complete the task in less time than it would take for everything to recover from the massive shock of trying to do it instantaneously. In other words, if it would take five or ten years to recover from doing it all at once then it's less disruptive to do it gradually over the course of the five or ten years it will take regardless. > What I would like to see is some bad actors really getting wiped out, our GDP reduce a bit, asset values go down. That will cost a few jobs in the beginning. The difficulty is in restricting the damage to bad actors. It's obviously undesirable to wipe out everyone who bought a home at inflated prices just because they had to live somewhere, or the retirement accounts of everyone whose company IRA only gives them a choice between mutual funds that all have similar exposure. > But, in some time deflation will reach a plateau (because everyone needs to buy food, but that's not as low as we need to get). The problem with deflation is that it's a destructive feedback loop. First people have less disposable income, e.g. because interest rates are higher and they have to spend their salaries on interest rather than consumption. Then they reduce optional consumption, and those industries downsize and people lose their jobs. Then those people stop buying everything except necessities because they have no jobs, so more other people lose their jobs. With unemployment on the rise, wages fall. With lower wages, there is even less consumption, so more people lose their jobs or have to take lower wages, and so on. Meanwhile investors notice that "holding cash" is suddenly a profitable low-risk investment strategy, so who needs to invest in medium-risk enterprises that generate value and create jobs? Not only does the stock market crash (along with everyone's retirement accounts), normal job creation ceases and market failures become abundant because no one can raise money to start a business or enter a market. The worse the markets do, the more people want to hold cash instead and the worse the markets do. Meanwhile the real value of all existing debt increases, forcing people to default, and defaults accelerate deflation. General deflation is utterly catastrophic. If you want to raise interest rates, either there has to be significant inflation already happening to offset the deflationary effect, or you need to offset it with a countervailing force, i.e. print as much money as it will destroy. > Once plateaued, it would allow savers and risk takers to start investing in businesses themselves (these are the guys today with non-speculative money but unable to invest in overpriced assets). You don't need deflation for this. The thing that causes the high asset values is really the low interest rates -- it's the same as the housing market. If risk-adjusted returns are higher than interest rates, people will borrow money and use it to bid up returns-yielding assets until they're not. If you want higher returns you need higher interest rates, but raising interest rates doesn't have to cause deflation as long as the money the higher interest rates destroy is recreated and used for something else -- like a UBI. Or even just tax reductions and the like. > Ultimately, bad actors from 80s, 90s and 00s are still alive and still investing right now. If the moral hazard is always solved by inflation, guess how many more speculative bubbles we will have. Deflating bubbles through inflation doesn't actually reward the people who pay too much, because the mechanism of operation is that the nominal price of the overvalued thing stays about the same while the price of everything else increases. The people holding the overvalued asset pay by having negative real returns, even if the nominal returns are zero or slightly positive.
- NTDF9 8y ago
  I agree with all of your thoughtful response and agree that option 3 is the best. While a deflationary spiral seems bad, and I agree its a bad spiral to go down, a deflation after massive inflation is ok. A deflation in asset prices through rising interest rates frees up surplus capital in the hands of people. For example, lesser rent/mortgage payments means more cash in hand to spend on say furniture. Lowering of prices would also allow other investors to take some risks. For example, if the cost of input goods into a factory start reducing, that would free up capital to hire more people or do more R&D. Of course, that only works while deleveraging from a bubble. I agree that deflation from "median" yoy inflation is probably not healthy. Too much deflation will also cause people to lose jobs because of lack of investment. But like I said, there is a floor to it. Capital freed up because of lower asset prices will circulate in the economy again. At the essence of this discussion, we are picking winners and losers. I'm not a fan of government making those picks. But, from what we've seen over the last 25 years, impunity from risks has created moral hazards already (such as promising 7% yoy growth to pension funds) with no concern of risk. The lenders need to take some risk and only that way will speculation end. For example, without bitcoin bust this year, people would've kept speculating the value of bitcoin to the moon (as was happening last year). With this bust, bitcoin denominated assets are still denominated the same but on real terms, they are deflated. Will that kill the bitcoin industry? Maybe. But for sure it will get rid of the excesses, speculation, fraud, overpromising and basically make humans aware that "Investments are subject to market risk. Please read the offer document carefully before investing" To conclude, while defaults sound bad, they're not as bad after such a bubble is created (so long as they don't cause systemic faults, at which point, the system should switch to minor inflation, UBI)
