6 ms·

Keynes doesn't say what you think he does. But I can see where you are going wrong. Look at the way you use water as a metaphor, but use it to mean simultaneous

Keynes doesn't say what you think he does. But I can see where you are going wrong. Look at the way you use water as a metaphor, but use it to mean simultaneously (1) the money supply (increasing/decreasing), and (2) the wave-like boom-bust flow of economic activity. Conflating these things leads you to paradoxical statements like "no new water is created" when you are taking about governments increasing the money supply. Or the way you say "all the splashing is magnifying the distortions" when this is theoretically impossible: preventing deflation by printing money cannot cause worse deflation by definition. What I think you want to argue is that MAN-MADE changes to the money supply are bad. But not only is this empirically wrong (read about "The Great Moderation"), it brings us back to the point that Keynes made above, when he asserted through a very simple analogy that there is no such thing as a natural economy as long as your idea of one is based around a currency (like gold) the supply of which can only be increased by digging it out of the ground. In this situation you CANNOT be worse off by having your government increase the money supply, because market forces will slowly encourage people to "print more money" themselves by just digging it out of the ground. Which means we're all better off to skip the shoveling and spend the labor on building an airport or something with at least the potential for social return. My contact information is in my profile -- I'd be happy to carry this on over email if you'd like to continue. And I'd encourage you to read Keynes. And also Kindleberger and Eichengreen if you genuinely believe that the worst of what we are seeing these days is anything like what the world has gone through in the past.

stretchwithme 16y ago
when more money is printed, the value of existing money goes down. all that's happening is that value is being taken from the general population and being given to the banks. deflation is not a problem. you had huge asset inflation and this is merely the correction of that distortion. The Fed's easy money and loose lending of Fannie and Freddie caused a doubling in price of the most expensive thing most people will ever buy. It was completely unsustainable and its deflation a necessary occurrence if normal economic growth is ever to be restored. Throwing money at every expansion of government ever conceived of will not restore it.
- fbailey 16y ago
  Well, deflation can be the worst problem any economy can have. If my money is worth more if I don't invest it and just hold onto it, I'm not going to invest anything. This is actually a situation that killed several medieval economies, there was just not enough currency to go round. Our modern western economy is worth a lot more than the combined gold supply of the world, so if we want to have a working currency we have to print it. Now the remaining question is how much to print, you can never print exactly the amount you would need to get 0% inflation, so you have either inflation or deflation. Since deflation makes investment worthless and kills your economy, inflation is the way to go. If no money is printed you have deflation there is no way to have a growing economy and not increase the monetary supply.
  - stretchwithme 16y ago
    Can you give me an example where this deflation worked as you described, where there was too much wealth and gold didn't provide enough money? I think it would be interesting to examine the policies that lead up to investments being worthless. And also an example where Keynesian has been followed and 0% inflation was achieved by just going with a big enough stimulus. From what I can see, out in the real world, the biggest practitioners of this theory are wracked with big growing systemic risks. At least those with large economic resources that allows them to gamble. China is doing this right now and when it pops, the Keynesians will be telling us how no one could have it seen it coming. The poor countries that believe in wealth through currency manipulation end up defaulting on the loans required to play these games. Meanwhile, there are plenty of examples where government focussed on a stable legal system and property rights. Switzerland, Singapore, Hong Kong. And plenty that used to have these conditions but got wealthy enough for its politicians to being playing the artificial growth games, like Japan and the US, who are actively pissing away all of their advantages. And your examples?
    - trevelyan 16y ago
      The Great Depression was a case of deflation transmitted internationally via the gold standard. Friedman followed Keynes here although this was not demonstrated statistically until Barry Eichengreen showed up with country-by-country evidence that recovery followed quickly once countries were forced off the standard (Golden Fetters). See also: http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021108/default.htm http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/200211... China took a Keynesian approach in 2008 and rode out the international economic crisis fairly well. There is a massive real estate bubble in major cities, but this dates back to the late 1990s and is being fueled by China's lack of property taxes (making real estate free to own) and the lack of alternate investment opportunities (Chinese citizens cannot invest abroad). So China is seeing local bubbles and general inflation. The fact that local governments are financed by land sales creates a further incentive to jack up land prices and puts the central government in a bind. If you're interested in this stuff, you might find this podcast worth listening to: http://popupchinese.com/lessons/sinica/attack-of-the-china-bears http://popupchinese.com/lessons/sinica/attack-of-the-china-b... It's a good question what will happen to the Chinese economy when the bubble bursts. But whatever precedes that doesn't have anything to do with Keynes or liquidity traps or deflation. And if you still have trouble with this think back to the basics and explain where Keynes' analogy is wrong. Why -- in the situation he describes of general deflation (a decrease in the money supply) -- would you ever want to increase the money supply by forcing people to dig rocks out of the ground? Why not just print more money and build an airport?

