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> but the situation is not improved if efforts to reduce debt end up pushing the economy into deflation and depression. I don't like how mainstream economists

by m52go 12y ago

> but the situation is not improved if efforts to reduce debt end up pushing the economy into deflation and depression. I don't like how mainstream economists tend to portray deflation: that it's a terrible thing that necessarily leads to depression. I mean, is the average man on the street going have more money to spend if the stuff he needs (food, energy, etc) costs 5% more than it did last year? I'm not saying deflation is always a good thing, but particularly in times of declining incomes, I find it hard to believe it's the scary monster mainstream economists make it out to be. And I particularly don't like how Krugman is always so quick to defend large debt loads. He keeps advocating to borrow borrow borrow, with seemingly no restraint. Is that really sustainable? > America has actually been borrowing less from abroad since 2008 than it did before Ya, because we're printing the rest. That is NOT a good thing. But of course, Krugman won't say that, or consequences that result from such policies.

yequalsx 12y ago
The government isn't "printing money" in the sense that this phrase commonly denotes. The government is selling Treasury securities on the open market. The rate of interest right now is quite low and has been for the past 7 years. Krugman isn't advocating a belief that all debt all the time is a good thing. He's advocating a belief that in the current situation debt is not the primary concern right now. Deflation is a bad thing for borrowers. It's a good thing for people who have no loans. I think the idea is that deflation is bad for the country because it's bad for banks and large multi-national companies. It would squeeze consumers who have mortgages and credit card debt and student loan debt. Thus this would contract the economy. As I understand these things. I'm not an economist.
- jhulla 12y ago
  You forgot QE1, QE2, twist, and QE3 where the Fed digitally created $4 trillion and bought up assets. That $4T didn't exist until the Fed conjured it up. Through a middleman, it was handed to the US Treasury.
  - yequalsx 12y ago
    I don't fully understand QE but I believe there is a balance sheet. It's not like money was created out of thin air as such. It did not increase M1. I'm guessing it did increase MB but I don't know. Of course my perception may be completely wrong.
    - nostromo 12y ago
      > It's not like money was created out of thin air as such. No, it was. Literally. The Fed can and does create money and then buy assets with that new money.
    - CyberDildonics 12y ago
      It is the Fed creating money out of thin air buying treasuries and it does increase M1. Here is the fed's own graph of M1. http://research.stlouisfed.org/fred2/series/M1 http://research.stlouisfed.org/fred2/series/M1 You can see where is starts to really skyrocket, which is where 16 trillion was given to the banks in the bailouts (or $53,000 for every person in the USA for scale). This money hasn't even made it into M2 yet.
  - hnnewguy 12y ago
    >until the Fed conjured it up. So in what way would you have money production occur, if not "out of thin air"?
    - msandford 12y ago
      Historically it has been people digging in the dirt to find precious metals and then coining those metals. Worked pretty well for thousands of years and doesn't allow people to counterfeit. If you want money to be a store of value there's no replacement to something that can't be faked. Personally I like the idea of my money holding value but from what I hear that's somewhere between "old fashioned" and "retardedly luddite" these days.
      - hnnewguy 12y ago
- nostromo 12y ago
  > The government is selling Treasury securities on the open market... And the Federal Reserve is buying a lot of those treasury securities with printed money.
  - yequalsx 12y ago
    From the FED: " The term "printing money" often refers to a situation in which the central bank is effectively financing the deficit of the federal government on a permanent basis by issuing large amounts of currency. This situation does not exist in the United States." http://www.federalreserve.gov/faqs/money_12853.htm http://www.federalreserve.gov/faqs/money_12853.htm Perhaps they are lying about what is really going on but I think transparency is of primary importance for the functioning of the bond market and I'm assuming they aren't lying.
    - nostromo 12y ago
      The term "permanent basis" is the only part of the statement that prevents it from being a lie. The Federal Reserve does not want to do QE forever. But they have been doing that almost nonstop since 2008.
      - yequalsx 12y ago
        That's what the balance sheet aspect is. There is a due date on the securities purchased by the Fed. Thus there is a time a limit. The Fed does not consider quantitative easing as just printing money. I think if it were just printing money then people would not have faith in Treasury securities and thus the interest rate would be a lot, lot higher than it is now. EDIT: From the link supplied above: "Global demand for Treasury securities has remained strong, and the Treasury has been able to finance large deficits without difficulty. In addition, U.S. currency has expanded at only a moderate pace in recent years, and the Federal Reserve has indicated that it will return its securities holdings to a more normal level over time, as the economy recovers and the current monetary accommodation is unwound."
      - elektronjunge 12y ago
- m52go 12y ago