  - AnthonyMouse 8y ago
    > For example, lesser rent/mortgage payments means more cash in hand to spend on say furniture. The mortgage payments don't really go down, because of the higher interest rates. You pay less in principal but more in interest. It also encourages people to take out shorter mortgages with higher payments so they can stop paying high interest sooner, which increases mortgage payments in the short term. The lower cost only comes 15 years down the road when the mortgage is paid off sooner. And anyone with an existing fixed rate mortgage is paying no less, while anyone with an existing adjustable rate mortgage is paying more. They both also lose any equity they had and could otherwise have been able to borrow against for consumption, investment or emergency use. > Lowering of prices would also allow other investors to take some risks. For example, if the cost of input goods into a factory start reducing, that would free up capital to hire more people or do more R&D. Except the price of the output goods starts reducing at the same time, so there is no extra money to invest, a hard conversation to be had with employees who will have to have their salaries proportionally reduced (even though they still have to make the same mortgage payment), and a serious problem if you have any inputs whose price hasn't declined, e.g. due to long-term fixed-price contracts or existing inventory that was bought on credit. > Capital freed up because of lower asset prices will circulate in the economy again. It isn't really a matter of being freed up. At a given money supply, that's how much money people have in total. If the price of a transaction is lowered then the buyer has more and the seller has less, but the total is still the same. The issue with deflation is that it starts with the net destruction of money. So the buyer has less because it was destroyed, then the seller gets less because the buyer can't afford as much. They both have less. Then the next seller in the chain also gets less. All the prices have to be lowered for everything, but that takes time to shake out and in the meantime people can't afford rent, default on their obligations, etc. -- which destroys more money and triggers another cycle. The theory that there is a floor to it because in the limit people will pay whatever they have to for necessities doesn't even work, because if you're unemployed with an underwater mortgage you can't afford, that happens on day one and on day two the amount you have left to pay for necessities is zero. The limit is hunger riots and anarchy. It's the Great Depression. Getting within a hundred miles of the limit is doom. > At the essence of this discussion, we are picking winners and losers. I'm not a fan of government making those picks. Neither am I, but unless you're going to abolish the central bank, it has to set interest rates at some level and release some amount of money into circulation in some way and those choices will affect things. "If you choose not to decide you still have made a choice." > The lenders need to take some risk and only that way will speculation end. They did what we induced them to do. The original housing crisis was caused in large part by government policies promoting subprime mortgage lending, to allow lower income people to afford a home. The current housing bubble was caused by a government policy of low interest rates to shore up housing prices and save people from underwater mortgages. What sense does it make to purposely induce the banks to do something and then punish them for it? > For example, without bitcoin bust this year, people would've kept speculating the value of bitcoin to the moon (as was happening last year). With this bust, bitcoin denominated assets are still denominated the same but on real terms, they are deflated. No, no, it's just the opposite. Bitcoin is down -- it's the currency -- so asset prices in Bitcoin are up. You now have to pay more Bitcoin for the same ham sandwich. Bitcoin prices rising to the sky is the deflation spiral, prices crashing is hyperinflation. The same as the dollar loses value against the Euro (or vice versa) if there is more inflation in one region than the other. It's one of the other problems with deflation, and why Bitcoin is designed wrong. It's intrinsically deflationary -- the currency supply can't increase in proportion to demand for currency, so you get deflation as currency demand rises. But deflation causes currency speculation, so you get hyper-deflation, i.e. Bitcoin prices soar. As soon as the demand starts to fall off at that price, so does the speculation, so the currency crashes. Then people start talking about "the death of Bitcoin" even though its utility for non-speculators is the same as it ever was. If some actually useful applications of blockchain start to appear before Bitcoin is displaced by some non-deflationary alternative there will be another rise and fall. Eventually people will tire of that and fix/replace it with something that allows currency supply to respond proportionally to demand. > To conclude, while defaults sound bad, they're not as bad after such a bubble is created (so long as they don't cause systemic faults, at which point, the system should switch to minor inflation, UBI) I would agree with that -- something small enough not to have systemic effects should be allowed to fail as nature intended. But consumer debt is so large that it's inherently systemic. And it's a creation of government policy. Uncle Sam needs to clean up the mess it created.

