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Author Topic: Deflation and Bitcoin, the last word on this forum  (Read 128509 times)
steelhouse
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September 13, 2011, 09:44:04 AM
 #241

"If you think deflation is just the devil, then fine, don't use bitcoin, just watch, you'll see soon enough whether it causes the bitcoin economy to stall, and you'll be in the position to gloat or eat your words. If deflation doesn't bother you then forget about it and continue living your life and spending your bitcoin."

I think it should be debated for alternative cryptocurrencies.  Did the recent price drop because of deflation?  Definitely not bitcoin is presently experiencing 30% inflation.  But, I really don't like this thread because the mass media has stuffed down the public's throat a complete an utter lie.  Deflation has no effect on an economy and if anything it is generally good because it helps the savers retain value of their savings.

The lie is told to protect lawyers, bankers, and educational elite to allow them to spend other peoples money.
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September 13, 2011, 02:47:08 PM
 #242

Deflation has no effect on an economy and if anything it is generally good because it helps the savers retain value of their savings.

Please, read my previous example and tell me where I'm wrong.
Deflation discourages investment (real capital accumulation) and that is definitely bad for the economy.
Of course, my example assumes an economy with just one currency, which will never be the case for bitcoin. I don't think deflation will destroy bitcoin, but I don't like the deflation is innocuous/good dogma shared by many people here.
As someone pointed out in a thread called "about hoarding", deflation makes bitcoin less suitable for commerce. Having alternative mediums of exchange, it will make the currency drop in value, which will eliminate the deflation. Deflation will not destroy bitcoin, but it will prevent it from having a healthy financial market.
Remember that lending you're also saving. There's no need for hoarding to save.
And please don't answer me with the flaws of inflation because I don't advocate for it and I'm with Hayek in the fight of the century. Just in case, I'm not keynesian!!!

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September 13, 2011, 05:05:55 PM
 #243

Price instability is a major problem. But I think we're talking about consistently low and predictable rates of inflation or deflation (2% either way).

No economist will deny that price inflation encourages spending and lending while price deflation encourages receiving and savings. If I am a merchant, I will always prefer to receive a deflating currency. But if I am a consumer, I will always prefer to pay with inflating currency. Bad money drives out good money. These actors play out in the same economy. So, if an extant industry sees sales decreasing, it would prefer to operate using devalued currency in order to gain customers paying with stronger currency.

The arguments that no one will lend bitcoins to start ups is a non-issue at this point. Dollars won't die tomorrow even if the euro does.

I think we're going through the phases very nicely. Right now, we are making bitcoins liquid. All the economic growth is related to exchanging bitcoins with other currency and making it easier to use and transact. I believe the next step will be growth of merchants, who should appreciate receiving payment in a strong, deflating currency and that value-add should counter the lack of customer base. With merchants will come more customers. This cycle should be expected to continue until saturation and with it price stability.

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September 15, 2011, 03:57:52 AM
 #244

Deflation has no effect on an economy and if anything it is generally good because it helps the savers retain value of their savings.

Please, read my previous example and tell me where I'm wrong.
Deflation discourages investment (real capital accumulation) and that is definitely bad for the economy.
Of course, my example assumes an economy with just one currency, which will never be the case for bitcoin. I don't think deflation will destroy bitcoin, but I don't like the deflation is innocuous/good dogma shared by many people here.
As someone pointed out in a thread called "about hoarding", deflation makes bitcoin less suitable for commerce. Having alternative mediums of exchange, it will make the currency drop in value, which will eliminate the deflation. Deflation will not destroy bitcoin, but it will prevent it from having a healthy financial market.
Remember that lending you're also saving. There's no need for hoarding to save.
And please don't answer me with the flaws of inflation because I don't advocate for it and I'm with Hayek in the fight of the century. Just in case, I'm not keynesian!!!

"So if the lender knows the inflation rate, he should (and will if he can) ask the real interest rate plus the inflation rate.
With deflation, he's not going to ask the the real interest rate less the deflation rate, he will get at least the lower of the two. If real capital yields go below the deflation rate, no lending at all would happen. Nothing. Lenders would just prefer to keep earning from deflation rather than investing in any real capital, even if it is profitable in real terms.
In this case there's no real investment out there that outperforms hoarding, so rational investors should not lend.
But when the deflation rate is lower than the capital yields, the problem is still there:
Some business that are profitable in real terms will turn out to be insolvent in a deflationary scenario, because financial costs are in nominal terms and your income and collateral are being devalued nominally."

