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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 dow

by 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

> 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.