Bitcoin Forum

Can someone explain to me :-
1- Why mild inflation (2.5%) is beneficial to an economy ? Has been answered repeatedly
2- If mild inflation is beneficial , shouldn't Bitcoin , as a deflationary currency , be counter-intuitive ? I'm looking for more current examples where despite deflation in a field (The same amount of fiat buying more goods), consumer spending is high.

One case submitted is :-

That is the current assumption from the academic type.

I wouldn't called mild inflation is needed any more than mild deflation is needed.

It encourages people to spend, buying the goods and services that in turn give others in the economy jobs and crank the whole engine onward.

It's what the FED wants you to believe to have an excuse for printing unlimited amounts of dollars.

It is not needed - and we are going to prove it.

There are a lot of factors. And it would require a lot of reading to understand.

I think the biggest reason that deflation is scary to the mainstream is because of its relation to economic collapse. In recent history the only time deflation has been seen in an economy was during a big colapse, so everyone thinks it correlates. Maybe it does, maybe it doesn't. If you go along with the Keynesian economics you tend to be very afraid of deflation's effects. if you believe in the Austrian School of economics you know that deflation is just an adjustment to market demand, and is perfectly reasonable.

In that sense, Austrian is more accurate than Keynesian.

The Fed doesn't print unlimited amounts of dollars for shits and giggles.  Currently, its being done in the QE program with the hopes that injecting liquidity will revive the cancerous mortgage backed securities underpinning the housing market.  However, in order to do this, they have to drop interest rates to near zero, meaning banks are then less likely to give out credit.

The housing market won't reinflate though, meaning that yes, this money they're printing will eventually just translate into inflation.  You disagree, Mr. Bernanke and Ms. Yellen?  Please tell me who the next generation of homebuyers will be, because everyone I know in their 20s is swamped by student debt, and oh right - banks aren't lending.

So, basically Bitcoin is going against the widely believed principal that a small amount of inflation is required to expedite economic growth ?

Can somebody give me more reasons , or give me a decent reading list to why a deflationary system is superior ?
I can already see negative effects of it , as most people already don't spend much of their Bitcoin due to their perception of it primarily as an investment.

Japan from the 90s til now.  Read up on the current economic situation, Shinzo Abe's plan, and the actions of the Bank of Japan.

Edit:  And also, its not necessarily going against the inflation-driven theory of growth, its just a hedge against excessive growth, functioning the same way as gold in these circumstances.

When the Fed started printing money with QE (it had never been tried before), they essentially put a price floor on mortgage backed securities (which had become near-worthless with people defaulting on their mortgages once there were no buyers left in the bubble).  Look at this chart of the gold price from the past 15 years - as a hedge, the price skyrockets in times where people lose faith in the dollar/fiats (especially when the credit ratings agencies begin downgrading the US govt's credit rating, because if that goes to zero, well...its all over).

http://goldprice.org/charts/history/gold_15_year_o_b_usd.png?0.48067244119010866

And the reason it skyrockets is one of the same reasons BTC has value - it can be slipped under capital controls and changed into a different country's currency if people were to move their family or just their money elsewhere.  Essentially it functions as an inflation hedge/floating currency, and because no govt has had control of its supply since the abandonment of the gold standard, it makes a very attractive asset if you're betting against the dollar/another fiat.

Mild inflation will push spending and investing.People isn't willing to keep fiat to lose value.  They prefer to spend or invest something to earn more fiat.It will increase the commence activities and revive the economy.

the reason the economy needs reviving in the first place is because the economy demands constant consumption.

The earth is not made for constant exponential increase in demand. We are already past the limit the earth can sustainably provide in resources, the current way the economy works will make the earth unsuitable to sustain life, and it's already causing unnecessary spread of epidemics and famine.

great to know the economy is working for the 0.01%, but it doesn't work for the other 99.99%

Inflation is a form of subjugation -- a way to ensure that the poor remain poor. The poor keep most of their wealth in the form of currency, and that wealth is destroyed by inflation. The wealthy keep most of their wealth in assets, and are not affected by inflation.

It is no surprise that the bankers running the Fed say that inflation is necessary. Who are benefiting the most from inflation right now? Owners of real estate and corporations. Everyone else has to suffer from rising food and energy prices and watch their bank accounts lose value.

In a normal economy, it's pretty much impossible to have no inflation or deflation, unless you're constantly mucking with the currency supply for that economy.  So that basically leaves you with a choice between inflation, which theoretically leads to an upward spiral in prices and spending (if xyz is going to cost more tomorrow, I should buy it today while it's cheaper), or deflation, which leads to a downward spiral in prices and spending (if xyz is going to cost less tomorrow, I'll wait until later to buy it).  A little deflation now and then can be ok, but it's easy for it to get out of control.

I think subjugation is a broader issue.  It doesn't matter whether you have inflation or deflation.  The rich will use either to their advantage.  In a deflationary scenario, the poor will still remain poor and will probably get poorer because, as a whole, they're the first ones to lose their jobs.

That seems to be a very mundane explanation and is insightful at the same time... :D


Actually growth produced from inflation is artificial growth, because it is not driven by necessities but by the expectation/fear of losing wealth. Therefore it can not be sustainable longterm and wastes resources.

I hope Bitcoin will prove that the doctrine of inflation-induced growth is wrong.

Mild inflation encourages people to invest and spend money on what they need, because if you don't, you money looses purchasing power. A health economy needs people to spend money to keep everyone employed.

From the FED's point of view, they also need a mild positive inflation to give room for a positive interest rate. If inflation is too low, there is little room for interest rate to throttle exchange rate, gdp growth, unemployment, lending... and so on.

My niece and her husband just bought a house (she's 23 I think).  So there you go.  Maybe it's because she chose NOT to go to college that she can afford it.

indeed, assets make money

people say money creates money, but it's the assets that make money. And only the rich have the money for proper assets (and they know which assets to buy in the first place).

Bitcoin is one of the few assets that is available for the masses, and it allows for investing it as well to even get interest on bitcoins.


people will buy things when they need it, which is much better because it prevents buying for 'wants' and encourages buying for 'needs'

which is much better for the environment in the end, and it might reduce greed.

A consumption driven society like we have now is very bad for many reasons. Ever heard of planned obsolescence? That certainly won't happen in an deflationary system.