2. I still think deflation makes borrowing to invest less desirable.
Say we have a potential secure investment that yields 5% of its value annually and interest rates are at 5%.
Our baker starts his bakery (and discounting its own wage and other costs) profits a 5% of the investment that goes to pay interest. After twenty years, the baker sells his bakery at the same price and pays back the full loan.
With stable prices, the investment covers its financial costs and therefore is economically viable.
With deflation, you also have to cover the gains of money from deflation to get the loan.
Say we have 5% annual deflation.
That same investment won't get the loan.
Producing exactly the same and selling the products at lower price each day, the baker can lower his wage to compensate deflation and will buy its supplies at a lower price, but he cannot lower the interest. Even if the loan is made in a way that the monthly payment of interest for the whole period takes deflation into account, the borrower will not be able to pay the loan after that period.
We have assumed a constant revenue of 5% and assuming there's no changes in the competition, there's no reason to expect it to go down.
But the nominal revenue has decreased. What has happened is that the capital (the bakery) has devalued. In our case to 0.95^20 = 0.358485922 % of its original price.

The business should have grown at a 5% rate too to compensate deflation. The interest paid monthly could be nominally constant in this case. Only the very best investments will get funded with deflation.


Where you are wrong: You don't consider hoarding and savings as an investment too.

So say you have an economy with 3% deflation?  Do you still want to buy things?  As long as you want to buy things there is an economy!  So someone has an idea they can either offer an interest rate above the 3% deflation or find shareholders. A 1% loan is really a 4% return, 1% for the loan and 3% for the deflation.   The reality is there would be no debt anywhere in the economy, which is good for the economy.

Many businesses hold debt, not because they need the money, but they want to hedge against inflation.  They can deduct the interest from taxes.  Thus rather than repay debt, they extend their debt so they don't have to maintain as much cash.

2. Where do you think money will be optimally invested by a banker giving loans to business or by a stockholder buying equity in a firm?

Since 1802, the stock market has returned $600,000 after inflation for every dollar invested.  Bonds have returned about $1000.  However, cash in a bank account has return nothing and is presently earning negative.  Yes, there would be far less loans, but the businesses don't deserve them and bankers don't deserve to receive the interest off them.  They earn money by using other peoples money at low interest and making loans at higher rates to earn a spread.  I don't have the numbers but if you do the math it will show as a disaster to people who put deposits in banks.  It would be much better to have a deflationary currency it allows savers to earn yield on their savings without using banks.  Thus, when the 85 year old senior citizen wakes up one day they won't see their money gone, stolen by the ravages of inflation.




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September 15, 2011, 06:50:00 AM
 #245

Where you are wrong: You don't consider hoarding and savings as an investment too.

Savings can be investments or not. But if you save by hoarding, that's not an investment.

So say you have an economy with 3% deflation?  Do you still want to buy things?  As long as you want to buy things there is an economy! 

I'm not saying that commerce will completely stop, just that investments would be reduced. Investments would stop if the deflation becomes higher than the interest rate.

So someone has an idea they can either offer an interest rate above the 3% deflation or find shareholders. A 1% loan is really a 4% return, 1% for the loan and 3% for the deflation. 

Exactly, that's what I'm saying. Investments need to outperform interest + deflation, which is harder than only outperforming interest.

The reality is there would be no debt anywhere in the economy, which is good for the economy.

Are you serious? Having no debts at all (having no financial market) is good for the economy?

Many businesses hold debt, not because they need the money, but they want to hedge against inflation.  They can deduct the interest from taxes.  Thus rather than repay debt, they extend their debt so they don't have to maintain as much cash.

I'm not advocating for tax measures that encourage people to get indebted. This seems wrong to me.

2. Where do you think money will be optimally invested by a banker giving loans to business or by a stockholder buying equity in a firm?

They're supposed to be equally profitable.

Since 1802, the stock market has returned $600,000 after inflation for every dollar invested.

209 years to multiply your investment for 600,000 ?
Let's find the approximate interest..

1.0658 ^ 209 = 608449.62

So it's approximately a 6.58% interest rate. Are dividends that high? The stock market is probably a bubble.