  > The government is selling Treasury securities on the open market. Right, which the Fed is then buying with the money being printed. Government debt is being monetized by the Fed however you slice it. > Deflation is a bad thing for borrowers. I understand what you're saying, and in theory, it's true. Practically, it's flawed. Why? Because when I'm on a fixed income, I don't care about the value of my money that's going toward paying down debts. I care about the value of the money I have left over. Say I earn $1000 a month. $600 goes to loans. $400 is left over to spend on food. With deflation, sure, that $600 is really worth more than otherwise. But it's a sunk cost to me. That $400 is what matters to me, as a consumer, and with deflation, it buys me more food!
  - dragonwriter 12y ago
    You assume those other numbers a constant with deflation, but they aren't. Because deflation means that $1,000 buts your employer more hours of your labor just as much as it means $400 buys you more food. Double the value of money and, sure, $400 would buy you what used to be $800 of food. But $500 will buy your employer w the equivalent of what used to be $1,000 of your labor (from someone, if not from you), so instead of $400 left after the fixed cost of financing those loans, you'll have a $100 shortfall.
    - m52go 12y ago
      Are you assuming wage decreases? That's a longer-term trend that I don't think we'd see with a shorter-term 3-5 year deflation.
    - sukilot 12y ago
      And this is why currency Economics is so hard. deflation/inflation don't happen uniformly to all dollars and sectors of the economy.
Retric 12y ago
Consider how traumatic the recent housing crash was for the man on the street. The payment was unchanged, but there was a massive loss of flexibility as people could not sell under water houses. Now expand that to the rest of the economy while lot's of leveraged companies and investments fail.
- nine_k 12y ago
  Isn't it because the prices of the houses were highly inflated, due to very easy credit? Do you think that the rest of the economy is a bubble like the 2008 housing bubble?
  - Retric 12y ago
    I don't think it matters why an asset deprecates. For a local example a mine/plant/army base closes and suddenly lots of houses are worth far less money. Hypothetically, if a disease kills off 25% of the population housing prices nationally are going to fall like a rock. They might not have been overvalued, but there suddenly worth less money. Deflation is less gruesome, but you still end up with house value < outstanding loan. The important thing from an economic perspective is simply value of asset vs debt.
uwe_dushan 12y ago
I've been trying to wrap my head around this myself as it does seem pretty counter intuitive (based on personal experience - 5% change in prices over the course of a year in either direction has no impact on my purchasing decisions). I think the key issue is that deflation makes borrowing a really bad idea (as each year you effectively owe 5% more) and much of our economy depends on consumer debt (cars, housing, college degrees) but I'm willing to accept that a programmer's mind isn't well suited for grokking economics.
- chom_noamsky 12y ago
  Well, common people don't even know how money is created and destroyed, so you wouldn't pick it up just from existing, like football. Even full-blown "economists" who aren't directly involved with finance and banking don't know how money is created and destroyed, and they form their most of their models and calculus without accounting for it. The closest you'll get to it in Econ 101 is the "money multiplier" which is just a one-dimensional calculation involving a bank's reserve rate. Subsequent Econ 101 models are formed around this one-dimensional parameter, and advanced economic models still make laughably naive accounting for the actual mechanics of money creation. And these court sycophants, the economists, they don't get called out on their pseudo-science, or the inapplicability of their conclusions due to the assumptions they made from the start, because we live in an economic system where the tail wags the dog. The powerful individuals who have ownership rights over economic assets, and large existing reserves of liquidity (money) -- when once power and wealth were supposed to be derived from production of economic utility -- they now have so much control of the money and the corporate ownership, that power and wealth are derived from existing power and wealth. Economic merit (good work on something that helps people) is no longer the thing that rewards people, it's the * * * Similarly, it is a dog-and-tail problem that's keeping you in the dark on why deflation is bad. It's not that deflation is a cause and bad things are the effect. It's that deflation is an effect of "bad" things in this money system. Inflation comes from money being loaned into existence faster than money is destroyed upon loan repayment (in the best case), or loan default (in the "worst" case). Inflation can mean that "the pie" is growing and people are feeling good on the medium- and long-term about their prospects for getting the piece of the pie that they want. Inflation can also mean that there's some broken source of money creation, and in the short term people feel the need to charge more for their goods and services in order to have the same piece of pie tomorrow as yesterday, and that's what court economists will model and pontificate about. But in the minds of the people at the high levels of government and status-quo power, this type of inflation is of less concern; it's a solved problem, relatively speaking at this point in history, and what they fear most is stagnating growth -- remember that inflation that comes from growth is what makes a population happy on the medium and long term. If macro-level growth stops, even for one year after one hundred, the risk of a cyclical destruction of existing money, assets, and debt is real. Money is created by issuance of new debt, and it is destroyed upon repayment of the principal (interest payments go into the accounts of the lender). When your pop loans you $1000, it's money he has and it's not destroyed