Inflation encourages wasteful behavior.


why is saving up bad? Why should you buy something you don't need, just to boost the economy?

Why should everyone have full-time jobs, while we are theoretically advanced enough to have machines do almost all of our work, while we can focus on art, science, and recreation? And actually do something useful with our lives instead of wasting the good parts of our lives working for a 'boss' like we are owned by someone like a fucking dog? Wouldn't you rather actually travel the world and spend time with your friends and family than having to do mindnumbing tasks so that someone you don't even really know makes a shit ton of money from the work you do?

Inflation is redistribution of wealth.
It redistribute wealth held in currency from the people holding the currency to people holding the newly printed currency.
A "mild inflation" like 2% year will destroy 80% of your saving in 40 year (you know, your eggs nest for the retirement).
Inflation favor people borrowing and consuming and damage people saving and lending.
Good investors are punished by inflation in favor of bad investors investing too much, too early.

With 0 inflation, the investors making the right prediction of the future will be rewarded.
With mild deflation the investors too much prudent (investing less than optimal) will be rewarded.
With mild inflation the investors too much reckless (investing too much than optimal) will be rewarded.

Actually inflation is worse than deflation because too much prudent investors will not invest and don't take loans. They just increase their savings level before starting their enterprises.
If things go wrong, they have a bigger and stronger safety net.
Inflation, on the other ends, reward malinvestments, consuming more savings and locking them in configurations that are difficult or impossible to undo. Like building houses no one need or use or is able to payback in the long term. At some time, people discover there is no more resources saved to complete their projects and are forced to stop them and start liquidate them at a loss.

I hate bull shit like this. This planet can sustain MANY more people than it currently does (here is a reference only arguing for 10 billion, but you can find others that will argue higher http://www.livescience.com/16493-people-planet-earth-support.html). The reason people are hungry has nothing to do with how much food there is. We currently produce more food than the world can stuff in its face ("The world produces enough food to feed everyone. World agriculture produces 17 percent more calories per person today than it did 30 years ago, despite a 70 percent population increase." http://www.worldhunger.org/articles/Learn/world%20hunger%20facts%202002.htm)

Yes, some of the things we do are unsustainable looking toward the future, such as burning fossil fuels, but we have MORE than enough right now, and will for a long time.

Do you know any history at all? There are less epidemics and famine than there ever have been in world history . Sure, some things go a bit higher for brief periods, but the long term trend is for a healthier world. (Sorry, couldn't find an easy info link on this, but I'm pretty sure it's true. I would sure rather live now than any other time in history as far as disease goes.)

If you still believe the FUD you're spreading give us some references.

Remind me what Milton Friedman said to a student asking a question, it was something along these lines :
-"M Friedman, resources of the planet are exhausting"
-"This is false, you start with the wrong premise"
-"What ?"
-"From an economic perspective, we never had so much petrol as now.
You can't say that the petrol nobody discovered 20 years ago under surface was existing. From an economic perspective, it existed only when we discovered it and had tools and capital to exploit it. Science discovers petrol faster than we consume it, so for an economic perspective, the resources are not exhausting, it is exploding. Why are you paying more ? it is certainly not because it becomes rare, maybe you can ask to your regulators."

it can sustain the NEEDS of many more but not the WANTS of many more.

Inflationary economics make people want more and more, and keep consuming even if they don't need, because their money will be worth less and less each day.

But we can't have more and more for everyone, someone is going to suffer, and the more profit the extremely rich want, the more people will have to suffer to fulfill the greed of the few.

Until at a point there's not even enough left for even the 1 person who has all wealth, because by the time that happens the world will be so polluted life s no longer possible.


I know, but it's unequally spread, i'm not sure if this will happen with a deflationary and limited currency, but i doubt it will be worse than the current system anyway

Easy to talk from a 1st world country, try living in a 3rd world country and see if you still like it so much

you seem to be pretty happy with the direction humankind is taking, are you a bankster by any chance?

The Keynesians mistakenly believe that the economy has some potential output level, and that we currentlty are below that. They think that creating more money, both treasury notes, central bank debt and private debt, will force production up to the potential. The new money goes to public spending, banks (supposedly to lend to businesses), corporate welfare and wars.

This kind of thinking leads to a planned economy, massive malinvestments, loss of freedom, poverty, a general feeling of being reliant on government doles, huge differences in wealth, social division and strain, and war.

They count and measure, but change the yardstick every month. GM supposedly increased output the previous period, but half of the increase went into the channel and was not sold to consumers. The other half was a result of subprime lending. GM is a crony company. Stalin did the same accounting tricks.

But in reality, there is no mystical maximum economic output level. It depends on the capital structure, the number of workers, the savings rate, the investment rate, and other things. The prices, including the market based interest rate will make sure that the capital structure is diversified, right sized and adapted to consumer demand. Saving rate, investment rate, consumption level should be decided by the market actors guided by prices, including interest rate. The money supply should be fixed, and governments should not take up loans.

If you get a $1000 new dole from the government, and simultaneously had taxes increased by $2000, you would ask yourself: What is the point, and where is the other $1000 going. Using the Keynesian method, you get the $1000, the government takes up a loan of $2000 in stead, but the collateral for that loan is your future income. The other $1000 is gone, consumed by the dominators.

You ask the wrong question OP. Do not misunderstood me, it is not about offending you  :D

First: Define "mild". As stated above, a "mild" 2% inflation destroys the purchasing power of your savings by 80% by the time you retire (given you save the same amount every year in your pillow in cash!)

Second: inflation also needs a definition. Speaking in general, people define it as the rising of prices of consumer goods compared in a given time/space period (example: price of 1 liter of milk in 1st of jan 2009, and 1st of jan. 2010). Also count in market changes, like: disease in cows, number of cows increased/decreased, producers of milk changed, demand for it has changed etc. etc. So, it might be that the value of 1 dollar has not have changed, but the market price of milk did. See http://en.wikipedia.org/wiki/Market_basket for more info.

