I see. And I realise I must correct myself. Hoarding doesn't cause deflation, an increase in the hoarded money pool does. A decrease causes inflation.
The more constant that pool is, the more stable V and P.
Yes, the technical term for it is demand for money
. A rather unfortunate one, since simple souls (and most of the economists) take it rather literally. As demand for nominal
money, little peaces of paper with portraits of dead leaders or their electronic equivalents. It's a related topic, that's why I mention it here, but.. just mention. FTM.
Let me call it then, demand for saving, because what it is demanded here is the quality of storage of value, not the medium of exchange one.
An increase in the demand for saving causes price deflation (always assuming a constant monetary base).
There should be no difference between investors that rely on loans and investors that doesn't. The self-financing entrepeneurs should think that they're lending to themselves. All borrowers and money holders investors are competing in the same market, the money holder must account the costs of capital-money even if he doesn't have to borrow it.
Yes deflation can lower interest rates (negative inflation premium) but it cannot lower the interest to zero.
Well, the world just doesn't work this way, and there's a difference between investors which rely on loans and those who do not. The loan market is an attribute of a rather developed and sophisticated economy and you can have (and there are) investments even without loans markets. Robinson Crusoe Examples to Rescue!
I suppose we should separate investments that need money from investments that don't. You can build your own net today and it would be a means of production, but nothing warranties a capital yield for it, because money is not needed to build another one. Anyone with or without money can build one, so by competition with other nets, the profit tends to zero. The cost of production of the net tends to equal the utility extracted from it in the fishing market.
And when looking at the relation between investments and loans, I insist in treating the investment as the more fundamental.. eh... whatever. If you have an investment project and you think it will be profitable then there is also an opportunity for a loan. Rate negotiable, but greater than zero and lower than the expected rate of profit.
Ok, with every loan there's an investment (let's exclude consumption loans for simplicity). And there's a part of the yield of the investment that goes to the investor, let's call it profit; a part that goes to the lender, let's call it basic interest and a part that goes to the insurance company that warranties the loan for the lender, let's call it risk premium. For our analisys, we don't care if the lender takes the risk to take the risk premium himself or if the investor and the lender are the same person and therefore takes all the yield of the investment.
So, in order to prove (credible claim) that price deflation (in the conditions of stable money supply and increasing technological productivity) will kill the loan market you have to prove that such conditions will turn all investments projects into unprofitable one. Now.. are you accepting the challenge?
Well, you're assuming that the deflation only comes from growth, but as we've seen the deflation can also come from an increase in the demand for savings.
Deflation comes also during the liquidation phase of economic cycles. A claim that you will probably harder to believe is that basic interest as defined above is the cause of economic cycles. But you're asking me to prove that less profitable investments will be made with deflation.
We must agree that the primary force that drives investments is profit and not the basic interest.
Then in my bakery example I show how with each iteration, deflation reduces the profit of the investor both nominally and in real terms, because the interest of the lender stays nominally stable and grows in real terms.
Also, the principal to be paid back stays fixed but the price of the real capital acquired by the investor shrinks, so if he consumed the profit, payed the interest and risk premium, and relays on selling the capital to repay the principal after the operation, his business becomes insolvent through deflation.
You can say: "The financial market will make the basic interest drop as less investors will be willing to borrow and the investors can refinance his loan". That's true. Deflation acts on gross interest as a negative inflation premium.
But there's a minimum basic interest that is over zero.
Here you can say "When the investor and the lender are the same person, a zero basic interest rate loan makes sense, because he can still make profit".
So I still must prove that money can always yield over zero, even with no investments.
My point that an increase in the hoarding pool doesn't lead necessarily to more investments. You assume that someone will buy the bricks, but they can stay in the stock of the producer. Or the deflation can force him to sell them at a lost, which will cause is bankrupt. Wasn't his business profitable? It was without deflation, but not with it.
Business plans going bad? Happens all the time. People learn and try to be wiser next time. But, I have to say that you are saying here is slightly different from your original position (as I understood it). Namely that saving can
lead to losses for the society as a whole, not that saving is inherently harmful.
Yes, hoarding doesn't necessarily causes harm. But the possibility of hoarding disturbs the medium of exchange function of money.
Is not the hoarders the ones we have to blame. Is the agreement that the medium of exchange must also be a storage of value what is wrong.
This may be the central point of our disagreements. You say that money can't yield on its own, it needs profitable investments.