by NTDF9 8y ago

AnthonyMouse 8y ago

> But I think if we have more rounds of QE and use the money for UBI, we'll get to Japan levels of disenchantment for 20 years (or perhaps more because we have far more debt to repay). What happened in Japan was gradual deflation -- certainly something we want to avoid, but the opposite of what creating money by fiat does. The problem we currently have is that some assets (especially housing) are overvalued. There are two quick ways out of it and a gradation of slow ones. The first is that we just force a housing crash by instantly setting interest rates above 5% and suffer the consequences. This is probably the worst option. Its primary virtue is that it revalues housing and interest rates to more realistic numbers right now. Its short-term costs are very high. The second option is better but still not great, which is that we do the first one and at the same time instantaneously create a few trillion dollars in cash by fiat and hand it out, so that housing prices crash in real dollars but stay the same in nominal dollars, and the price of everything else (including wages) has a big one-time jump to catch up. Then nobody is underwater on their mortgage, nobody defaults, banks don't fail, etc. But it would still be very disruptive and screw over one side of every fixed-price contract on anything, require all prices to immediately be renegotiated, etc. The third option is to do the second option in slow motion. Eliminate the mortgage interest tax deduction, slowly raise interest rates, generally encourage people to take out smaller mortgages, all while creating new money (and transferring it to citizens without obligation) to offset 1:1 the destruction from the net debt reduction. The faster you want this to happen, the higher an annual rate of inflation you need. It may or may not cause nominal housing prices to actually go down depending on the pace, but real housing prices would decline until they're reasonable again. It's much less disruptive but takes longer. This is still the best option even if you demand quick results, because even doing it at an accelerated rate could complete the task in less time than it would take for everything to recover from the massive shock of trying to do it instantaneously. In other words, if it would take five or ten years to recover from doing it all at once then it's less disruptive to do it gradually over the course of the five or ten years it will take regardless. > What I would like to see is some bad actors really getting wiped out, our GDP reduce a bit, asset values go down. That will cost a few jobs in the beginning. The difficulty is in restricting the damage to bad actors. It's obviously undesirable to wipe out everyone who bought a home at inflated prices just because they had to live somewhere, or the retirement accounts of everyone whose company IRA only gives them a choice between mutual funds that all have similar exposure. > But, in some time deflation will reach a plateau (because everyone needs to buy food, but that's not as low as we need to get). The problem with deflation is that it's a destructive feedback loop. First people have less disposable income, e.g. because interest rates are higher and they have to spend their salaries on interest rather than consumption. Then they reduce optional consumption, and those industries downsize and people lose their jobs. Then those people stop buying everything except necessities because they have no jobs, so more other people lose their jobs. With unemployment on the rise, wages fall. With lower wages, there is even less consumption, so more people lose their jobs or have to take lower wages, and so on. Meanwhile investors notice that "holding cash" is suddenly a profitable low-risk investment strategy, so who needs to invest in medium-risk enterprises that generate value and create jobs? Not only does the stock market crash (along with everyone's retirement accounts), normal job creation ceases and market failures become abundant because no one can raise money to start a business or enter a market. The worse the markets do, the more people want to hold cash instead and the worse the markets do. Meanwhile the real value of all existing debt increases, forcing people to default, and defaults accelerate deflation. General deflation is utterly catastrophic. If you want to raise interest rates, either there has to be significant inflation already happening to offset the deflationary effect, or you need to offset it with a countervailing force, i.e. print as much money as it will destroy. > Once plateaued, it would allow savers and risk takers to start investing in businesses themselves (these are the guys today with non-speculative money but unable to invest in overpriced assets). You don't need deflation for this. The thing that causes the high asset values is really the low interest rates -- it's the same as the housing market. If risk-adjusted returns are higher than interest rates, people will borrow money and use it to bid up returns-yielding assets until they're not. If you want higher returns you need higher interest rates, but raising interest rates doesn't have to cause deflation as long as the money the higher interest rates destroy is recreated and used for something else -- like a UBI. Or even just tax reductions and the like. > Ultimately, bad actors from 80s, 90s and 00s are still alive and still investing right now. If the moral hazard is always solved by inflation, guess how many more speculative bubbles we will have. Deflating bubbles through inflation doesn't actually reward the people who pay too much, because the mechanism of operation is that the nominal price of the overvalued thing stays about the same while the price of everything else increases. The people holding the overvalued asset pay by having negative real returns, even if the nominal returns are zero or slightly positive.

