4 ms·

Good luck. You're swimming against a tide of people minted from education with the mindset of deflation bad, inflation good. Of course, everyone likes deflati

by brc 14y ago

Good luck. You're swimming against a tide of people minted from education with the mindset of deflation bad, inflation good. Of course, everyone likes deflation when it means they can buy more for less. Of course, if prices of things get so low that people start to purchase, then deflation will eventually reverse, unless you assume that deflation will continue forever until prices reach zero and everything is free. Of course, everyone force-fed a diet of Keynes assumes that hoarding relates to stuffing mattresses full of money instead of holding cash in banks, where the bank can lend the money out and still invest. They uncritically swallow the line that a central bank inflating at will is the best thing for an economy. Inflation/deflation are just two phenomena with different winners and losers, the same as high/low currency values. Deflation favors lenders and savers, and inflation favors borrowers and spenders. The inflationists always assume that the borrow/spend nexus is far more important than the lend/save. But of course saving drives all investment, so a period of deflation isn't necessarily a bad thing. In fact we see deflation in specific markets like housing which helps to clear out the bad decisions and mistakes and set the base for future expansion. Once you clear your head of the foolish 'borrow and spend' mantra of the last 80 or so years, and realise that investment and production are more important than spending and consuming, it becomes obvious that a bit of mild deflation isn't necessarily the hobgoblin it is made out to be. The simple fact is that no economy and social order has ever imploded due to deflation, but inflation has some pretty terrible economic and social effects when it gets out of control. Deflation, like any long position, can only ever go down to zero. Inflation, however, is like any short position and can go to infinity.