Bonds have returned about $1000.  However, cash in a bank account has return nothing and is presently earning negative.  Yes, there would be far less loans, but the businesses don't deserve them and bankers don't deserve to receive the interest off them.  They earn money by using other peoples money at low interest and making loans at higher rates to earn a spread.  I don't have the numbers but if you do the math it will show as a disaster to people who put deposits in banks.

True. However, you have to think about why interest rates are low at the same time there's inflation. That would not happen with an inflationary chain currency because the money is not loaned into existence (or created through monetizing debt). When you do that, the investors that get the inflation loans won't bid in the real financial market, resulting in less demand for the real savings. The inflation funds are confused with savings funds and the interest rate goes down.
On the other hand, if inflation were predictable, constant, and put in the hands of miners (that provide a valuable service), the inflation would be taken into account in nominal interest rates as "inflation premium". Because people can dodge inflation losses by investing in real capital and the borrower and lender know it.
Inflation should increase the interest rate, it doesn't today because of the way it is created.
But I don't advocate for inflation. I don't want to rise nominal interest, I want to lower real interest in a sustainable way (not exponentially growing debt nor inflation).

It would be much better to have a deflationary currency it allows savers to earn yield on their savings without using banks.  Thus, when the 85 year old senior citizen wakes up one day they don't see their money gone, stolen by the ravages of inflation.

With a deflationary currency, the old senior would have multiplied his savings by 1.03 ^ 60 = 5.8916031 in 60 years only by keeping them under the bed. Assuming that a 3% deflation is sustainable for 60 years which is not. Deflation is either caused by economic cycles or growth. And deflation destroys growth until the deflation itself disappears.
But my question is, what is the old man doing for the rest of society to deserve that return?
How are we better off by him removing the medium of exchange from circulation? The cash also protects him against uncertainty.
Shouldn't he pay for that insurance?
And cash is an abstract commodity, it is cash because the rest of society accept it as such. So the "producers" of money are in a sense the acceptors/users of the currency, because they're the cause for the concrete currency to be money. If they decide that bitcoin is not money anymore, it isn't.
Instead of paying he's effectively charging to the rest of society 3% for every year he enjoys the cash pile insurance.

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September 15, 2011, 04:10:04 PM
 #246

Where you are wrong: You don't consider hoarding and savings as an investment too.

Savings can be investments or not. But if you save by hoarding, that's not an investment.

...

Since 1802, the stock market has returned $600,000 after inflation for every dollar invested.

209 years to multiply your investment for 600,000 ?
Let's find the approximate interest..

1.0658 ^ 209 = 608449.62

So it's approximately a 6.58% interest rate. Are dividends that high? The stock market is probably a bubble.

The average 'saver' is not investing in the stock market, he is selling his fiat and hoarding stock. He is trying to retain value for his retirement against a devaluing currency but contributing very little to innovation through his purchase.

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September 15, 2011, 05:32:31 PM
 #247

The average 'saver' is not investing in the stock market, he is selling his fiat and hoarding stock. He is trying to retain value for his retirement against a devaluing currency but contributing very little to innovation through his purchase.

Still saving by hoarding goods is better than hoarding money, because the funds go to the producers who can reinvest it.
The flaw of the current system is that it invests more than it saves. But saving and not investing doesn't cause growth. It doesn't creates more means of production. Deflation encourages saving but discourages investing. That's what is wrong with deflation.

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September 15, 2011, 07:14:45 PM
 #248

2. Where do you think money will be optimally invested by a banker giving loans to business or by a stockholder buying equity in a firm?

They're supposed to be equally profitable.

Since 1802, the stock market has returned $600,000 after inflation for every dollar invested.

209 years to multiply your investment for 600,000 ?
Let's find the approximate interest..

1.0658 ^ 209 = 608449.62

So it's approximately a 6.58% interest rate. Are dividends that high? The stock market is probably a bubble.

Cash is not suppose to lose value either.  The stock market is not undervalued since bond rates are so low.  The stock market most likely will not provide same level of returns as last 200 years.  However, at the present time bonds,bills, cash will all lose money to inflation and stocks might break even.  That is the sad state when you hire orators to run the country as a front to the people that want to rob it.
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September 16, 2011, 07:48:10 AM
 #249

Cash is not suppose to lose value either. 

