Bitcoin Forum

We are being told deflation is bad for our economies and this is used as excuse from our central banks to print more money and destroy our savings/currencies. What they say is that in a deflationary environment, the price of goods falls so people would not buy anything and would rather wait to buy in future, therefore slowing the economy. If so why smartphones sell like hot cakes?their price is falling and people are buying them actually because of that. Maybe because each time the price decreases customers feel like they are getting a good deal, therefore are prompted to buy!!
If our economies are not growing it means that there isn't much inflation pressure, so I don't see any reason to artificially induce inflation by destroying our currencies. I would like to know your view on that..also do you think bitcoins (deflationary) will see a wider adoption by retailers in future?

Yes it is. According to the laws of economics, the amount of banknotes in circulation, must correspond to the quantity of goods and services in the market.

I can't see anything good in deflation. But it's inevitable.

to be honest I prefer to see some deflation rather than artificially inflate prices by destroying currencies. Maybe there will be some pain in the beginning but eventually the market would adjust itself. However I am not so convinced the fall of prices is inevitably bad for shoppers or merchants, if this was the case why hi-tech products whose prices are constantly falling, sell so much?

Deflation is falling prices. It sounds good, but it's not good for the economy.

Delayed spending slows the economy and government revenue is expected to fall. The you might get falling wages, debtors finds it increasing hard to finance debts. Some argue that short term moderate deflation is not that evil, but governments in general tries to avoid that.

they are both bad, deflation or inflation, if they are extended too a high degree, like everything in the world

equilibrium is the key

If slower spending means you do not buy thing you do not have to buy, then it is good for the environment/society.

I agree about the debt part, that is actually why our governments prefer inflation to deflation, because they can devalue their debt..

The problem is that the nominal interest rate cannot fall below zero, because that would mean reducing savers’ bank balances every month, and would prompt them to withdraw their deposits from banks and stash cash under the bed. Together with inflation, this puts a floor on the real interest rate too. If inflation is low and real rates can’t fall far enough to boost demand and perk up prices, demand will weaken still further. This is the dreaded deflation trap.

Deflation is bad.

The adjustment period is bad because wages are sticky and won't fall fast enough without a lot of unemployment pain (and forever lost production). But, more important, loans are quoted in fixed currency amounts so current loans become a much larger burden on families and companies if incomes are falling.

Investment will fall. People will be fired. Consumption will fall. And we all will be on a lower standard of living path.

(and don't give me the "people will adjust to falling wages" argument. That's just a recipe for a lot of needless pain and ignores the fact that people have existing loans.)

Wow the neo-keynesian trolls have certainly gone to town here already, I should point out there are those who believe it's a bad thing because of falling prices, what they fail to grasp, is that's only a bad thing for people who rely on high prices in order to make money, such as speculators and people holding various assets, who these neo-keynesian economists are on the side of.

For the rest of us like you and me, deflation is absolutely fantastic, it makes everything easier to afford and allows you to build up savings, you aren't being forced to work twice as hard for half as much and it protects you against market manipulation of the money supply which is what causes these price swings neo-keynesian economists are so afraid of. Another thing to bear in mind of course is that for some baffling reason particularly on this forum the words inflation/deflation have been twisted in their definition to suit the neo-keynesian viewpoint, when I talk about inflation/deflation I am talking about the currency supply, when you print currency and increase the supply that's inflation, when you keep things the same or in fact reduce the amount of currency supply in circulation that's deflation and it causes the exchange rate of that currency to rise against others which is what's happening with Bitcoin and the dollar.

Yes, you're actually recognising that the idea of falling prices being a bad thing is a load of shit, I am building my investments right now and the rising price of Bitcoin is helping me a lot and is a perfect example of why deflation is a good thing, the idea that inflation helps people is a joke because while it may make a short term rise happen as is what's happening in the stock markets right now everything is going to collapse and be a catastrophe. The central banks are advocating the printing of money to keep things going, it isn't out of any benign purpose but it is to keep all these prices we're seeing artificially high, eventually it is all going to collapse in on itself, the only question is how long they'll keep things going, all inflation is, is a very sophisticated form of market manipulation.

Don't fall into the trap of arguing in a debate with people who use made up definitions for words or alternate realities in order to help them win, inflation/deflation is to do with currency supply, it isn't anything to do with prices, prices falling and rising are a result of inflation and deflation they aren't actually the process itself, people who argue using these terms are trying to sweep the issue of currency supply under the rug.

If you worked for a living and your wages were in Bitcoin and Bitcoin deflated (i.e. its value went up) say from $200 to $400, you would be fired. If you claim you'd agree to a wage drop then you're really saying your salary is not valued in Bitcoin. It's valued in bananas or something and only paid in the equivalent Bitcoin.

Bitcoin is broken by design because the gold standard (deflation) is dead. Read this:

"How can we design a digital currency to be more like a self-regulating, homeostatic living organism? One way would be to use a more sophisticated kind of formula, one that contains among its parameters feedback from transaction metrics. For example, more new money could be issued as its value relative to goods and services rises, and less could be issued (or some removed) in the opposite, inflationary case. Or perhaps an even better parameter would be the velocity of money. If the number of transactions per “coin” per month falls, indicating deflation, more money could be created. If economic activity starts overheating, money could be removed."

http://blog.p2pfoundation.net/charles-eisenstein-on-the-next-step-for-digital-currency/2013/07/22

Depends on the cause of the deflation. Deflation due to a collapse in aggregate demand is bad. Deflation due to an increase in aggregate supply is good, at least in a healthy economic system. Any deflation is bad in the current system because there's way too much debt.

This sums it up better for me than the countless numbers of posts on this topic. A little monetary deflation is just the opposite of a little monetary inflation. Nothing dramatic.

I would really like people to finally put the non-argument of people postponing purchasing of goods due to falling prices to rest. No one has unlimited time on this planet so no one is going to walk for another year (and then again as in perpetuity) because a car would be 2% cheaper the next year.

We deserve better thinking.

Whelp, calling an argument you can't counter "non-argument" seems like a good start.
inb4 [any negative reply]:  I'd really like people to finally put non-arguments like that to rest.

You clearly don't understand how inflation and deflation works, you're forgetting that because the prices will lower due to the currency becoming more valuable that it will make costs cheaper for employers as well when it comes to materials and other expenses.

Stop trying to exclude one or the other to suit your arguments and agenda.

Sorry, but some costs for employers will not fall. His debts will remain the same and so will your salary.

Would you seriously argue that someone will not purchase a car because he expects it to be 2% cheaper next year?
And what about the next year: again no purchase due to the same reason?

Asking the question is answering it. It's really a non-argument.

Would I put off buying a fleet of new cars for my company if cars depreciated more substantially?  The answer is "obviously yes."
No one is talking about necessities, like morning coffee.  I don't care if I have to pay double @ 7am for the same cup I could buy for its regular price @ 7pm.  Don't extrapolate from this that I don't care about saving money, and that 200% daily deflation would not alter my buying habits.

My turn:
Would you invest in car company stock that nets 2% a year, knowing that keeping your money in your mattress Trezor would be both safer & net the same end result?

Wait while I fall out on the floor.  Lambchop just suggested to buy Bitcoins and hold it in your trezor!   

Threadstalking me again?  That's just creepy, bro >:(
Besides, don't you Bitcoiners like your prey a little younger?

What??? oh yeah still on ignore :D  haha

So you would never ever buy new cars for your company (and why did you purchase cars at all: remember, the fallacy argument is that such purchase is (forever) postponed).

http://doctorfeelgood.co.nz/wp-content/uploads/2014/06/spock-illogical.jpg

It depends on the person

From a consumer's point of view, deflation stimulate spending, since his money now have more value, he can buy more things. Inflation will stimulate saving, since his money can buy less things and he will save the money to buy more important things

From an investor point of view, deflation will increase his cash holding, and inflation will increase his investment and asset holding

So, for a consumer driven economy like US, deflation is good; for an investment driven economy like China, inflation is good

Indeed !  The non-argument is easily wiped from the table when you look at one of the biggest markets on earth: consumer electronics.  You know that the i-phone you spend a fortune on today will cost much less next year when the newer model will come out.  Nevertheless, people cue in front of an Apple store to be the first to buy it at high prices when it comes available.
We've seen the same effect in the personal computer market for 2 or 3 decades now.  People want to consume here and now, even if it will be WAY cheaper next year, for the same, or even a better product.

Nobody will delay much of his consumption because it will be 2% cheaper next year.

But a little deflation has a HUGE advantage over a little inflation: you do not need a bank any more if you want a modest interest rate on money.  You can just KEEP it.  A little deflation is a disaster for banksters, who are supposed to distribute part of the seigniorage that comes with the money printing necessary to sustain inflation in a growing economy. 

What is problematic though (and especially for banksters) is that in a slightly inflationary system, you have an advantage if you live on debt.  If suddenly the rules change, and you find yourself indebted in a deflationary system where the debt is expressed in the monetary asset that deflates (that rises in price), then you are in deep shit too.

So a little deflation (which you get on average with a supply stable currency) would avoid having a huge amount of banksters and be good for the economy simply because of that (all the resourses spend on banking can now go to do productive stuff) ; but a sudden change from inflation to deflation will make more than one go bankrupt, because of the debt spiral in which he finds himself.

People say that in a deflationary system there can be no loans.  But that is not true of course.  Only, loans will have only very small interest rates.  A zero-interest rate loan will cost the debtor a real interest rate of the order of the growth of the economy (= the deflation rate).  Indeed, if he borrows 1000 shinkels today, and will have to pay back 1000 shinkels in 2 years, then those 1000 shinkels to pay back can buy about 4% more (assuming a deflation rate of 2%) than what he borrowed.  He has to earn about 4% more value to pay back the loan.  In fact, that would be a normal return on investment: if you have your average Joe investment, you should at least produce the average economic growth on the capital, otherwise you better do something else, if people on average can have that ROI.

Point is, nobody is going to lend you 1000 shinkels to get 1000 shinkels back in 2 years, with the counterparty risk.  If you have 1000 shinkels, you will just KEEP them.  So if you lend out 1000 shinkels, you want to get somewhat more back, at least to cover the counterparty risk. 

Which means that the borrower will have to have a higher-than-average ROI on the capital borrowed, in order to be able to pay back the loan.  Which is a good thing.  It means that people will only invest in "over-the-average" return activities.

In as much as this would slow down the economy, it would also slow down the (average) deflation, and as such, it would automatically lower the effective interest rate (which is the asked interest rate, plus the deflation rate). 

It would stop encouraging people to invest with debt in lower-than-average efficient economical activities, and as such prevent misallocation of resources, which is the big problem with an inflationary system.  There would still be debt, but much less, and only debt that has a high potential for investment and return.
 
Which would be the big disaster for banksters.

Of course I would buy new cars.  I just wouldn't buy as many cars in my lifetime as I would if the money I held was going to be worth less next year.
Let's say I live for a hundred years.  In that time, my dealer could sell me 2 cars, or 200.  Which do you suppose he'd like more?

Getting back to something more realistic & my company's fleet: It could be replaced every 3 years, or every 4.  Or every 5.  Yes, I would buy new cars, but not as often.  Get it?  

Now asking a Bitcoiner to read an entire post in one go is mean and unreasonable, so read the text below again.
Bonus: see if you've missed anything.


Now, if you still feel that you've made a cogent argument, keep rereading until that feeling goes away.
You're welcome.

For an inflation based economy, deflation is kill, just like penicillin to bacteria

The deflation in 2008 is a cure for the disease that US has caught since 1971, however the bacteria has not been killed, they kidnap the whole world by printing more money

The slaveholders were sick, and the king decided to have all the slaves voluntarily double their work for free to make them recover from the disease.

The interesting thing is, the slavery is not intended, but a natural result of countless human's selection over hundreds of years, all the other solutions had been unstable and abolished (like gold standard), is it a human nature to prefer slavery over instability?

It means people won't buy anything. Why buy something worth $ 200 today when you can get it tomorrow for $175. People don't buy, business go bankrupt and people lose their jobs. No jobs=no economy since there is no demand and now you have to inject a fortune to get it rolling again.

Just remember the deflationary crises of the 19th century.

Do you realize that your example has 12.5% deflation, per day? That's hyper deflation, not normal deflation. Rephrase that example to: "Would you buy something for 200$ today if you can get it for 196$ next year?" (2% deflation per year).

Don't know if the smartphone prices are actually falling (apart from the obsolete models, of course), but if this is really the case, then we see technological innovation and competition at work driving the prices down. Regarding people not buying anything, you evidently don't see the whole picture. What matters more here is producers' profits decline, which is the primary cause of the drop in demand (in the majority of cases, at least).

Debt shouldn't be the only way to raise funds to start a company..with cryptocurrencies hopefully it will become easier for everybody to issue shares and fund a company without having to make debts. It would force people to make good business plans (otherwise nobody would join their project) plus if you were to own shares of a supermarket in your neighborhood I'm sure you would try to shop always there. However this cannot work if there is not some sort of regulation/supervision. Unfortunately people are always looking for ways to scam others so somebody has to supervise.

In fact, taking debt is not that bad in the long run. In both cases (taking debt vs issuing shares) you will have to share some of your profits, but in the former case you pay out the debt and are done with it while in the latter case you are stuck paying out indefinitely long.

Peope don't delay their spending because they think the price is going to go down a litlle bit or they would not buy iphones that will go down 50% in price in a year or they wouldn't buy as much with their credit cards. Deflation is good for the consumer but deflation happens during a drepression and when there is a lack of demand so it is sometimes associated with it but it is a consequence of the lack of demand not a cause.

Yes, but it's not the only possible cause. It's also possible to have deflation due to an increase in aggregate supply. Then it's benign deflation. So whether deflation is good or bad depends on the underlying cause of deflation. Obviously a collapse in aggregate demand is bad.

The relevant questions concerning this topic are:

• In the current economic system, can central banks effectively combat deflation due to collapses in aggregate demand? Are quantitative easing and zero/negative interest rate policies real solutions or does it just kick the can down the road?
• What are typical causes of collapses in aggregate demand?
• In an economy with a fixed supply of money, is a continued collapse in aggregate demand (deflationary spiral) inevitable?

In the current economic system, can central banks effectively combat deflation due to collapses in aggregate demand?

Don't know what you mean by the current economic system (there are many in this context), but yes, they can, provided the economy you refer to is not built on debt. Otherwise, they can try to "restart" the economy through effectively writing off the existing debt (what they seem to be doing).

What are typical causes of collapses in aggregate demand?

There is a story of economic cycles, the longest of which (but not limited to) are associated with the so-called technological paradigm shifts (e.g. transition from manual to mechanized labor).

In an economy with a fixed supply of money, is a continued collapse in aggregate demand (deflationary spiral) inevitable?

Not necessarily, it also greatly depends on the money velocity, the increase in which can potentially make up for the decline in the aggregate demand. Though this doesn't happen in reality.

All of these problem of deflation is based on one assumption that fiat money's value is constant, and it is used as a benchmark of value, which is not true

For example, when you see a house's price going up and everything else's price keep the same, you think it is the house become more valuable. But the reality is your dollar worth less and everything else also worth less against that house

Why people stubbornly use fiat money as a benchmark of value, like using meter to measure length and using minute to measure time?

If you give up the belief of absolute value of currency, then all the claimed problems of deflation will disappear: When price of something drops, the purchasing power of the currency is increasing, means productivity is higher thus everything become more and cheaper, people will spend more, just like when bitcoin reached $1200, the amount of spent bitcoin is highest

On enterprise side, although the amount of currency they earn decreased, but currency appreciated, their real income will increase, salary become cheaper, they could hire more people and drive larger projects. This also happened when bitcoin price reached $1000+, lots of projects were setup back then

So, the claim of deflation's negative impact is just based on a stubbornly hold belief that currency is a benchmark of value. In fact the whole modern monetary theory is constructed on this blind belief

A post full of misconceptions and delusions. Just a few notes below:


Productivity, as per Wikipedia, is "an average measure of the efficiency of production. It can be expressed as the ratio of output to inputs [emphasis added] used in the production process, i.e. output per unit of input". As both output and input can be expressed in money terms, the money is effectively taken out of the equation, therefore the increase in the purchasing power has nothing to do with productivity.

Strictly speaking, it is not so simple, but your reasoning actually works against your assumption, i.e. it can be said that with the increase in purchasing power productivity is decreasing (since producers make less profit and can actually suffer losses).


Yes, people got rid of their bitcoins in every possible way (probably the only chance in our lifetime at such rates). And don't confuse speculation with consumption, which would most likely account for the increase in bitcoin turnover, if it did happen at all.


In real life, producers' profits may turn negative due to decreased prices. But negative is negative, and you can't do anything about it, deflation or not. What you say is probably the most common mistake people make when they discuss deflation "on enterprise side". In short, deflation is not a mirror reflection of inflation (as many erroneously believe).

Apologies, havent read the whole thread, so this may have been mentioned.

Deflation is good for regular people, savers etc provided they keep their employment. Bad for govts because falling prices are not taxable. If wages stay stagnant yet prices go down, it's effectively a pay rise.

Inflation; Good for govts as debts gets smaller as everything inflates. This is what the CB's of the world are chasing. They'll never be able to pay their debts, and don't plan to anyway, but inflation knocks the relative size off the debt pile. Inflation usually comes with a wage increase, govts get more tax receipts.

The 'deflationary spiral' is the thing people fear about deflation, although it is much like the Bogeyman; theorized about but never spotted  :)

Deflation caused by the contraction in aggregate demand is always damaging to the employment. And this impact is twofold. First and most obvious, producers have to cut production (i.e. the number of employees) due to less demand for their goods. Secondly, the decrease in prices leads to shortening profit margins, which, per se, is more damaging to large-scale production enterprises that earn profit through volume (and where the number of persons employed is higher). This way more companies go belly up, and consequently more people are laid off.

But this is exactly contradicted by the observation that people are willing to spend a night before an Apple shop to buy an i-phone 5 when it came out, while if they waited for a year, they would have gotten that same i-phone 5 for much less money (namely when the i-phone 6 came out).

So this myth is empirically not true.

And not just for i-phones.  It has been true for the personal computer market since about 3 decades.  The SAME product in the computer market devaluates like hell, and nevertheless it is part of the biggest industry (consumer electronics) on this planet.  If you go to the supermarket, and you look up the price of a specific computer NOW, and you look at its price 6 months from now, you will see that it has lowered in price (simply because more performing machines came out).  So, according to this myth, NOBODY would buy computers, because they will be cheaper 6 months from now.  That is NOT what is observed, on the contrary.

So this "people will stop buying because it would be cheaper for them to buy the same thing 6 months from now" is simply NOT TRUE.

And that kills the main argument for "inflation is needed for people to spend stuff and deflation will kill consumption".

But that is exactly the whole point !!  Why would you buy an i-phone 6 TODAY, when you can buy that SAME i-phone 6 next year for less money (when the i-phone 7 will come out) ?

Because THAT is the anti-deflationary argument: people won't buy stuff TODAY because the SAME STUFF will be cheaper tomorrow.  (not newer and better stuff, the SAME stuff).  Well, we observe empirically that this is simply NOT TRUE.

Why did people buy personal computers when they knew that 3 years later, they could have gotten a machine with similar performance for a much lower price ?

There is deflation caused by the increase in productivity and technological innovations (consumer electronics as the most obvious example), and there is deflation caused by the contraction in consumption. In the latter case the phrase "deflation will kill consumption" makes no sense, since deflation is an effect, not a cause. I hope this won't be a matter of dispute.

All financial crises in history, made by deflation.

Not necessarily, the insane financial policies, leading to a run-away inflation in the total majority of cases, also take their toll, like the incessant train of money devaluations in Zimbabwe.

No, it's a straw man; refuted ad nauseum by the likes of stormfront.org, mises.org, zerohedge, MyBeanieFortune and other beacons of economic learnings & light on the interweb.

By this argument inflation is irrelevant since inflation's "negative impact is just based on a stubbornly held belief that currency is a benchmark of value".

By this argument all the "benefits" of deflation are an illusion.

The observable fact is that the adjustment from mild inflation to mild deflation is painful. People lose jobs because both employees and employers do not reduce salaries fast enough and loans are paid off in fixed amounts and end up sucking more resources than expected to pay off and therefore reducing investment.

The ironic thing is you are right that, theoretically, the value of money does not matter and is quite arbitrary. It's the unforeseen changes in the rate of change of money value that causes problems. Steady is best. You can write contracts (loans and employment contracts) that take a steady %2 inflation or a %2 deflation into account.