EGreg 14y ago
Just because people hold money in bank does not mean that the banks will lend people money. In fact, after being bailed out with TARP, many banks did not turn around and increase the amount of lending that they were doing. However, most of them did pay back their lender (the Fed). As with anything, too much of any extreme is bad. Too much inflation or too much deflation. But with fiat currency, it's natural to expect steady inflation over time -- especially if it's not tied to a commodity (e.g. after we got off the gold standard). That's because there's value in lending money to some enterprise, and that's the time value of money. Organizations with good credit (e.g. banks) issue and lend money to organizations with worse credit. So they will expect a return in the enterprise, and overall if they guess right, the enterprise will have returned principal + interest to the lender. If they don't then the money disappears from the system, but in most booming economic times, more money is created, and eventually more money is printed to provide more base money in order to pay back all that interest. So it's like an elastic money supply that's being prodded by lenders / banks looking for a return.
- eru 14y ago
  > If they don't then the money disappears from the system, but in most booming economic times, more money is created, and eventually more money is printed to provide more base money in order to pay back all that interest. The financial systems works different. You seem to be conflating wealth and money. Money doesn't disappear from the system when someone fails to repay a loan. (Unless you are taking a rather wide, but still sane, definition of money, and hold that lending increases the money supply.) No extra money needs to be printed to pay back all that interest. That's because central banks pay a dividend to their governments.
  - EGreg 14y ago
    I am talking about M2 money supply shrinking when borrowers default and/or banks fail, as in the great depression -- right? http://en.wikipedia.org/wiki/Money_supply#United_States http://en.wikipedia.org/wiki/Money_supply#United_States Also I am not sure what mechanism you are describing when you say that central banks pay dividends to their governments. On the contrary, governments like the US use their central banking system to do open market operations on bonds they issue to finance their operations, and usually have to pay interest on that debt. No?
    - eru 14y ago
      > Also I am not sure what mechanism you are describing when you say that central banks pay dividends to their governments. Please see e.g. https://en.wikipedia.org/wiki/Central_bank#Currency_issuance https://en.wikipedia.org/wiki/Central_bank#Currency_issuance: "The European Central Bank remits its interest income to the central banks of the member countries of the European Union. The US Federal Reserve remits all its profits to the U.S. Treasury." https://de.wikipedia.org/wiki/Deutsche_Bundesbank#Gewinn https://de.wikipedia.org/wiki/Deutsche_Bundesbank#Gewinn has some more information, but you have to speak German (or use Google Translate). Lower than expected profits of the Bundesbank have been in the news in 2011.
tatsuke95 14y ago
>"In fact we see deflation in specific markets like housing which helps to clear out the bad decisions and mistakes and set the base for future expansion." Periods of asset deflation after over-investment/economic distortions may act as a balance, but it isn't "good". Having your net worth halved is crippling. >"The simple fact is that no economy and social order has ever imploded due to deflation" No economy implodes due to deflation or inflation alone. Countries like Germany or Zimbabwe had production capacity collapse. That led to printing money (to stave off deflation), which in turn led to hyperinflation. Too much money chasing too few goods, remember? In order to have too few goods, the country's production has to go into the toilet. Saying deflation isn't bad flies in the face of many of the greatest economic minds we know, with tons of research and theory to back it up.
- solistice 14y ago
  I'm actually genuinely curious what research and theory you are referring to, and I wouldn't know where to start looking. Could you give me some pointers?
  - begurken 14y ago
    From Wikipedia: http://en.wikipedia.org/wiki/Causes_of_the_Great_Depression http://en.wikipedia.org/wiki/Causes_of_the_Great_Depression "In their 1963 book A Monetary History of the United States, 1867-1960, Milton Friedman and Anna Schwartz laid out their case for a different explanation of the Great Depression. Essentially, the Great Depression, in their view, was caused by the fall of the money supply. Friedman and Schwartz write: "From the cyclical peak in August 1929 to a cyclical trough in March 1933, the stock of money fell by over a third." The result was what Friedman calls the "Great Contraction" — a period of falling income, prices, and employment caused by the choking effects of a restricted money supply. Friedman and Schwartz argue that people wanted to hold more money than the Federal Reserve was supplying. As a result people hoarded money by consuming less. This caused a contraction in employment and production since prices were not flexible enough to immediately fall." Here's a video of Milton Friedman (he won a Nobel Prize for this work) explaining how monetary contraction caused the great depression: https://www.youtube.com/watch?v=O7pnjzCuSv8 https://www.youtube.com/watch?v=O7pnjzCuSv8 "By 1933, the quantity of money in the United States had gone down by a third." ... "For every 3 dollars of currency and deposits that people had had in 1929, only 2 dollars were left." One thing people often forget about deflation is that a general decline in the level of prices also includes labour prices and interest rates. It is characterised by zero interest rates, falling prices, falling wages, and because wages are 'sticky-down', high unemployment. You really do not want to live in a deflationary economy unless you have a large pile of cash. It's miserable. A second, and in my view, more valid definition of deflation is a contraction of the money supply. Ben Bernanke (current Fed Chairman) is an expert on causes of the great depression, and has been doing everything he can to ensure that the US money supply does not shrink.

by brc 14y ago

EGreg 14y ago

Just because people hold money in bank does not mean that the banks will lend people money. In fact, after being bailed out with TARP, many banks did not turn around and increase the amount of lending that they were doing. However, most of them did pay back their lender (the Fed). As with anything, too much of any extreme is bad. Too much inflation or too much deflation. But with fiat currency, it's natural to expect steady inflation over time -- especially if it's not tied to a commodity (e.g. after we got off the gold standard). That's because there's value in lending money to some enterprise, and that's the time value of money. Organizations with good credit (e.g. banks) issue and lend money to organizations with worse credit. So they will expect a return in the enterprise, and overall if they guess right, the enterprise will have returned principal + interest to the lender. If they don't then the money disappears from the system, but in most booming economic times, more money is created, and eventually more money is printed to provide more base money in order to pay back all that interest. So it's like an elastic money supply that's being prodded by lenders / banks looking for a return.