Why not? Cash is a proxy between what you sell and what you want. Money is a common created through the agreement (well, sometimes it is enforced) of all its users to accept it. But why society must hold the value indefinitely until the seller decides what he wants in exchange?

The stock market is not undervalued since bond rates are so low.  The stock market most likely will not provide same level of returns as last 200 years.  However, at the present time bonds,bills, cash will all lose money to inflation and stocks might break even.  That is the sad state when you hire orators to run the country as a front to the people that want to rob it.

I mostly agree. The problem with keynesians is that they don't understand that you need to save before investing.
Having low interest rates is great, but you can't achieve it the way they do, because is not sustainable (eventually interest rates will rise) and it have catastrophic side effects. If you want to fight interest rates you have to understand their source.

But still, don't you see the problems with deflation?
Please don't assume that the only alternative is systematic inflation. We're talking about deflation and you cannot defend it by attacking inflation. In fact, you only attack one kind of inflation: debt-money inflation. As said, expocoin (bitcoin with a cosntant inflation rate and therefore exponential growth of the monetary base) would not be as bad.
My proposal is fixed monetary base plus demurrage (so you don't fight deflation directly but you prevent its financial effects), but first we have to agree that there's a problem with deflation.


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September 19, 2011, 01:28:20 AM
 #250

The amazing thing about this entire argument is that the built-in "Deflation" in Bitcoin does not even kick in for another 20-30 years anyway,  and even when it does, then unless Bitcoin becomes the defacto currency for an entire nation state we're only talking about deflation of Bitcoin itself not the enitre monetary system.

If the price of Bitcoin is still quoted in US Dollars and the economy of the world is still based on Fiat, all of this is moot. All you have when the blocks stop being generated is a fixed store of value which is subject to market forces, much like gold, which MAY deflate and PROBABLY will, but this is by no means certain. It could just as easily hyper-inflate to $0.01 in a matter of days.
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September 19, 2011, 01:57:13 AM
 #251

built-in "Deflation" monetary stability in Bitcoin does not even kick in for another 20-30 years anyway,  and even when it does, then unless Bitcoin becomes the defacto currency for an entire nation state we're only talking about deflation monetary stability of Bitcoin itself not the enitre monetary system.

Monetarily bitcoin will never be deflationary, unless you consider ooops attrition. Bitcoin is likely to appreciate due to increased demand for its utility. IFF bitcoin becomes wildly and globally popular, then fiat currency will inflate itself out of existence, with increasing supply and inferior utility, thus decreasing demand. The fight is on!

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September 19, 2011, 02:25:56 PM
 #252

@Ten98
I'm not talking specifically about deflation in bitcoin. I'm just here to remove the "deflation is good/innocuous" dogma. Deflation is very bad for the health of the financial market. I expect the dollar to hyperinflate soon.

@Netrin
I think he means price deflation, not monetary deflation. Also bitcoin will not have monetary stability because some wallets will be lost. It will have monetary deflation.

Anyway, do we agree that deflation discourages real capital investment?

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September 19, 2011, 02:42:59 PM
 #253

Anyway, do we agree that deflation discourages real capital investment?

I'm pretty sure I saw another thread where someone showed you, mathematically, that investment in a business can easily beat the growth of value caused by falling prices (increase in total output with a stable money supply).
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September 19, 2011, 03:25:48 PM
 #254

Deflation is very bad for the health of the financial market. I expect the dollar to hyperinflate soon.
M3 is contracting, M0 dollars are appreciating. As long as USD/UST is the best game in town, considering Asia's dependence upon cheap exports (devaluation), Europe's real risk of default, demand and confidence will increase for green dollars. I think we're looking at global fiat HT within the decade, but dollars may be the last fiat standing.


I think he means price deflation, not monetary deflation. Also bitcoin will not have monetary stability because some wallets will be lost. It will have monetary deflation.
Ten98 was unclear at best or simply mistaken, because there is no such thing as "built-in price Deflation". Sure, I've called lost wallets "ooops attrition".


Anyway, do we agree that deflation discourages real capital investment?
Deflation discourages debt, encourages savings, from which real investment comes.

