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The problem with deflation is that we are a nation of debtors. Deflation causes debt to become more expensive, thus raising defaults and all of the ripples that

by hobbsh 12y ago

The problem with deflation is that we are a nation of debtors. Deflation causes debt to become more expensive, thus raising defaults and all of the ripples that follow. edit: I should clarify that I don't completely disagree, just that debt is the real problem. No one wants to endure the short term pain so we keep "kicking the can down the road" as they say.

carsongross 12y ago
I agree, I think we are probably too far gone at this point. There will almost certainly be a massive deflationary shock anyway, because total debt isn't expanding at anywhere near the rate necessary to keep up with the pre-2008 curve. (Last I saw, about a year ago, the gap was 30 trillion dollars between the L1 total debt and the extrapolated pre-2008 L1 curve.) Regardless, I think its important to point out that a slow and steady deflation is actually an ideal or at least a reasonable state for an economy.
- roymurdock 12y ago
  Reasonable yes, but I don't think you can go as far as to say that it's ideal. The ideal state for an economy is one where the rate of inflation/deflation is determined by the market. This would happen if central banks were disbanded and the production/circulation of currency was left to a (regulated) private sector with a healthy number of competing companies innovating to have the best currency on the market. What we are seeing now is a natural adjustment to years of accumulating debt under an artificial, inflation-targeting central banking system. Central banks have tried their best to prevent deflation in order to support the debt-driven "fractional-reserve" system that has created an unsustainable network of debt that is no longer tied to the productivity of real assets. A system of competing private currencies would remove artificial signals manufactured by central bank monetary policy and gov. fiscal policy.
  - carsongross 12y ago
    Sure. I'm saying, ceteris paribus, advances in technology should make the things we want less expensive. That's generally (though not always) why we bother to pursue them. In real life ceteris is never paribus, of course.
  - coderzach 12y ago
    I'm curious how competing currencies would work in practice. Are businesses required to accept any currency? Can anyone create their own currency? How do you regulate private currencies?
    - kansface 12y ago
      1. No. Businesses (by federal law), aren't even required to accept dollars now. 2. Yes, but would you use Honest Achmed's Used Cars and Dollars? 3. (Private) Ratings Agencies would rate currencies and maybe each other. The market picks the winner based on trust, convenience, or whatever else it cares about. In practice, I'd expect an 80/20 rule. Two currencies would make up 80% of all transactions in a given region, with a rather large tail (gold/silver/basket of commodities backing, fixed exchange rates, etc). Multiple currencies is nearly unworkable with paper money, but quite trivial with digital paper money.
    - roymurdock 12y ago
      Kansface's reply is really good. Hayek also wrote a great paper on the subject in 1990. In it he quite presciently predicts the current conundrum of the euro zone and makes the case for competing physical currencies. He realized that this would never happen in his lifetime but went through the the intellectual steps nonetheless. Virtual currency could make his thesis possible. Check it out if you're interested: http://mises.org/library/denationalisation-money-argument-refined http://mises.org/library/denationalisation-money-argument-re...
- ArkyBeagle 12y ago
  I believe the "ideal" - at least when you assume central banking - is a perfect fit between the expansion of the money supply and the "value" it represents - IOW, a dollar/pound/ruble means the exact same thing, year by year. That would amount to population grown ( which is lagged by the age at which people go to work ) and productivity growth. I believe that describes "zero inflation" but it's sort of hard to say. It is possible that the previous evils of deflation no longer apply ( because technology) , but I'd rather not find out through experiment.
hardcandy 12y ago
Also the biggest tickets to middle class wealth in the last few decades have been pensions and home equity. Home equity being the ability for a young couple to borrow money at a low rate on a stable asset that appreciates at a higher rate (over a 30 year time horizon). Pensions have been removed. If housing price growth stops as well, that's a significant double blow.
- YokoZar 12y ago
  Housing and rental costs have been a substantial drain on what would otherwise be the new middle class. For the most part they don't (yet) own homes, lower prices can only help them. Consider how much doesn't get invested by the poor and middle class into education, paying down debts, or retirement savings accounts. It feels rather absurd to suggest that they would somehow benefit from continually raising the price of something they need to buy.
  - collyw 12y ago
    Exactly. Its great for those who own, paid for those who don't yet.
graedus 12y ago
Precisely. I understand it like this: if the United States has some $18tn of debt and it has to pay this back in dollars that are more valuable than they were when the debt was issued, that debt load quickly becomes unserviceable. However, if they successfully inflate away some significant percentage of the value of the USD, the nominal debt remains the same but it becomes lighter in real terms. Pippa Malmgren - correctly, I think - describes this inflating away the value of the currency (and by extension, all outstanding debts) as just another form of default, and one that has been used many times in history. It's just more stealthy than saying "we can't pay, so we won't pay" or something similar[0]. [0] https://www.youtube.com/watch?v=KBU59sY2erA https://www.youtube.com/watch?v=KBU59sY2erA
- ArkyBeagle 12y ago
  But government debt is DESIGNED to be inflated away. The U.S ran a then-terrifying $2B deficit during WWII. The whole point of government debt is that GDP rises eclipse it over time. I am rather shocked that anyone can't tell the difference between the effects of mild inflation on debt and default. Debt is not a blood oath - it's just a tool. We're better off if we can use this tool and use it properly. With deflation, that's harder.
- prostoalex 12y ago
  Inflation is not a secret, they're shooting for an average of annual 2% rate http://www.federalreserve.gov/faqs/economy_14400.htm http://www.federalreserve.gov/faqs/economy_14400.htm The markets, however, figure that out, and price that in. Which is why countries with weak currencies don't have an option to borrow in their native currencies.
prostoalex 12y ago
Higher number of defaults just leads to risk re-evaluation and debt repricing, it doesn't change anything structurally.