when you repay him, but when a financial institution that is allowed to write new money on the ledgers in exchange for a debt, money which came out of no one's accounts, then principal repayments do not go into the bank's accounts. They are destroyed by the same ledger that created them. That's the thing that the winners in this system don't want you to know, that's what people who watch football don't know, and that's what King's Court Economists (economists who don't specialize in finance) don't account for when they model, predict, and generally pontificate to the public. If a loan is not repaid, then a financial institution is legally bound to use its own accounts to repay the principal. They consider this when they demand collateral/consideration for a loan. So, finally, here is your mistake: deflation is not a primary cause of bad things, it is an effect. When the macro economy stops growing, or even threatens to stop growing and people start getting tight and conservative in their estimation of future prospects, the threat of a "death spiral" arises: people get tighter with their money, a few extra loans tank here there and everywhere, then people and institutions really get tighter with their money, having seen "the economy starting to get bad" locally, firsthand. All that needs to happen next is a critical mass of So then money becomes tight not only because people feel thrifty, but because money is literally being destroyed on every tanked loan. A lot of money gets destroyed on big loans, like real estate and business loans. The collateral and bankruptcy sales have to be priced in the present-day environment, and they tend to be for less than . This is the deflation that powerful institutions like government very much want to avoid, for obvious political and military reasons, and a majority of rich private individuals and institutions also want to avoid, just because it's harder in general to make money -- there will be big winners in the private sector during deflation (which IS a tanking economy, and nothing besides), but there will be even more losers in the rich elite private sector during deflation. We were basically at that point in 2008, and at that point at times previous in history, like just before gold stopped being a money equivalent and became just another asset you could buy with money in a money system that collapses when it stops expanding. 2008 was the start of a new era in tail-wags-the-dog financialization, where economists and people are encouraged to have any false beliefs they find reasonable and useful about how the economy works, so long as the system of debt, ownership, and debt-based money does not experience a deflationary death spiral. So our economic activity is dictated by certain constraints and priorities of government and private elite interests, who need to keep the status quo from collapsing. Eventually it will collapse, and the dollar-denominated assets of everyone, middle class or upper class, will experience "price discovery" down from a persistently-inflated level, will experience persistent difficulty obtaining liquidity (cash) in an environment where bankruptcies are too common, formerly-reliable cash flows such as surround retail businesses disappear, everyone who owes anything to anyone gets scared and defensive, and everyone who is owed anything by anyone gets gets scared and aggressive. Oh, it won't be the end of history. But it will probably kick off a new dark ages. Not a dark ages of technological regress, but of fascism, mass suffering, holocaust, propagandization, and Darwinistic brutality. We already have a hard time finding the money to give each other to keep all of us alive (food, medicine); the money simply will not be there for us to provide life to millions (billions?) of people who are dependent because they have no source of economic vitality in a deflationary environment. You see, money is just about the ultimate fetish in the minds of men, today. I mean that more like Freud used it than like 1-900's use it. It's so powerful in our minds that it controls us. Things like economic activity and production of utility are possible without it, but we have let money preclude that. Want to build a sustainable economy? You can't, unless there's going to be a dollar-denominated return on the investment, and the dollar system literally can't persist forever, because it can't grow forever. * * * Money comes only from debt. And the money supply rapidly collapses when it stops growing. And that's what no one talks about. And that's going to kill us in the long term, even if we could have lived a different history without debt-based money, and could have had a different future if we had moved away from it. * * * If you want to get some alternative education on these issues, you have to be really careful because there's more mythology, anti-semitism, tinfoilism, and noise than signal out there in people's minds, and thus on the internet. But I think this a decent one: Renaissance 2.0, by Damon Vrabel (2010) https://www.youtube.com/watch?v=48pQImAztgs https://www.youtube.com/watch?v=48pQImAztgs -mirrored video because original content producer pulled his videos and quit being an activist * * * Oh, and by the way, I'll say this now even though it doesn't come directly into play into anything I've said this far, nor the education video linked, but it needs to be said by someone who is reasonable, rational, educated, and very hurt: 9/11 was an inside job.
frandroid 12y ago
> And I particularly don't like how Krugman is always so quick to defend large debt loads. He keeps advocating to borrow borrow borrow, with seemingly no restraint. Is that really sustainable? As long as the interest remains smaller than inflation, yes.
hnnewguy 12y ago