We've rarely seen deflation in modern times except after the collapse of an inflationary bubble. But ancient Egypt, one of the strongest and longest standing civilizations in human history, had during most of its existence deflation at best and stability at worst. Rome was standing pretty well until they started devaluing their metal currencies. The United States was strong for the first century under a deflating currency.

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September 19, 2011, 07:12:54 PM
 #255


I'm not talking specifically about deflation in bitcoin. I'm just here to remove the "deflation is good/innocuous" dogma. Deflation is very bad for the health of the financial market. I expect the dollar to hyperinflate soon.


We are likely to have some pretty strong price inflation in the next couple of years, if the economy actually starts to recover and people go back to work and pay off those debts without defaulting.  Then there will be a large increase of currency in the market due to QE1 & QE2.  However, hyperinflation is something altogether different.  A currency can, and many have, suffered very large annual inflation rates for a couple of years without imploding; but hyperinflation is always and everywhere a political event.  The Federal Reserve exists for the benefit of the member banks, not for the benefit of the US government or the public.  So long as the Fed exists, and continues to manage monetary policy independently of Congress, then hyperinflation simply isn't in the cards.  That would destroy the golden goose, as far as the bankers are concerned.  The banks would rather see an inflation rate of 20% for a few years and crush the market economy than surrender the power of control over monetary policy.  Congress will have to take it by force, and it won't prove easy.  Still, things don't look secure for the Fed's charter considering how well Ron Paul's retoric has infultrated the Republican base this year.  If Congress cancels the Fed's charter, or takes over monetary policy in some other manner, then hyperinflation is a possibility.  Otherwise, forget it.  And even as bad as inflation could get in the US, it's likely to not be as bad as inflation might be under the Euro or in China.  The US FRN is the safe haven of soverign wealth funds and unscrupulous political officials the world over, and any net influx of captial to the US FRN is going to support it's buying power until such time as the influx tapers off.  But sooner or later, significant price inflation in the US is already a certainty.

Quote

Anyway, do we agree that deflation discourages real capital investment?


No, we do not agree.  Monetary base deflation discourages imprudent capital investments.  Capital investments that deserve funding will always find it.

"The powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent meetings and conferences. The apex of the systems was to be the Bank for International Settlements in Basel, Switzerland, a private bank owned and controlled by the world's central banks which were themselves private corporations. Each central bank...sought to dominate its government by its ability to control Treasury loans, to manipulate foreign exchanges, to influence the level of economic activity in the country, and to influence cooperative politicians by subsequent economic rewards in the business world."

- Carroll Quigley, CFR member, mentor to Bill Clinton, from 'Tragedy And Hope'
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September 19, 2011, 09:36:07 PM
 #256

Then there will be a large increase of currency in the market due to QE1 & QE2.
I believe QE* were immediately effective. The talking point purpose may have been to stimulate the economy back to the Greenspan bubble. But in actuality, they effectively kept core CPI above zero, lowered interest rates while allowing the Treasury to increase the bond issuance. More to the point, QE* provided a BASE/M0 money supply on reserve as banks and other financial institutions massively deleveraged M3. Unlike non-debt based economies such as Weimar Germany or Zimbabwe, in our modern economy, credit collapse evaporates the majority of money. The printing of M0 was in the area of 3 trillion which pales in comparison to the trillions of M2 and incalculably less than higher (M3+) derivatives which <pooof> no longer exist. Since the end of 2008, M3 (on the books) collapsed 20% and has only this year come out of negative growth. M0 (printed money) is just the 'stuff' you get when you liquidate your assets, like the soot from an extinguished lamp.

In so many words, I agree that hyperinflation is not in the United States' immediate future. However, volatility will go wild. Real inflation, including food and energy, is already in the double digits annually. Europe is another story entirely.


Still, things don't look secure for the Fed's charter considering how well Ron Paul's retoric has infultrated the Republican base this year.
I've been quite skeptical of the 'competing currencies act', but actually, I don't see any other strategy. If populists got control of the money supply, I'd give that currency no more than a year before it hyperinflated. Americans with secure jobs should pay off their debt, enjoy the wealth that will soon come, and take pity upon everyone else.