So, given that we were at %2 inflation, why not just leave it there since contracts already take that into account? Why call for unneeded pain by calling for switching to a currency with deflation when the benefits are an illusion?

Increased productivity means less value for produced goods, since the supply increased and demand does not change, this is the basic economy 123

Output and input should not be expressed in currency, since the currency's value is changing all the time (Ruble dropped 50% against USD in a year, is that mean Russian's productivity suddenly doubled?)

In fact, there is no good way to measure the value, fiat money usually were used as an approximation, the precision of this approximation is about +-20%, any deflation or inflation is much lower than that scale, the pro-inflation talk can be regarded as an excuse for banks to print more money for themselves to spend



Speculation is also part of the economy, and in fact majority of today's economy is driven by speculation on assets, all of the newly created money directly goes to assets, not consumption, it is also the speculation of those assets caused the financial crisis


Again, it is a common mistake by economists to use currency as an absolute measure of value. But I understand that it is extremely difficult for them to understand that currency's value fluctuates all the time, since they have been using currency to measure value since they barely can do 1+1. If they start from an international point of view by looking at FOREX market, then they will understand that currency's stable value is just an illusion. Get rid of that illusion, then people will not look at the numbers in their account to decide if they are profitable or not, they will look at what they really gain from a certain economy activity

Exactly, if you get rid of the illusion of stable value of currency, then all the talks about inflation or deflation will be dismissed. In fact, even if you use currency as benchmark of value, in a same day, something's price is going down and some other things' price is going up, inflation and deflation happens at all levels at the same time in the economy due to supply and demand change, it does not matter

But saying that deflation will destroy job and create recession is some kind of political campaign: Banks want to create more money for themselves, so they prefer an inflative model, so they first inflate it and then stop printing and crash the economy, and tell people that deflation is bad, so that they could print more money for themselves. Considering that FED has successfully printed money of future 30 years and handed them to commercial banks, the success of this political campaign is enormous

If the mainstream economists insists on a deflative model, the world will be a totally different world, at least banks won't get a chance to rob during a financial crisis, and there would never have been a financial crisis in the first place

I have just one question. What are you as a producer going to do with negative profit, i.e. a loss that you may incur as a result of decreasing prices? Remember that you have to pay wages from your income, and your employees don't care about your ideas (absolute measure of value and all that) but love cash.

I disagree that there are no benefits. The currency would be a better store of value for one.

Also, we want a different economic system, one that is more free and more sustainable, where common people don't become debt slaves en masse and the banking pyramid doesn't rob people en masse. Where the main currency isn't money by decree of government but by choice of the majority of individuals.

If people are going to pick a currency themselves they're probably not going to pick one that constantly devalues. It's nice to be able to have savings in money that doesn't vaporize over time.

If in your example there would be deflation due to an increase in aggregate supply then you're simply failing as a company to keep up with the rest of the economy, since apparently your company's increase in productivity did not match the economy's average.

If on the other hand in your example deflation is due to a collapse in aggregate demand, then yes, the company has a problem.

So...  Looking at 2014 & 2015... Bitcoin's knda out, right?

But hey, you're free to pick whichever currency you want--Bitcoin, Doge, BTCeanies.
Sadly, others are also free to not take you seriously, and guilelessly laugh in your face as you try to buy things from them (using your coin of choice).

I thought it was evident that we were discussing here deflation due to aggregate demand contraction. I guess many have an intuitive assumption that company profits would be decreasing in proportion to the decrease in prices of the goods the company sells (hence comes the idea that their real income will increase despite the drop in prices).

This is flat-out wrong.

Indeed, if you use cash as unit of value, you will have this problem. And Keynes said that people prefer a rising cash income and rising price over a dropping cash income and dropping price. It is this basic instinct make inflative monetary policy seems reasonable

The problem is, in today's inflation based model, most of the new money do not enter economy as increased projects and salary, those money were used to buy assets and debt, which makes majority of people poorer

However, if new money can not be created at ease, and money becomes more valuable over time, business can still profit if there is demand

Take a bitcoin mining business for example, a mining rig of 2000W power now generate far less bitcoin income than 2011, but as a thumb of rule, the mining operation still roughly holds a line of 6 months return on investment (btc wise), regardless of bitcoin's exchange rate. And now the whole mining industry is making much more income than 2011, they are building larger sites, hiring more people. Those employees have much less bitcoin income comparing to 2011 due to the rise of bitcoin's exchange rate, but their purchasing power increased due to the overall industry is expanding. The reason is simply because the market demand is increasing at a fast pace, it is the market demand, not money supply, decide if a business is profitable or not

On the other hand, during 2014, mining rig price dropped as a result of contraction of aggregate demand, but that is a important sign of market telling you that now demand is weak, you must scale down the supply. Artificially increase the demand by printing more money does not change the fact that now aggregate demand is lower: When you are tired, you should sleep, instead of drinking more coffee. Luckily, bitcoin has a fixed daily supply, so the only way to adjust to shrinking demand is to drop its price and scale down the mining operation, everything worked as it should

So you deem that laying off people and closing business is an issue arising from people (or economy as whole) using cash as unit of value? In other words, it is human nature that is at fault here, and deflation would be good if people were not what they are?

I remember you saying quite the contrary earlier. Did you finally understand that "on enterprise side" deflation (due to demand collapse) is a bad thing?

Deflation is often a consequence of a lack of demand which means the economy is in a bad shape but deflation is not a bad thing in itself in the sense that it is a positive consequence of a lack of demand and helps people.
People don't buy less if they think the price is going to go down a little bit or even a lot, look at people buying with credit cards or buying iphones which will be half price in a year.

You seem to be still confused about the wrong side of deflation (is there a right side?). There are two things to understand why the collapse in aggregate demand is bad (and very bad at that). First, it is enterprise that creates value, so it comes before anything else. Secondly, when prices are falling, it becomes more risky to run it, since you may end up with less money than if you weren't engaged in enterprise altogether. Thus less value is being created overall, and how this can help people?

By the way, the prices of i-phones going down in half a year have nothing to do with deflation.

thank you for your comment, I think deflation is definitely a symptom of a weak economy but it can also be the results of technological progress and an increase in efficiency in manufacturing. If a company finds a way to bring down costs to manufacture a product it's very likely to lower prices to be more competitive. I think deflation is also the results of globalization, there is much more competition now, and there is a real "price war" between countries

I have to disagree to a degree. In reality it doesn't work as we all would have wanted it to work out. If a company finds a way to bring down costs to manufacture a product, they won't lower the price but most likely market a new model at the same price and stop producing the previous model altogether. If you look at the price of consumer electronics (say, personal computers) for the last twenty or so years, you will see that the prices didn't change much within this time span.

Enterprise does not create value, value comes from the demand, and enterprise just create supply, they can't artificially create demand

When you have eaten your dinner, you don't want more food, you can eat some medicine and squeeze in even more food, but that will just create severe problem for your health

Same, when a society has finished its major job and want to have a rest, any simulation will not work, simply because people don't want to spend more. In stead of getting more houses and more cars, they might want to save more and retire earlier, it is that behavior of saving caused deflation

People spend when they have access to surplus money (or credit).  Alternately, when they think their future income is at risk they don't spend (save).  This is common sense.  Has very little to do with prices being cheap or expensive.

All this nonsense about smartphone prices is a non-argument.  If you look at the flagship models the prices have been steadily increasing.  Samsung Galaxy S6 is more then S5, and more than S4 and more than S3, etc.. at release.  Of course the manufacturer has to discount previous model to clear inventory for new models.  This is not the meaning of deflation when economists are using the term

It easier to understand inflation / deflation when looking at housing prices where interest rates have effect.   When credit expands, prices rise due to increased aggregate demand.  When credit contracts prices deflate to pick up the slack in demand.  When prices deflate, firms have to cut back expenditure but wages tend to be sticky so instead to cutting back your wages they usually look for labor market offshore.  Increased unemployment  creates a large swath of population unable to consume or have access to credit so aggregate demand falls further leading to deflationary spiral.

Some other guys here even come to the point of saying that value is being created by speculation. You evidently seem to be of the same kind. I'm not going to get into nit-picking (value added vs value created) since your understanding (or, rather, lack thereof) of what's what is pretty obvious (at least, to me). But just in case, if enterprise doesn't create value, why do we need it at all?

And you still didn't explain how a company's real income is increased when the company suffers losses due to decreases in prices.

Doesn't currency deflation result in product/service price inflation?

If so, that sounds bad.

Exactly, using fiat money (that is created out of nothing) as unit of value is the main reason that we have waves and waves of financial trouble. But without cash, people don't even know how to measure value, since value is a very subjective thing, it changes based on supply and demand all the time. A universal standard of value never exist in reality: Even gold worth less near a gold mine

So, the banks must coin an abstract concept of "money", that fits into everyone's imagination. Since everyone need money to do trading, the demand is huge, you just need to create it based on those demand, that was what John Law discovered: Money is wealth, its value can be arbitrarily decided as long as people's trust on its value does not change

The reason that fiat money's value does not change is not because those fancy tricks banks are doing, it is because the trust to fiat money seldom changes, and the major task of banks is to maintain that trust. In fact, unless the country is extremely poor or you produce 10 times more money every month and pour them to factories to produce weapons during a war, the resilience of that trust is extremely high. FED just showed that printing 5x more money will not shake majority of people's trust in USD's value

Gambling have been existing since human exists, it is a real demand, especially for rich people. It provides fun and excitement and a hope for a potential gain, just like any other game

As a business owner, I can tell you that my income purely depends on market demand, and that demand changes vastly during each year (up to 100%), due to competition and seasonal factors. Even a very mature business can not reach a stable state of constant income

So what FED is doing has nothing to do with my business, in fact when they print more money to shift wealth to banks, the majority of my customers will become poorer, and consume less, resulting less sales at my side

True, if banks later spend their income, we will get some boost in consumption and income, but look at what banks are buying: loads of debts and assets, they only consume a little and re-invest a lot

They have both their good and bad effects. Overall I would say it is better to have an economically stable currency with small swings but being neither inflationary nor deflationary.

Exactly, and it is almost impossible to find something that can be used as a standard unit of value

Since value is decided by supply and demand, if you are going to create a universal standard of value, what should you do? You try to find something that is equally needed by everyone, and the supply is similar to everyone too. But once it becomes a standard of value, some of the people will try to accumulate more of it and some others will just lose their share. So eventually the value of this currency will drop for the rich and rise for the poor: A 100 dollar bill's value is totally different in the eyes of a bank and a plumber

The current system is trying to make 99% of people similarly poor, so that currency's value is similar to majority of them, thus keep the value of currency stable during the process

They have to do with the Bogey man argument against deflation, namely that people would postpone consumption if they knew that prices are falling.  i-phones and personal computers indicate that this is simply not true.  People buy NOW, at higher prices, rather than wait for a year, to buy THE SAME thing at a lower price.

It is that last hypothesis that warns against "the deflationary spiral".  The argument is stupid, and is empirically shown to be wrong.

Of course, "i-phones lowering in price" is NOT the same as macro-economic deflation.  That's clear.  But that's not the argument to "show" how  a little deflation would induce a deflationary spiral.

That argument goes as follows, and is based upon hypothesis (H):

1) people are used to certain prices and wages
2) there is a mild deflation (say 2% a year)
3) people holding money, realize that if they wait to spend their money, they will be able to buy more with that money next year
4) ===>>>> (H) people will hold their money and spend next year
5) this increased hoarding of money makes the velocity of money go down
6) a lower velocity of money means still lower prices
7) the deflation increases: instead of 2% a year, we have now 4% per year
8) people realise that the prices will STILL be lower next year
9) =====>>>> (H) people will hoard even more
10) etc...

Given that the falling price of the i-phone 5 hasn't pushed people to postpone their buying of the i-phone 5, (H) is wrong.

In fact, you could tell the dual story against inflation:

1) people are used to certain prices and wages
3) there is mild inflation (say 2% a year)
3) people having money will know that things will be more expensive next year
4) they will spend everything right away !
5) this increased spending increases V
6) that increases prices even more
7) inflation increases: instead of 2% we now have 4%
8) people realize that the prices will still be higher next year
9) they spend even more right away
10) etcc...
HYPERINFLATION.

With light inflation of 2%, no hyperinflation is in sight.

With light deflation of 2%, no deflationary spiral is in sight.

Smartphones are a terrible example.  These things naturally depreciate.

Use housing or real estate as an example because they are usually purchased w mortgages and they are affected by interest rates. Either that or use stocks and bonds as example.

In your example if inflation gets too high the CB can raise interest rate but when deflation occurs we can hit the zero bound on interest giving us no easy fix.  QE hasn't shown to be effective

I think we are getting somewhere. Definitely progressing to something here. Mild deflation would influence your calculation, but you will not stop buying goods and services. The economy will not screech to a halt with people postponing purchases for the rest of their lives. The balance just shifts.

Next item to explore: if the economy does not halt with screeching tyres, what does exactly happen then?

I think Maegfaer already raised a few interesting items so no need to start all over again  8)

Deflation is definitely very bad for credit driven economies. Instead of buying on installments you´d obviously save cash and wait for prices to drop. Same goes for other debt. Why borrow when prices are going down. It makes no sense.

Hmm... johnyj says (in this (https://bitcointalk.org/index.php?topic=907262.msg10721202#msg10721202) post) that it is not a big deal really. Do you agree with him, and if you do, how does it match up with what you say here? Quoting below his post:


Is this debt not real (surreal?), or inflation is negligible to make its levels dangerous (though inflation could only depreciate it after all)?

Agree with this logic, basically deflation is not essentially a bad thing in small amounts
What matters most is if their is more return on investment holding the money today or holding the money tomorrow also known as the time value of money.  
If it was deflation at 10% then some people might consider holding their currency unless they can invest it at a higher rate etc.

The colors in this chart are outrageously misleading. For example, you easily confuse Japan with U.S. Social Security Trust Fund, Belgium with U.S. Federal Reserve, China with U.S. Military Retirement Fund, and so on. I'm curious, is this done intentionally?

Deflation coupled with debt and/or leverage is always bad. Most nations have nearly doubled the amount of debt and leverage that existed in 2008.

No, you didn't say that last quote, but I never pretended that you did in the first place. And you're not sure whether you agree with the quote or not? How come?

But that's not my point altogether. You say that any price instability is harmful to the debt denominated in the fluctuating currency (if I got you right). This can hardly be agreed with since it all on depends on both the counterparty you look at and direction of the price movement. Inflation is beneficial for borrowers (unless the interest rate can be changed, of course) while deflation is more advantageous to lenders.

Of course it's bad. How can losing money or value not be?


The debt is bad for the people but good for the entities that the money is owed to. It's just one way politicians can launder cash into businesses legally so debt will always be there as it's profitable to the corrupt as long as they can get away with this legal money laundering loophole.

Even if you have difficulty in separating those colors, there is a reading order called clockwise

Your impression of China holding large amount of US debt is based on some statistics that showing all the foreign owners share, and that share is about one third of the total US debt

Foreigners, as of March 6, 2015, held $6.1 trillion debt which constitutes approximately 47% of the debt held by the public (or about 33% of the total U.S. national debt). But the debt held by government accounts and intragovernmental debt (about $5 trillion) are not relevant here, so we actually should compare debt held by foreign investors against the total debt held by the public.

There are no historical precedent or empirical evidence of deflation being bad for the economy.

There are many historical examples of strong currencies - ie. deflationary currencies - supporting strong and growing economies.

The only example often mentioned is the US "Great Depression", however reading into the details of that the problems were caused by a lot of bad investments by banks and a drought.
When all these investments went belly up the investors fled to cash which caused price deflation.

In other words deflation was not the cause, but just a side effect.


There is no such thing as "Laws of economics" the whole field refuses to practice the scientific approach.

All money are just virtual points that mean nothing. What means something is what people are doing: Take the US, lots of banking, insurance costs and wars. Not so much education, healthcare or manufacturing.
These REAL things are why the US economy is doing badly.

If all Americans woke up from their stupidity and started doing productive things their economy would do well again - even if they burned all their money.

"Money" and "the economy" are entirely ephemeral things.

If you measure "the economy" by the monetary unit, more inflation is always the best of course... such is the stupidity of mainstream economists.


Now to really answer: Inflation means the government gets to spend most virtual points and direct the flow of resources. Deflation means that individuals get to direct the flow of points and resources.

Which spender is best for an economy? Again history shows that big bureaucratic empires are not long lasting.

In conclusion deflation improves the efficiency of the virtual points system we call "Money" - Bitcoin is deflationary once mining rewards taper off and is therefore superior to fiat.

If you read into the history (as you pretend you did), you would have known about a train of economic crises in the second half of the 19th century, which ultimately led to the First World War. Furthermore, a drought and bad decisions by banks could not even in theory have caused an economic collapse that lasted through decades and led to yet another world war.

Well if "bad decisions" is not sufficient explanation neither is "too few paper notes" ;)

As for what bad decisions can do Mao's "great leap forward" where many resources were poured into steel production for largely no benefit directly led to millions starving.

I'm not going to argue with you or disprove all the examples you may think you have, I just wrote to say how it is.

I'm not going either. But there is a simple test. You have a collapse in aggregate demand which leads to deflation (that is, to decline in prices). How will this affect enterprise, negatively, positively, or there will be no influence at all (enterprise productivity remains the same)?

Deflation is bad ... for gov.
Not for people.  :D

https://www.youtube.com/watch?v=Rmvpqq9QOUw

http://imagizer.imageshack.us/a/img913/16/6Wsiyn.jpg

Deflation means you can buy more with the amount of money so it is good for the people but inflation allows the governement to hide their mistakes and lie.

Take 1929 for example, the collapsing aggregate demand means most of the people have become poorer, that was a direct result of the earlier inflative monetary expansion: The economy bubble attracted many people to put their money in stocks and assets and greatly increased their spending

During the last phase of bubble, banks successfully cashed out and ran away with the money (gold). The banks were reluctant to spend the gold in the following crash, since then their effort of bubble making will be erased, they'd rather sitting on their loot and quietly watching the economy collapse. That is the reason there was heavy deflation

http://www.thebubblebubble.com/wp-content/uploads/2012/04/1929.jpg

If we have not removed gold standard, same thing would still happen during 2008 crash. But now banks can create money out of nothing, so they have a new way to deal with bubble bursting: They create money to buy everything dirt cheap during a collapse and collect even more loot, so they not only benefit from the bubble making also benefit from the bubble bursting. After each bubble and burst cycle, large amount of wealth moved to banks

Could you please cite authoritative sources about the inflative monetary expansion back then. I'm singularly curious how this is possible under the Gold Standard Act (which set de facto gold standard in the U.S., and was canceled only in 1933, that is after the Great Depression had already begun) when the U.S. dollar had been freely redeemed for gold (1 dollar per 1.5046 grams of pure gold).

If there is deflation, people will tend to hoard the money they have since the "value" of currency will increase in the coming future. This will reduce the demand of the goods drastically.

This is yet another common misconception based on nothing but intuitive (mis)understanding. When you buy a car, it starts depreciating right after you begin driving it (in fact, it would depreciate even if you didn't drive it at all). According to your reasoning, people wouldn't buy cars and other quickly depreciating things they can happily live without.

Deflation can actually postpone consumption, but this effect will be temporary and short-lived.

You seem to be writing just for the sake of writing and having your word heard. What exactly do you disagree with me on? I never said that deflation is the same as depreciation, I was trying to explain the psychological motives behind human behavior, why people will still spend under deflation.

Just in case, deflation is a decrease in general price level. Depreciation means a decrease in value (just like deflation a decrease in price), what you refer to here is a narrow definition from accounting (but this is still the same concept of losing value). I think I explained it pretty well to repeat myself in respect to psychological aspects being effectively the same for both deflation and depreciation.

So what do you actually disagree with me on? You seem to be trying to hide the lack of thought behind the flow of words (which are irrelevant to the issue in question you are making an effort to argue against).

tee-rex, you're wrong buddy. Deflation does increase hoarding and lack of incentive to spend money. As others have said, deflation alone is bad for an economy. Also depreciation is not the same as Deflation....where are you getting this stuff from?

Hey, man, did you read the post where I explained it all? Depreciation is not the same as deflation, I'm curious beyond myself how you could get my point this way. But if you, nevertheless, got it so, then you obviously have not understood a single bit of what I had written about. Deflation works the same way as depreciation, psychologically, that's why postponement in consumption due to deflation per se will only be temporary and short-termed (I don't mean here an aggregate demand collapse which caused deflation, to clarify this point beforehand).