>I find it hard to believe it's the scary monster mainstream economists make it out to be. It isn't really complicated. First, when the value of holding cash gives a positive return, then it changes investment allocations. People often argue that "I won't change my spending habits!" Well, if you were economically rational, you would. But let's be realistic, no one cares about you putting off buying a TV. The concern is for the global financial system as a whole, who suddenly have incentive to hold money rather than circulate it. Second, incomes are part of the deflation equation. It's one thing when technological progress allows for manufacturing processes to make items cheaper and we get cheaper computers. It's another when massive price deflation (ie oil) causes a sharp decrease in wages and mass unemployment. Third, debtors are harmed during deflation, as the absolute value of their debts increases. That means your average household gets into trouble. >That is NOT a good thing. Prove it. Seriously. If you can, I'm sure you've got a Nobel in your future. I'm not being facetious. Nobody really knows how this ends, good or bad. Unfortunately, Economics can't run experiments. You apply theory, make a best guess, implement the policy, and hope for the best.
- m52go 12y ago
  Everything you said is true, but I don't find the points terribly practical. 1) I seriously doubt investors will prefer to hold US dollars for meager deflation gains instead of investing in other financial assets projecting far greater return (stocks, bonds, real estate, etc). 2) Wages are sticky. Yes, 20 years of deflation would send wages down. I don't think a short period of deflation would do too much. 3) See my comment below. I printed an abridged version of it here: When I'm on a fixed income, I don't care much about the value of my money that's going toward paying down debts. I care about the value of the money I have left over. Say I earn $1000 a month. $600 goes to loans. $400 is left over to spend on food. With deflation, sure, that $600 is really worth more than otherwise. But it's a sunk cost to me. That $400 is what matters to me, as a consumer, and with deflation, it buys me more food. I appreciate your points, but I still think deflation fears are overblown. ------------------ EDIT: to comment on your last remark about proving the unfavorable effects of money-printing...I don't need to run tests. I have history. Money printing is the genesis of hyperinflation, a well-documented historical phenomenon. http://en.wikipedia.org/wiki/Hyperinflation http://en.wikipedia.org/wiki/Hyperinflation Printing paper money to monetize debts NEVER ends well. Show me a case in which it does, and I'll award you a paper Nobel Prize.
deleted 12y ago
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dimitar 12y ago
Deflation according to mainstream economists is undesirable because of a bug in labor markets - "downward nominal wage rigidity". Since businesses cannot cut salaries (wrecks productivity, due to the morale hit), they hire less or lay off people. And in a depression many enterprises must to one of these things to remain profitable (they cannot increase prices, obviously). This right now has a bigger effect on family incomes than the small gain from lower prices on goods. If productivity is rising rapidly and there is more or less full employment, the opposite case would be true. Inflation is good in such cases, because if wages don't change in dollar terms, whey will be cut in real terms, allowing for more employment. Debt is part of capitalism, just like steel is used as building material. Talking about debt in moral terms as good, bad or whether there is a right amount (for whom?) isn't productive. Speaking about government debt, right now Eurozone countries have to pay very low interest rates; once they rise too much or full employment is reached, Krugman has said many times that he will advocate restraint. When conducting monetary policy the Fed buys government securities from the public, not from the Treasury; it pays market prices for it. There is still huge demand for US government bonds (mostly in the USA, thats why "money we owe ourselves". It does remit its profits to the Treasury, but that is a very small percent of the government budget. When the expansion of the Fed balance sheet is so big that it becomes a price setter for government bonds (in dollar terms of course!), then you could say it is printing money to cover deficits. It did that from 1945 to 1951 to pay for WWII and inflation did rise to 25%. So everyone will notice if when the Fed starts "printing money to cover deficits".
- m52go 12y ago
  > Debt is part of capitalism, just like steel is used as building material. Talking about debt in moral terms as good, bad or whether there is a right amount (for whom?) isn't productive. Of course. If I spoke of debt in absolute terms, I didn't mean to. > Speaking about government debt, right now Eurozone countries have to pay very low interest rates; once they rise too much or full employment is reached, Krugman has said many times that he will advocate restraint. The problem is Krugman tries to have it both ways. Back in 2012 when borrowing rates were MUCH higher, he STILL criticized austerity. http://www.nytimes.com/2012/09/28/opinion/krugman-europes-austerity-madness.html http://www.nytimes.com/2012/09/28/opinion/krugman-europes-au... When economies are good, governments should spend more, because, why not? And when economies are bad, governments should spend more, because, it's the only way out. I've never seen him advocate restraint on government spending. If you can recall evidence to prove that wrong, I'd genuinely love to see it. > There is still huge demand for US government bonds (mostly in the USA, thats why "money we owe ourselves". Agreed. But this won't last forever. Let's take China for example, one of the largest foreign buyers of our debt. They have to buy large quantities of it because they're pegged to the USD. What happens when they decide to remove that peg? I doubt they'll warn us. Remember what happened with the Swiss Franc?