Eco 101:

Let say, the whole amount of currency (which plays the money function) is a 100, and the whole amount of goods/services which can be bought/sold by that currency is also 100.
If the government - issuer of the currency - prints (QE by FED), for example, another 10 units of currency that year, the amount of goods/services is still 100.
Now, we have 110 currency for 100 wares. This will generate an increase of prices equals to the increase of new currency in the rotation, ~ 10%.
So, no, inflationary policy will not make people to spend more and increase the consumption, create new jobs, since the resources/labor/capital in the REAL PHYSICAL world did not have changed, we only had more colorful paper. Yes, by numerical count, people spent more, because prices went up, but the sum of the goods did not rise.

Some may argue, that new "money" fuels new investment. There is a basic fallacy here. For any investment to be economical, you have to earn more than you spend. Means: you have to make profit. But, if the money inflates for example, 2%, your profit rate has to be n+2% of the usual n profit to reach just the same amount of return, given no inflation!
Also, if you can not find an investment, your money gets less and less, year by year. (hence the loss of purchase value).
Actually, that is why the stock exchange is pumping up, the newly created money tries to find a way to not lose value (compound interest).

Of course, the newly printed money first gets into government's pocket (infinite budget!), whom them sell it to the banking system for interest rates controlled by the same government(!), then the banks can lend it out to the real actors of economy for a significantly higher rate than the inflation rate, hence the only participants who win out with inflation are governments and "friendly" banks tied to them. That is why every single state in the world is in ever increasing debt year by year (the real economy can not produce that many goods/services as newly created money produced/year).

In this system, inflation makes money a "proof of debt".
That is why Keynesian policy is a nonsense...

Now, let us examine the definition of deflation in a free market economy setup (like Bitcoin).
It means, that the same laptop you would have bought in 2004 for 500$ now you can buy for 50$, or you can buy a 10 times faster laptop for the same 500$. The purchasing power of your dollar increased for the same technological level, or you can get a 10 times better technological product for the same price!

This does not mean you wont spend your money. It only means, that the wealth of the world (product/services) increases, and you either need less and less unit of money to get the same product, or the same amount to get a better product! Actually, this increases the incentive to invest and save, because, now you have a vested interest to create better products, which you will also be able to pay, since your money does not depreciate, so you do not "have to spend it" because the rate of inflation is faster than the rate of product improvement.

This makes the Bitcoin money system, a money where it is a "proof of value".



 

So many wrong economic theories here.   

OP I suggest you take a coursera course instead of asking here about economics

These guys probably never even read an economics book in their life.

I'll give you a hint - inflation has nothing to do with Keynes

I agree on the second. Well, i rather say, i expand on that.
And i disagree on the first. The OP can have meaningful answers here as well :-), but yes, go read something, like Human Action (952 pages) (https://mises.org/Books/humanaction.pdf).

Keynes was all about government spending, to "fuel" the economy. Inflation of the money supply - because we are talking about THAT - turned out to be a way to do it, and
at the same time tax the people, while they do not know they are taxed. Governments hit "likes" button.

Or watch Jeffrey Tucker's short video about the 20th century monetary policy failure http://youtu.be/SSWvwBug19M?t=15m30s .

And yes, inflation itself is not Keynesian, because a Keynesian can not even define it in a sensible way. I mean, demand-pull inflation is so laughably wrong...private and government spending as a cause of it; in the same sentence we have private - a free market actor-, and government spend - by definition is the opposite of market. The Keynesian view on inflation is just fairy dust hocus pocus, the cost push inflation (yes, resource got more expansive due to sudden events, gasp!) view of them has nothing to do with the available money supply, it is just a typical example of unkown-knowns (and it is only in a given industry, NOT the whole economy).

The theories around it, and how governments acted in the 1906-70's, everything is wrong and history proved it. Hayek "won".
http://mises.org/daily/6716/Why-Keynesian-Economists-Dont-Understand-Inflation

Keynes only prescribed that for recessions to avoid spiral into depression.   If inflation was rampant he would suggest raising interest rates.  And taking money out of circulation

Keynesian believe in gov't intervention. 

Yes, that is correct.
Unless, we examine the fact that recessions are caused by government interventions. And their proposed solution is government intervention. The irony.
Also, interest rate increase does not takeout money out of circulation. It creates the need for MORE money in the future! (100*2%=102 money needed to payback. 100*10%=110 money needed to pay back.)

My (well, reality's) problem with government intervention is that, at the end of the day, there is one guy sitting in his bureau, signing a paper, how the 100 millions of people
should act (interest rate basically modifies the action of millions). That 1 guy can not have the slightest clue about the values/actions of 100 millions of people (=the market).

Central point of failure. Also, he does not have a stake in the outcome, he is playing with tax payer money, not his own.
These two adds up to total failure, as shown in the last hundred(?) years (since the creation of FED in 1913).

Now, there is this project called Bitcoin, to decentralize (=free market) the money, while at the same time make people to risk their own assets, when "signing the paper".
I can not think of a better incentive+resource allocation system to create a medium of exchange!

Thats not historically correct.   Bank runs were more commonplace before creation of the Fed.

Keynes was less about monetary policies and more about fiscal policies.   His breakthrough was "aggregate demand".  It wasnt until Friedman that we have "monetarism"

I dont believe Govt cause recessions or inflations.   Economies respond to market forces.   Govt try to influence economies using policy and sometimes it helps and sometimes it makes things worse or does nothing.

Bitcoin is Satoshis influence coming from Rothbard.   Who,  IMO is a not to be taken seriously as an economist. 

I don't disagree that inflation may lead to wasteful behavior and feeds the whole instant gratification mentality.  But what's a better alternative?  Out-of-control deflation (which is often what happens with deflation) leads to depressions--market crashes, very high unemployment, etc.

I think this is too simplistic.  Consumer psychology does matter.  Have you ever driven by a string of gas stations, seen that one of them has raised their price by 30 cents (which, from experience, indicates that the rest will likely be higher soon, too), and then stopped at the next station with the cheaper price to fill up?  I've certainly done that.

Also, remember that inflation and deflation generally affect wages as well as prices.  If we're in a deflationary environment, on average, I can expect to be paid less next year than this year (which could also come in the form of losing my job).  If I believe that to be the case, I'm going to save money as much as I can--only buy the essentials, etc.  If everyone does that, the economy will tank.

Most sane people would rather lose 3% of their savings, than be unemployed or have to downsize their business due to hoarders spending less money.   We need money to be inspire entreprenueral

You're right, entirely too simplistic, but it does satisfy the Econ 101 perspective (Econ 102 actually - Econ 101 is quite broadly a Microeconomics course at most schools, whereas Econ 102 is Macro, but I digress).