Actually, it was me who had shown here why precisely deflation is bad for the economy.

Monetary expansion comes mostly from fractional reserve banking, it does not need the increase in base money. Under a gold standard the base money is very stable, and if you look at base money before 2008, it was also very stable, grew a couple of percent per year

A credit bubble is created by lending out the same money again and again. You suddenly have lots of assets with high market price, then at certain stage, people will definitely want to cash out the gain, only find out that the real money that banks have is only a fraction of the assets total value, so the banks will face a bank run when large scale of cashing out happens

Velocity is not a measure of consumption rate.  It is a measurement of the average velocity of a single unit of currency (as you know !).

If the money supply is large, and prices are low (deflation !), you can consume just as much with lower velocity.  It doesn't mean that consumption has lowered at all.

Consider this:

There are 100 eggs and 100 apples produced in a toy economy, and there are 10 shinkels.  If velocity is 10, then an apple and an egg will cost half a shinkel.
Q = 100 eggs and 100 apples (equivalent value) = 200
P = 0.5

P Q = 100

M = 10
V = 10

M V = 100.

Now, horror, deflation.  It turns out that the price of an egg drops to 0.25 and the price of an apple too.  Velocity drops from 10 to 5.

What happened ?

P Q = 50 (100 eggs and 100 apples)

M V = 50.

There's no decrease in consumption: 100 eggs and 100 apples have been produced still, and consumed still.  Velocity came down.  Price level came down. So to support this identical consumption, a smaller money flow was NEEDED.  No problem.  Why did the velocity come down ?  Maybe because people were formerly holding sea shells as store of value, and now they traded it to keep money.  There was a shift in the store of value market.   Who knows ?

But velocity has nothing to do with consumption rate a priori.

Indeed, and as has been shown with i-phones and personal computers now since long, people don't mind paying MORE right now, rather than wait and spend less later.  They want it NOW, even if they could get it much cheaper next year.

So the myth of postponing consumption because of price decrease is simply that: a myth.  People don't postpone consumption because of projected or real price decrease of the *same* item next year.  Nevertheless, this basic assumption needs to be made to "prove" decrease in consumption due to deflation.

Actually, what happens is that historically, one finds *correlations* and one assigns cause and effect the other way around.  Deflation can be a consequence of consumption decrease.  It is not its origin.

Like having a Rolex on one's arm is a consequence of being rich, and not the origin of being rich.  It is not because you put a Rolex on your wrist that you suddenly became rich.  Nevertheless, there's a strong correlation between people being rich and people wearing Rolex.

Deflation decreases velocity, and an economy without velocity is a dead economy, like eurozone.

At least in Weimar, there was an important velocity of money :-)  The economy must have been booming there  ;D

BTW, deflation can also happen with decreasing money supply.  Or with increasing production, and identical money supply and velocity.  So how do you link causally the change in velocity to the decrease in consumption (and not the other way around) ?

Remember that you cannot demonstrate the direction of a causal relationship with a statistical correlation.

Eurozone is a light version of gold standard or close to it, and bitcoin is a hard-core version. Both are flawed.

Actually, I quite like the Euro, even though it is a fiat currency and hence open to corruption (as we see now, with those QE propositions) and seigniorage in the pockets of the first line banks.  Its principles of being non-economically and non-politically steered are pretty sound.  Also the fact that it isn't related to any government per se (and is as such the very first non-national fiat currency as far as I know) is a step in the right direction.

It is a bit hard to say that gold, which has been the back bone of monetary history for 5 millennia, is "flawed".  It has allowed for world wide commerce since the dawn of civilisation.  Corrupt states couldn't stand it, that's true.  And today, the fact that it is a physical asset makes that it starts having difficulties as a currency.

Your knowledge is inaccurate. The Euro is actually a euphemism for Reichsmark, and Germany is the main engine behind it and the European Union both politically and economically. The recent tensions between Greece and the EU (read Germany) have a long story.

Undoubtedly, yes. I would love to have my business partners use XBT. Here's why:

1. It's a faster and more secure method of paying/getting paid (lower transaction friction means sales go up)
2. Zero third party risk
3. Money supply is known and behavior is 100% predictable (very important for business) and can't be tampered with - superior to inflationary fiat.

I hope it is the Deutch Mark and not the Reichsmark  ;D

In a deflation,the people delay purchases.  This reduces demand for goods and services, which means employers have to reduce production, which means they reduce wages or hours and lay off workers

You mean: if a certain product A costs a price X now, and you know that the same product A will cost 95% of X 2 years from now, you will not buy product A now and wait for 2 years ?

Do people do that with the i-phone 4 ?  Have people done that with the i-phone 4S ?  Have people done that with the i-phone 5 ?  Have people done that with personal computers ?  Did people not buy a personal computer in 2002, because they could have bought a very similar machine in 2004 for less money ? 

This hypothesis is so terribly contradicted by empirical evidence that it is funny that so many people repeat it as the standard explanation of why deflation would be bad.

Read about the deflationary problems of 18th-19th century:



"The great lesson of the 19th century and the gold standard was that such a limited amount of monetary systems causing continual crises and deflation are tight corset in any development effort

The other big lesson of the 18th and 19th century is that if the radical new entrepreneurial era lacked the narrow corset of gold over his head, then it was much easier to develop above and beyond the norms of ancient corruption (ie the church and the aristocracy). As the currency was literally rare and one gold sovereign not ever saw before you, all investments should be made through the already payers and / or privileges. And so the new entrepreneurship acquired kinship ties with the old privileges and companies took the form of the East India Company, a construct that is that no relationship was with the current concept of business.

In short as the amount of players and the amount of goods are not fixed in an economy, a stable currency would function as either corset (when the economy was growing up), or as loose pants (when the economy was shrinking). And even more impressive is that the fixed amount of currency itself would be that would cause the economy shrink as deflation would make each transaction completely undesirable. Let us not forget the great problem of the 19th century. There were so few shoes and so many barefoot people. When someone was making a shoe factory to footwear these people, the more he made shoes, so dropped the "price" of the shoe as a result end up bankrupt with shoes in the store at the same time when the world was still barefoot."

see more:   http://www.techiechan.com/

It is true that since the gold standard was de facto released (about around 1914), we haven't known any crises any more  ;D

From first look, it seems reasonable, but if you look long term, it is totally different: In a deflative environment, people will delay the consumption and accumulate large amount of savings, with that amount of savings, their financial health is better and better, thus the whole society is stronger. But in an inflative environment, people will borrow more and more, and ends up with huge load of debt that they struggle to pay back, that will impoverish the whole society and make majority of people heavily enslaved by the banking class

Obviously, banks don't want you to save more and more, thus they have to pay you more and more interest, they want you to borrow more and more so that you can pay them interest, that is the true reason behind the inflative monetary policy

And all these talk about inflation and deflation is based on people's misunderstanding that fiat money is an unit of value, and an inflative monetary policy will greatly reduce the value of fiat money, which is even better for banks since they loan out money and hold assets

I' sure that this topic has ben discussed before. Bitcoin isn't a state currency nor should be one. At least not to today's standards. Economies of the modern world are (in most of the cases) a bet on development. Investors fund states so they can work out their missing payments. Sorta like fractional reserve but you get incidents like the ones of Cyprus and Greece in times of crises...

Strange logic. People hoard gold (for example), production decreases, thus less real value is being created, and the whole society allegedly becomes stronger... What purpose that gold will be when there is no enterprise any longer?

To sum it up, what are you going to eat?

Exactly, production can only decrease to a certain level (malinvestment will fail), real demand never disappear because of a deflative monetary policy, people are adaptive, they will save more but not stop spending. Imagine that you remove all the fiat money in circulation (maximum deflation), it will not crash the economy, people will immediately find other ways to do the trade, there are so many things can be used as currency

And, people don't hoard gold, banks do, you give them the gold/land/debt, they give you paper or numbers, that's the deal. Take Switzerland for example, they don't produce too much, they just hold lots of gold, isn't their society not strong enough?

Johan Law has tried to discredit gold and even forbidden citizens from holding gold, just to make sure his paper money hold its value

Indeed, you can not do anything with gold, you can not even eat it, but that is also true for almost any liquid assets

It will. You yourself recently explained to me the reasons why the U.S. economy had collapsed in the Great Depression (people lost their money when banks went bust), and this had been miles from "removing all the fiat money in circulation". Did people find ways to do the trade?

Money is the blood of the economy.

In my opinion, 1929 depression is caused by the fact that most of the people have been robbed off of their wealth long before the bubble burst. It does not matter if you find other ways to trade when you have already spent all your wealth in exchange for some useless paper. And without inflation monetary policy throughout the decade before 1929, such kind of thing would never happen

Money is not the blood of economy, but a tool used by banks to extract blood from the economy. Injecting a lot of water (money created out of nothing) into the economy will just dilute the thickness of the existing blood and make the body struggle to make more blood

You say that most of the people had been robbed off of their wealth long before the bubble burst, but this alone would immediately cause the instantaneous collapse of the bubble (right after people had lost their wealth), since the bubble can only exist as long as new money is flowing in it, and in ever increasing amounts at that.

Nope its propaganda, deflation will increase purchasing power of people who can then spend more on stuff.

Yes people could hoard and some consumption will be decreased, however those consumption levels are not healthy anyway.

Resources are finite, people should not consume madly like nowadays do with this credit card scam system, and some businesses are not meant to operate. The financial speculative sector is like 40% of the GDP of any western nation, which is totally unproductive, it should be like 3-4%.

And besiedes the whole fractional reserve system that we have now is only fueling the global ponzi scheme of credit speculation, which is directly funded by your tax money and it is the collateral for it.

Thats why governments bail out banks from tax payer money because its the collateral for it. So its stupid when people protest about it, because it was set up this way from the beginning.

The return to gold standard is propaganda. According to the laws of economics, the amount of banknotes in circulation, must correspond to the quantity of goods and services in the market. So, deflation and inflation are always bad for an economy.

Appeal to authority and no arguments?

The amount of banknotes in circulation ALWAYS corresponds to what you buy with it :)
If there are less bank notes, then you can buy more with a single bank note.  If there are more bank notes, then you can buy less with a single bank note.  In the end, with all the bank notes, you can buy everything.  No matter how many bank notes there are.

If there's 1 kg of gold in circulation, then that 1 kg of gold will buy the whole world economy.  If there is 1 ton of gold in circulation, then that 1 ton will buy the whole world economy.  In the latter case, you will be able to buy exactly 1000 times less with 1 kg than in the former case.

Who's told you that? It seems that you are overestimating the value and buying potential of money. Different countries use different monies, and even with gold you won't be able to buy the whole world economy, since not all countries (let alone individual sellers) consider gold as money, and not all of the world economy is for sale in the first place...

Wealth is not money

... assuming for the example, gold being the only money of course.

The point was that it doesn't matter how much "money" there is, whatever it is.  Price will adapt.

And by "the economy" I meant of course total aggregate demand (or offer).

Won't work. First, it is exactly supply, not demand, that matters here. Second, if sellers taken together (aggregate supply) want 10 kilos of gold for their goods but you have only 1 kilo, guess what will happen? You would evidently say that the prices will adapt (namely, the prices that sellers ask), but this is not what will actually occur. You will spend your only kilo of gold (since sellers won't sell below production costs en masse), and the remaining goods priced for other 9 kilos will not be sold...

Boomshot!  :)

The bubble only collapse when people find out that their wealth on paper start to drop, and they rush to sell it. As long as that paper wealth is rising or keep flat, people will just hold into it or buy more, thus the sell pressure on market is not enough to trigger a downfall, however those who drove the bubble has already cashed out long before the crash, because they know in advance, when they stop injecting more credit into the market, the bubble will burst inevitably

This is the common statement trying to hide the truth. Money is wealth, and it is the most liquid form of wealth, because it can exchange any kind of wealth at any time, anywhere (Domestically)

Those who claim that money is not wealth are usually banks, since they don't want others to be suspicious about the fact that they create wealth by just writing numbers and printing. If money is not wealth, then their money creation seems not a big deal

According to this law, the amount of USD in circulation has increased 5x since 2008, so we should have 5x more goods and services in the market, which is not true

Or, I can create trillions of USD as I want but put all of them in my own account, so that the amount of banknotes in circulation correspond to the quantity of goods and services in the market

I believe this law of economics: In a free market, anything with exchange value, including money, must have a production cost close to its face value, otherwise it is a scam

You said exactly the opposite! You said: the quantity of goods and services must correspond to the amount of banknotes! lol lol !!

EDIT: You "said"

Germany, one of the biggest and supposedly stable economies in Europe has one of the biggest gold reserves in the world. This happens while they're part of a monetary union. They're not the only ones that control the rate of money printing within this union.

China has also increased the rates it imports gold. While I agree with you that it's unlikely for a gold standard to return, gold is still held as a reserve globally.

When did I say that? I think quantity of goods and services has nothing to do with banknotes

The gold standard (fixed supply) and the inflationary banking fiat system, violate the quantity theory of money (M=PQ/V), the most important law in economics. Both are scams.

That's a bit like "the moon and Mars violate Newton's law of gravity ; both are scams", no ?

The quantity theory of money cannot be violated because it is tautological: both sides express the price of what has been bought during a certain time with a certain monetary asset.  On one side it is the total price of sold stuff (P x Q), on the other side it is the total amount of money paid for it (M x V).  Both are tautologically equal: what you pay for it, is the price of it.  So the equation can only be valid.

If 1 million dollars is spend buying stuff, then the price of what has been bought is 1 million dollars, and the amount spent on it is 1 million dollars, right ?

I don't think that the amount of gold held by a central bank has anything to do with the currency they emit.  It is just that a central bank, which can emit a currency, can also use that currency to manipulate markets: it doesn't cost them anything because they can print the money to buy in the market.
Central banks usually want to manipulate the markets of other stores of value, such as gold, to make people loose money in it (except for their friends).  Bitcoin will, if it is big enough, also be manipulated by central banks.
The essential reason for central banks to manipulate other stores of value is to make them more volatile and hence less attractive as store of value, and keep people from using them in general instead of their printed money.
This is why they pump and dump regularly the gold and silver market for instance.

It has nothing to do with "keeping reserves" (for what ?), but is sold to the public that way.

Central banks want people to use their money, also as store of value.  They need to destroy confidence in all other forms of store of value.

Do you really believe that "it can exchange any kind of wealth at any time, anywhere"? It is certainly a far cry from reality. Say, you have a home (where you live and which you love for its uniqueness), and someone suggests you sell it, and gives a higher price than the average on the market for that type of house at that. Would you sell it? There are a lot of things that can be bought and sold, but which people may not want to sell for whatever reason and whatever money...

And I don't even say about things that are commonly considered as wealth of top quality, but simply not for sale (in fact, being more valuable than money itself)

Yes dinofelis. They are both scams. Money supply should be controled by   M=PQ/V    or    M=kPY (Cambridge equation). https://en.wikipedia.org/wiki/Cambridge_equation.

How can they buy more if by that time they had long been stripped of their wealth (as you said earlier)? Also, if they had been robbed off of their wealth, wouldn't it be natural that they would try to cash out immediately, thus causing the bubble to pop? Your arguments lack a proper timing between events (namely, complete stripping of wealth and bubble collapse), thereby rendering you whole point dubious (that withdrawing of all fiat from an economy won't stall or crash it)...

http://www.investing.com/rates-bonds/switzerland-10-year-bond-yield

And switzerland has the official interest rate in -0.75%

What you talked about is price. Let's raise the price to 100 times of your house's worth, wouldn't you sell your existing house and move to a better new house? The reason that you don't sell your house is because the market price does not indicate its true value, when the price is higher than its value, it will get sold. Value is a subjective measure, the reason that you don't sell your house is because the price is not high enough to reach your valuation, not because money is not wealth.

If money is not wealth, donate all your money, since you don't lose any wealth  ;)

Suppose that you have used 90% of money to bought stock at $500, and you use the rest to buy them at $600, then it rise to $800 and you anticipate it will rise to $2000, then you have exchanged all of your money to some paper which trades at $800, so you feel you are richer. When price start to fall, you panic sell, the price will immediately drop back to $400 since there is almost no buyer. In fact, sell it or not sell it, your money has already been lost, it is just a matter of taking a large loss or a small loss. The wealth shifting by assets bubble takes years, but when it is finally done, people will realize it in a couple of weeks

You are juggling with words here. I say that you can't buy all the wealth there, no matter how much money you might have. You can't buy power, since real power is not bought with money, but taken with force (ultimately), though money can be of great help there. If you already have enough money for a decent living, a home that you are quite satisfied with, you would not care for a true market value of it, since you were not going to sell it at all. I'm really curious why such things amaze you. Would you sell your kidney if someone offered twice the price for it?

There are things that you may personally value higher than all the money in the world, and there are things that most people value higher than all the money out there...

 ;D ;D

Too much economic theory is based on the false assumption that everyone owns things for speculation rather than utility.  There are people who say nothing would be sold if everyone knew the true value of something.  That is based on the idea that things are only bought for speculation.

Value is not even absolute.  You could probably offer someone enough money to sell his first kidney, but you couldn't do the same to buy someone's second kidney.  A milk farmer can only use so much of his own milk as milk.  If he converts it into something else he eventually has to sell what he makes with it.  In this case, he can consume as much as he can himself, and then sell at a tiny price what he cannot.  Nobody is going to come with his truck to a remote farm to buy milk by the cubic meter at retail prices.

sdp

Eurozone has a great future.

TROLL ALERT!

The eurozone is made up by countries that are full of debt and 1-2 export countries that facilitate the debt for them.

Portugal,Spain,Italy,Greece,Malta,Cyprus,and are almost near a debt crisis. While a few of them stand good like Finland ,Germany and to some extent France.

So the solution to this is to hyperinflate the euro so that those indebted countries can pay their debt later. See it's always free stuff now, and pay later, like all socialist dumbasses are doing right now.

Because of this only 2 possible outcomes could exist:
1) Germany gets tired of those lazy socialist countries and kicks them out of the EU or they'' leave on their own once they see that they wont get cheap euro
2) Germany will play along, hyperinflating the euro (because let's be honest Greece will never pay it's debt) causing pre WWII. hyperinflation, 1929 style financial depression

I think option 2 is more likely. So put your seatbelts on because prices will skyrocket in the near future (2-5 years)

The other members of E.U. must kick out Germany.

Then there is nobody left to rob from and it will immediately collapse. The whole point of the current ongoing european QE is to rob a wealthy country and then give that money into loan to : Portugal,Spain,Greece,Italy,Cyprus and other socialist countries who can then give it to lazy fat TV-watcher welfare dumbasses.

Jobless rate is going higher and higher even with the stimulus that they are so proud of that it works, no it doesnt, it will go up until eventually the hard working people will be taxed 99.99% and the lazy welfare leftists will enjoy free meal and other free stuff.

Actually, Germany is the most lazy country. They dont work, they use immigrants to do their works. The whole Germany builded by immigrants.

I would disagree with that, but there are certain elements of power there that made them be the "kings of europe".

First of all they got huge aids after WW2 whereas nobody else got that, so they are the favorite country of the banking class.

Also since their economy is heavily subsidised (yet not from their own taxes in a socialist manner, but from the levy they take from other EU contries), so basically it's socialism without high taxes and moderate debt.

Of course this has roots from the Deutsche Mark when it was backed by gold, and it was deflationary, so it became a big target for global investment.

Also they are heavy exporters, their companies conquered literally, europe, and using their government and EU henchmen to fabricate legislation that prevent competition.

Basically they are a combination of mercantilism and socialism, and they use the less fortunate EU members are collateral for the EU debt.

If's like if you feed the cattle before you eat it sort of tactics, it's disgusting, but its mutual. The other socialist contries need that  debt, otherwise they would not be socialists.

No no. The total amount of money is not able to buy everything in the economy. There is no such relation. It is neither equal to the available consumer goods, or any subset of what is on the market.

The total amount of money is equal to what value the population want to have in reserve, in money form, for short or long time, aggregated.

Take the aggregated value of what people want to have in reserve, divide it by the total amount of money unit, and you have a starting point for the value of the unit of money. So more money therefore means less value per unit. But the rate of change of the volume of money is also of great importance for savers (an loaners)(not so much for people in a situation where they spend as they earn, or save in other assets), and also the expectation of future devaluation. Add the errors of this future expectation (which is speculation). I think that is about it.