by m52go 12y ago

yequalsx 12y ago

The government isn't "printing money" in the sense that this phrase commonly denotes. The government is selling Treasury securities on the open market. The rate of interest right now is quite low and has been for the past 7 years. Krugman isn't advocating a belief that all debt all the time is a good thing. He's advocating a belief that in the current situation debt is not the primary concern right now. Deflation is a bad thing for borrowers. It's a good thing for people who have no loans. I think the idea is that deflation is bad for the country because it's bad for banks and large multi-national companies. It would squeeze consumers who have mortgages and credit card debt and student loan debt. Thus this would contract the economy. As I understand these things. I'm not an economist.

jhulla 12y ago
You forgot QE1, QE2, twist, and QE3 where the Fed digitally created $4 trillion and bought up assets. That $4T didn't exist until the Fed conjured it up. Through a middleman, it was handed to the US Treasury.
- yequalsx 12y ago
  I don't fully understand QE but I believe there is a balance sheet. It's not like money was created out of thin air as such. It did not increase M1. I'm guessing it did increase MB but I don't know. Of course my perception may be completely wrong.
  - nostromo 12y ago
    > It's not like money was created out of thin air as such. No, it was. Literally. The Fed can and does create money and then buy assets with that new money.
  - CyberDildonics 12y ago
    It is the Fed creating money out of thin air buying treasuries and it does increase M1. Here is the fed's own graph of M1. http://research.stlouisfed.org/fred2/series/M1 http://research.stlouisfed.org/fred2/series/M1 You can see where is starts to really skyrocket, which is where 16 trillion was given to the banks in the bailouts (or $53,000 for every person in the USA for scale). This money hasn't even made it into M2 yet.
- hnnewguy 12y ago
  >until the Fed conjured it up. So in what way would you have money production occur, if not "out of thin air"?
  - msandford 12y ago
    Historically it has been people digging in the dirt to find precious metals and then coining those metals. Worked pretty well for thousands of years and doesn't allow people to counterfeit. If you want money to be a store of value there's no replacement to something that can't be faked. Personally I like the idea of my money holding value but from what I hear that's somewhere between "old fashioned" and "retardedly luddite" these days.
    - hnnewguy 12y ago
nostromo 12y ago
> The government is selling Treasury securities on the open market... And the Federal Reserve is buying a lot of those treasury securities with printed money.
- yequalsx 12y ago
  From the FED: " The term "printing money" often refers to a situation in which the central bank is effectively financing the deficit of the federal government on a permanent basis by issuing large amounts of currency. This situation does not exist in the United States." http://www.federalreserve.gov/faqs/money_12853.htm http://www.federalreserve.gov/faqs/money_12853.htm Perhaps they are lying about what is really going on but I think transparency is of primary importance for the functioning of the bond market and I'm assuming they aren't lying.
  - nostromo 12y ago
    The term "permanent basis" is the only part of the statement that prevents it from being a lie. The Federal Reserve does not want to do QE forever. But they have been doing that almost nonstop since 2008.
    - yequalsx 12y ago
      That's what the balance sheet aspect is. There is a due date on the securities purchased by the Fed. Thus there is a time a limit. The Fed does not consider quantitative easing as just printing money. I think if it were just printing money then people would not have faith in Treasury securities and thus the interest rate would be a lot, lot higher than it is now. EDIT: From the link supplied above: "Global demand for Treasury securities has remained strong, and the Treasury has been able to finance large deficits without difficulty. In addition, U.S. currency has expanded at only a moderate pace in recent years, and the Federal Reserve has indicated that it will return its securities holdings to a more normal level over time, as the economy recovers and the current monetary accommodation is unwound."
    - elektronjunge 12y ago
m52go 12y ago
> The government is selling Treasury securities on the open market. Right, which the Fed is then buying with the money being printed. Government debt is being monetized by the Fed however you slice it. > Deflation is a bad thing for borrowers. I understand what you're saying, and in theory, it's true. Practically, it's flawed. Why? Because when I'm on a fixed income, I don't care about the value of my money that's going toward paying down debts. I care about the value of the money I have left over. Say I earn $1000 a month. $600 goes to loans. $400 is left over to spend on food. With deflation, sure, that $600 is really worth more than otherwise. But it's a sunk cost to me. That $400 is what matters to me, as a consumer, and with deflation, it buys me more food!
- dragonwriter 12y ago
  You assume those other numbers a constant with deflation, but they aren't. Because deflation means that $1,000 buts your employer more hours of your labor just as much as it means $400 buys you more food. Double the value of money and, sure, $400 would buy you what used to be $800 of food. But $500 will buy your employer w the equivalent of what used to be $1,000 of your labor (from someone, if not from you), so instead of $400 left after the fixed cost of financing those loans, you'll have a $100 shortfall.
  - m52go 12y ago
    Are you assuming wage decreases? That's a longer-term trend that I don't think we'd see with a shorter-term 3-5 year deflation.
  - sukilot 12y ago
    And this is why currency Economics is so hard. deflation/inflation don't happen uniformly to all dollars and sectors of the economy.