But money performs services on its own and "it can charge" for those services.
Well, I guess that exactly for that "services of its own" that markets choose a commodity to serve as money, medium of exchange. Also it is "it can charge" or "it can't charge" If the second that's part of the appeal for holding money.
Money can "profit" (not itself, the owner) from those services. But is not the market that chooses what money is, is an agreement between the market participants. That's why it doesn't have to be necessarily a commodity, it can be made out of paper or even bits.
Money is by definition the more liquid asset. That represents an insurance against uncertainty that the money holder gets for free. The rest of the money users are paying indirectly for that insurance.
OK, someone gets something for free. Relatively speaking. So much I get. How is this a big deal? Where's and who's the victim?
It is an externality. The first thing we must realize is that someone somewhere is paying the costs, there's a victim somewhere.
The first that will pay that cost is the borrower, in form of higher basic interest. It makes better to just hold the money than lending at zero interest.
If interests suddenly dropped 1%, the firsts to take it would be the investors through extra profits. They would compete for that 1% extra profit until the "gain" (the non-loss) would be transferred to the society in form of cheaper products.
So the whole society is paying for that free privilege in form of higher prices. And the costs are payed not only through financial costs but also through capital yields.
The basic interest prevents the yields of capitals that really need financing from dropping below the basic interest itself. It limits competition between means of production of the same type.
For example, if the basic interest were lower, houses could yield less (in proportion of the costs of production of the house) and still get financed, making rents drop.
Also, money is needed for trade, even when there's no profitable potential investments nor growth. And "the wares pay" for that reallocating service. The basic interest is included in the final selling price of every product. The merchant not only collects his wage from the final selling price, but also the interest on the liquidity he needs in his operations. Again, if the merchant have the money, it should consider that he's lending to himself, because he's competing with other merchants that operate with borrowed money.
In this sense, capital-money is the only authentic capital (here I define capital as something that has sustained yields rather than means of production) and the interest rate is what protect the means of production (that need financing to come into existence, not simple nets) yields. Capital that won't yield as much as money does is simply not financed, and that prevents further competition within a certain type of capital.
Market prices, market prices, market prices.. For goods and interest rates. Also there is no such thing as basic interest
and hold money does not yield (monetary) interest.
Not for holding it. When you hold it, is like if you were spending it in the insurance to uncertainty that a pile of cash represents. To take the basic interest, you need to invest it (or lend it, letting other do the investment).
Another way of taking the basic interest is trading. That's what a merchant does. Even with no investments, merchants need liquidity that will pay for. Again, we don't care if in some cases the lender and the merchant are the same person.
He buys wares at a price and sells them at higher prices his wage and his costs of operation, which include the basic interest on the liquidity they need.
So the basic interest is extracted in first term from the wares.
The consumer also pays more here because of interest. If money wasn't a store of value, people would actually have more to save.
Most people pay more (indirectly) in concept of interest than what they receive from their savings. Even many of the people who doesn't have debts and have lent savings.
Your theory of value seem to be a variant of cost theory of value where as a fixed cost into the price of every good enter the (a fixed?) interest rate on the price of loaned (own) capital. But that's backwards! First it is from the prices of goods that prices of inputs are inferred, and second interest is also a market price set by supply and demand.
No, no. Don't get me wrong. Value is relative. What I'm assuming is that investors know the input before making the investment and selling the products. That's not always the case. But costs (including capital yields) tend to be lower or equal to selling prices by market forces.
Capital tend to yield at least as much as the basic interest, but that's not a universal law of nature and sometimes it doesn't. That's what bubbles are about. People overestimating the yields of the capitals in certain sector.
And there's supply and demand in the financial sector, but there's a minimum basic interest that lack of demand or excess of offer can't beat.
Well that's about it. Also about that "free insurance" that you seem to hate so much. Like it or not, but there is a demand for safe, long term storage of value. And if money cannot server as such a storage people will start looking for substitutes.
Do you really think that it is better for people to save in paintings, old violins, even gold? Shotguns and canned beans?
Let them save whatever they feel they need to save. Gold could act as a parallel "store of value agreement", but the saver would be more exposed to changes in the "demand for savings", because the value derived from the medium of exchange function won't be there anymore.
Yes, I prefer people saving anything but the medium of exchange.
If they want to be sure they can eat tomorrow, let them store food instead of outsourcing their storage needs for free.