Banks robs everyone, if other countries left, then German government will be debt-laden, just like in US. If other countries stay, people could blame some countries like Greece or Spain. In fact, without debt-laden countries buying lots of things from Germany, German people can not make a net profit

Anyway, they will all be robbed by ECB, working hard or not working, does not matter. It seems the southern European people are much wiser and they know how to live like bankers: Only consume, no work ;D ;D

You're right of course that the total amount of money only buys 1/V the aggregate demand.  But it does buy it, right ?


This is a very smart point at first sight.  However:
The point is that that is the VALUE of the total amount of money times the holding time, not the amount of money itself !

Whether there is 1 kg of gold in circulation, or 1 ton, that doesn't change anything.  It is not because there is 1 ton of gold in circulation, that people want to hold 1000 times more value !  Whatever is the aggregate demand of holding value, it will be "diluted" over the amount of money in existance.  So any amount will do !

Of course, the aggregate demand for holding value is essentially T x M with T the harmonic average of 1/V.

In fact, you can look at the value of money in two ways: on the spending side, which is given by V x M, and related to the aggregate demand of goods and services (what I loosely called "the economy"), and on the holding side, which given by T x M.

However, you need the link with goods and services even to assign any "value" to it.  After all, value is only expressed as a function of goods and services in the end.  If there weren't goods and services to be bought with money, it wouldn't have any value in the end !

Bitcoins have value because:
1) you can exchange them for dollars or euros or .... with which you can buy stuff
2) you can buy stuff directly with bitcoin (as of now yet a very small fraction of the market, except the black market).

A "monetary unit" that could never be exchanged, directly or indirectly, for goods or services, would not have much value (only its intrinsic value, which is then purely collector's fun).

Yea banks do rob everyone right now at this moment through inflation. The problem is that they are only opportunists, they adapt to the system. It's the central bank that's the king-pin , they are the ones that destroy the economy.

Yes the problems are mutual in the EU, i guess Germany doesnt care if they go bankrupt, and shouldnt. I mean let them leave the EU zone, go bankrupt and then join again after they recovered...
Because if they stay, they will just destroy the EURO,which when it comes to hyperinflation, will hurt Germany too.

No, banks do not rob everyone through inflation, that is the old style. Now they rob everyone through QE, which is magnitudes larger than inflation. Take FED for example, they created 5x more money since 2008, that's 40 years of GDP increase at 4% per year. All that went into banker's pocket in 5 years, this scale of robbery was never seen in human history. By keeping those money in their pocket, they will easily avoid any kind of inflation

Similarly, ECB is going to use the same trick to rob whole European by 60 billion euro per month, all those money will belong to ECB. If Greece quit, other countries will be robbed, they might discover that the problem is not Greece, but a systematic one. So they must keep Greece in to cover the scheme and blame everything on PIGS countries

Greek people might understand these bank's scam much better than anyone else, so they go the same route as those banks, like those investment banks gambling with customer money and collapsing and asking for bailout, both opportunists

Like others have said, deflation, like inflation, is neither good or bad in and of themselves.

Inflation favours those with debt while penalising savers.
Deflation penalises those with debt while favouring savers.
For every argument for/against deflation there's a symmetric argument against/for inflation. So it seems to me 0% is best as it favours neither.

As for the argument that deflation is bad because there is so much debt, that's just poor reasoning. What's bad is that there is so much debt.
If 0% inflation/deflation was targeted by an economy then the inevitable mild deflation would be offset by inevitable mild inflation.

Of course those who are both in debt and able to print dosh like to promote the idea that inflation is good, as it's to their benefit.

Also, the argument that people put of buying when prices are falling was once the other way round - that is it was argued that inflation put people off buying[1].

[1] http://ftalphaville.ft.com/2015/03/23/2122452/economists-agree-deflation-is-either-good-or-bad-or-irrelevant/

A little less deflationary pressure on America: the dollar is starting to retreat it seems. At least for now. I guess it wants to retest that 2010 top.

http://finviz.com/fut_chart.ashx?t=DX&cot=098662&p=w1&rev=635628645880709032

Work is bad for the skin.  ;D

By this you confirm that you don't understand how deflation impacts an economy, and that you didn't read the previous few pages of this thread where I explained it mathematically why deflation simply cannot be a mirror reflection of inflation.

That is inflation. It's called monetary inflation. Dont look at phony government data of CPI showing 0.5% inflation, thats bullshit, thats only because they discounted the USD strenght from it (meaning that they rob not just US citizens but every other citizen who owns USD including other currencies that hold USD reserves, everyone who uses OIL and other commodities as they are all denominated in dollar)

Yes the USD strenghtened alot to hide the 500% inflation, but all that strength got straight into CB's pockets and their henchmen investment banks.

So the real inflation through QE1,QE2,QE3 was then 500% in aggregate, anot definitely not 0.5% or similar. So you can't trust government data because its very misleading.

I measure inflation through the monerary supply (not that they report that number honestly, actually they dont even publish the M3 numbers in the US anymore, i wonder why, maybe because they print so much money now that they are ashamed to show it)

The CPI based inflation is misleading, follow only the money supply and see how much they steal actually, with your own eyes, you'd be amazed.


This is a predatory world, everybody robs everybody as long as there will be a government to force us to use these fiat ponzi scheme scammer money system, and pay taxes.

The free market would instantly make banks obsolete, bitcoin actually does make them, but yes the government requires you to have a bank account with these scammers if you run a formal business, so it's totally fucked up.

You're right, I didn't read all the other pages,as there are 8, I think. I've now had a quick look through them but couldn't find your mathematical explanation as to why inflation and deflation are not mirror images. I'd be interested in seeing it so would be grateful if you'd say what number it is. Thanks.

BTW, this might be of interest to you and others, http://ftalphaville.ft.com/2015/03/23/2122452/economists-agree-deflation-is-either-good-or-bad-or-irrelevant/#respond

Below I cite three of my posts (emphasis added) relevant to the matter that pretty much explain this all. Note that I specifically point out that deflation is not a mirror image of inflation, since, obviously, you are not the first to come up with such an idea.




Remember, negative remains negative, no matter what. In inflation profits in nominal terms increase, so you expect that in deflation they would decrease (thus mirroring inflation), while in reality profits not just decrease but can actually turn into losses.

@tee-rex #176:

TBH, I was hoping for a more mathematical argument than what you give in #176, I just find algebra easier to follow than words (maybe because it's less ambiguous).

Anyway, you seem to be making a point about profit. TBH, I hadn't analysed that, but having slept on it have now done so and am still of the opinion the two flations are mirror images (perhaps complements, or conjugates, is a better term. But, as I inclined above, I'm not that good with words).

===================================================
Here's how I see it.

First, if inflation is p (per week) then the corresponding deflation is q = -p/(1+p) [1].

Say a trader has production costs W and sells what is produced for R = 2W, each week (it's a little easier if we assume 100% mark up).

If now inflation kicks in at p, then on the first week W_1 = W(1+p) and R_1 = R(1+P), thus maintaining R/W = 2.
And on the kth week W_k = W(1+p)^k and R_k = R(1+p)^k, again maintaining R/W = 2.

The deflation case is trivially the same, with p replaced by q = -p/(1+p), and we find R/W = 2 as above.

That's it really.
===================================================

Also, others support my view[2]. Sorry, but I haven't had time to find a specific file, but you can scroll through some of the contents of the books in [2]. Ah, just managed to load this[3] (it was taking forever last night so I gave up), in which the 4th para starts, "Inflation's mirror image, deflation, has less of a dark historical legacy". I haven't read it all so don't know if it says much more about them being mirror images. It would be nice to find a pdf, or what ever, giving an argument for or against my assertion. If you manage to find such please let me know. Still, I do find it a useful guide, but maybe that's because symmetry has always been strong in my thinking, in fact even before I knew it was called symmetry.


[1] This is easily proved: If a period of inflation is followed/preceded by a complimentary period of deflation then the total inflation/deflation must be 0, thus we require (1+p)(1+q) = 1.

[2] https://www.google.co.uk/?gws_rd=ssl#q=deflation+is+the+mirror+image+of+inflation

[3] http://www2.hmc.edu/~evans/inflation.pdf

If I don't use formulas this doesn't in the least mean that my argument is less mathematical than would have been if I did. My point is that you don't need deep understanding of economics to see why deflation is bad, since it can be easily shown by pure mathematical reasoning.

You assume that goods are produced and sold instantaneously, which is not the case in real life. Production cycles can be as long as a few years. If the time span of your production cycle was equal to zero, then neither inflation nor deflation would have any impact on your profits (in percentages), which is what your example reveals.

Correct usage should be R_t2/W_t1, where t2 and t1 are different time moments for revenue and cost flows in a production cycle, t2 > t1. In inflation R_t2 is always greater than W_t1 (provided we were profitable before inflation set in), whereas in deflation R_t2 may become less than W_t1 (even if we were profitable before deflation set in, i.e. R > W and R/W time-invariant). That would mean a loss. So, in inflation you can never mathematically suffer a loss due to inflation per se (if you were profitable before, of course), while in deflation it becomes quite possible through the effect of deflation as such.

No.  If you take into account the fact that there's a time difference between the cost of production, and the price of selling the product, you should also take into account the real interest of the blocked capital.

So if the difference in time between t1 and t2 is large enough to accumulate significant inflation or deflation, you have to take into account that the capital blocked at time t1 in the production, namely W_t1, costs you the interest on that capital between t1 and t2.  So your actual benefit is not R_t2 - W_t1 but rather R_t2 - W_t1*(1+(t2-t1)*i).

If you now correct the interest rate for the inflation (that is, i = i0 + p), you will find that inflation or deflation is totally indifferent.

You cannot just correct i for inflation and not correct R_t2 for it at the same time (since you would sell at higher, already inflated prices). In fact, you can't even correct it (W_t1*(1+(t2-t1)*i)) for inflation at all (since your costs are fixed at t1). You buy raw materials at old uninflated prices, and now you suggest we should recalculate their cost at new prices when we sell finished goods (that is i = i0 + p)? That would be an entirely novel idea in accounting. Strictly speaking, you can't even write R_t2 - W_t1*(1+(t2-t1)*i), or that wouldn't be your profit (or benefit, in your speak).

Nevertheless, explain to me how this can help you if you suffer losses due to deflation? What exactly are going to correct? And what are you going to multiply the factor (R_t2 - W_t1) by if it is less than zero? Will the end result magically turn into positive?

Why should I repeat again and again that negative is negative?

I agree.  What you described connects to Keynes "sticky prices" and "sticky wages".

In deflation period firms can't automatically adjust prices.  What they do is cut expenses.  Usually the first is layoffs

I feel we are arguing past each other. That's probably my fault as, as I said, I hadn't analysed profit.  I had a sleep on it but likely should have spent another night on it, sorry about that. Let's recap my (and many others) claim that inflation and deflation are mirror images.

In my original post #170 I said,

"Inflation favours those with debt while penalising savers.
Deflation penalises those with debt while favouring savers."

I think we can agree on that, yes?

I followed that with,

"For every argument for/against deflation there's a symmetric argument against/for inflation. So it seems to me 0% is best as it favours neither."

Thus implying they are mirror images.

You came back with an argument (#176) about profit turning negative, yes?  (I then started trying to form a view about profit. That, I think, was a mistake, on my part).

The thing is, that profits can turn negative under deflation is not an argument against my conjecture, AFAICS.

Profits relate to a producer. A producer's mirror is a consumer. Those are the symmetric entities I should have identified, and be debating. So let's do that.

My claim is that if inflation favours the producer (and so disfavours the consumer) then deflation disfavours the producer (and so favours the consumer).

But it seems to me that you've already argued deflation disfavours the producer, yes? And I assume you're of the opinion inflation favours the producer, yes?

So we are in agreement on this, yes?

Of course that doesn't prove my conjecture, I know.

Anyway, I'll leave it at that for now, and wait see if you agree my points so far,

Small stable inflation favors producers (large 2-digit inflation cannot be stable by definition, let alone run-away inflation) and doesn't favor the consumer much (though it contributes to better employment overall). Deflation, on the contrary to what you say or may think, doesn't favor the consumer either, and most evident this becomes in the long run. You may think that profits and losses are not relevant to this, but here I should cite myself once again:


Since producers are more inclined not to reinvest their profits under deflation, thereby they have to cut production and lay off people (for reasons explained above). This directly hits on the consumer. Thus we have the consumer suffering in both cases, but deflation is more dangerous since it also hits hard on the producer. And not a trace of mirroring by any means.

And inflation doesn't favor borrowers since less lenders are willing to loan in the inflationary environment, and thus less credit overall due to higher interest rates and smaller number of lenders.

It helps if you think of the economy of an ecosystem instead of dichotomy between producers/ consumers, borrowers/ savers, etc..

Deflation is bad for everybody.  Slight inflation advantages some and tolerable for most

No, you're missing my point. 

At t1, if there is an inflation rate p, then interests will be i0 + p, where i0 is "purely economical and independent of inflation" (that is, the market price for "store of value", independent of the currency at hand).

Now, if you buy your stuff at time t1 for a price W_t1, you can consider that you BORROW money at t1 for an amount of W_t1.  You will pay back that loan at t2, when you get to sell your product for a price R_t2.

So during the time t2 - t1, you have a loan of magnitude W, on which you will have to pay an interest (t2 - t1) * (i0 + p) * W.

So the extra COST of inflation equals (t2 - t1) * p * W.

If you have deflation, this is a gain (p is negative).

Now, you are right that this doesn't entirely compensate the "gain" due to inflation, of the increase of R.

Indeed, you can say that R_t2 = R_t1 * (1 + (t2 - t1) * p).  So R_t2 is bigger (in nominal value) and it "brings you" indeed an extra amount of cash which is (t2 - t1) * p * R_t1.

If your sales price were exactly equal to your cost, that is R_t1 = W_t1, and you would not have created value, then the COST of inflation, W_t1 * p * (t2 - t1) would cancel out ENTIRELY the 'benefit of inflation' R_t1 * p * (t2 - t1), because it is equal.

In the same way for negative p (deflation) of course.

However, if you create value, that is, R_t1 > W_t1, then you do have a small difference: you gain somewhat if there is inflation (on your benefit) and you loose somewhat if there is deflation (on your benefit)... at least in nominal numbers.  However, as your gain in nominal numbers, can now buy LESS, that is even corrected for a second time.

But if you make a benefit, you will still make a benefit, whether there is inflation or deflation.  Because the interest on the borrowed money to do your production is corrected for it.

To illustrate the naivity of "inflation makes for easier benefit", consider the following case:

at time t1 you buy for amount W a set of goods (say, a stock of soap).

At time t2 you sell your stock of goods for price R.

You are concluding naively that as R at t2 will be higher (because of inflation) at t2 than the price you gave for it at t1, that you will have made some benefit !!

So under inflation, storing stuff is generating a benefit under this kind of reasoning !

You immediately see where that goes wrong.

You could have placed your amount of money W on a savings account with an interest i = i0 + p at time t1.

At time t2, that amount of money would have increased by a factor (t2 - t1) * p * W simply due to inflation, which is of course EXACTLY the "benefit" you would have obtained by selling your soap.

The same is of course valid in deflation.... except that if the deflation equals i0, YOU DON'T NEED A SAVINGS ACCOUNT ANY MORE.

And THIS is the true panic that mild deflation inspires: normal people don't need a savings account any more.  You don't need the financial institutions any more to compensate (partially) for the loss your money suffers under inflation.  3/4 of financial institutions are out of business under mild deflation, as they are useless.

THIS is the ONLY serious reason why politicians and financials panic for mild deflation.  As others said, mild deflation and mild inflation are mirror images of one another on all other economic aspects.

I would not even agree with that, as long as inflation or deflation is steady and expected, for the simple reason that interest rates are compensated for it.

Someone in debt might think that inflation is good for him.  But at an inflation rate of 2%, his nominal interest rate on his debt will be 2% higher than without that inflation.  So normally he doesn't win anything.

The only winners of inflation are those that take a benefit on money and interest FLUXES.  Those are higher with inflation.  There are two kinds of organisations that do this: financial institutions and states.

I like that.  I propose that from tomorrow on, everybody on this planet pays me 0.1% of his income.  It is a rule that advantages some (in this case, me), and it is tolerable for most ;)

Ah, the ultimate argument when it is shown that all principal effects of inflation and deflation are economically essentially neutral and mirror of each other if you take all effects into account.

Point is, stickiness of prices are only valid in the short term.  Otherwise, nobody would even be willing to pay $1.- for a loaf of bread, given that we are used to 10 cents for it !

Stickiness of prices is just as well an argument against inflation as against deflation (and in fact, implies that inflation and deflation should be MILD).  Consumers DO adapt to higher prices in inflation.  They are not holding on to any "stickiness" in the long run.  They adapt to the market: if there ain't any more at the old, lower prices, they are willing to pay higher prices.

The stickiness of prices in wages and so on only comes about because of LEGISLATION which does some kind of price fixing.  If those prices were just as free as a loaf of bread, and the labor market would be fluid, then wages would adapt just as well as the price of a loaf of bread.

If you have an inflation of 2%, you have an effective wage drop of 2% a year, and you have to negociate a wage increase to keep the same effective wage.  If you have a deflation of 2% a year, you'd get an automatic wage increase of 2% a year.  First of all, that is not so terribly uncommon.  And second, there could be wage lowering negociations from the side of the employer.  They would in times of deflation be just as natural as wage increase negociations in times of inflation.

There is no long run stickiness of prices.
Markets always impose prices.

It seems that it is you who is missing my point.

First of all, if you do really borrow capital (which is a viable way of financing you working capital), the costs of it, that is interest paid, are already included in W_t1 (yet another entry in total costs). Furthermore, inflation means that the price which you sell your goods at also rises, so your extra cost of inflation will be offset in the revenue. And last but not least, you can indeed write something like R_t2 - W_t1*(1+(t2-t1)*i), but this will be not what you likely wanted to say. What is i here? If it is a rate of inflation in disguise then it will be offset by an increase in R_t2 (since prices grow), so you in fact should write something like R_t1*(1+(t2-t1)*i)) - W_t1*(1+(t2-t1)*i). But the latter shows that your nominal profit increases by the rate of inflation, and remains the same in percentages as before. So, essentially, nothing has changed for the producer. If you add p to i0 it will be as well offset in the resulting R_t2 (by definition).

But that was not my point entirely.

You still don't see that it is not the same for deflation. In deflation you may end up with less money than you started with, i.e. R_t2 < W_t1 due to prices falling, even though, on paper you may easily get R_t2 > W_t1 * (1-(t2-t1)*i). But the latter won't make up for the losses, which will be real. If you write for deflation what you wrote for inflation, you will see the absurdity of your reasoning. Why did you not do this?

As I said before, you can indeed write something like R_t2 - W_t1*(1+(t2-t1)*i), but this won't be your profit, since it is a premium that you get or lose over another investment which gives you i%. If you get losses due to deflation, i.e. end up with less money in your pockets, will you be better off than if you hadn't invested your money at all?

The nominal interest.  Because the capital you blocked at time t1 for buying your goods at that moment, costs you an interest i.
The nominal interest is the real interest plus the inflation rate.


p is the inflation rate, i is the nominal interest rate, which equals i0 + p.
To R, you should only apply p of course.  To W, you apply i0 as well as p.  But essentially you do the same as I do, yes: the increase in output at time t2 because R rose nominally because of inflation is compensated by the higher interest you have to pay on your loan of W because of inflation when R = W.

In other words, whether there is inflation or not, if R = W, the "higher nominal sales price" will be compensated for the higher interest rate you have to pay on your loan of W because of inflation.

No, you don't.  Well, if you do, you will ALSO loose when there is inflation.  Simply because of the higher interest you have to pay on your loan of W.

Imagine that you buy this year for $1000 of stuff, that the real interest rate is 6% and that inflation is 5%.  This means that the nominal interest rate is 11%.  You have borrowed your $1000,- at 11% interest rate.
Imagine your product is ready after a year, and it is worth 2% more in real terms as the cost.  So it would have been sold at $1020,-  this year, but because of inflation, you can ask $50 more for it next year (I'm not considering second-order effects).

So you can sell your stuff for $1070 next year.  However, you have to pay $110 of interest on your loan.  So net, you are LOOSING money: you gained $70 (20 value creation, and 50 inflation) but you have to pay $110 in interest), even though you sold for more than you bought.

---> $40 LOSS.

Now, consider 5% deflation.  The nominal interest rate is now 1% (real interest rate remains 6%).

You have borrowed $1000 at 1%.  You could again have sold your product this year at 1020, but because of deflation, you can only sell it for 50 less, that is, for $970.  That's your thing: you can actually sell it for LESS money.  Yes.  But you only have to pay $10 as an interest.