Retric 12y ago

Consider how traumatic the recent housing crash was for the man on the street. The payment was unchanged, but there was a massive loss of flexibility as people could not sell under water houses. Now expand that to the rest of the economy while lot's of leveraged companies and investments fail.

nine_k 12y ago
Isn't it because the prices of the houses were highly inflated, due to very easy credit? Do you think that the rest of the economy is a bubble like the 2008 housing bubble?
- Retric 12y ago
  I don't think it matters why an asset deprecates. For a local example a mine/plant/army base closes and suddenly lots of houses are worth far less money. Hypothetically, if a disease kills off 25% of the population housing prices nationally are going to fall like a rock. They might not have been overvalued, but there suddenly worth less money. Deflation is less gruesome, but you still end up with house value < outstanding loan. The important thing from an economic perspective is simply value of asset vs debt.

uwe_dushan 12y ago

I've been trying to wrap my head around this myself as it does seem pretty counter intuitive (based on personal experience - 5% change in prices over the course of a year in either direction has no impact on my purchasing decisions). I think the key issue is that deflation makes borrowing a really bad idea (as each year you effectively owe 5% more) and much of our economy depends on consumer debt (cars, housing, college degrees) but I'm willing to accept that a programmer's mind isn't well suited for grokking economics.

chom_noamsky 12y ago
Well, common people don't even know how money is created and destroyed, so you wouldn't pick it up just from existing, like football. Even full-blown "economists" who aren't directly involved with finance and banking don't know how money is created and destroyed, and they form their most of their models and calculus without accounting for it. The closest you'll get to it in Econ 101 is the "money multiplier" which is just a one-dimensional calculation involving a bank's reserve rate. Subsequent Econ 101 models are formed around this one-dimensional parameter, and advanced economic models still make laughably naive accounting for the actual mechanics of money creation. And these court sycophants, the economists, they don't get called out on their pseudo-science, or the inapplicability of their conclusions due to the assumptions they made from the start, because we live in an economic system where the tail wags the dog. The powerful individuals who have ownership rights over economic assets, and large existing reserves of liquidity (money) -- when once power and wealth were supposed to be derived from production of economic utility -- they now have so much control of the money and the corporate ownership, that power and wealth are derived from existing power and wealth. Economic merit (good work on something that helps people) is no longer the thing that rewards people, it's the * * * Similarly, it is a dog-and-tail problem that's keeping you in the dark on why deflation is bad. It's not that deflation is a cause and bad things are the effect. It's that deflation is an effect of "bad" things in this money system. Inflation comes from money being loaned into existence faster than money is destroyed upon loan repayment (in the best case), or loan default (in the "worst" case). Inflation can mean that "the pie" is growing and people are feeling good on the medium- and long-term about their prospects for getting the piece of the pie that they want. Inflation can also mean that there's some broken source of money creation, and in the short term people feel the need to charge more for their goods and services in order to have the same piece of pie tomorrow as yesterday, and that's what court economists will model and pontificate about. But in the minds of the people at the high levels of government and status-quo power, this type of inflation is of less concern; it's a solved problem, relatively speaking at this point in history, and what they fear most is stagnating growth -- remember that inflation that comes from growth is what makes a population happy on the medium and long term. If macro-level growth stops, even for one year after one hundred, the risk of a cyclical destruction of existing money, assets, and debt is real. Money is created by issuance of new debt, and it is destroyed upon repayment of the principal (interest payments go into the accounts of the lender). When your pop loans you $1000, it's money he has and it's not destroyed when you repay him, but when a financial institution that is allowed to write new money on the ledgers in exchange for a debt, money which came out of no one's accounts, then principal repayments do not go into the bank's accounts. They are destroyed by the same ledger that created them. That's the thing that the winners in this system don't want you to know, that's what people who watch football don't know, and that's what King's Court Economists (economists who don't specialize in finance) don't account for when they model, predict, and generally pontificate to the public. If a loan is