5 ms·

If houses got cheaper every year, very few people would want to buy them, and people stuck with mortgages would have a powerful incentive to walk away from them

by sethg 15y ago

If houses got cheaper every year, very few people would want to buy them, and people stuck with mortgages would have a powerful incentive to walk away from them. If cars got cheaper every year, then people would put off buying new cars for longer. If gold got cheaper every year, then a lot of gold coins would be dumped on the market. If everything got cheaper every year, then people with money in the bank (or under the mattress) have an incentive to reduce how much money they spend, in general. This would lead to factories reducing their production and laying off employees, giving the remaining employees an even more powerful incentive to hang onto their savings.

jonkho 15y ago
The flaw in your argument is that currency is subjected to demand pressures as well. How so? When demand for housing, food, electronics is high, then it automatically implies demand for currency is low. That is another way of saying people are willing to give up currency for real goods; which is another way of saying people are putting less value on the currency over physical goods; which means the barter power of the currency is decreasing; which means lower buying power with respect to the currency. That is key point. This means that there is rise in prices (without monetary intervention) when there is preference to own goods. And we all want goods and services in the end game. But this rise in prices do not spiral out of control because there is demand for currency as well - which really is demand for time preference, that being the choice to consume later on. We also know the demand for time preference is not unlimited because ultimately have to consume to make good of the money. Therefore, with greater population, comes with greater demand for money, but also comes with greater demands for owning/consuming goods. So that is why price levels will not absolutely decline over time because money supply is fixed. In fact, history proves this point -- look at the USA data in pre-federal reserve era.
joelhaus 15y ago
> This would lead to factories reducing their production and laying off employees Trade imbalances resulting from an economy run on bitcoins would also decimate most domestic production, so sethg's statement is doubly true. It's the same reason you hear members of congress railing against China's currency peg that artificially deflates the yuan; it makes Chinese exports cheaper to the rest of the world.
- nunb 15y ago
  Does "deflates the yuan" mean the yuan is deflationary? In that case its value should get higher and exports should decrease, as happened with the Japanese Yen.
  - joelhaus 15y ago
    A deflated Yuan allows you to buy more Chinese goods for the same USD[1]. Regarding the second half of your question, you must look at the supply of the currency versus the demand for that currency. It's common for governments to intervene in foreign exchange markets as a means to an end. This makes it a difficult market to invest in, as artificial forces can move the market. Just because there might be a fundamental economic reason for the Yen to appreciate, that doesn't mean the Japanese (or some other) government won't intervene in order to improve their trade balance. The mechanism that the Chinese government uses to keep the Yuan pegged to the USD, is the purchase of U.S. treasuries[2]. Here is some additional info: http://fpc.state.gov/documents/organization/65773.pdf http://fpc.state.gov/documents/organization/65773.pdf http://www.nakedcapitalism.com/2010/03/on-chinas-currency-peg-and-potential-policy-actions.html http://www.nakedcapitalism.com/2010/03/on-chinas-currency-pe... -------------------- [1] http://en.wikipedia.org/wiki/Fixed_exchange_rate_system#Mechanism http://en.wikipedia.org/wiki/Fixed_exchange_rate_system#Mech... [2] http://www.treasury.gov/press-center/press-releases/Pages/js774.aspx http://www.treasury.gov/press-center/press-releases/Pages/js...

by sethg 15y ago

jonkho 15y ago

The flaw in your argument is that currency is subjected to demand pressures as well. How so? When demand for housing, food, electronics is high, then it automatically implies demand for currency is low. That is another way of saying people are willing to give up currency for real goods; which is another way of saying people are putting less value on the currency over physical goods; which means the barter power of the currency is decreasing; which means lower buying power with respect to the currency. That is key point. This means that there is rise in prices (without monetary intervention) when there is preference to own goods. And we all want goods and services in the end game. But this rise in prices do not spiral out of control because there is demand for currency as well - which really is demand for time preference, that being the choice to consume later on. We also know the demand for time preference is not unlimited because ultimately have to consume to make good of the money. Therefore, with greater population, comes with greater demand for money, but also comes with greater demands for owning/consuming goods. So that is why price levels will not absolutely decline over time because money supply is fixed. In fact, history proves this point -- look at the USA data in pre-federal reserve era.

joelhaus 15y ago

> This would lead to factories reducing their production and laying off employees Trade imbalances resulting from an economy run on bitcoins would also decimate most domestic production, so sethg's statement is doubly true. It's the same reason you hear members of congress railing against China's currency peg that artificially deflates the yuan; it makes Chinese exports cheaper to the rest of the world.

nunb 15y ago
Does "deflates the yuan" mean the yuan is deflationary? In that case its value should get higher and exports should decrease, as happened with the Japanese Yen.
- joelhaus 15y ago
  A deflated Yuan allows you to buy more Chinese goods for the same USD[1]. Regarding the second half of your question, you must look at the supply of the currency versus the demand for that currency. It's common for governments to intervene in foreign exchange markets as a means to an end. This makes it a difficult market to invest in, as artificial forces can move the market. Just because there might be a fundamental economic reason for the Yen to appreciate, that doesn't mean the Japanese (or some other) government won't intervene in order to improve their trade balance. The mechanism that the Chinese government uses to keep the Yuan pegged to the USD, is the purchase of U.S. treasuries[2]. Here is some additional info: http://fpc.state.gov/documents/organization/65773.pdf http://fpc.state.gov/documents/organization/65773.pdf http://www.nakedcapitalism.com/2010/03/on-chinas-currency-peg-and-potential-policy-actions.html http://www.nakedcapitalism.com/2010/03/on-chinas-currency-pe... -------------------- [1] http://en.wikipedia.org/wiki/Fixed_exchange_rate_system#Mechanism http://en.wikipedia.org/wiki/Fixed_exchange_rate_system#Mech... [2] http://www.treasury.gov/press-center/press-releases/Pages/js774.aspx http://www.treasury.gov/press-center/press-releases/Pages/js...