So you've lost $30 on your sales, and you've lost $10 because of the interest: $40 LOSS.


The loss actually only comes about because of the difference of the REAL INTEREST and your ADDED VALUE.
The real interest rate was 6%, and your added value was only 2%.  So you made a loss of 4% IN BOTH CASES.


Let us now consider a value creation of 15%, with the same numbers.

5% inflation: you could have sold your product this year for $1150, but because of inflation, you can sell it next year for $1200,-
You have to pay $110 interest on your loan, so your net gain is $90.

5% deflation: you could have sold your product this year for $1150, but because of deflation, you can only sell it for $1100.-
You have to pay $10 interest on your loan, so... your net gain is STILL $90.

Then W_t1 will be dependent on inflation or deflation, because the cost of the borrowing (the interest) will be higher in inflation (and W_t1 would be higher in inflation) and lower in deflation (and W_t1 would be lower in deflation).

It seems to me whether producers are more inclined to reinvest or not is immaterial, as I'm talking about a producer that's still producing.

Anyway, I think we're going to have to agree to disagree on this. I'll just finish with a generalisation of my #177.

=================================================================
Let's assume it takes 3 weeks[1] to produce a good and we produce goods every 3 weeks.

The cost each week is w_0 = w, w_1 = w(1+p), w_2 = w(1+p)^2, thus w_k = w(1+p)^k    

The cost to make the 1st good is W_0 = w_0 + w_1 + w_2 = w((1+p)^3 - 1)/p
The cost to make the 2nd good is W_3 = w_3 + w_4 + w_5 = W_0(1+p)^3
 
The cost to make the kth good is W_3k = w_3k + w_3k+1 + w_3k+2 = W_0(1+p)^3k

Now, in #177 we were able to maintain R = 2W, can we still do that?
Yes, as the cost of making a good is (1+p)^3 times the cost of the prior good while prices are inflating at (1+p) per week, much like in #177. In fact the only real difference is that we start with a different value for W_0 (was W_1 in #177, I think).

So R_k = 2*W_K works just fine, and we can maintain a constant mark up (R/W = 2).

As with #177,  the deflation case is trivially the same, with p replaced by q = -p/(1+p).

[1] We can easily generalise to n weeks. Also, "weeks" can be generalised to any time period we chose.
=================================================================
Let's do a quick analysis of profit (this is OTTOMH, so I'd welcome anyone pointing out flaws in the maths or logic)
I'll use g for gain. Note: g is a function of p, that is g = g(p).

g_0 = R_0 - W_0 = W_0

g_3 = R_3 - W_3 = W_3 = W_0(1+p)^3

So g is increasing/decreasing in line with inflation/deflation.  
So in real terms g = g(p) can buy the same amount of goods as g' can where g' = g'(0).
Thus neither inflation nor deflation is an incentive or disincentive to produce stuff.
Also consumers are no better or worse of under either inflation nor deflation.
Of course all this assumes wages and prices adjust in step each week (or whatever period we're using).
That doesn't necessarily mean the flations are not mirror images if that's not the case, but the analysis will be trickier, and interesting I think.  
=================================================================

Thanks for taking the time to debate, it's always useful to have someone challenge your ideas, even if we don't agree on all points (or any).

Let's say we have a zero real interest rate to simplify matters, since it is the same for both inflation and deflation. Also, we started with a condition that we are profitable at 0% inflation. What will your example be in these conditions, for inflation and deflation, please.


You get the same positive result since in both of your examples you effectively have inflation, 11% in the first case (6+5) and 1% in the second (6-5). Now let's talk about real deflation.

Of course, the real interest has to be larger than the deflation rate (which it normally is).  Otherwise, you will never get a loan !

But if you really want to do the calculation, which is silly, we can:

Suppose that you are profitable with 2% value increase.  That is, with no inflation, you will buy stuff for $1000, and you will sell it at $1020,-, you'll make $20 of profit.

Now consider 5% inflation.  The interest you now pay is 5% on your loan.  So you borrow $1000, and you have to pay $50 on it.
You will be able to sell your stuff for $1070,- because of inflation.

So you sell it for $1070, you pay $50 interest, and you pay back your loan of $1000.  Profit: $20.

Consider now 5% deflation.  We are now in the crazy situation where the actual interest is negative: you borrow $1000, and you'll have to pay negative interest: you will only have to re-imburse $950 (this is why you won't get a loan if the deflation rate is higher than the real interest rate).

You can sell your stuff now for $970.  You pay back your loan of $1000, and you receive $50 (your negative interest).

Net profit, again: $20,-.

Point is, that in a real economy, with fixed money supply, the real interest rate can never be lower than the deflation rate (which is equal to the economic growth).  Indeed, you don't want an interest rate that is lower than the *average* economic growth, do you !

Real interest rate is NOT inflation.

It is the price the market asks for having value tomorrow instead of today.  In investor terms, it is the average return on investment you can expect from your average-Joe production activity.

Real interest rate has even nothing to do with money itself or with currency.  

We are not talking about loans! We are talking about producers who don't necessarily take loans but work on their own capital.

The cost of putting money into something for a certain time is ALWAYS equivalent to borrowing that money.  Because you have to compare using the money the way you intend, with lending it out.

If you had to spend $1000,- and not have your product finished for a year, and interest rate is 10%, then you COULD HAVE OBTAINED $100 by lending it out during that year (placing it on a savings account, say).  So if you spend it on something, and you can sell your product only one year afterwards for $1050,- you have essentially LOST $50, as compared to putting your money on a savings account at an interest rate of 10%, or by lending it out at 10%.

Inflation or deflation has nothing to do with this.  If your return on investment is LOWER than the market interest rate, you lose in using the money for your investment.  You better put it on a savings account.

So you should always, if you need money in an example, consider that you borrow it.

You forgot that we agreed that interest rate is 0%, so you would have to return the same 1000$ (not 950$ as you pretend). But you can only earn 970$. In this case you incur a loss of 30$.

And then consider that you don't borrow but have $1000 as your own money. With the deflation of 5% you will get back only $970. You loss is same 30$, and in both of these cases you end up with less money than you had before.

Do you now get it?

The *real* interest rate was 0%, which means that with a deflation of 5%, the NOMINAL interest rate is -5% (which is an absurdity, but why not).

It is in practice not possible to have a negative nominal interest rate, and deflation will always be less than the real interest rate normally, so that the nominal interest rate is still a positive number.


Because we are in the absurd situation of a negative nominal interest rate.  If there is a negative nominal interest rate, you simply keep your money !  It would be absurd to invest into something that has less ROI than the deflation rate, which gives you a free interest.

However, that situation cannot last.  Because deflation (in fixed money supply) comes essentially about from the fact that the economy GROWS, and that more stuff has to be bought with the same quantity of money (assuming velocity more or less constant).

If the economy grows, it is normal to have a positive real interest rate, because the return on investment is normally HIGHER than the economic growth.  So normally, the real interest rate, which is of the order of the average return on investment, is higher than the economic growth which induces deflation.  As such, the nominal interest rate, which is equal to the real interest rate diminished with the deflation rate, will still be positive.

REAL interest rate of 0% implies NOMINAL interest rate of -5% if deflation is 5%.  So you pay the nominal interest rate on a loan, which is now MINUS $50 (and which nobody will accord you).

If you borrow money at 0%, you will have to return the same amount that you borrowed (deflation, inflation, or whatever). I don't know what else is here to discuss. If you disagree, then you disagree, I have no more inclination to discuss this issue any further.

Actually, I don't already understand what you mean by real interest and what you mean by nominal interest.

If you borrow money at 0% NOMINAL RATE, and deflation is 5%, it means the REAL INTEREST RATE is 5%.  Not 0% as you pretended.

Now, if the real interest rate is 5% (which becomes 0% nominal rate at 5% deflation), it would become a nominal interest rate of 10% if there were 5% inflation.

Because nominal interest rate (the one you have to pay) i = i0 (the real interest rate) + p (inflation, or negative if deflation).

In other words, if the market determined a real interest rate of 5%, and there is 5% deflation, the nominal interest rate on a loan will be 0% (you give back what you got) ; if there is 5% inflation, the nominal interest rate will be 10% (you have to give back 10% more than what you got after a year).

The real interest rate is related to the expected average return on investment of capital in the economy (independent of any currency and hence independent of any form of inflation or deflation).

You don't seem to understand that the nominal rate you have to pay on a loan (or that you get on a savings account) includes a correction for inflation from the real interest rate.

http://www.investopedia.com/articles/investing/082113/understanding-interest-rates-nominal-real-and-effective.asp

Nominal interest rate – Inflation = Real interest rate

Okay, you borrow money at 0% interest rate (that means that you will have to return the same amount you borrowed, you name it), which is essentially the same if you just had that money. Inflation as well as deflation is 5%, your profit margin is 2%, when will you suffer losses, and when will you earn profits?

Wages arent negotiated down.  Layoffs happen and you see increase of unemployment.

Were you asleep the past 7 years?.

Stickyness of prices doesn't mean market doesnt control prices.  It means the adjustment lag behind and explains why deflation can spiral. 

Wages don't have the tradition to be negociated down because we live in an inflation-induced world since 1914 (and before that, there wasn't much like collective wage negociation tradition).  All our social and economic traditions are based upon an inflationary money.

If deflation were standard, it would be just as normal to have a negotiation downward of wages.



Deflation can spiral just as much as inflation can spiral.  They are duals.

The point is that the nominal interest rate is not the same when there is inflation and when there is deflation.

Nominal interest rates (those you have to pay) will be much higher in an inflationary situation than in a deflationary situation.  That's the whole point.

In the 70-ies, when there was 2-digit inflation, you also had 2-digit interest rates on a savings account for instance.

The more there is inflation, the higher will be the interest rates.  The more there is deflation, the lower will be the interest rates. So you can't say "let's keep the (nominal) interest rate constant - say 0% - and calculate the case of inflation and deflation".

You were claiming that deflation is a mirror image of inflation, right? Now you seem to be backpedaling this issue, how come? Why don't you just accept that you were wrong?

We agreed to start at 0% inflation-deflation rate where nominal interests rates would be close to zero, then inflation-deflation would kick in. If the business was profitable at 0% inflation, it will most certainly stay profitable in the inflationary environment too, while in the deflationary environment it is not given, which can be proven mathematically. Deflation is not mirroring inflation!

Not at all.  Where do you get that ?  Inflation increases nominal interest rate, deflation decreases nominal interest rate.  Symmetric, no ?


Yes.  If the nominal interest at 0% inflation/deflation is 0%, then the REAL interest rate is 0%.  The nominal interest rate will then be equal to the inflation/deflation rate, because the real interest rate is unchanged, here 0%.

That means that if we have inflation of 5%, the (nominal) interest rate will be 5% ;
if we have deflation, the (nominal) interest rate will be -5% (which is, as I said, an absurdity, but which comes because of your starting assumptions of having a real interest rate of 0% and nevertheless deflation, which is economically difficult to consider).

In the no-inflation case, you buy for $1000.-, you pay 0 interest (nominal rate = real rate here is 0), and you sell for $1020 (if your ROI is 2%).

You make $20 profit.

In the inflation case, you buy for $1000,-, you pay $50 interest, you can sell for $1070, and you make again $20 profit.

In the funny deflation case, you buy for $1000, you pay minus $50 interest (that's what it means to have a negative interest) - that is, you only have to reimburse $950, you can sell for 970, and you AGAIN make $20 profit.

The only point being that nobody is going to borrow you money at a negative nominal interest rate.  But that is because you wanted to consider the case of 0% real interest rate and nevertheless deflation.



I exactly calculated you the opposite.

Here is your post. It seems that I remember them better than you do:

Well, that still holds, doesn't it ?

You make $20 of profit in the 3 cases.

I was asking where you thought I was back-pedalling ?

You didn't answer this my post:


These are starting conditions (no inflation, no deflation, interest rate is 0). Go on with your answer.

I just did.  Twice already.  You make $20 profit in the 3 cases.

Except that you refuse to consider that nominal interest rate is higher when there is inflation than when there is deflation.  That's my whole point.

If at 0% inflation, interest on a loan is 0%, then it will be 5% interest when inflation is 5% and it will be (funny) -5% when there is 5% deflation.

The point also being that you can't really have 5% deflation and 0% real interest rate (that is, negative nominal interest). But with your given starting points, that's what we have to consider, which is of course not really possible.

You didn't, and I already explained why (since in your examples there is no real deflation).

There is initially no inflation and no deflation, but zero interest rates, both nominal and real, so nothing favors either pro-inflation or pro-deflation view. I'm still waiting, explain to me how deflation will mirror inflation when they set in. Your profit margin is 2%, inflation and deflation are 5% each at the end of the production cycle.

The only cases you can consider are constant, permanent, and expected inflation, or constant, permanent and expected deflation of course.  All the rest are suprise effects, like changing exchange rates and so on.

Unexpected inflation comes down to an unexpected drop in value of money.  As such, if you had previously exchanged money into something else (like production goods), then you will of course make a benefit when exchanging back into money after its value dropped.

Unexpected deflation comes down to an unexpected rise in value of money.  As such, if you had previously exchanged money into something else (like production goods), then you will of course suffer a loss when exchanging back into money.

That's pretty evident and trivial of course, but that doesn't say anything about sustained and constant inflation or deflation rate.

If you have $1000, and you buy soap with it, and then there is inflation, you were better off with the soap.  However, if there was deflation, you were better off keeping the $$.  So much is evident for an unexpected CHANGE in inflation/deflation rate.

Why do you say that if there is a constant deflation rate of 5%, there is no deflation ???

I think you should re-read this post:

https://bitcointalk.org/index.php?topic=975486.msg10900212#msg10900212

it is still the best example.  As the real interest rate is bigger than the considered inflation or deflation, we have positive nominal interest rates in the 3 cases, which is much more realistic.  As such, it illustrates much better the 3 cases of inflation, neutral, and deflation.

So you don't what to deal with the simplest case and hope that if you complicate matters (making them hard to understand), it will somehow help you? Okay, there is 5% deflation (and 5% inflation) already under the way. Nominal interest rate (at which you borrow) is 0% under deflation (it can't be less than 0 by definition), and 5% under inflation. The question remains the same, i.e. if you borrow 1000$ and your profit margin is 2%, when will you be profitable, and when will you suffer losses?

You cannot have 0% nominal interest rate under 5% deflation, and only 5% interest rate under 5% inflation.  Their difference should equal 10%, not 5%.

Otherwise we are in different conditions of real interest, that is, borrowing would be much more expensive in real terms under your deflation conditions than under your inflation conditions.  The whole point is that for every percent of inflation, the nominal interest rate will also rise with one percent, and for every percent of deflation, the nominal interest rate will also decrease by one percent.

So if you want to consider 0% interest rate at 5% deflation, you should consider 10% interest rate when there is 5% inflation.

But the case of 5% deflation, 0% interest rate, and 5% inflation and 10% interest rate, I want to do:

a) deflation case:

I borrow $1000 at 0%, I would have sold at $1020 (2% ROI) but because of deflation, I can only sell at $970.  $30 LOSS.

b) inflation case:

I borrow $1000 at 10%, I would have sold at $1020, but because of inflation, I can sell at 1070.  I have to pay $100 interest.  $30 LOSS again.


Why ?  Because the real interest rate is 5%, and my ROI is only 2%, so I LOST 3% in both cases.

c) neutral case:

I borrow $1000 at 5% (real rate), I sell at $1020, I have to pay $50 interest: again a loss of $30.

You are obviously trying to push you logic unto real things. Why should their difference be equal to 10%? Just to suit your considerations? The lower limit of interest rate in deflation is set to 0 (below that no one will lend to you), the lower limit in inflation is determined by the rate of inflation, so 5% interest rate under 5% inflation is quite possible. In fact, it can even be even lower than that.

I'm talking about what happens in reality. And in reality deflation as well as inflation has beginning.

Because nominal interest rate = real interest rate + inflation.

The real interest rate is the cost of borrowing money in real terms.  If we want to see the pure effects of inflation and deflation, we should of course consider the real price of borrowing money in the same conditions.

If you change the economic conditions between the two cases, you are not considering the effects of inflation and deflation any more.   You should change inflation and inflation ONLY ; ceteris paribus.

Otherwise, I could just as well change any other aspect of business arbitrarily and blame inflation or deflation:

"consider 2% inflation and the rent of my work shop is $500 ; now consider 3% deflation and the rent of my workshop is $900" or any other change in business condition.

No, the real cost of borrowing money (the real interest rate) has to remain constant of course.

The real cost of money is the one which will determine if your ROI will  be beneficial or not.  If your ROI is larger than the real interest rate, your activity will be beneficial ; if not, you will suffer a loss.

What is real interest rate here and how is it different from inflation? I think you are trying to confuse the issue. I always thought the cost of capital (borrowing money) in real terms already included inflation. And then the nominal interest rate is equal to inflation plus profit margin for lenders.

Nevertheless, now let's proceed to the case where you don't borrow. 5% inflation and 5% deflation. You already have 1000$ and your profit margin is the same 2%. Will you be profitable under inflation in real terms, and will you suffer losses under deflation? You don't borrow, so you don't care about nominal interest rates (only about inflation).

In fact, a CHANGE is relative.

If we have a constant inflation rate of 10%, a real interest rate of 5% (so a nominal interest rate of 15%), and SUDDENLY the inflation rate drops to 2%, then this is entirely equivalent to having initially an inflation rate of 3% and suddenly having a deflation of 5%.

Indeed, if you had a ROI of 8% (so 3% higher than the real rate, you expect a gain of 3% hence), and you borrowed $1000 at 15%, you were going to sell at 1080 (ROI) + 100 (inflation) = 1180.  You would have to pay 150 interest.  So you would make $30 profit.

However, you have borrowed your $1000 at 15%, and now inflation turns out to be only 2%.  So you will only sell at 1080 + 20 = 1100.  However, you still have to pay your 150 interest ===> you make unexpectedly a loss of $50 because of the unexpected drop in inflation.

We are running in circles. You always have to consider that you borrow, because you have to compare to what you would have obtained by NOT spending your money, but to place it on a savings account instead.

But if you like:

5% inflation (interest rate 10%).  If you place your money on a savings account, you would have obtained $1100.

If you do your thing, you would have sold at 1070.  You would have suffered a loss of $30 compared to placing your money.

5% deflation (interest rate 0%).  If you kept your money, you would have had nothing, so in the end you'd have $1000.

If you do your thing, you would have sold at 970.  You would have lost $30 as compared to keeping your money, again.

I put up a few links earlier.

Real interest rate has nothing to do with inflation and deflation.

Real interest rate has to do with the price of borrowing value (no matter in what currency).
Inflation and deflation have to do with a specific currency: it is the price change of a currency.

Real interest rate is independent of a currency.  If the real interest rate is 5%, and I borrow you 20 houses during a year, it means I want an extra house back.  It is the market-determined cost of putting value at disposal during a year.

It has nothing to do with inflation or deflation of a specific currency.

The nominal interest rate is the real interest rate, corrected for the expected change of price of the currency at hand.  It is what you have to pay.

If the real interest rate is 5%, and I borrow you 100 eggs during a year, I expect 105 eggs back.

If the real interest rate is 5%, and I would lend $1000, and inflation is 2%, I know that next year, this $1000 is worth less, so in order to obtain really my 5% value, I have to ask you a nominal interest rate of 7%.

If there is deflation, and I know that $1000 will be worth 2% more next year, I'm happy with a nominal interest rate of 3% (because I will have my real value increase of 5%).

The cost of borrowing money in NOMINAL terms you mean (the actual rate you have to pay) includes, as you say, inflation and indeed, the expected profit margin for the lenders, which is exactly the real interest rate.

The profit margin of the lenders is indeed what is market-determined, between demand for borrowing value, and offer for borrowing value.  It is "the price for putting value at disposal during a year".  If we want to compare things, we have to keep this condition constant.

The REAL margin for creditors (the real price for debtors) is the real interest.  It is, as I said, determined by the offer by creditors and the demand by debtors.

If a potential creditor wants to put a certain value on the market, which is worth $1000 right now, and there is 10% inflation, he will only consider that he makes a benefit for everything ABOVE 10%.  Indeed, if he lends his $1000 right now, and he gets back $1100 a year from now, he cannot buy anything more with it than right now.  So there's no incentive for him to not buy the stuff right away and lend his money.  If the nominal interest he asks is 15%, he will consider that he got 5% VALUE back.  The real interest rate.  The nominal rate on the market will then be 15%, and the real interest rate 5%.