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September 20, 2011, 12:55:56 AM
 #257

Then there will be a large increase of currency in the market due to QE1 & QE2.
I believe QE* were immediately effective. The talking point purpose may have been to stimulate the economy back to the Greenspan bubble. But in actuality, they effectively kept core CPI above zero, lowered interest rates while allowing the Treasury to increase the bond issuance. More to the point, QE* provided a BASE/M0 money supply on reserve as banks and other financial institutions massively deleveraged M3. Unlike non-debt based economies such as Weimar Germany or Zimbabwe, in our modern economy, credit collapse evaporates the majority of money. The printing of M0 was in the area of 3 trillion which pales in comparison to the trillions of M2 and incalculably less than higher (M3+) derivatives which <pooof> no longer exist. Since the end of 2008, M3 (on the books) collapsed 20% and has only this year come out of negative growth. M0 (printed money) is just the 'stuff' you get when you liquidate your assets, like the soot from an extinguished lamp.


I can't contest anything you say above, but I think that the price inflation will not be truly felt until a recovery is in the works for real.  Most of that QE money, as you said, is sitting in bank reserves because they can't or won't lend right now.  Once that sentiment changes back into a 'boom' mentality, M3 will shoot for the Moon like never before, and that is when the majority of the price inflation is going to be noticable.  In the meantime, deflation is the dominate theme, due to the contraction of M3 outpacing the expansion of M0 and M1.  I'm still not ruling out a 'stagflationary' period in the near term, however.

Quote

In so many words, I agree that hyperinflation is not in the United States' immediate future. However, volatility will go wild. Real inflation, including food and energy, is already in the double digits annually. Europe is another story entirely.


I don't even think hyperinflation is in the US's distant future, because as much as I like Ron Paul as a candidate I consider the odds of his success (or anyone else's) at forcing meaningful reform or control upon the FedReserve to be on par with the odds that the world will actually end precisely on December 21st, 2012.  Which is to say, not very good.  The last actual president who tried to reform the monetary system was assassinated about a month after the attempt.  Corrolation is not causation, and I'm sceptical of a connection anyway, but I'm never going to rule it out either.

"The powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent meetings and conferences. The apex of the systems was to be the Bank for International Settlements in Basel, Switzerland, a private bank owned and controlled by the world's central banks which were themselves private corporations. Each central bank...sought to dominate its government by its ability to control Treasury loans, to manipulate foreign exchanges, to influence the level of economic activity in the country, and to influence cooperative politicians by subsequent economic rewards in the business world."

- Carroll Quigley, CFR member, mentor to Bill Clinton, from 'Tragedy And Hope'
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September 20, 2011, 04:17:34 AM
 #258

I think that the price inflation will not be truly felt until a recovery is in the works for real.  Most of that QE money, as you said, is sitting in bank reserves because they can't or won't lend right now.  Once that sentiment changes back into a 'boom' mentality, M3 will shoot for the Moon

The banks could invest the parked reserves in the UST market but the interest is too low. When interest rates go up, so will unemployment, foreclosures, and insolvency. Refinanced equity on the appreciated housing bubble tangled debt as reserves. When families and companies default, the banks will need the parked reserves on their books to stay solvent. https://www.youtube.com/watch?v=0SKDLnuAQmQ&t=30m (0:30 - 2:00). There won't be a recovery without deflation. I don't remember the 70's, but I've been advised to look forward to it: High price inflation, high unemployment, economic stagnation.

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September 20, 2011, 10:43:36 AM
 #259

Anyway, do we agree that deflation discourages real capital investment?

I'm pretty sure I saw another thread where someone showed you, mathematically, that investment in a business can easily beat the growth of value caused by falling prices (increase in total output with a stable money supply).

You don't mean JoelKatz, right?
Anyway, can you link me to the mathematical proof. Somehow I missed it.
If you mean that some investments will be made even with deflation, I agree. But that's not the point. The point is that it will prevent other investments that would be profitable with price stability.

Deflation discourages debt, encourages savings, from which real investment comes.

We've rarely seen deflation in modern times except after the collapse of an inflationary bubble. But ancient Egypt, one of the strongest and longest standing civilizations in human history, had during most of its existence deflation at best and stability at worst. Rome was standing pretty well until they started devaluing their metal currencies. The United States was strong for the first century under a deflating currency.

Deflation encourages hoarding, which is only one form of saving.
It discourages debt, yes. Are you saying that we shouldn't have financial market?
I agree we must first save and then invest, but if deflation is greater than capital yields, there will be no investment at all.