stretchwithme 16y ago

when more money is printed, the value of existing money goes down. all that's happening is that value is being taken from the general population and being given to the banks. deflation is not a problem. you had huge asset inflation and this is merely the correction of that distortion. The Fed's easy money and loose lending of Fannie and Freddie caused a doubling in price of the most expensive thing most people will ever buy. It was completely unsustainable and its deflation a necessary occurrence if normal economic growth is ever to be restored. Throwing money at every expansion of government ever conceived of will not restore it.

fbailey 16y ago
Well, deflation can be the worst problem any economy can have. If my money is worth more if I don't invest it and just hold onto it, I'm not going to invest anything. This is actually a situation that killed several medieval economies, there was just not enough currency to go round. Our modern western economy is worth a lot more than the combined gold supply of the world, so if we want to have a working currency we have to print it. Now the remaining question is how much to print, you can never print exactly the amount you would need to get 0% inflation, so you have either inflation or deflation. Since deflation makes investment worthless and kills your economy, inflation is the way to go. If no money is printed you have deflation there is no way to have a growing economy and not increase the monetary supply.
- stretchwithme 16y ago
  Can you give me an example where this deflation worked as you described, where there was too much wealth and gold didn't provide enough money? I think it would be interesting to examine the policies that lead up to investments being worthless. And also an example where Keynesian has been followed and 0% inflation was achieved by just going with a big enough stimulus. From what I can see, out in the real world, the biggest practitioners of this theory are wracked with big growing systemic risks. At least those with large economic resources that allows them to gamble. China is doing this right now and when it pops, the Keynesians will be telling us how no one could have it seen it coming. The poor countries that believe in wealth through currency manipulation end up defaulting on the loans required to play these games. Meanwhile, there are plenty of examples where government focussed on a stable legal system and property rights. Switzerland, Singapore, Hong Kong. And plenty that used to have these conditions but got wealthy enough for its politicians to being playing the artificial growth games, like Japan and the US, who are actively pissing away all of their advantages. And your examples?
  - trevelyan 16y ago
    The Great Depression was a case of deflation transmitted internationally via the gold standard. Friedman followed Keynes here although this was not demonstrated statistically until Barry Eichengreen showed up with country-by-country evidence that recovery followed quickly once countries were forced off the standard (Golden Fetters). See also: http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021108/default.htm http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/200211... China took a Keynesian approach in 2008 and rode out the international economic crisis fairly well. There is a massive real estate bubble in major cities, but this dates back to the late 1990s and is being fueled by China's lack of property taxes (making real estate free to own) and the lack of alternate investment opportunities (Chinese citizens cannot invest abroad). So China is seeing local bubbles and general inflation. The fact that local governments are financed by land sales creates a further incentive to jack up land prices and puts the central government in a bind. If you're interested in this stuff, you might find this podcast worth listening to: http://popupchinese.com/lessons/sinica/attack-of-the-china-bears http://popupchinese.com/lessons/sinica/attack-of-the-china-b... It's a good question what will happen to the Chinese economy when the bubble bursts. But whatever precedes that doesn't have anything to do with Keynes or liquidity traps or deflation. And if you still have trouble with this think back to the basics and explain where Keynes' analogy is wrong. Why -- in the situation he describes of general deflation (a decrease in the money supply) -- would you ever want to increase the money supply by forcing people to dig rocks out of the ground? Why not just print more money and build an airport?