If the inflation is only 2%, he will be satisfied, in the same circumstances, with a nominal rate of 7%.  In the same market conditions, then, the nominal rate will be 7%, and the real interest rate still 5%.

Because the lender looks at his real rate to offer or not to offer.  So the offer on the money market will be determined by the REAL interest rate.  It is the same, for a lender, to get 15% if inflation is 10%, or to get 7% if inflation is 2%.  Offer will be the same in both conditions.

On the side of the borrower, you get a similar reasoning.  His demand will also depend on the real rate, not on the nominal rate.

This is why the market conditions actually determine the real rate.  

Then the real interest would be equal to nominal one in case there is no inflation?

So, as I understood your reasoning, you still consider as losses anything which the producer gets above the inflation rate but below inflation plus lenders interest, i.e. nominal interest? Even if he is not borrowing, right?

Yes, that's the idea.  Because if there is no inflation or deflation, the monetary gain is the gain in value.  The "real interest rate" is the actual gain in value.  The nominal rate is the rate you have to pay, and which compensates for the inflation or deflation, if you borrow a monetary asset.  If there's no inflation or deflation, both are the same.


Yes, because you should consider that he's borrowing.  The point is that you have two investment options:
1) doing your thing USING the money
2) lending out the money (which comes down to putting it on a savings account, say).

If you get more by putting the money on a savings account rather than doing your thing with it, doing your thing is a losing affair.

Let us assume no inflation or deflation for the moment, just to illustrate the point.

Say that you have $1000.- lying around.

You have 2 options:

1) putting that $1000.- in a savings account with an interest rate of 5%

2) doing something with it with a return on investment of 2%

Obviously, if you go for 2), you make 3% loss as compared to what you would obtain if you didn't actually do something with the money but put your money in a savings account, right ?

If you do an investment, and you get less from it than you'd get from a savings account, you're actually making losses.  That can seem strange, but it becomes more obvious if you consider that you have to borrow the money to do your thing.

Now of course I'm neglecting something here, and that is the margin taken by the bank, who gives a lower return on savings accounts than it takes on loans.  True.  I'm taking out the bank as an intermediate, and consider that a savings account is directly a loan to someone.  So it is true that you get cheaper off using your own money than having to borrow (because of the margin taken by the bank).  The "real interest rate" for savings accounts is smaller than the real interest rate for loans.  The difference goes in the bank's pockets.  But of course the reasoning here is somewhat simplified, to get down to the essentials of the effects of inflation and deflation, without working out an entire business plan :)

Look at games like league of legends or heroes of the storm. When they release a new hero, it's the most expensive hero for a few weeks, after a while, the price drops, and after more time has passed the price drops again.

Even though everyone knows the price will drop if you wait, you can see a lot of people actually buy the hero on day 1. Why? Because they can afford it and they do not want to wait. Others may wait a bit, but get it after 2 weeks once the price has dropped, because they feel waiting two weeks to get 33% off is worth it. Others may even wait 3 months to get 50% off.

Having something early is worth it to some, so deflation isn't that bad in a highly competive and "status symbol" driven economy. Why else do people buy a BMW while they could also have bought a cheaper ford? Exactly because it is expensive, and it shows the world you can afford an expensive luxury car and a brand new model to boot.

A 2 year old model Bentley is a lot less valuable than a brand new model of a similar serie. So, deflation in a sense can already be observed, and it's not breaking the economy at all. And that's even for items we don't even need.

Let's look at food now, and toilet paper, razors (for shaving), toothpaste. You can't just say "oh, I will just wait until next month, because food will be 5% cheaper by next month". Yeah, problem is if you don't eat you'll fucking starve before you get to see the 5% reduction in the first place.

Do you understand that by saying this you are losing touch with reality (and simple reason at that)?

First, if you put your money into a savings account, you won't be able to get nominal interest rate (NIR) in return, since it is the rate you borrow money at. Strictly following your logic, you can put the money on a savings account only at the rate of inflation (you see where I lead you to?), since lenders happen to be the same ones who take money from you, but, as you said, the NIR is a sum of inflation plus real interest earned by lenders (not you), i.e. their profit margin. This is where your logic fails.

Second, a business that works on its own capital only, appears to be always less profitable (since you subtract the cost of (non)borrowed capital from its revenue, and thus profit) than a business that actually borrows capital and earns more revenue. But in reality the former may get more money in profit (since they don't have to pay interest on borrowed capital) than the latter. This is where reason ultimately leaves you.

Third, if you, nevertheless, insist that we should necessarily compare a profit margin earned by a non-borrowing business to that of money lenders (to see if it is profitable), why not then compare them to a profit margin of, say, drug dealers? In this case, both enterprise and money lenders (which are just another business) will be conspicuously unprofitable, right? This is the point where your idea becomes evidently absurd.

Ask any business if money, locked up in a warehouse, buildings, machines, etc... is not a cost factor.
If you calculate, for any business, the discounted cash flow, then any "frozen" money during a time is discounted as a cost equal to the interest you pay on that amount of money during that time.

If you are going to claim that you make a profit, because you've locked up 10 million dollars during a year in material, and you got a return of 200 dollars over what you spent, I wonder how many people are going to consider that *you* are still in touch with reality :)

And if you think that a savings account has zero real interest, you should change bank.  Because a bank uses your money you put on a savings account to lend it to people wanting to get a loan.
It is true, however, that these days, real interest rates are so terribly low (because low demand, and high offer) that you hardly distinguish nominal rate and inflation.  But on a savings account, you're supposed to get more than just the inflation.

And finally, I already explained that caveat.

Why are you permanently trying to confuse concepts? If you've bought raw materials and are producing goods from them, how on Earth does it happen that you have "frozen" the money? Even if so, how come that you would not "freeze" the money If you just borrowed that money to buy the same raw materials at the same time (but would have to pay interest on it at that)?!

Do you understand that the further you go the more laughable your arguments become?

If you are buying goods on Monday for $1000 000.- and you can only sell your products on Friday, then you have frozen one million dollars during a week.  The cost of that freezing of money in your raw materials is the interest on it.
That's very elementary business accountancy, you know.


You do freeze the money.  That's why you pay interest on it !

The interest rate that is used is normally the "risk free interest rate", usually determined by state bonds.  Savings accounts are usually slightly lower.  So, no, you do not compare to the return on investment of drugs dealers. 

Thus you freeze the money in both cases, right? Then why did you raise the issue of "frozen" money at all?

Dinofelus is talking BS that has nothing to w real world.

Its just cashflow.  Dont need to make it sound conplicated

Yes, it is cashflow.  Now tell me, is cash flow free ?
If you immobilise (I called it "freeze") money in raw materials, machines and other things for a year, do you think that that is for free ?  

Consider these two different business plans:

A) Joe needs to buy a computer worth $10 000 000 on January, and will design, using that computer, a new spoon.  In June he will buy $1000 of metal and make spoons out of it, which he will sell in December for $1200,-.  At that point he will sell his computer for $10 000 000.

B) Jack needs to buy a PC worth $1000 on January, and will design, using his PC, a new spoon.  In June he will buy $1000 of metal, make spoons out of it, and he will sell them in December for $1200,-.  At that point he will sell also his PC for $1000,-.

Are you SERIOUSLY saying that both Joe and Jack are going to make the same profit, namely $200,- ???

My point is that if the interest rate is, say, 2%, then Jack is making a profit of $200 - $10 - $20 = $170
(the $10 is the $1000 of metal that he immobilised for 6 months, and the $20 is the $1000 of his PC that he immobilised 1 year)

Joe, on the other hand, is making a monumental loss of about $200 000.  In fact, his loss is exactly:
200 000 + 10 - 200 = $199 810,-

If you monopolise capital (here, $10 000 000) during a certain time (if you "freeze" it), then that costs money.  The cost is called the interest.

Are you really that dumb? Your money "frozen" in raw materials (from which you make goods that you later sell) earns you revenue. And as long as it is above inflation, you are still making profits by any means. By the way, your "risk free interest rate" is actually below inflation. For example, inflation in the US was 1.6% for 2014, while 1 yr US treasury bonds yielded only about 0.25% the same year, so you are obviously dancing upon nothing...

So, for you, if you need for $ 10 000 000 of material during a year, or you only need $1000 of material during a year, if in the end you sell for $200 more than the expenses you did a year before, you made a benefice of $200 ?

As I told you, good luck with your business :)


This simply means that the real risk-less interest rate was negative.  There is so much demand to place money, and there is so little demand to borrow money, that people even want to pay for others to keep their money.  This is a real possibility when there is inflation: that you are willing to PAY for people to borrow your money, because you can attenuate somewhat the loss of value due to inflation.

Thereby it cannot serve as a proof of what you are trying to prove. If you take a look at historical risk-free rates of short-term treasuries (or other short-term financial assets of the kind, for that matter), you will find plenty of periods where rates have been significantly below inflation in the same period.

It just means that one business is less profitable than another, that's all. As long as profit earned is above inflation (mind this), the business is sustainable in the long run. Which will never be the case if it continuously suffers losses due to deflation, whatever interest rates might then be. I don't really understand why you are trying to argue against this simple fact.

In deflation the business can save more money and whilst many competitors will compete with it, this could bring true capitalism with better and better products.

In inflation the banks eat your money by inflation and also by debt that you hold. Many companies hold alot of debt, if interest rates were to rise, they would all go bankrupt.

Together wit the CB aswell and later the whole world.

What kind of companies (save for financial institutions indeed) you mean that hold debt? In fact, companies usually borrow money from banks to finance their working capital or make investments into their fixed assets (property, plant, and equipment). Also, expand more on how businesses can save more money in deflation, through laying off their stuff, maybe?

They save alot of money because the underlying money instrument gets more valuable, so the fact that they sell their products cheaper doesnt matter, because they can also buy more resources with that money and pay less salary for workers (while the purchasing power of that less moeny is still better than of that before).


In inflation they just create a giant debt bubble for the whole country which will pop out every 7-10 years and create massive unemployment.

And after about 50 years the whole system collapses under the huge amounts of debt.

Clock is ticking:
http://www.nationaldebtclocks.org/

Yes yes yes! Dont know why nobody gets this.  Most business depend on credit in some fashion.  So a even a steady deflation rate will discourage borrowing which in turn discourage activity.

Deflation is bad for everybody.  Inlflation advantages those with capital but tolerable for most.  Inflation harms those without access to credit

It doesnt matter if things are cheaper in the long run.  What matters is the economic machine keeps running

The same keynesian propaganda nonsese here.

Deflation as i already said will help people have more purchasing power. Giving credit to people is just fixing the problem that was created by it in thefirst place.

While inflation robs people you just give more credit back to them as they were robbed. This whole credit based economy will collapse soon.

Could you please explain that to tee-rex who thinks that the amount of money blocked in the production process (that is, between the moment you need to spend it, and the moment you get to sell your production) has no cost.

And of course they get that money for free and don't pay any interest on it, right ? :)

So whether they have to borrow $10 000 000, or $1000 during a year, for a certain production on which they will make a "profit" of $200 in both cases, is entirely equivalent to you ;)

Assume no deflation or inflation, right.

WHY would one business be less profitable than the other then according to you ??  After all, they both made $200 of profit according to you.  The first one uses $1000,- in January, and sells for $1200,- in December ; the second one uses $10 000 000 in January, and sells for $10 000 200, - in December.

From what amount onward wouldn't they become profitable ?
When they need to block 1 billion ?  20 billion ?  500 billion ?
Because even a company that needs to use 500 billion in January, if it can, according to you, sell his production and everything else for $500 billion + $200,-, is profitable according to you, right ?

The long term deflation is normally equal to the economic growth, assuming average constant velocity in the long run.

As such, if activity would diminish, deflation would also diminish.  In periods of economic recession, a fixed money supply would give rise to inflation.

The only ESSENTIAL difference between inflation and deflation, is that in inflation, you need a financial sector to help protect your savings from value decrease, a financial sector which takes a margin between borrowing and saving ; while in the case of deflation, you don't need that financial intermediate, as a pile of money "brings his own interest".  You can still use financial intermediates, to get MORE than the deflation rate, and they can still lend out at a positive nominal interest, but they cannot take too large margins because otherwise the interest they would give you on your savings would become negative.

The only thing for which deflation is bad, is financial institutions.  They live essentially on inflation.

The real interest on a loan, in a deflationary scheme, has a lower bound equal to the deflation rate.  That is, if the deflation rate is 2%, any loan will cost AT LEAST 2% in real terms, and probably somewhat more.  This lower bound on loans avoids people to invest in low-rentability projects.  There wouldn't be any "cheap money" with which bubbles can be blown, and which can be misallocated in huge amounts.  So the correction for mis investment would come much earlier and wouldn't be able to be pushed back and back with more and more cheap money until there is a major crisis.

But there's a feedback.  If that interest rate would be too high, and would cripple businesses, then growth would diminish, and so would deflation rate.  So there is no danger for "permanent depression due to deflation".  After all, at zero growth, there wouldn't be any deflation either !  And if there would be a depression, you'd get inflation.

No I agree with him.  It has a cost but business take that risk because they have a PO so some inventory is guaranteed sold.  But if there is a steady rate of deflation then the cost is higher.  Less incentive to do business

What do you mean by "underlying money instrument", I don't quite understand. Could you give an example of such an instrument? if the business begins suffering losses, they won't miraculously turn into profits, even if the "underlying money instrument" gets more valuable.

You seem to be desperately trying to catch at a straw and again confuse different concepts, most likely through lack of knowledge or proper understanding. If businesses have a high profit margin, and there is plenty of demand for their goods, it is profitable for them to expand production through credit. Thereby they get more profit in absolute terms, even though their profit margin is diminished by the interest paid on debt.

And when demand collapses such companies are left with debts and the need to refinance these debts somehow.

I was talking about profit margin, I thought it was evident. In fact, you are very hypocritical in your answers. At first you imply that businesses should have profit margin above nominal interest rate to be considered as profitable, since they could get there by just doing nothing. Then, when I point it out that you won't be able to get there since you can't eat at the money lenders interest (what you call real interest), you switch topics and start talking about risk-free financial instruments such as government bonds. But, as it turns out, in half of the cases these assets yield interest well below inflation, you again backpedal this issue and try to ridicule the facts through intimidating numbers. This won't work.

It doesn't matter how much money is "locked" as long as your profit is above inflation. Why don't you loudly orate now about how much real income you would actually lose if you "locked" money in these risk-free interest bearing assets, which, according to you, we should use as a yardstick for profitability? It was your idea after all, wasn't it?

No, what I'm saying, what I'm repeating, and what you don't seem to understand, although this is very elementary in every form of business, is that money that is used on time A, and made only available again on time B, has a cost, equal to the interest rate times the amount of money, times (B - A).

That has nothing to do with inflation or deflation.  It is the fact that that value is blocked during that time in whatever you spent it on.  

Now, what interest rate to pick exactly is a point of discussion: is it the savings account rate, the "risk free interest rate", or is it the best possible loan rate you could get, that can be discussed, but doesn't alter the principle.

If you spend an amount of money X at time A in order to produce, to only get it back at time B when you sell your stuff, then the COST of that "frozen" amount of money equals s * (B - A) * X, and it is a cost, just like the cost of using electricity or the rent or whatever.

Look up http://en.wikipedia.org/wiki/Discounted_cash_flow and http://en.wikipedia.org/wiki/Time_value_of_money

These are very elementary concepts, you know.

Consider no inflation/deflation, and an interest rate of 5% (whether this is on a savings account, the best loan you can get, or the "risk free interest rate").

Suppose, case A, that you spend today $1000,- and that you will sell your product for $1200 in a year from now.
Using the method of discounted cash flow, that $1200 a year from now has to be reduced by the interest:
$1200/(1.05) = $1143.-
The value of selling something for 1200 in a year is worth 1143 today.
And you are spending 1000 today.  So the value of your undertaking is $143,-

Suppose now, case B, that you spend $10 000 000 today, and that you will sell your product for $10 000 200 in a year from now.
Using that method again, 10 000 200 a year from now is worth (10 000 200 / 1.05) = 9523809 today.
But you are spending 10 000 000 today.  So the value of your undertaking is - $476 190.-
You're making a loss of half a million almost !

Now go and study "discounted cash flow" and "time value of money".  I'm not going to explain this basic concept again, 10 times in a row.

I'll just copy part of the Wiki example, that is almost exactly the same as the examples I'm using here:

Yes it is. According to the laws of economics, the amount of banknotes in circulation,

must correspond to the quantity of goods and services in the market.

No it doesnt, where did you get your diploma from the banksters? This seems to me cheap keynesian propaganda.

You can have any amount of money in circulation, if the goods are less, then the price of it will be lower, because it's worth more.

And thats beneficial because less amount of money is needed to buy alot of goods and services.

It's almost as same as the current keynesian model from objective perspective, except the 8 year periodic crashes, debt bubbles and hyperinflation.

I see no flaws in deflation at all.

Of course i bet many keynesian propagandists will mock me for this...

This is my take on it.
1. Deflation postpones Production
why? because it makes sense not to commit into depreciating resources (materials, labour) until you absolutely have to.
2. Your bussiness model must convert to "on-demand Production" / Pre-Ordering.
Question1 Can/Will the client accept all the production risk/delay ?
Question2 Can all bussinesses convert to such a model? How about bussinesses
 

• with large inventory requirements - Can be aleviated by JIT Production ie 3D Printing ?
• with continuous production requirements (ie coke factories) -  Can safely assume continuous demand ?
• with Deep supply chain -  Set up contract networks that get triggered on the demand end (deferred transactions in blockchain or smart contracts)? 

Will time constrains be met?

• with Labour requirements  - Very liquid service oriented labour market ?
• with Long Time to market (ie raising crops/livestock or even knowledge workers) - Food will become scarce? 
• that leverage economies of scale -  Can leverage economies of scope instead?  Europe and US are anyway in a de-industrialisation phase

3. On demand-Production leads to more economical resource usage
A major advantage will be a more eco-friendly production (less waste)
4. Riskier investment options, less private investment.
Are savings banks going to survive? Who will broker investements for the masses?

In all I see a lot of preconditions for a deflatory economy to work, and it seems to me to make it work you have to kiss capitalism byebye and move on to a computed-planned economy. Still point 3 may be a game-changer

 

A small amount of inflation is good for a healthy economy, it helps it grow.

Bitcoin's inflation is not a big deal right now.

There is a cost to storing value in stocks, whether there is inflation or not.  There is a cost to buying stuff now, that you will only use in your production 2 years from now.  That cost is financial (I had a long discussion about this in the previous posts), and that cost is also one of storage, and risk of it getting stolen or degraded.  Nobody buys expensive electronic components now to be soldered on a board 2 years from now.  

So in ANY CASE it is best to limit the amount of stock of goods you have, and to obtain them as late as possible, ideally just in time for production.

You don't postpone production of course, because production is your source of income.  You don't want your income to be delayed further in the future.  

Whether there is inflation or deflation, you want:
1) to get your production time to be as short as possible (the time between having to spend money to start your production, and to sell your product)

2) get your product out as soon as you can (to be the first one on the market, to beat the competition).

You are simply indoctrinated with an idea that has no ground, and that idea is that "a little inflation is good".  If you analyse EVERY aspect, EVERY argument that would be in favor of "a little inflation", you see that it contains a major economic misunderstanding, and that it has a mirror argument with "a little deflation".  But "a little inflation is good" is an unfounded dogma that is repeated so often, for which so many bogus after-the-fact arguments are given, that it is hard to see the evident falsehood of that claim.

"a little inflation is good" for the financial sector.  That's all.

There is also a lot of empirical evidence that people DO NOT POSTPONE buying articles because their price depreciates over time.

You will postpone production until there is demand, otherwise your output will sit in your warehouse, not in your distributor's
Either you buffer input or output you lose money, if you buffer neither you increase latency insert unknowns and lose contracts add to that the of capital underutilization. That is a lose-lose scenario for a producer. Multiply that across the supply chain and feel free to rage when the iphone you prepaid last year got delayed again.

Anyway the problem is that in a demand driven economy little innovation happens against an investment driven economy.
See the soviet-US comparison

Depreciation from obsolescence is not the same as monetary appreciation.
Iphone 4 depreciates against iphone 5 etc, latest iphone doesnot depreciate against the dollar, and similar other fast iterating products

If you need empirical data look no further than the bitcoin miners producers that trade in bitcoins, this forum is full of customer satisfaction stories

Yes, apple postponed the production of his first i-phone until there was demand for it.  Then they piled up a million of i-phone 2 in their warehouse.