by hobbsh 12y ago

carsongross 12y ago

I agree, I think we are probably too far gone at this point. There will almost certainly be a massive deflationary shock anyway, because total debt isn't expanding at anywhere near the rate necessary to keep up with the pre-2008 curve. (Last I saw, about a year ago, the gap was 30 trillion dollars between the L1 total debt and the extrapolated pre-2008 L1 curve.) Regardless, I think its important to point out that a slow and steady deflation is actually an ideal or at least a reasonable state for an economy.

roymurdock 12y ago
Reasonable yes, but I don't think you can go as far as to say that it's ideal. The ideal state for an economy is one where the rate of inflation/deflation is determined by the market. This would happen if central banks were disbanded and the production/circulation of currency was left to a (regulated) private sector with a healthy number of competing companies innovating to have the best currency on the market. What we are seeing now is a natural adjustment to years of accumulating debt under an artificial, inflation-targeting central banking system. Central banks have tried their best to prevent deflation in order to support the debt-driven "fractional-reserve" system that has created an unsustainable network of debt that is no longer tied to the productivity of real assets. A system of competing private currencies would remove artificial signals manufactured by central bank monetary policy and gov. fiscal policy.
- carsongross 12y ago
  Sure. I'm saying, ceteris paribus, advances in technology should make the things we want less expensive. That's generally (though not always) why we bother to pursue them. In real life ceteris is never paribus, of course.
- coderzach 12y ago
  I'm curious how competing currencies would work in practice. Are businesses required to accept any currency? Can anyone create their own currency? How do you regulate private currencies?
  - kansface 12y ago
    1. No. Businesses (by federal law), aren't even required to accept dollars now. 2. Yes, but would you use Honest Achmed's Used Cars and Dollars? 3. (Private) Ratings Agencies would rate currencies and maybe each other. The market picks the winner based on trust, convenience, or whatever else it cares about. In practice, I'd expect an 80/20 rule. Two currencies would make up 80% of all transactions in a given region, with a rather large tail (gold/silver/basket of commodities backing, fixed exchange rates, etc). Multiple currencies is nearly unworkable with paper money, but quite trivial with digital paper money.
  - roymurdock 12y ago
    Kansface's reply is really good. Hayek also wrote a great paper on the subject in 1990. In it he quite presciently predicts the current conundrum of the euro zone and makes the case for competing physical currencies. He realized that this would never happen in his lifetime but went through the the intellectual steps nonetheless. Virtual currency could make his thesis possible. Check it out if you're interested: http://mises.org/library/denationalisation-money-argument-refined http://mises.org/library/denationalisation-money-argument-re...
ArkyBeagle 12y ago
I believe the "ideal" - at least when you assume central banking - is a perfect fit between the expansion of the money supply and the "value" it represents - IOW, a dollar/pound/ruble means the exact same thing, year by year. That would amount to population grown ( which is lagged by the age at which people go to work ) and productivity growth. I believe that describes "zero inflation" but it's sort of hard to say. It is possible that the previous evils of deflation no longer apply ( because technology) , but I'd rather not find out through experiment.

hardcandy 12y ago

Also the biggest tickets to middle class wealth in the last few decades have been pensions and home equity. Home equity being the ability for a young couple to borrow money at a low rate on a stable asset that appreciates at a higher rate (over a 30 year time horizon). Pensions have been removed. If housing price growth stops as well, that's a significant double blow.

YokoZar 12y ago
Housing and rental costs have been a substantial drain on what would otherwise be the new middle class. For the most part they don't (yet) own homes, lower prices can only help them. Consider how much doesn't get invested by the poor and middle class into education, paying down debts, or retirement savings accounts. It feels rather absurd to suggest that they would somehow benefit from continually raising the price of something they need to buy.
- collyw 12y ago
  Exactly. Its great for those who own, paid for those who don't yet.

graedus 12y ago

Precisely. I understand it like this: if the United States has some $18tn of debt and it has to pay this back in dollars that are more valuable than they were when the debt was issued, that debt load quickly becomes unserviceable. However, if they successfully inflate away some significant percentage of the value of the USD, the nominal debt remains the same but it becomes lighter in real terms. Pippa Malmgren - correctly, I think - describes this inflating away the value of the currency (and by extension, all outstanding debts) as just another form of default, and one that has been used many times in history. It's just more stealthy than saying "we can't pay, so we won't pay" or something similar[0]. [0] https://www.youtube.com/watch?v=KBU59sY2erA https://www.youtube.com/watch?v=KBU59sY2erA

ArkyBeagle 12y ago
But government debt is DESIGNED to be inflated away. The U.S ran a then-terrifying $2B deficit during WWII. The whole point of government debt is that GDP rises eclipse it over time. I am rather shocked that anyone can't tell the difference between the effects of mild inflation on debt and default. Debt is not a blood oath - it's just a tool. We're better off if we can use this tool and use it properly. With deflation, that's harder.
prostoalex 12y ago
Inflation is not a secret, they're shooting for an average of annual 2% rate http://www.federalreserve.gov/faqs/economy_14400.htm http://www.federalreserve.gov/faqs/economy_14400.htm The markets, however, figure that out, and price that in. Which is why countries with weak currencies don't have an option to borrow in their native currencies.

prostoalex 12y ago

Higher number of defaults just leads to risk re-evaluation and debt repricing, it doesn't change anything structurally.