What matters the most (at least mostly from a Keynesian perspective) is the time scale over which the new money is introduced relative to the amount of employment (who's getting the money and the degree of centralization of wealth).  If the government instantly prints that 10 extra dollars and hands it out to the population via the banking system, then yes, prices will explode 10%.  But think about the response of prices from the perspective of a step-input vs. ramp-input - a step-input will obviously cause a greater reaction, whether the response is prices in a money model or the deflection of a spring in a physical model with an initial push.  The math is the same.

Yeah , I didn't mean 101 literally , just in the sense that 101 implies the most initial course of study in that field.

The first question I had asked has been answered well and repeatedly ('Why is mild inflation needed ?')

To my second question , I'm still looking for more answers.
The best comparison where despite being deflationary , growth still occurs in that field is computing power :-

So you have read some books, we have not. Trust you. Well. You may call it neo-keynesianism, ok. Inflation is central, nothing can be discussed without it.

But there is no such causality. This was definitely disproved with the stagflation of the eighties.

Well considering that computers are still a relatively new invention, we see a lot of economies of scale in play in the field of computer engineering (not the least of which is that computers themselves help us design computers).  Its not so much deflationary per se, but rather that the field was initially very profitable (and not very competitive), but has since become more distributed in terms of market power.

The problem here is that you can't speak of markets for goods and services as inflationary or deflationary, only as monopolized or price-taking.  While in terms of coin-mining hardware, you'd consider the computer an asset, to the rest of the world its just a computer (outside the market). 

Inflation and deflation refer to macroeconomic prices as a whole (i.e. how a decrease in computer costs and costs of other enabling technologies might lower prices across the entire economy).  Its not just the effect of prices in a single market, but rather how these prices then have a reverberating effect across the entire ecosystem.

Was that what you were getting at or did I miss your query?  (cool discussion btw - haven't had one of these since undergrad)

Who doesn't need a laptop immediatly will wait for a better one (or cheaper one), who needs a laptop right now will buy it anyway.

What's so bad about people onl buying what they need?

Also, in fact, is a $50 laptop in 2024 really cheaper than a $500 laptop now, if we consider the same $50 can buy you 500 pieces of bread in 2024 compared to 50 pieces of bread now? (Considereing deflation)

Is unemployment inherently bad?

I think it's just the fact that unemployed people make no money that is bad. But what if we drastically reduce the amount of hours everyone needs to work in a week, to example 4 or 5 hours. And have machines do all the work. Wouldn't we be better off?

Also depressions are not caused by the lack of selling products, it's by overly high expectations of ever exponentially increasing sales. But deflation or inflation, sales will never continue to grow exponentially. With inflation it may only look like it does because the money supply increase exponentially, but the profit is fake because the value of the money is less. Also with deflation you would not need exponentially increasing sales because even if you make less money each year, you can buy the same products (or even more) with it.

I think many people are stuck in thinking inflation is good becaus they are used to it, but I don't think anyone has ever really tried to have an open mind about honest money (gold/silver/bitcoin) and all honest money by default is deflationary.


If by that you mean we won't buy a new kitchen every 3 years, a new car every 2 years, a new computer  every year and a new phone every 6 months, than yes, the economy will tank.

But do we really NEED to be that wasteful to be happy? Do we?

I hope not, or else the world won't  be able to continue as we know it for the next 50 years or so!

I'm not sure if I am going in circles half of the time :(

Anyways, many people were saying how a deflationary model is superior.
I was simply asking for precedence or hypothetical examples.

The computers one seemed sensible from my perspective , didn't realize that deflationary couldn't be applied to only a specific field.

Here is an excellent explanation about inflation. By the way, it comes from a non-economist, Andreas M. Antonopoulos

http://youtu.be/KLj2X8ml-CI?t=34m36s  just watch till 41:20 (but i advise to watch the whole video, VERY educational).

He explains it through with:
"in a debt based monetary system, deflation sucks, because the biggest debtor is the government, who than would never able to repay the loans if the currency starts to worth more year by year. So they inflate the money into nothingness."

and also:
"deflation in a debt based currency can lead to a catastrophic collapse of the demand, BUT in an asset based currency - Bitcoin -, it does not."

Computer prices is not "deflation" -- its scale of manufacturing.   Please don't listen to these uneducated people who learn economics from youtube & fringe lunatics like Molyneux and Adropolous

Here's some historical examples of deflationary periods:  Theres a lot more examples but I just copy & paste this from some website

Post Panic of 1837―United States
Following the Panic of 1837, which was spurred by all banks' insistence on accepting payments in either silver or gold coinage alone, there was a five-year long period of economic recession in the US during which the money supply in the US economy had decreased by almost 30%.

The Great Deflation―United States
This was a 20 years long period, spanning from 1870-1890, in the US when there was a drastic decline in the prices of goods, raw materials, labor and services throughout the country. This was a rare instance of a nation actually gaining from deflation as due to the low cost of materials and labor, the just-beginning-to-industrialize US economy of those times was better able to swiftly inundate itself with industries and set up factories and production units at a lower cost. During this time, the well-established industrial nations such as Great Britain suffered economically due to a fall in demand and prices. The cause of this deflationary period is attributed to the return to gold standard post Civil War.

The Great Depression of the 1930s
The Great Depression is, perhaps, the most notorious among all historical periods of deflation. It started with the catastrophic US stock market crash on 29th October, 1929. This phenomenon is also known as the Wall Street Crash and the day it happened is grimly remembered as Black Tuesday. The Great Depression was born of manifold reasons, such as massive failures in financial structures like banks and stock markets, contraction of money supply by the US Federal Reserve, decision to return to the Gold Standard by Great Britain prior to World War 1, etc. The ripples of this depression was felt worldwide, with most countries experiencing its onset at different times during the 1930s, till the early 1940s.