Which is a HUGE part of the economy!!!

As a matter of fact Apple had supply chain delays for iPhone 5 in 2012 and it took beating for 2 Quarters

Thats my point, apple was allowed to forward thinking, because of investor friendly environment, if apple had waited for a demand to trigger production they would never make it. Now if iphone is of any actual practical use is another story

There is absolutely no indication that Apple could not do so in a deflationary environment.  Because exactly things like i-phones indicate that people do not postpone their acquisition, even if the same item gets much cheaper one year later.  The i-phone 4S got much cheaper one year after it got released, but people were standing in a queue to be able to buy it, the first day, at full price.  When the i-phone 5 got out, the same happened.  And the same happened when the i-phone 6 came out.

If people were going to postpone their demand because items become cheaper, then nobody would ever stand in a queue before an Apple shop the day when a new version of an i-phone comes out, wouldn't they ?

So, no, people do not postpone their demand because of mild deflation.  As such, in mild deflation, companies can still have ideas, bring out new products, generate (or not) demand for it, in exactly the same way as under mild inflation.

Under mild inflation, business have to pay higher interest on their loans than under mild deflation.  But "money doesn't get cheaper".  The price of money (the real interest rate) is determined by offer and demand.

For businesses, there is no real difference between an environment that is mildly inflationary or mildly deflationary.

It is a huge parasite on the economy, yes.  Their true added value is essentially zilch, and they can appropriate them a lot of production, through seigniorage that goes with monetary inflation.

It is.  You have the situation where you have an object A that you can acquire for X NOW or for X - Y LATER.  The anti-deflation proponent's claim is that if such a situation presents itself, people will postpone their acquisition.  You would be crazy to buy A now for X, if you can buy it next year for X - Y, no ?  That's the argument, isn't it ?

Well, empirical evidence shows that that is not true.  People queue to buy A at price X NOW, and they don't buy it a lot one year later at price X - Y.  Some people do, but most don't.


That is not the point.  And even that is not true.  For the i-phone, it may be the case.  But for personal computers, the "state of the art" latest machine has been dropping in price for decades.  My very first personal computer, I bought it beginning of the eighties for the (non-inflation corrected !) sum of about 6000 Euro (it weren't Euros back then).  My second personal computer was a Mac-plus, which I bought for 3000 Euro.
In 2000 I bought a PC for 1200 Euro.  I recently bought a good laptop for 800 Euro.

The currency itself. Economics is all about relativity.

You lose profit because the prices go down for whatever you produce or service out.

But you also lose expenses, because your raw materials, cost of labour, electricity, and wages of your workers go down.

And they all go down the same % point, so this relative decline makes you at status quo, and you didnt lost anything after all.

=========

And the same for the consumer, yes his wages go down, but the prices of the stuff around him also goes down, so its only an illusion that you lose money , when infact you didnt gain nor loose anything.

In fact since the competition is now tigher than evenr you get alot of quality stuff that never existed before in an inflationary-minimum wage based economy.

You also dont need a pension system in this world. Becaue you put 20$ away today and find yourself with 1m$ by the time you get old.

========

This completely eliminates the need for central bank & government leftist -marxist welfare bullshit, and makes the economy 999999999x more efficient.

Where is the story of sticky wages in this? The one main reason for loss of real output and increase in unemployment during an economic shock and it doesn't show up anywhere in your narrative.

It's never "the same % point" and salaries never drop as fast as they need to, not for the currently employed, so they lose their jobs.

Umm,  production requires credit if you are big business.  Without finance production would massively slow down.

In a mildly deflationary enviroment cost of borrowing is too expensive. People wont afford to buy big ticket things like houses or cars if they had to pay cash.

Yes. You need loans to move the money to the people with the opportunities, the ideas, the drive, the vision. Only in very rare cases do these people have money of their own.

Now with loans the important factor is the stability of the trend. Inflation or deflation that is constant for many years can be accounted for in loan agreements. However, shocks causing inflation or deflation to change can be disruptive, even ruining these people.

 

The argument for deflation has always been that the holders of cash should be able to claim a fixed fraction of economic output even if that output grows.

With a fixed number of Bitcoins each coin represents 1/21millionths of the whole economy and as the economy grows the holder of 1 Bitcoin still has claim to 1/21millionths of the larger economy. If a home is dropping in value (priced in bitcoin) then this just means it represents a smaller and smaller fraction of the total economy. So maybe it should fall in price in terms of Bitcoin. Same Bitcoin balance buys more.

Some think that's wrong.

This other side of the argument is that a holder of 1 Bitcoin should be able to buy a fixed amount of goods. A crate of apples for example. If the economy grows by 10% and the fraction of value of the total economy that the crate of apples represents falls 10% then so be it. He is still able to buy the crate with his Bitcoin. The economy as a whole requires more Bitcoin over time to account for the extra 10% for this stability in purchasing power to happen.

If one wants his own purchasing power to rise with the economy he should loan his money (and take risk) under an agreement that accounts for inflation, positive or negative. He should not expect to hoard his cash under a mattress and get more goods for them in the future.

In the end we can all agree that instability in Inflation/Deflation is bad. However, absolute inflation vs. zero inflation or deflation, even if stable, is really a choice between a fixed value for your unit of money in the future vs. a fixed fraction of economic output for your money as the economy grows.

You can observe Japan from 1990's to see the effect of a constant deflation.  Not terrible but not desirable either.  Constant inflation is preferable

buying a product 1year later has lower utility for the consumer that is reflected on the price no deflation play here

It is the point, the whole point!
State of the art Pc can exceed 10k euros, and it is going up up up through the decades, your needs follow a milder trend that in a price tag goes down. You no longer need state of the art.

Stability is not always expressed by a single point, it may well be a periodic set, or if you like a wave.

Would you prefer a measure that changes every time the extend it measures changes?
People are comfortable when the locality doesnot relay on global information.

Just because oil dropped by half, Russia fall into inflation, is that good for Russian economy? For Russia, the export of oil brings less income, the Ruble has become weaker, the import price rose, that's bad for economy

However, for a country that export daily consumption goods, a weak currency will stimulate the export thus make the economy stronger

So, from practical point of view, inflation and deflation can have totally different affect for two countries with different export/import profile. There are many factors more important than these small parameters, it is just an political claim for banks to print themselves some money

I was not going to reply to your posts any longer, but this made my cup of patience to overflow finally. Your turn out to be a hypocrite of even deeper dye than I previously thought.  You've been recently laying yourself out to prove that sheer speculation (in a narrow sense of buy-and-sell) does really create economic value to consumers, and now you dare say that the financial sector is a huge parasite on the economy and their true added value is essentially zilch?

There is no contradiction.  The financial sector is not just "speculation".  In fact, speculation is indeed useful. By financial sector, I mean, essentially the banking world that has access to freshly printed fiat money.  Speculation can be done by any person, and has a priori nothing to do with the financial sector.  Loaning money can also be done between private persons. 
Of course, there are justified financial services.  But most of the banking activity consists in obtaining fresh fiat money to speculate or to lend.  There's not much, or even no, added value in taking fresh money from the central bank at 0.1%, and lending it out for 2% to people wanting a mortgage.   

I have to say that I exaggerated: there is a very small fraction of the financial sector that does have value.  Professional speculation with customers' money is such an activity, for those customers having a lot of money, but who want to outsource their speculative decisions.

Obtaining credit doesn't mean that you need a huge financial sector.  After all, obtaining credit is a market, between those wanting to offer credit, and those wanting to obtain it.  In principle, it is sufficient to bring together both parties.  It is a bit like e-bay.  There is a business opportunity to bring together creditors and debtors, but it doesn't have to be as big as the banking sector.


I don't know where you get that.  In a mildly deflationary environment, nominal interests on loans are much lower than in a mildly inflationary environment.  That was my whole point.

What do you prefer ?
A $200 000 loan in a 2% inflationary environment at 5% interest, or a $200 000 loan in a 2% deflationary environment at 1% interest ?

THIS !!

In fact, this can be debated.  After all, if you would invest in a "total economy basket" (that is, a basket of shares that is an image of the actual economy), then your basket's value will grow with the economic growth.  You could think of such a basket as the most possibly hedged fund.  There is no lower risk.  Even a state bond has a higher risk, and it is considered in the financial world as the risk-less investment reference.

So whether you buy into that "total economy fund" or whether you simply have fixed supply, shouldn't alter anything.  At fixed supply, the deflation is (in the long run) equal to the economic growth.  If the economy grows with 2% a year, under fixed supply, you can expect a 2% rate deflation.  If the economy shrinks with 5%, you can expect, under fixed supply, an inflation of 5%.  This is assuming long term stability of the velocity of money.

Now, I don't see the economic utility of investing in a "total economy basket" because it expresses NO PREFERENCE.  Now, the value of speculation and investment resides exactly in the CHOICES you make: to support THIS business OVER that business, and hence send a signal to the market.  But to send a signal to "the whole of the economy" is equivalent to not sending a signal.

So what can you do ?  You can invest specifically.  Then you "add value" if you do so in a faster-growing sector, with higher return than the average growth.  But you can still do that in a deflationary environment, because investing in a faster-growing sector than the average economy will bring you MORE than the gain by deflation.

If average economic growth is 2% (and hence deflation is 2%) but a certain sector grows at 5% (has a return on investment of 5%), then it would still be beneficial to invest in that sector: you would win 3% in nominal terms (and hence 5% including inflation).  You would win over just hoarding.

The only thing is that deflation would evidently make you loose if you invested in sub-optimal sectors, which is less evident to see in an inflationary environment. 

So, in the end: in a deflationary environment, hoarding money gives you the average return on your value, in the same way as a useless "full basket" investment would do in a non-deflationary environment.  You can still win by investing in a faster-growing sector.  However, nobody can win in (over) investing in a lower-return sector, which is possible by a financial sector in an inflationary environment.  It is about the sole difference.

If we dont need a huge financial sector then why does it exist?  Obviously it came i to existence because demand is there.  Free market after all

Sorry what I meant is that.  If you borrow mortgage and your house falls in value.  When all payments made you lose money.

Also interest rates doesnt matter if you have no money anyways.  In defation you have high unemployment

Because of fiat inflation.  I'm convinced that 80% of the "useless" and very lucrative part of the financial sector resides in the inflation driven fiat currency.  The financial sector has the MONOPOLY in obtaining fresh fiat money from the CB, and hence obtains its seigniorage (indirectly).

In an inflationary situation, hoarding money is losing value.  So you are FORCED to put your money on a savings account, even to try to keep its value.  This forces you to give your money to a bank, not even to gain in value, but just trying to KEEP the value.  Now, that bank then gets A LOT OF MONEY at its disposition to do a lot of stuff with, like gambling, investing in doubtful things, and hence blowing bubbles.  Moreover those banks also get the fresh money from the central bank at lower rates than it writes out loans take a lot of value for nothing, but you are obliged to pass through them.  You can't borrow directly from the central bank as they can.  They have a privilege. 

THAT's why they exist. 

As I said, not entirely, because there ARE useful financial services, but not at the scale of the financial sector.  MOST of the financial sector exists because of fiat inflation --- which is why they are scared to death of deflation.

Makes you wonder...  ::)

They get reserves from Central Bank not money.  Your view of finance is incredibly simplistic.  I dont think you know how that industry functions

inflation is important for economy to grow.

Not if it doesnt enter into the economy.  Dollar actually became stronger against most major currencies in case you didnt notice

But isn't hoarding investing in oneself directly opposite to a total basket? Do both create the same economic environment regardless of inflation/deflation? or is your logic simply based on two negatives ?
Anyway the problem is not *your* wealth, but the economy as a whole. Not the ratios but the absolutes
As a final thought on deflation, Things tend to decay why not money?

It did but I would be surprised if the Dollar didn't go down against most real assets by the end of 2017.

Of course, but that is sufficient.  The reserves and the imposed fractional ratio determine how much money a bank can create.  You should maybe read the first chapters of the Treatise on Money by Keynes again ?

Simply said, if I'm bank A, and you're bank B, we can write loans to each other as much as we like, and those loans become created money.  If there's no legal limit, two banks can create an infinite amount of money, by lending to each other.  The reason being that the "debt certificate" that bank A holds of bank B, is considered an asset of bank A, and the "debt certificate" that bank B holds of bank A, is considered an asset of bank B.  As such, by lending themselves, say, each, $ 100 000.- they have created two times $100 000.- of assets one another.  Their balances are in check: they have each an "asset" (the other bank's debt) of $ 100 000.-, and they have each a debt of $ 100 000.- (as a bank account they opened for the other bank with $100 000.- on it).  They can even ask interest.  There's a cash flow due, and there's a cash flow coming in.

Now that they have their balances in check, and they have money (that is, the bank account in the other bank with $100 000 on it), they can lend it out to, say, someone needing a mortgage.  They then ask that person 3% interest on it.  If bank A lends out its freshly created $100 000,- to Joe, who wants to buy a house, by writing him a cheque on the other banks' account and then Joe has to give them $ 3000.- a year.

So on Monday, Bank A didn't have a dime.  On Tuesday, Banks A and B do their money-creating swap.  On Wednesday, bank A loans its money to Joe.  Now, bank A has an income of $3000.- a year.  Its balance is still in check.  It has no dime, but it has a debt to bank B of $ 100 000.- and it has a mortgage contract worth $100 000.- with Joe.  Its balance is in check.
Bank B will do the same.

On Thursday, the directors of bank A and B meet in a bar, and decide to start over next Monday....
As such, they generate each an income of about $ 3000.,- a week, as long as they find mortgage customers...

They can do the same with a mutual loan of $ 1000 000.- or even $ 1000 000 000.- or ....
But in reality, they can't because there's a legal limit: their reserves.  It was Keynes' (correct) argument to require a reserve and a reserve ratio by law, to avoid the "runaway" of banks creating money.

Suppose that the reserve ratio is 5%, and bank A and bank B manage to have $ 1000 000.- each as a reserve deposit.  That means that they can now play that game until they have about $ 20 000 000.- of customer bank accounts (of the other bank, say ;-) ) and lending out $ 20 000 000.-

They cannot "go party" with $ 20 000 000.- because they have to have their balances in check.  It is not that they can SPEND that money. But they can LOAN that money, and invest it and they don't need a high return on it.  If their reserve COSTS them, say, 1%, and they can obtain even 0.5% on the $ 20 000 000.- they work with, then they make sheer benefit even though they invest badly.

Indeed, the 1% on their reserve costs them only $ 10 000, and the 0.5% on the $ 20 000 000 brings them $100 0000 !

So IF you can obtain reserves, you can create money.  And if you can create money, you obtain the interest on it "for free".  You cannot spend the money itself, but you can spend the interest, which you do get for free.

When banks get into problems is when they screw up so badly that they LOSE money, and that they loose their $ 20 000 000.-

The trick of "pumping money" with banks is to use the reserve fraction ratio as a leverage on the interest: if you get $ 1000.- more reserves, you can play with 20 000 or so.  So you only need to generate a return on those 20 000 that is 20 times smaller than the cost of your 1000 in order to break even.  If you become greedy, and you start doing risky things with those 20 000, then you might be very rich, or you might be in deep shit if it goes wrong.  

"investing" for me, means "buying capital goods", means of production.  So if you hoard, you do not buy capital goods. You do not buy machines with the aim to produce.  If you were USING your own money to buy machines for a production you're planning, then you would indeed be investing in yourself, and "gamble" that you are a better business than a business out there in which you could have invested.


I'm assuming steady state, and long term constant money velocity, which means that the economic growth is constant, that inflation or deflation is constant.  Now, if the velocity of money is constant, it also means that the aggregate demand for "store of value" is constant: that people "hoard" always the same amount.  

So your hoarding is not ADDITIONAL to other hoarding: we consider that the total amount of hoarding is already stabilized.  As such, if you hoard more, the hypothesis is that some else hoards less, because we assume steady state.

So the difference between both ("investing in the total basket" and "hoarding") would simply come down to a different constant value of the velocity of money.  If people hoard more, the velocity is lower.  If people "invest more" the velocity would be somewhat higher.

You could also see it differently: if people hoard more, it is as if the total amount of money is smaller.  And if people invest more, it is as if the total amount of money were higher.  But as long as people do, on average, the SAME thing, that amount won't CHANGE.

Of course, in a deflationary model, you can assume that it is more interesting to hoard than in an inflationary model.  So the amount of hoarding will probably be higher in a deflationary model than in an inflationary model.  But once things have stabilized (that is, once the amount of hoarding has adapted to the amount of inflation or deflation), and once hence the velocity of money has adapted, there is no difference in fact between both.

Of course, on the short term, there will be fluctuations.  There will be short term changes in inflation and deflation, there will be short term changes in hoarding versus investing, there will be short term fluctuations in economic growth.

We're trying to look at the long term picture to see the long term influences of these elements, and for that, it is better to assume the simplistic steady state as a basis to start from.  Because the claim "inflation is good"  or "deflation is a disaster" is a general statement, which, if true, would be easily demonstrated in steady state models.  It doesn't.  In fact, economy is largely indifferent to it.

So we have essentially 2 models we look at:

A) inflationary model:
inflation = 2%
velocity = 3  (people don't hoard much)
real interest = 4%
economic growth = 4%

B) deflationary model:
inflation = -2%
velocity = 2 (see, the average hoarding is higher here)
real interest = 4%
economic growth = 4%

(note that in model B, we are not in "fixed supply" because the economic growth is still above the deflation rate, so there is still money creation, but less so than in A)

Of course, in B, prices will be 30% lower than in A because of the lower velocity.

A transition from A to B might be a scary ride !  But in steady state A or in steady state B, economically, things are essentially equivalent (except for the financial sector who lost all the "hoarders").

I think this explanation is good, and I hope I don't jump in too early (for the other people in the discussion), with some effects of this.

Assuming, as denofelis explained, that for the economy at large, there is no difference, we can still draw some interesting conclusions:

In a deflationary environment, people would have larger savings in money. That means, it would be easier for everyone to buy a big ticket item out of cash, thus feeling richer, and in fact being richer. Of course, everyone can not do it at the same time, else the savings will go down and the balance is off.

In a deflationary environment, there will not be that large redistribution of value from the general public to the banks (really the bank persons) via the interest on loans.

The transitions between deflationary and inflationary environment is important to the short sighted politicians. The transition to a inflationary environment is good for the politicians. Therefore there is small hope achieving deflation with voting. On the other hand, going further in the direction of inflation, thus enforcing the current system, is possible.

What worries me in this assesment is the assumption of steady growth.
The steady state in the deflationary model may be a dynamically unstable state, and at the first shock revert to a more stable dynamic but with negative growth.
What you say is that lower money velocity is counterbalanced only by the prices. but there is no guarrantie them economy will choose this path you may well witness price increases as producers factor in and shift over to customers various risks, and lower output instead that translates to unemployment and eventually a demographic readjustment, either by social exclusion or immigration

This so wrong on so many levels..  You just dont understand banking

deflation is the whole purpose of the economy.
when we manage to improve production supply rises and prices go down and so everyone can buy more things.
companies are still making the same amount of money because the higher sales volume makes up for the lower price and so wages stay the same.

what the government is doing today has nothing to do with improving economics, they need inflation to inflate their debts away.

they don't care that they are ruining the capital structure of the economy, wasting resources on bad investments and ruining production for everyone causing real prices to rise.

To explore some concepts, it is often useful to keep other things static, or in this case, steady.

Economic growth is essentially unmeasurable, but we can easily approximate it by looking at the volume of consumer goods available, or even better, the value (but since value is also fundamentally unmeasurable, that introduces more uncertainty).

Growth is not given. It can be negative, as nature can disrupt the production, kill off lots of people in a pandemic, and humans can start wars (which kills soldiers that could be workers, consume capital that could otherwise be used in production, in addition to the direct distruction of capital and consumer goods). Nature can also randomly increase production, for instance a rift can expose new sources of metals.

The most important parameters for growth is the population, and the savings rate. That is because the savings is the source of investments. Direct investment contra investment through lending, it does not matter, because if someone takes up a loan to invest, the money has to come from someone else who saved and lent out. With investments come productivity, note that economic freedom is necessary, confiscation through taxes and planned investments never leads to optimal capital use. Central planning reduces wealth relative to what could be achieved in the free market, and central planning can also reduce wealth absolutely, that is, produce negative growth, as we see happening before our eyes in Venezuela. There is also the cultural tendency to save, that first started in europe. If there is no saving in some community, prosperity can never occur. Then there is the willingness to take risks in investments, which can be hampered for a generation after a socialistic implosion, like we see in Russia.