History is complex and many factors are in place, not just deflation. I'm sure there's also data points with inflation and stability, but that doesn't make inflation good.
Can we discuss it in terms of logic? Praxeology if you wish.

No, we do not agree.  Monetary base deflation discourages imprudent capital investments.  Capital investments that deserve funding will always find it.

Price deflation discourages all investments, but there's some investments that are so good that are going to be made despite the deflation.
With 5% interest rates and 3% deflation.
Let's see some investments and loans, and if the money owner will make them or not:

7% interest loan with 3% risk premium -> No
7% interest loan with 2% risk premium -> Yes
5% interest perfect secure loan -> Yes
5% yield perfect secure investment -> No

Why?
Because unlike the 5% interest loan, the 5% perfect secure investments depreciates at 3% per year.
Seriously guys, what's wrong with my bakery example?

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September 20, 2011, 06:41:38 PM
 #260


Deflation encourages hoarding, which is only one form of saving.
It discourages debt, yes. Are you saying that we shouldn't have financial market?
I agree we must first save and then invest, but if deflation is greater than capital yields, there will be no investment at all.


There are natural counter-tendencies that limit how much deflation can occur within a given working economy.  One might argue that exceeding those limits are possible, and the results would be destruction of the working economy, but there are no cases that affirm this argument.  Deflation tends to be much milder than inflation, if only because the rate of inflation under a fiat currency is under the direct control of those who can legally (or even illegally) produce that currency, thus there is no practical limit to the inflation rate.  There is no case of deflation exceeding 10% APR under a gold standard, but there are several events of inflation exceeding 400% APR under fiat currencies.  A deflationary rate of 10% is very high, and would have some harsh effects; but an inflationary rate of 400% actually destroys the economy based upon the fiat currency.  The risks are not comparable.

Quote
No, we do not agree.  Monetary base deflation discourages imprudent capital investments.  Capital investments that deserve funding will always find it.

Price deflation discourages all investments, but there's some investments that are so good that are going to be made despite the deflation.
With 5% interest rates and 3% deflation.
Let's see some investments and loans, and if the money owner will make them or not:

7% interest loan with 3% risk premium -> No
7% interest loan with 2% risk premium -> Yes
5% interest perfect secure loan -> Yes
5% yield perfect secure investment -> No

Why?
Because unlike the 5% interest loan, the 5% perfect secure investments depreciates at 3% per year.
Seriously guys, what's wrong with my bakery example?


You're view of praxelolgy is oversimplified.  You are not alone in this error.

http://www.fee.org/from-the-archives/the-importance-of-economic-theory/

<snip>
"Take, for just one example, Galbraith’s interpretation of Adam Smith’s notion of self-interest, an idea that is constantly misunderstood even today. Galbraith seems to believe that self-interest might not lead us to the socially optimal outcome, as the invisible-hand idea would suggest. This is a terrible misunderstanding of the role of self-interest in economics.

First, self-interest does not automatically equal greed in economic theory. It is not assumed that individuals are motivated solely by selfishness or material gain. Economics is not about the particular motivations individuals have but rather is a method of analysis. It assumes individuals attempt to maximize their welfare as they conceive it, which can be selfish, altruistic, spiteful, loyal, or even masochistic. Individuals are attempting to achieve their ends with the means they believe to be the best.

Second, institutional context matters. The rules we live under will determine whether Adam Smith’s invisible hand achieves socially beneficial outcomes or not. The invisible hand guides self-seeking individuals — people who are attempting to achieve their ends — to serve the public good, but only under the correct rules. Private property, freedom of contract, and competition are all necessary to achieve what Smith envisions with the invisible hand. As Sigler says in the review, “[T]o discuss Smith’s theory without mention of competition is to discuss Napoleon without mention of war.”

<snip>

"The powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent meetings and conferences. The apex of the systems was to be the Bank for International Settlements in Basel, Switzerland, a private bank owned and controlled by the world's central banks which were themselves private corporations. Each central bank...sought to dominate its government by its ability to control Treasury loans, to manipulate foreign exchanges, to influence the level of economic activity in the country, and to influence cooperative politicians by subsequent economic rewards in the business world."

- Carroll Quigley, CFR member, mentor to Bill Clinton, from 'Tragedy And Hope'
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