The Financial Crisis of 1997―Asia
It all started when the Thai Baht collapsed, as a result of the Thai government's decision to float the national currency by cutting down its peg to the USD. This decision was spurred by failure to support the Baht exchange rate after long periods of financial extensions, most of which was extended towards real estate. Thailand was already under a staggeringly high foreign debt, way before the Baht crashed, and was technically seeing bankruptcy in the eyes at that time. The currency crash only added fuel to the already raging fire of an economic collapse. Starting from Thailand, the Asian Financial Crisis spread its ominous grip upon a large part of Asia, including Indonesia, South Korea, Laos, Malaysia, Hong Kong and Philippines were the countries that received a major blow due to this crisis. Other Asian countries like China, India, Singapore, Taiwan, Vietnam and Brunei also felt the ripples, though on a much smaller scale.

The Japanese Deflation of the 1990s
Starting in the early part of the 1990s, the deflation in Japan, was a result of a combination of various economic and demographic dissonances. Chief among them were asset price deflation, investment in insolvent companies, extension of non-performing loans by banks, etc. Also, due to the large incidence of banks involved in non-performing loans, people in Japan prefer investing their savings in Treasury Bonds rather than in bank accounts, further pushing these banks towards insolvency. Another major concern is Japan's negatively lopsided demographics. A significant part of the Japanese population consist of individuals above the age of 60. This part of the populace is headed towards a decline and a higher death rate, which significantly exceeds the birth rate in Japan, making such demographics a major issue.

Financial Crisis of 2007-2010
The recent recession that rocked the global economy started with a decline in the liquidity that took place in the US banking sector. Widespread unemployment in terms of drastic decline in recruitment and a peak in firings by companies all over the world was witnessed during the period starting from December 2007 till June 2009. Repercussions and ripples of economic depression can still be seen and felt at present, though on a much smaller scale than when it started. This is why despite recession having officially ended in June 2009, the threat of a deflationary rebound still lingers in our minds.

That was a brief overview of the major deflationary occurrences in world history. Although there are certain technical differences between recession and deflation, both cripple the economy. Compared to deflation, inflation is the lesser evil as people don't lose employment and the aggregate demand keeps mounting, leading to increased production of goods and services which require employment and recruitment of more people. In fact, within a certain limit, a small dose of inflation now and then is actually good for any economy.
Read more at Buzzle: http://www.buzzle.com/articles/historical-periods-of-deflation.html

Deflation is in the monetary base used to transact in an economy.   Recession refers to the productive growth of the economy or GDP, especially with more people in a country its natural for more business to be conducted but it is separate from numbers of currency notes or digital transactions done daily.
   They are not linked in effect and vice versa; unfortunately neither do we grow automatically as a country because we have inflation.

The biggest point here is government debt.   That is the elephant on the see-saw.    Over 50% of GDP is done via politics so this is where the whole gravity of any argument starts to revolve to anything which can justify or make easier that burden of taxation, debt and so on.   In that context we cheer inflation especially now as many governments have no way to repay their debts up front.

Extreme levels of inflation in a currency and also deflation would mean price instability.   This represents inefficiency and possibly a restriction on business as contracts can no longer be written reliably.  One reference to that might be the airlines trying to account for oil prices.   We have giant reserves and production even with various wars and USA as a free country is a big producer however oil price can spike and that is a price instability partly stemming from easy money policy.


The ideal is perfect pricing or zero inflation and zero deflation, stable value to currency hence why gold was used as an element its unchanging where as politics can cause a countrys promise to repay debt become very unstable and so now its currency.   People argue against bitcoin as has no link to anything fixed, so it represents instability and a challenge for business so if it were deflationary that might be a step up as a recognisable trend

Great overview, thanks. These episodes are examples of abrupt deflation due to clearing of debt. When debt is paid back or it is evident that the debt can not be paid back, and therefore written off. Since debt is a part of the money supply, that means when there is clearing of debt, the money supply goes down.

I still do not think that should be messed with, because the threat of debt having to be written off, is what should hold the market back to not create too much debt. I understand that this can be argued both ways.

What is interesting, is the question: Why do the neo-keynesians, who believe that the money supply should increase when economic activity goes down, why do they insist that the new money is created in the form of debt? Because the debt, since it can be cleared, makes the total money supply much more instable. If they instead insisted on printing paper dollars, they would exist forever, and a panic could not reduce the money supply.

Of course I have an opinion of this, that it is a form of deception, since the market does not necessarily understand that debt increases money supply, and it is easier for the government to get a sanction for it. But if there is another explanation, I would like to know it.

The idea is when you have recession the interest is lowered to encourage lending and when economy recovers the debts are paid down. 

BTW so far the QE doesn't have the effect its intended to have so you can say the theory is flawed.  The problem is you can't force someone to borrow money even if you make it cheap to do so. 

As for why The Treasury don't print paper money?  The short answer is that's not how it works.  They're not allowed to.

The Treasury issues bonds and the Fed buys them off the open market.  They do this to affect interest rate.  If they just printed a truckload of bills what are they gonna do with it? 

I wouldn't say there is any deception there.  If you go to the federal reserve website, its all explained.

As Milton Friedman would say, the root of the problem is that banks are relying on the central bank to provide liquidity if there is any crisis.
The net effect is that any mismanagement on the central bank part will crash the whole system. (It is a single point of failure)

Most of the bank run of the past (1907) were quickly resolved after short suspension of payment.
Some bank failed, but most survived, because they knew they would not count on the money printer to save them.

It is similar to the analogy of forest and underbrush in thieves emporium.

It is maintaining a forest by preventing any fire to catch.
The net result is that the underbrush will expand so much, that the odd of the first fire to consume the entire forest go very high.

Another way of maintaining the forest is to regulary light fire when the underbrush is not big enough to spread. The small stuff get cleared away, preventing a fire to consume the whole forest afterward.

The central banks are preventing any fire to catch, but the underbush grew so much that a spark can now consume the forest.

First, deflation is the increasing purchase value of the currency (yes, we all know it is not that simple, and it has many angles/subtext etc. We here are talking about bitcoin as a currency vs. fiat as a currency, and the inflation/deflation about these two. We do not care about CPI core rate, consumer price index vs. PPE...).

It does not matter, why computers are cheaper/better, if i can by a better for the same money as 1 year ago, my currency have more purchasing power relative to a past date FOR computers (and this was only an example, we all know, that one segment doesn't make the WHOLE currency higher in value..)