not repaid, then a financial institution is legally bound to use its own accounts to repay the principal. They consider this when they demand collateral/consideration for a loan. So, finally, here is your mistake: deflation is not a primary cause of bad things, it is an effect. When the macro economy stops growing, or even threatens to stop growing and people start getting tight and conservative in their estimation of future prospects, the threat of a "death spiral" arises: people get tighter with their money, a few extra loans tank here there and everywhere, then people and institutions really get tighter with their money, having seen "the economy starting to get bad" locally, firsthand. All that needs to happen next is a critical mass of So then money becomes tight not only because people feel thrifty, but because money is literally being destroyed on every tanked loan. A lot of money gets destroyed on big loans, like real estate and business loans. The collateral and bankruptcy sales have to be priced in the present-day environment, and they tend to be for less than . This is the deflation that powerful institutions like government very much want to avoid, for obvious political and military reasons, and a majority of rich private individuals and institutions also want to avoid, just because it's harder in general to make money -- there will be big winners in the private sector during deflation (which IS a tanking economy, and nothing besides), but there will be even more losers in the rich elite private sector during deflation. We were basically at that point in 2008, and at that point at times previous in history, like just before gold stopped being a money equivalent and became just another asset you could buy with money in a money system that collapses when it stops expanding. 2008 was the start of a new era in tail-wags-the-dog financialization, where economists and people are encouraged to have any false beliefs they find reasonable and useful about how the economy works, so long as the system of debt, ownership, and debt-based money does not experience a deflationary death spiral. So our economic activity is dictated by certain constraints and priorities of government and private elite interests, who need to keep the status quo from collapsing. Eventually it will collapse, and the dollar-denominated assets of everyone, middle class or upper class, will experience "price discovery" down from a persistently-inflated level, will experience persistent difficulty obtaining liquidity (cash) in an environment where bankruptcies are too common, formerly-reliable cash flows such as surround retail businesses disappear, everyone who owes anything to anyone gets scared and defensive, and everyone who is owed anything by anyone gets gets scared and aggressive. Oh, it won't be the end of history. But it will probably kick off a new dark ages. Not a dark ages of technological regress, but of fascism, mass suffering, holocaust, propagandization, and Darwinistic brutality. We already have a hard time finding the money to give each other to keep all of us alive (food, medicine); the money simply will not be there for us to provide life to millions (billions?) of people who are dependent because they have no source of economic vitality in a deflationary environment. You see, money is just about the ultimate fetish in the minds of men, today. I mean that more like Freud used it than like 1-900's use it. It's so powerful in our minds that it controls us. Things like economic activity and production of utility are possible without it, but we have let money preclude that. Want to build a sustainable economy? You can't, unless there's going to be a dollar-denominated return on the investment, and the dollar system literally can't persist forever, because it can't grow forever. * * * Money comes only from debt. And the money supply rapidly collapses when it stops growing. And that's what no one talks about. And that's going to kill us in the long term, even if we could have lived a different history without debt-based money, and could have had a different future if we had moved away from it. * * * If you want to get some alternative education on these issues, you have to be really careful because there's more mythology, anti-semitism, tinfoilism, and noise than signal out there in people's minds, and thus on the internet. But I think this a decent one: Renaissance 2.0, by Damon Vrabel (2010) https://www.youtube.com/watch?v=48pQImAztgs https://www.youtube.com/watch?v=48pQImAztgs -mirrored video because original content producer pulled his videos and quit being an activist * * * Oh, and by the way, I'll say this now even though it doesn't come directly into play into anything I've said this far, nor the education video linked, but it needs to be said by someone who is reasonable, rational, educated, and very hurt: 9/11 was an inside job.

frandroid 12y ago

> And I particularly don't like how Krugman is always so quick to defend large debt loads. He keeps advocating to borrow borrow borrow, with seemingly no restraint. Is that really sustainable? As long as the interest remains smaller than inflation, yes.