eru 14y ago
> If they don't then the money disappears from the system, but in most booming economic times, more money is created, and eventually more money is printed to provide more base money in order to pay back all that interest. The financial systems works different. You seem to be conflating wealth and money. Money doesn't disappear from the system when someone fails to repay a loan. (Unless you are taking a rather wide, but still sane, definition of money, and hold that lending increases the money supply.) No extra money needs to be printed to pay back all that interest. That's because central banks pay a dividend to their governments.
- EGreg 14y ago
  I am talking about M2 money supply shrinking when borrowers default and/or banks fail, as in the great depression -- right? http://en.wikipedia.org/wiki/Money_supply#United_States http://en.wikipedia.org/wiki/Money_supply#United_States Also I am not sure what mechanism you are describing when you say that central banks pay dividends to their governments. On the contrary, governments like the US use their central banking system to do open market operations on bonds they issue to finance their operations, and usually have to pay interest on that debt. No?
  - eru 14y ago
    > Also I am not sure what mechanism you are describing when you say that central banks pay dividends to their governments. Please see e.g. https://en.wikipedia.org/wiki/Central_bank#Currency_issuance https://en.wikipedia.org/wiki/Central_bank#Currency_issuance: "The European Central Bank remits its interest income to the central banks of the member countries of the European Union. The US Federal Reserve remits all its profits to the U.S. Treasury." https://de.wikipedia.org/wiki/Deutsche_Bundesbank#Gewinn https://de.wikipedia.org/wiki/Deutsche_Bundesbank#Gewinn has some more information, but you have to speak German (or use Google Translate). Lower than expected profits of the Bundesbank have been in the news in 2011.

tatsuke95 14y ago

>"In fact we see deflation in specific markets like housing which helps to clear out the bad decisions and mistakes and set the base for future expansion." Periods of asset deflation after over-investment/economic distortions may act as a balance, but it isn't "good". Having your net worth halved is crippling. >"The simple fact is that no economy and social order has ever imploded due to deflation" No economy implodes due to deflation or inflation alone. Countries like Germany or Zimbabwe had production capacity collapse. That led to printing money (to stave off deflation), which in turn led to hyperinflation. Too much money chasing too few goods, remember? In order to have too few goods, the country's production has to go into the toilet. Saying deflation isn't bad flies in the face of many of the greatest economic minds we know, with tons of research and theory to back it up.

solistice 14y ago
I'm actually genuinely curious what research and theory you are referring to, and I wouldn't know where to start looking. Could you give me some pointers?
- begurken 14y ago
  From Wikipedia: http://en.wikipedia.org/wiki/Causes_of_the_Great_Depression http://en.wikipedia.org/wiki/Causes_of_the_Great_Depression "In their 1963 book A Monetary History of the United States, 1867-1960, Milton Friedman and Anna Schwartz laid out their case for a different explanation of the Great Depression. Essentially, the Great Depression, in their view, was caused by the fall of the money supply. Friedman and Schwartz write: "From the cyclical peak in August 1929 to a cyclical trough in March 1933, the stock of money fell by over a third." The result was what Friedman calls the "Great Contraction" — a period of falling income, prices, and employment caused by the choking effects of a restricted money supply. Friedman and Schwartz argue that people wanted to hold more money than the Federal Reserve was supplying. As a result people hoarded money by consuming less. This caused a contraction in employment and production since prices were not flexible enough to immediately fall." Here's a video of Milton Friedman (he won a Nobel Prize for this work) explaining how monetary contraction caused the great depression: https://www.youtube.com/watch?v=O7pnjzCuSv8 https://www.youtube.com/watch?v=O7pnjzCuSv8 "By 1933, the quantity of money in the United States had gone down by a third." ... "For every 3 dollars of currency and deposits that people had had in 1929, only 2 dollars were left." One thing people often forget about deflation is that a general decline in the level of prices also includes labour prices and interest rates. It is characterised by zero interest rates, falling prices, falling wages, and because wages are 'sticky-down', high unemployment. You really do not want to live in a deflationary economy unless you have a large pile of cash. It's miserable. A second, and in my view, more valid definition of deflation is a contraction of the money supply. Ben Bernanke (current Fed Chairman) is an expert on causes of the great depression, and has been doing everything he can to ensure that the US money supply does not shrink.