About the personal and insulting remarks. You do not even know me, and you call me (and others) uneducated. And you CAN watch MIT lectures on youtube, does that make them "fringe lunatics" as well? You call Antonopoulos (you couldn't even spell hes name correctly) a lunatic in a Bitcoin forum. Do you know who that man is? How he is one of the core developers, and researcher of the blockchain? How he is involved in the betterment and education about bitcoin, and leading speaker in every great bitcoin conference? Which i guess you never were, troll.

By the way, who are you? How many code you wrote to the protocol? Do you have a successful crypto start-up? Have you have written a new economic theory book?

If no, than you should not throwing poo on everyone you can just see.
Let me assume something about your knowledge as well: you are one of those autoriter professor fatishist, who only cares about who says thing, and not what they say.

Where does Friedman say that?  Heres a quote from an interview where he recommends QE to the BOJ


"Now, the Bank of Japan's argument is, "Oh well, we've got the interest rate down to zero; what more can we do?" It's very simple. They can buy long-term government securities, and they can keep buying them and providing high-powered money until the high-powered money starts getting the economy in an expansion."

Its true he wanted to abolish the Fed but not for the reason you state

Your post is full of irony.  LOL

Friedman tolerates the FED because it is established.
But given its existence, he would probably have said if alive that even our last crisis QE was the right response. (Even if he would prefer a world without central bank)

But to quote him :


So the failure of liquidity was partly because by blind trust into the FED reflected by the low reseve deposit ratio before 1930.
I don't find again where he is talking about how the big banks would have stepped in and helped a concerted action to restrict withdrawl instead of just hoping the FED to help them.

The analogy I made, is not from him, but from thieves emporium.

Its no secret Friedman wanted to replace the Fed with a computer that set inflation at 3%

But its not because of "lender of last resort" issue.  Its because of his politics.

He preferred the clearing house system.  But for sure he blamed the Fed for the Great Depression of not responding w QE in a timely

After all he is the founder of monetarism

Yes, I'm just talking about the way things are, not the way they ought to be.  I completely agree that there is a lot of unnecessary waste that should be cut out, even though it would hurt the economy in the short term.  My family and I generally try to drive things into the ground before we replace them.

Without a FED, he would argues that banks would have kept reserve to deposit higher.
Sure, some banks would have failed. But the result of low reserve to deposit combined with the failure of the fed to provide liquidity made it catastrophic.

Without FED, reserve to deposit would be higher, and would not have resulted in a whole forest burning, to come back to my analogy.

Yes thats what I said.  Friedman is not against QE.  He has political preference for free markets.

He wants controls on money supply.  But he wants it from a computer rather than a chairman to make decisions

Youre trying to bend Friedmans ideas to align w your beliefs.  Friedman is a monetarist.  He can be both hawkish and dovish on monetary policy.  I don't know where he said "if there wasn't a Fed, the Great Depression wouldn't have happened".  Can you link me where he said that?  I all found is that he blamed the Fed for letting GP happen b/c they didn't do QE when things started to get bad.  Bernanke quoted Friedman on this to justify his decision to my MBS off the banks.

But regardless of Friedman.  The idea that fractional reserve affects lending is not correct.  Doesnt work like that in real life.   Banks create loans then find reserves later.  In essence there are no reserve restrictions as long as there is demand for loans

I recommend you look into Minsky.  His view is more consistent w how banking works in real life

I already quoted 2 sentences from the monetary history of united state where he points finger at the FED that provoked low reserve-desposit ratio in banks. So when they failed to do a QE, banks had not enough liquidity to face the withdrawl of deposit.

I am not bending him to my idea, and I don't even see where we disagree since, I never denied that he agrees on QE.

And also, I can't understand how we could deny the idea that when banks count on a central authority to provide liquidity, and that central authority fails to do that, all the banks that depended on it will crash.
As a developer I call that single point of failure.

The point to which we disagree, to which I did not want to imply it came from Friedman, is that the FED incentivize big banks to take toxic loans.
Why ? Because Bernanke will always tries to save them. Why ? Because it is the subject of its thesis. He is interested on non monetarism mechanism of the propagation and spreading of a crisis.

So, in other word, he will prevent any big bank to fail to stop a crisis to propagate. He is right, and that's its job. But it also means that it gives no incentives for big banks to be careful about toxic loans. (Even more if such toxic loan are called AAA by Buffet)

What if banks (potentially big) where allowed to take fire more often ? There would be more bank failure for sure, but local one. And then a recession would not spark a global economy crash.

I'll look Minsky nevertheless.

I think are interpreting what Friedman is saying differently from me because maybe you arent looking at the context of history of banking.

Before 1914 instead of Federal Reserve System the big banks used a clearing house system.

This system was an association of private NY banks.  So member banks acted as "lender of last resort".   In 1907,  when there was a bank panic JP Morgan used this clearing house association to inject liquidity into the banking system.  The Federal Reserve System can be seen as a nationalization of this NY Clearing House Assc..   There was political pressure to create a Central Bank b/c this NYCA only served member banks while letting regional banks go insolvent.

So what Friedman is talking about is not single point of failure or fractional reserve.   He thinks the role of lender of last resort is more effective if private than if govt.   That clearing house works better than central bank.   What he says is the Fed is supposed to expand credit in times of crisis but because they failed to do so,  a recession became depression.  In other words they failed their job.

Here's a youtube video of him talking failed monetary policies of the Fed that resulted in Great Depression. www.youtube.com/watch?v=ObiIp8TKaLs

He is against the Fed.   But not for the reasons you think.   He is comparing a private vs govt clearing house system

But I think he got it wrong since the NYCA still exist today.   

'Coin money and set the value there of'      Coin gold and silver, not completely make up what they feel like the value should be.

I find it hard to believe Milton is so happy to go along with the Fed when he has so many good ideas normally.  Just his basic premise, free to choose does not tend towards a central bank greater then all others and without choice like we currently have.  It is a system of force not economic competition, he really wanted more of this as a solution?

Capitalism itself is basically defined by the distribution of capital and ownership by the people.  Not a centralised system, not politically controlled for governments own benefit in their spending determination.   Its all warped so badly now, this is not capitalism

Friedman is not Rothbard.   He's a follower of Adam Smith.   He just thinks free market comes ups better solutions than govt because of the incentive to profit

Maybe by reading Minsky, I'll understand more how banking system works, Milton Friedman does not go in great length about it.