hnnewguy 12y ago

>I find it hard to believe it's the scary monster mainstream economists make it out to be. It isn't really complicated. First, when the value of holding cash gives a positive return, then it changes investment allocations. People often argue that "I won't change my spending habits!" Well, if you were economically rational, you would. But let's be realistic, no one cares about you putting off buying a TV. The concern is for the global financial system as a whole, who suddenly have incentive to hold money rather than circulate it. Second, incomes are part of the deflation equation. It's one thing when technological progress allows for manufacturing processes to make items cheaper and we get cheaper computers. It's another when massive price deflation (ie oil) causes a sharp decrease in wages and mass unemployment. Third, debtors are harmed during deflation, as the absolute value of their debts increases. That means your average household gets into trouble. >That is NOT a good thing. Prove it. Seriously. If you can, I'm sure you've got a Nobel in your future. I'm not being facetious. Nobody really knows how this ends, good or bad. Unfortunately, Economics can't run experiments. You apply theory, make a best guess, implement the policy, and hope for the best.

m52go 12y ago
Everything you said is true, but I don't find the points terribly practical. 1) I seriously doubt investors will prefer to hold US dollars for meager deflation gains instead of investing in other financial assets projecting far greater return (stocks, bonds, real estate, etc). 2) Wages are sticky. Yes, 20 years of deflation would send wages down. I don't think a short period of deflation would do too much. 3) See my comment below. I printed an abridged version of it here: When I'm on a fixed income, I don't care much about the value of my money that's going toward paying down debts. I care about the value of the money I have left over. Say I earn $1000 a month. $600 goes to loans. $400 is left over to spend on food. With deflation, sure, that $600 is really worth more than otherwise. But it's a sunk cost to me. That $400 is what matters to me, as a consumer, and with deflation, it buys me more food. I appreciate your points, but I still think deflation fears are overblown. ------------------ EDIT: to comment on your last remark about proving the unfavorable effects of money-printing...I don't need to run tests. I have history. Money printing is the genesis of hyperinflation, a well-documented historical phenomenon. http://en.wikipedia.org/wiki/Hyperinflation http://en.wikipedia.org/wiki/Hyperinflation Printing paper money to monetize debts NEVER ends well. Show me a case in which it does, and I'll award you a paper Nobel Prize.

deleted 12y ago

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dimitar 12y ago

Deflation according to mainstream economists is undesirable because of a bug in labor markets - "downward nominal wage rigidity". Since businesses cannot cut salaries (wrecks productivity, due to the morale hit), they hire less or lay off people. And in a depression many enterprises must to one of these things to remain profitable (they cannot increase prices, obviously). This right now has a bigger effect on family incomes than the small gain from lower prices on goods. If productivity is rising rapidly and there is more or less full employment, the opposite case would be true. Inflation is good in such cases, because if wages don't change in dollar terms, whey will be cut in real terms, allowing for more employment. Debt is part of capitalism, just like steel is used as building material. Talking about debt in moral terms as good, bad or whether there is a right amount (for whom?) isn't productive. Speaking about government debt, right now Eurozone countries have to pay very low interest rates; once they rise too much or full employment is reached, Krugman has said many times that he will advocate restraint. When conducting monetary policy the Fed buys government securities from the public, not from the Treasury; it pays market prices for it. There is still huge demand for US government bonds (mostly in the USA, thats why "money we owe ourselves". It does remit its profits to the Treasury, but that is a very small percent of the government budget. When the expansion of the Fed balance sheet is so big that it becomes a price setter for government bonds (in dollar terms of course!), then you could say it is printing money to cover deficits. It did that from 1945 to 1951 to pay for WWII and inflation did rise to 25%. So everyone will notice if when the Fed starts "printing money to cover deficits".

m52go 12y ago
> Debt is part of capitalism, just like steel is used as building material. Talking about debt in moral terms as good, bad or whether there is a right amount (for whom?) isn't productive. Of course. If I spoke of debt in absolute terms, I didn't mean to. > Speaking about government debt, right now Eurozone countries have to pay very low interest rates; once they rise too much or full employment is reached, Krugman has said many times that he will advocate restraint. The problem is Krugman tries to have it both ways. Back in 2012 when borrowing rates were MUCH higher, he STILL criticized austerity. http://www.nytimes.com/2012/09/28/opinion/krugman-europes-austerity-madness.html http://www.nytimes.com/2012/09/28/opinion/krugman-europes-au... When economies are good, governments should spend more, because, why not? And when economies are bad, governments should spend more, because, it's the only way out. I've never seen him advocate restraint on government spending. If you can recall evidence to prove that wrong, I'd genuinely love to see it. > There is still huge demand for US government bonds (mostly in the USA, thats why "money we owe ourselves". Agreed. But this won't last forever. Let's take China for example, one of the largest foreign buyers of our debt. They have to buy large quantities of it because they're pegged to the USD. What happens when they decide to remove that peg? I doubt they'll warn us. Remember what happened with the Swiss Franc?