In the days of Adam Smith, the natural growth under peace would amount to about a doubling of wealth per generation.

It is necessary to underscore that increase in wealth is not the same as increase in consumption of natural resources or destruction of pristine nature. We are talking about value, which is subjective and decided by each individual as preference for one thing over another. We can easily see that in the products that have a high value but need only a small amount of material to make.

Eventually. wealth will expose itself as longer life, healthy life, freedom, the opportunity to explore the world and yourself and make a satisfying life, for everybody.

There are simplifications, but I essentially write the first few chapters of Keynes' Treatise on Money.  So maybe he didn't understand banking either.

Because the only way to have continuous mild deflation with fixed supply is when there is steady growth of course.
In other words, if there is no economic growth, and there is a steady supply of money, then there is no reason to assume there will be deflation either (at least in the long term - short term fluctuations in the velocity of money - that is in the demand of store of value in money - can always induce temporary inflation or deflation).


Yes, because prices are set in markets.  Prices are the response variable, always.  Prices that are set freely in markets are never "a priori" variables. 


If they lower production, prices will rise.

Amen !

Not modern banking. 

http://www.bankofengland.co.uk/publications/Pages/quarterlybulletin/2014/qb14q1.aspx

So you agree that unemployment and hoarding has adverse effects on growth?

Trully free market pays a price of anarchy that is larger than the price of stability of Trully central planing. The reality however is that other factors like Privilege dominate the economic parameters in both cases. A computerized planning may be the endgame as we will be forced to seek higher market efficienies

In a dynamic system response variables become also input variables because of feedback. Experience in greece shows that removing money supply sees price increase, and negative growth, high unemployment. Even if this is an equilibrium its not one you would like to be in.

"...There is not a uiversal agreement on what money is. ..."
So Economics are kinda like Theology ;). Some would argue though that it is Theology

No. Unemployment is not the result of the free market, it is solely a result of red tape to disallow work, and government intrusion into markets. With free markets, it is just as easy to sell your work (get a job) as it is to sell tomatoes, that is, you get a better price for a better product, but you will be able to sell it all. Young people of today may not believe this, but it has been the case in the past. That is how students could travel, split your summer vacation in two, work in one half, travel in the other. There was never a question of how to find work. This was around here (unspecified) in the seventies.

We don't want artificial stability.  We want organic, continuous change to adapt to nature and the preferences of the people in the market. We don't want to adapt to the highflying ideas of the elite, we want freedom. That is also what creates the most value, and that is by definition. If someone decides for you, you get less value, according to you.

Hoarding is not negative. Hoarding is the result of speculation on part of one individual that some ware will be more scarce and valuable in the future.  Hoarding makes sure that the stuff is available at the time of need, distributed to those in most want of it through the higher price. Hoarding of money is specially not negative, neither in the now or in the future, because it means that the hoarder in fact consumes less in the now, making goods, including investment goods,  available for a lower price to others in the now.

I wonder how you could come to infer these things. Hoarding (of things with intrinsic value) is investment. If there is negative growth in an environment with sound money and free markets, I want that, because that is the result of the individual preferences. Everyone has to decide how to split is time between work and other activities. If there is a swing toward leasure in the aggregate, negative growth will ensue, so what?

Hoarding postpones consumption. This, taken by itself, isn't good, is it? Then you come to say that hoarding is akin to speculation, i.e. you hoard something so that you could sell it later at a higher price to those who most want it. That I can't understand, since it is you, the hoarder, who contributes greatly to this need in the first place by stashing something away...

You are confused, probably by the negative connotations of the words speculation and hoarding. So let me use other words.

Setting usable stuff aside, because your foresight tells you that the stuff will be more needed in the future, is investment. It carries a risk (the future could unfold otherwise) and it costs money (the price of the stuff). If you do this investment, you reserve some of the stuff in the now, when the need is not so vital, to release it in the future, when it is scarce. This way you create value. At the same time, the price of the stuff now will increase as a result of your demand, directing more investments into producing the stuff.

Consumption is not good in itself, that depends on the preferences of the consumers, that is, everybody. Using central planning, confiscation and force to extend consumption now, is destruction of value. I can not understand why people with all senses in behold can echo the nonsense from the statists.

I don't think that by this you can create value. Actually, you create deficit and profit by this later...


Why consumption is not good by itself? It may not be good but that's what would depend... All in all, why would you produce anything if there would be no consumption for your goods?

Because the stuff is more valueable in the future. The value in the future must of course match the cost, the interest and the risk - standard investment accounting.

In that case I would not produce it. That is the point. The consumers decide, and you need to consume to live, so something will always need to be produced. Why is this a problem?

Hoarding (savings) & investment are 2 different things.

WRT Investments your capital is at use.  Yes it could be good or bad investments but doesn't matter, the capital is being used

WRT Savings, the capital is just sitting there, frozen.  Might was well consider it not part of economy

There is nothing systemically different between now & 70's.  Same govt, same Central Bank.  If there is a different economic state, then it has nothing to do with the system.  Has to do with other forces

A little bit of inflation is good for economic growth but, when prices begin to fall after an economic downturn, deflation may set in causing an even deeper and more severe crisis.

Total confusion. Investment is buying capital goods for the purpose of making money. It is not only machinery, it can be stuff like oil or grain. If you save in a commodity, not money, that is investment.

Saving in money, on the other hand, is not investment, it is just saving value for the future. The special thing with saving in money, is that you do not pivot the production structure any specific way. Your demand for money just marginally increases the value of money. Also with lending out your money, you don't affect the market, you invest in what the general market finds most profitable, and you marginally decrease the interest rate.

Just as the consumers affect what should be produced, the money savers direct the investment level. No third party can know better what the level of investment should be.

The difference, at least around here, is that it is easier to get some form of social support, there is much more (and increasing) red tape, more corporate welfare, and so called seed funds that require that you have friends in high places when you want to start a business. The tax is somewhere between your neck and your ears, meaning your new business don't just have to be more profitable than doing nothing, it has to be brilliantly better.

So, at first you deprive someone of something valuable, then give it back when it becomes more valuable through deficit and call this value creation? I for one cannot call this process as value creation. You, of course, may think different...

The problem is you saying that consumption is not good per se. If you don't produce (i.e. your consumers don't consume), you just don't get richer (and other people through your business activities as well). In real life, though, you would actually become poorer (cost of capital and all the things you said hereto on the matter)...

You nailed it, and I can not argue a non argument...

Consumption is good if the consumer thinks it is good. If he rather wants to save, that is good too. What is not good, is when someone steals the savings and invest it, allegedly for the benefit of the victim.

So you agree that consumption as such is not bad, i.e. it is good? If you agree to this, would you as well agree to a statement that anything that contributes to the increase of aggregate wealth available to a society as whole is good too? I mean anything which is considered ethical in this society and not against human nature indeed...

No, only that which the consumer requires and expresses as demand on the market.

That said, you agree that not all that adds up to the total wealth of a society is good, is it? You simply can't have some part of consumption being allegedly bad, and, at the same time, agree that all increase in the aggregate wealth of a society being good nevertheless...

What is your answer to such a dilemma?

Look, I don't know what you are up to, lure me into a socialistic trap perhaps. There is no one that can allege, ethically, that someting is bad or good, except the traders themselves. If you don't like something, don't buy it, argue againts it in the newspapers, you can even associate with a bunch of people to boycott it, just don't use violence or hire some violent people through the voting system to use violence against the traders. That's all.

Socialistic trap?! It was actually a logic trap to show you that your point just doesn't stand. You see, your arguments may be incomprehensible, or even bizzare, but they should at least be logically consistent. And now you begin talking sheer nonsense about violence, traders and what not, instead of dealing directly with rather a simple issue...

In fact, it was you who first said that something (namely, hoarding) is not negative

Ok back to hoarding. Why do you think coffe is available all year round, even if coffee is harvested only once a year? Why do you think skis are available in ample supply just when you need them in the winter vacation, even if they are produced all year round? Why do you think a flight is available to you just when you need to go to that conference, even if it takes years to build an aeroplane, and the owner could not possibly know your plans? Why do you think someone just gives you an umbrella when you hit the street in New York, without you having ordered it in advance?

It is all hoarding. You want to glue some high flying ehics to it, but there isn't.

I think you are misusing the term. I simply can't grasp how building an aircraft can have anything to do with hoarding. Hoarding, as per Wiki, "occurs due to individuals obtaining and holding assets thought to be undervalued and build up reserves of it in hopes to profit or save money later"...

Also note that I don't say that reaching for profit is bad per se

Well everything mentioned fit into that definition. Someone has to own the plane, also while it is being built. Just lose the simplistic moralism related to the word hoarding, and you will be able to see.

Hoarding
Just because a strategy may be good for an individual that doesnt neccessary mean that it will be good when applied by everyone.
Bringing arguments that this or that is good because someone does profit is irrelevant, if that cannot be generalized.
Ie It is good for a rabbit to eat grass, it is good for a rabbit to survive wolves, if every rabbit did that though there soon be no rabbits left
Unemployment
How can free market be irrelevant, free market is an economic system, employment is a variable in this system! ?!? Output reduction leads to unemployment, unless you expect bussinesses to keep staff idling
Free market
Freedom in free market is an illusion, a rabbit is free to get eaten by the wolf. Central planning does not need wolves it gets by with birth control,

The plane doesn't fit into this definition at all. While it is being built, it is not a plane yet, since it can't fly. And even if it could, it won't be allowed until it is completely finished. I hope at least this won't be a matter of dispute. To say that an aircraft building company hoards details to sell them later as a plane at higher price seems to be completely divorced from reality...

Why do you keep saying that I'm trying to attach some form of morality to it?

I don't want to play.

This is the fundamental flaw in collectivist thinking.  If a strategy is good for an individual, it is good when applied to every one because every one is an individual.  If it isn't good for every one, then it wasn't good for an individual either.

Typical example: having a lot of children.  Is that a good or a bad thing for an individual ?  Is it good or bad that I have 10 children ?  If my aim is Darwinistic, and I want to get as much of my genetic material in the next generation, what should I do ?  Breed like rabbits, have one kid, have no kids ?

You may say: if YOU have 10 children, that might be Darwinistically good for YOU, but if EVERYONE has 10 children, the world will go down in over population.

No.  In fact, I should have as many children as I can economically support efficiently.  If I have enough economic means to educate well, 5 children, that's what I should do.  If I make less children, I will diminish my genetic presence in the next generation, and if I make more of them, they will be economically weaker and may not survive the next round.  If I optimize the number of children, and my economic value so that each of them reaches a good level to start in live, then that's my best solution.

And now, it turns out that if everybody would do that, that is, optimise its number of kids as a function of his own economic power, then that that would also be globally the best solution.  Poor people wouldn't make kids because they would starve any ways.  Rich people would have a lot of children.  In the end, you would have an economically better balanced next generation.

But that doesn't happen, because there are obliged economic transfers from the rich to the poor, who allow poor to breed more poverty. 

So even in the most "collectivist" a priori questions, you see that if everybody really optimises for one-self, everybody optimizes for one-self.  In fact, that's nothing more than game theory.

I think the misunderstanding between both of you comes from two different views of hoarding.

The first view on hoarding is that you store stuff when it is cheap (that is, when there is a lot of offer, and not much demand), and you sell when it is expensive (that is, when there isn't much offer, and there's a lot of demand).

This is the "good" kind of speculation, that softens scarcity.  It is the chipmunk that puts nuts aside in summer for the hard season.  When nuts are abundantly available, they don't consume everything, but they put aside some.  When there are no more nuts available, they live off their hoarded savings.

Hoarding that way increases prices when things are cheap, and decreases prices when things are expensive, as such stabilising price.  The benefit you make on hoarding is exactly equal to the price difference.  Hoarding stops being interesting when price is totally stabilised and there is no "cheap" and "expensive" season any more.

But the other view of hoarding is "pump and dump" market manipulation.  In an a priori constant price market without temporary preferences ("summers" and "winters" for nuts), you might try to manipulate the market by storing a lot of stuff, making buying contracts at "normal price", by your hoarding, you increase the market price, and when the stuff that became scarce because of you having bought half of the available production, you make sales contracts at higher prices, and then dump everything on the market.

The point is of course that in order to do so, you need to be able to buy a significant fraction of the market.

So "pump and dump" can only happen with very significant sole players on the market, or by a cartel.  However, the normal hoarding behaviour can be done by many many small independent hoarders.

Many small, individual hoarders cannot do a pump and dump, because the whole trick is to be perfectly synchronized in buying "just before" the scarcity, and selling "just before" everything floods the market.  If you are slightly out of sync in a pump and dump, you loose instead of gaining.

Congratulations, you have now linked genetic diversity with wealth, and you are on your way to devolution. And before you tell me thats not the case, take a look at all the noble families of europe in middle ages, or modern day Luxembourg.
But anyway in reality rich people breed less than poor people why do you think that happens?

Greedy algorithm may be the best distributed algo and most efficient computationaly, but will not give you the global optimal basic game theory

Hoarding is an one way transfer from the economy to your hoard, Saving is saving for the bad days, Cornering the market is part of the game. 3 diffrent things

Because otherwise they wouldn't remain rich ?

Poverty has the tendency to propagate.  It breeds, until it dies of poverty.  Malthus.


Nash equilibrium.  If your "global optimal" solution isn't a Nash equilibrium, it won't last.
You reach a Nash equilibrium when everybody applies a strategy, such that no-one can gain anything by changing only his own strategy.

This is another argument why "a strategy that is good for an individual" is also a strategy that is good for everybody.  Because otherwise it wouldn't be a Nash equilibrium.

It is the problem with all "moralising" utopia.  "We should all help one another".  It simply isn't a Nash equilibrium: someone can win in that game, by having all others help each other (him included) and not helping others himself (change in just his own strategy).
 

I would say: hoarding can be 2 things: a form of saving, or a form of cornering a market.

That is not what game theory says.  Nash equilibrium does not mean "good for everybody".

Game theory 101.  Prisoners dilemma, Nash equilibrium is not good for both prisoners.  Its the move each expected to make knowing all possible outcomes

Its not that easy to corner the market.  Look up Silver Thursday.  BTW its illegal to hoard if your intention is to corner the market

If your solution is not a Nash equilibrium, it will simply not be adopted in a non-cooperative game.  So even though it might be Pareto-optimal, it won't work.  As such, the ONLY solutions you should consider, are Nash equilibria, simply because the others are unstable and will not be adopted, or remain adopted.

The prisoners dilemma is indeed the best illustration of that.  The point is that the optimal solution will not be adopted, simply because each individual can improve his situation by changing strategy.  As such, the only Nash equilibrium is not the optimal solution, but it is the only stable solution.

It is the same reason why cartels can't last.

That's correct, but the fundamental problem with laws that forbid INTENTIONS and not acts, are that intentions are unfathomable.

BTW.  There was a prisoners dilemma experiment w real prisoners and the results show majoriry of prisoners dont snitch each other. IOW not NE

"We should all help each other" is called human empathy.  Its neither moralising nor a game.  Happens all the time because thats how humans are

Yeah  ;D

The point with the mathematical prisoners dilemma is that it is very abstract.  It is as if the ONLY cost/reward is years of prison.  In reality there's a lot more that plays: reputation, revenge, IOU, agreements, ...  Because, if you don't know the other person's decision, you run the risk that the other guy didn't betray you, and that you betrayed him.  If he gets free, or he has friends outside, you might be worse off outside than inside the prison !  So the REAL cost/reward structure in a real prisoners dilemma is much more complicated than in the abstract game.

Empathy is a phenomenon whereby you experience good or bad sensations as a function of what you perceive that SPECIFIC OTHER persons experience.  Empathy is always limited to a small circle of persons (family, friends), and is a phenomenon that can happen or not.

If empathy were universal, no police, no prisons, no laws would be necessary.  After all, each of us would feel much better, knowing that other people would feel better by his actions.  That's obviously not the case.  We would all sit together around the camp fire and sing Youmbala.

Anything dealing w humans are complex.  You could use math to explain stuff but easier to use sociology if you are talking about society

Being universal just means everyone has same experience.  Doesn't mean  Competition or conflict will dissapear.  Quit making such black and white arguments.

I'm sorry but YOUR hypothesis was universal empathy.  If you don't have universal empathy, then any non- nash equilibrium will not be stable (that's exactly the idea of a Nash equilibrium: that you do not NEED total cooperation for it to be stable).

A Nash equilibrium is such, that, from the POV of a single individual, there is no incentive to change strategy.  That is, if a single individual changed strategy, and all the others kept their way of doing (the Nash equilibrium), the single individual would lose.  So he won't change strategy.

So in order for a situation to be stable and NOT be a Nash equilibrium, it means that some people would win by changing strategy, but they WON'T because of "empathy".  They would systematically take decisions at their own loss, for the sake of keeping the global solution.  So in order for this situation to remain stable, it would be absolutely necessary that random people suffer from universal empathy.

In other words, in order for your claim to be true (that is, there are stable optimal solutions which are not Nash equilibria), you need to make the hypothesis that random people do suffer from universal empathy.

So no social construction can be stable without being a Nash equilibrium.  However, it will be a Nash equilibrium with a very complex and sophisticated cost function, which will include all of human forms of satisfaction and dissatisfaction, including empathy.  It won't be a "bookkeepers" cost function, with just monetary gain or something.  So it may SEEM that certain situations are stable and nevertheless not a Nash equilibrium, because we don't understand the real cost function.  That's exactly what happened with the real-world prisoners dilemma.  We thought that the cost function was a naive "years of prison", while there's much more that enters it.  In fact, it is essentially unfathomable.  We're back to human action.

I can't follow what you are talking about.

I didn't state any hypothesis.  But you are misapplying game theory.  Game theory doesn't say "a strategy that is good for the individual is good for everybody".  It doesn't say anything is stable or not

You can't say "no social construction can be stable without a Nash Equilibrium".  That makes no sense and not what Nash equilibrium attempts to predict. NE is making a matrix of all players and possible strategies and predicting the most probable move or the Nash equilibria.

It's like saying there can be no suffering in a bell curve because 68% of income fall within one standard deviation.  This statement is true but has no common sense

Then I think that you didn't understand the meaning of a Nash equilibrium.  The hypothesis set forward in game theory is that we have non-cooperative individuals who try to optimize their own gain in a rational way each independently, and the question is: what are stable configurations of strategies in such a case.  That is to say: what strategies can be applied, so that no individual has something to gain by NOT adopting it.  Those sets of strategies are then stable against the postulated desire of every individual to rationally improve his situation given his environment.  That's what a Nash equilibrium is.

Any proposed set of strategies that is hence not a Nash equilibrium, means that some individuals would have personal gain if they didn't follow it.  As such it is not stable: there's a serious probability that said individual will NOT adopt the prescribed strategy, or will change from the prescribed strategy to another one when he realises that that is in his personal advantage.

Even Jesus realized the Nash equilibrium :)


Indeed, the situation: "you can bring a bottle of wine, or a bottle of water, and we will drink the mixture", has a single Nash equilibrium: we all bring water and we drink it !

Although it would maybe have been better that everybody brought wine, and we drank wine, that's the UNSTABLE situation, because indeed, everybody makes the rational decision, that whatever the others bring, if you add a bottle of water instead of adding a bottle of wine, what you will drink in the end will not be very different, and what you will pay (for a bottle of wine, or a bottle of water) will be quite different.  So, whatever the others decide to do, you will be better off bringing water than bringing wine.

Most naive social engineering is based upon not realizing that non-Nash strategies are not stable.  The usual reaction to the discovery of this evident truth is then to be outraged by so much egoism :)

No i understand it.  I took a class at Yale.  We had to make those matrixes.

1st there is not a single nash equlibrium (not to mention that it may not even be a single point but a closed trajectory in the solution space) It is highly sensitive to the initial parameters, one could at least  set the initial parameters so (Rig the game) so that players eventually gravitate to the optimum eq.

however in central planning choice is striped from the players (not freedom) so nash equlibrium is irrelevant as there is no game and only the computational tractability of calculating the global oprimal is the problem. When that is no longer an issue, there is no point in trying to find a solution using a computationaly cheap distributed algo as in a game.

As we move to more accessible market parameters ie public transactions, public performance records, and higher computational power wtr local knowledge and low cpu power of the past. combined with the necessity of higher efficiency. I see/predict that free market with all its problems will be abandoned in the end

This is highly unlikely since you can't effectively predict human behavior which forms the basis for taking economic decisions by individuals on the micro-scale. As long as they are free in their actions, indeed. This is where central planning would ultimately fail...