But still, why does the creation of FED lowered reserve to deposit ratio ? If it is not by the confidence of FED to inject liquidities instead of private banks ?
This is again, a quote from milton friedman I took in earlier post.

I suspect also, that before, multiple clearing house existed, or else, why not calling the one central bank.
If JP Morgan had not injected liquidity with the clear house. The effect of the crisis would be more or less local to member banks.
Also, maybe other member banks with better liquidity would have helped instead of JP Morgan.
The net result is that disaster and fire would be local, and the responsability to make the system work is in the hand of people who profits from it.

If every banks depends on FED for liquidity, contrary to before, this put tredemous power in the hand of one man. (or one board)
A failure of such man translate into a failure of the whole system.
More over, contrary to a bank, the FED will never close its door, which give it no incentive to make things work. Worse.
Any failure of FED will make them earn even more power because they are credited to save the system afterward. (Great depression)

If the responsability of providing liquidity would be in the hand of member banks (which coincide with their self interest to prevent a crisis), the whole forest would not burn because of the failure of one man whose own business does not depends on its performance.

W Fractional Reserve lending there is supposed to be a cap limit ratio like 1:10 or something like that.  But in real life if somebody wants a loan the bank will write the loan and find the reserves later through interbank lending.  You can see in practice that there's no limit except by demand on loans.

The way clearing house associations work were like this:  Member banks get together and deposit reserves (gold) in the clearing house balance sheet.  The clearing house issue clearing house certificates (CHC).  The member banks uses these CHCs as money.  At the end of day they settle there balance w the clearing house.  In times of crisis, the clearing house issues a clearing house loan certificate (CHLC).  The CHLC is NOT backed by the reserves of the clearing house it is credit.  If a member defaults on loan the other members absorb the loss and kick out the defaulting member. 

I think you have the cause/effect opposite of how I see it

Private banks have incentive to maximize profit.  The clearing isn't created for the purpose of preventing crisis.  Its created so banks have an efficient credit system.  Crisis happens because of some external event. 1907 crisis happened after 2 guys tried to corner the copper market and failed.  In the event of crisis, there needs to be a "lender of last resort" to inject liquidity into illiquid credit market.

1) Clearing house only has self interest.  -->Profit motive to save their own members first.
2) Central Bank has no profit motive.  --> Incentive to look after the system

(BTW, Not only JP Morgan & NYCHA; Rockefeller, Rothchilds & the Treasury also committed funds to inject liquidity into the banks.  JP Morgan gets credit for leading the campaign to do this.)

The debate is which motive is more effective?  Self interest or the systems interest? 

Friedman is a free market believer so he says people do a better job when looking after their own money.  This may be true to a degree but it may also lead to "Tragedy of the Commons" type scenario.  And when crisis happens it takes a volunteer like JP Morgan to intervene.  W a Central Banks its their job to intervene in crisis

OTOH, without profit motive there might not be adequate reward to do a good job.  Most govt agencies are slow and incompetent, stuck in bureaucracy, etc..

The debate w Friedman boils down to less regulation vs more regulation.  In the 1980's, the influence of Friedman led to policies of deregulation which people blame for the bubbles and subsequent crash so we are back to Keynes (neo-Keynesian & post-Keynesian).  Minsky & Modern Money Theory is considered post-Keynesian.  Its still heterodox and not mainstream but I think Minskys ideas are gaining more popularity now after his Financial Instability Hypothesis explained the 90s Asian Financial Crisis & predicted the bubble burst

http://www.levyinstitute.org/pubs/wp74.pdf

Thanks for the course on clearing house, does minsky explain that in details ? it is interesting.

I would point out that JP Morgan lead the campaign for its own self interest because they also have incentive to prevent the crisis from spreading. (I think we agree on that)

The debate of self interest versus system interest is clear for me. My background as an entrepreneur in one of the worse bureaucratic country in the world, a whale out of control, does not help. (France)
But from Game Theory, there is some kinds of problem (prisoner's dilemma problem), that might be solved more effectively by adopting a system view. (Which is why I'm not completely against gov)
But it is not proved that the money system can be modeled as a prisoner's dilemna problem.

I come from a developer background, so I primarily see Central Bank as a single point of failure of the whole system.

Clearing house members have incentives to kick a member that default on loan, because they don't want to absorb losses forever.
Also, I suspect there were lots of clearing houses, and so the failure of a big member bank in one clearing house will not make other clearing house member to absorb the big loss. (except with the psychology impact on depositors)

With the FED system, a bank that is too big will never fail, because member banks don't have incentives to kick them out (they does not loss from a default, since the gov will bailout the big dying whale).
If one day gov decides to not bailout by not emitting bonds (This is how money get printed as I understand), then the member banks of the FED will have to absorb the loss, and the whole system will get out of whack.

Minsky doesn't talk about clearing houses.  I think its from Allyn Young's book

Your intuition maybe correct about individual incentives.  But I think you are too hung up on political disapproval of the Fed or Central Banks.  What I mean is you seem to want to conclude that Central Banks don't work or cause harm so you are looking for justification of your hypothesis instead of looking at the empirical data.

The reason I bring up Minsky is because his view of money is endogenous.  That banks create loans then find reserves after.  This view is more accurate about what goes on in banking rather than Friedmans exogenous money supply view.  

Minsky says the mechanism of financial crisis come from the borrowers.  There are 3 categories of borrowers; hedge/ speculative/ finance.  When times are prosperous, when the borrower has excess cash he takes more speculative risk due to "euphoria".  The influx of speculative investors create speculative bubbles.  The last to enter are Ponzi borrowers.  In the case of the Ponzi borower, the investor relies on the appreciating asset to cover the debt.  When the asset fails to appreciate to cover the debt the Ponzi borrowers money gets 'frozen' and he's forced to liquidate the position.  When many investors are forced to do this you have a crash.

Personally, I think Minsky's idea is the most accurate understanding of markets.  It is inline w Keynes except Keynes description is a vague "animal spirits".

(BTW Keynes was an investor so his view comes from being a market participant)

Friedman tend to take a position of "efficient market hypothesis" because he follows Adam Smith.  Whatever the market determines is the correct (natural) state

It's depressing to see people in this thread talk about "mild inflation" as though it's accepted to be something good. It's like saying "mild theft of your bank account is OK". As central banker Paul Volcker said "a 2% inflation target means that a worker loses 70% of his savings during a 30-year working life".