NTDF9 8y ago
I agree with all of your thoughtful response and agree that option 3 is the best. While a deflationary spiral seems bad, and I agree its a bad spiral to go down, a deflation after massive inflation is ok. A deflation in asset prices through rising interest rates frees up surplus capital in the hands of people. For example, lesser rent/mortgage payments means more cash in hand to spend on say furniture. Lowering of prices would also allow other investors to take some risks. For example, if the cost of input goods into a factory start reducing, that would free up capital to hire more people or do more R&D. Of course, that only works while deleveraging from a bubble. I agree that deflation from "median" yoy inflation is probably not healthy. Too much deflation will also cause people to lose jobs because of lack of investment. But like I said, there is a floor to it. Capital freed up because of lower asset prices will circulate in the economy again. At the essence of this discussion, we are picking winners and losers. I'm not a fan of government making those picks. But, from what we've seen over the last 25 years, impunity from risks has created moral hazards already (such as promising 7% yoy growth to pension funds) with no concern of risk. The lenders need to take some risk and only that way will speculation end. For example, without bitcoin bust this year, people would've kept speculating the value of bitcoin to the moon (as was happening last year). With this bust, bitcoin denominated assets are still denominated the same but on real terms, they are deflated. Will that kill the bitcoin industry? Maybe. But for sure it will get rid of the excesses, speculation, fraud, overpromising and basically make humans aware that "Investments are subject to market risk. Please read the offer document carefully before investing" To conclude, while defaults sound bad, they're not as bad after such a bubble is created (so long as they don't cause systemic faults, at which point, the system should switch to minor inflation, UBI)
- AnthonyMouse 8y ago
  > For example, lesser rent/mortgage payments means more cash in hand to spend on say furniture. The mortgage payments don't really go down, because of the higher interest rates. You pay less in principal but more in interest. It also encourages people to take out shorter mortgages with higher payments so they can stop paying high interest sooner, which increases mortgage payments in the short term. The lower cost only comes 15 years down the road when the mortgage is paid off sooner. And anyone with an existing fixed rate mortgage is paying no less, while anyone with an existing adjustable rate mortgage is paying more. They both also lose any equity they had and could otherwise have been able to borrow against for consumption, investment or emergency use. > Lowering of prices would also allow other investors to take some risks. For example, if the cost of input goods into a factory start reducing, that would free up capital to hire more people or do more R&D. Except the price of the output goods starts reducing at the same time, so there is no extra money to invest, a hard conversation to be had with employees who will have to have their salaries proportionally reduced (even though they still have to make the same mortgage payment), and a serious problem if you have any inputs whose price hasn't declined, e.g. due to long-term fixed-price contracts or existing inventory that was bought on credit. > Capital freed up because of lower asset prices will circulate in the economy again. It isn't really a matter of being freed up. At a given money supply, that's how much money people have in total. If the price of a transaction is lowered then the buyer has more and the seller has less, but the total is still the same. The issue with deflation is that it starts with the net destruction of money. So the buyer has less because it was destroyed, then the seller gets less because the buyer can't afford as much. They both have less. Then the next seller in the chain also gets less. All the prices have to be lowered for everything, but that takes time to shake out and in the meantime people can't afford rent, default on their obligations, etc. -- which destroys more money and triggers another cycle. The theory that there is a floor to it because in the limit people will pay whatever they have to for necessities doesn't even work, because if you're unemployed with an underwater mortgage you can't afford, that happens on day one and on day two the amount you have left to pay for necessities is zero. The limit is hunger riots and anarchy. It's the Great Depression. Getting within a hundred miles of the limit is doom. > At the essence of this discussion, we are picking winners and losers. I'm not a fan of government making those picks. Neither am I, but unless you're going to abolish the central bank, it has to set interest rates at some level and release some amount of money into circulation in some way and those choices will affect things. "If you choose not to decide you still have made a choice." > The lenders need to take some risk and only that way will speculation end. They did what we induced them to do. The original housing crisis was caused in large part by government policies promoting subprime mortgage lending, to allow lower income people to afford a home. The current housing bubble was caused by a government policy of low interest rates to shore up housing prices and save people from underwater mortgages. What sense does it make to purposely induce the banks to do something and then punish them for it? > For example, without bitcoin bust this year, people would've kept speculating the value of bitcoin to the moon (as was happening last year). With this bust, bitcoin denominated assets are still denominated the same but on real terms, they are deflated. No, no, it's just the opposite. Bitcoin is down -- it's the currency -- so asset prices in Bitcoin are up. You now have to pay more Bitcoin for the same ham sandwich. Bitcoin prices rising to the sky is the deflation spiral, prices crashing is hyperinflation. The same as the dollar loses value against the Euro (or vice versa) if there is more inflation in one region than the other. It's one of the other problems with deflation, and why Bitcoin is designed wrong. It's intrinsically deflationary -- the currency supply can't increase in proportion to demand for currency, so you get deflation as currency demand rises. But deflation causes currency speculation, so you get hyper-deflation, i.e. Bitcoin prices soar. As soon as the demand starts to fall off at that price, so does the speculation, so the currency crashes. Then people start talking about "the death of Bitcoin" even though its utility for non-speculators is the same as it ever was. If some actually useful applications of blockchain start to appear before Bitcoin is displaced by some non-deflationary alternative there will be another rise and fall. Eventually people will tire of that and fix/replace it with something that allows currency supply to respond proportionally to demand. > To conclude, while defaults sound bad, they're not as bad after such a bubble is created (so long as they don't cause systemic faults, at which point, the system should switch to minor inflation, UBI) I would agree with that -- something small enough not to have systemic effects should be allowed to fail as nature intended. But consumer debt is so large that it's inherently systemic. And it's a creation of government policy. Uncle Sam needs to clean up the mess it created.