Deflation is also otherwise known as "productivity". Humanity becomes more productive in things like agriculture, IT, manufacturing and the cost of goods is supposed to go down. Guess what, under that system the standard of living also goes UP.

But oh no, banks want to sell more debt and protect existing debtholders (even if insolvent) so they hire politicians and academics to spout absolute rubbish about how "oh oh inflation is good, really, no, no, really". Lower prices keeps people from buying things, oh, oh wouldn't want them to actually SAVE any money now would we? OK genius riddle me this: if LOWER prices mean people buy LESS, then why do companies like Amazon and Walmart do everything they can to make their prices CHEAPER? This reasoning would say oh no just raise prices and people will want to buy more.

Let's see, it's better for me if A. I go to the store and receive the same quantity of goods as last time I was there, or B. I go to the store and receive LESS goods for my money than last time. Select ONE scenario that makes you WEALTHIER. This is not rocket science

Short answer:  Because mild inflation is easier to control than deflation or runaway inflation.

Amazon or Walmart arent good examples.  Thats micro.  Were talking about macro.

People buy more when economies are robust and people have money to spend.  Deflation is usually a sign of recession

As long as bitcoin does not become the uniform measure of how things are priced then economies will be safe from the dangers of deflation.

Up until the point that all 21 million BTC are mined, bitcoin will technically be inflationary because more bitcoin will be in circulation then the previous day. The reason why people call bitcoin deflationary today is because it is expected that the price of bitcoin will increase over time, which has the same effect as deflation (one dollar tomorrow buys more goods/services tomorrow then it does today)

There is two kind of deflation.
The good one, and the bad one, you are referring on the bad one, that gave us a traumatic experience.

Good deflation happens results from technological progress that supply an excess of goods.
This is good for customer which will see price shrink.
The stocks will likely stay ahead, the technological progress backing faith in the future.

Bad deflation happens when customers save money for future incertainty. When they fear a crash, and consequently, provokes it, by holding their money.
In other words, the reduction of price does not come from technological advancement.
It can be triggered by stocks fall, as the great depression. (that can come from multiple reason that goes from bad monetary policy, to lack of technological advancement to boost the demand)

Not quite.   You have to measure inflation/ deflation on basket of goods (CPI).  Not just individual categories of goods.   If you look at historical data,  most deflation occurs in recession times.

Stocks falling in 1929 onwards was a symptom not the cause of economic decline.   It may have been abrupt and disrupting to people, shares are forward looking but not the determiner of a companies fortunes.     I think then like now that bonds are far more important to funding companies balance sheets


Seems like too absolute a statement.   FED can end up spinning its wheels at some point, they can only redirect value but they are not a creator or even a holder I think.  That would take real reserves and we know dollar is not backed or linked to solid value, FED is just forcing adjustments to what system dollar market participants populate.   Banks will fail and FED will do nothing as it will be too occupied trying to save itself, in the end it will sacrifice others for its own continuation

Deflation in prices while dollar loses value also would be surprising if demand were higher, it does seem to indicate a problem then.   The problem we got today is they are trying to force higher prices in order to create growth, thats such mixed up logic.   It cannot work that way, thats like me grabbing the cart and pulling the horse.   So long as the cart is going a good speed, the horse is doing just fine or maybe I pushed them both over a cliff

http://en.wikipedia.org/wiki/List_of_fallacies
I think this part of wiki must read like my first abc book of government -

There are two functions that money plays in the economy (besides being a measure of value), i.e. a store of value and a means of exchange, and these functions are obviously contradicting each other. To be a good store of value, a currency should not be depreciating in time, whereas to be a good medium of exchange, it should. Bitcoin by its deflationary nature is more suitable as a store of value, not as a medium of exchange, that's why it seems to you counter-intuitive. :)

From experience we see that when the value of money goes down, we have more export and less bankruptcies, and house owner with debt profits. The problem is that we do not want this, we want cross border trade to be neutral, bancruptcies to exist for creative destruction, and we do not want the spenders to profit off savers. When the euphoria passes, we have a non-optimal capital structure and most people lose wealth and immediate spending power.

Who are you referring to when you say "we" in "we do not want this, we want cross border trade to be neutral, bancruptcies to exist for creative destruction, and we do not want the spenders to profit off savers"?   Corporations that export goods like a weak currency because their goods are more competitive overseas.  Banks certainly don't want bankruptcies.  And the spenders, which seem to outnumber the savers, obviously prefer to profit.  So it would seem like a majority of people prefer things the way they are (at least until they blow up).  So by "we", are you just referring to those of us who would actually prefer a more stable economic/financial system?

He's saying the economy as a whole. Without bankruptcies (or at least repayment with a positive real interest rate) money is valueless. Without valuable money, savers don't have a reliable store of value and thus must speculate to preserve their wealth. Forced speculation creates uncertainty. Uncertainty is a net destroyer of wealth as it discourages investment. Without savers and investment, the future holds less wealth than the present, which is basically the ultimate sin of any monetary system.

Ah, I see.  Thanks--that's a good explanation.  As repayment with a positive real interest rate is generally more desirable than debt destruction (default/bankruptcy), does this basically imply that inflation is required for a healthy economic system?

Repayment is debt destruction. Sure, it is not a default, but the whole debt can never be repaid by repayment (mathematically speaking).
They talk about it in https://www.youtube.com/watch?v=iFDe5kUUyT0 (https://www.youtube.com/watch?v=iFDe5kUUyT0) at 13 minutes.
I advice you to look at the whole Hidden Secrets of Money series.

With we, I mean I.

I don't want inflation. Inflation means money creation, the money goes to friends of the government. We get a capital structure that is satisfactory for yesteryear. We get too much vertical integration. We get businesses queuing outside government offices in stead of making the best goods and services they can. We get the rich spenders if they are lucky. We get poor savers. We get eye catching public works. We get increased number of government services. This is the same every time. It was also the case for the Weimar hyperinflation (they had other things also, war reparations and an open ended general strike in Ruhr). Lots of politicians know this, but restraint is always next time - else the voters get upset. There seems to be no way around this. Except, maybe, if the public by themselves preferred to use sound money. With gold, this has not been the case. With bitcoin? Maybe.