Why Mainstream Economists Lie About Deflation

[michaelsuede]

The first question I have for the inflationistas is, who is to decide who gets the new funny money if Bitcoin was to be arbitrarily inflated?

Say we are to have an inflationary Bitcoin currency that is arbitrarily printed up at a rate that exactly matches price deflation (which is an impossibility, but lets say its possible to code such a mechanism).

Should the miners get it?

If the system was changed to grant miners additional coins based on CPI price levels, does that not artificially give miners control over more resources than they otherwise would have?  Money controls resources.

Those who get the new money first get the most benefit.  This is because they get it before it has circulated in the economy and driven up prices.  This is why countries who engage in money printing have highly stratified wealth distribution.  Typically bankers and bureaucrats benefit from printed money the most under fiat fractional reserve systems because they are at the top of the money spigot.  Under our current system, those who use debt leverage the most ultimately derive the most benefits.

Again, it is not “a wash” when comparing the benefits and detriments to savers and debtors.  It is not a wash because funny money distorts the structure of production.  This should be plainly evident from the preceding paragraph.  Funny money distorts interest rates, which alters not only who controls resources within an economy but also what an economy produces.  Here is an entire lecture by Prof. Roger Garrison that explains exactly how printing money causes detrimental distortions in the structure of production.

When interest rates are artificially low, long term interest rate sensitive projects that normally would NOT be undertaken due to interest rate costs suddenly look like viable projects.  This is how bubbles get formed.  When rates are low, housing looks like a great deal.  Everyone can suddenly afford half million dollar homes because they figure they can make the payments on 4% mortgage.  If rates were at their market set levels, those same people would not be looking to purchase a new home because they know they would never be able to make the payments at a 15% rate.

So the economy moves to produce many new homes when rates are artificially low, but since the productive capacity of the economy is finite, some other area of the economy must suffer in order to meet the demand for new home construction.  The economy can not make the same level of consumer goods if housing production expands.  People and resources must be diverted from consumer goods production into housing production in order to meet the demands of new home construction that is inspired by the artificially low interest rates.

This bubble will last until the market realizes that there are so many new homes on the market that the people who speculatively bought in the hopes of making money on asset appreciation can’t unload their homes at prices higher than they bought them for.  At this point home prices plunge as the speculators move out of the market and dump all the houses they have been holding.  Eventually a point will be reached where people are so in debt that they can’t afford to take out more debt even if the banks have an unlimited funny money reserve pool to lend from.

But setting that aside, let me get back to the problem of finite productive capacity.  Printing new money never creates more goods and services within an economy.  PRINTING MONEY ONLY CHANGES WHO CONTROLS RESOURCES AND WHAT AN ECONOMY DECIDES TO PRODUCE WITH THOSE RESOURCES.  If the government prints up a trillion dollars to buy 10 new aircraft carriers, it is the same as if the government robbed the private sector of all the steel and manpower that those carriers require.  If those productive resources are diverted into carrier production because the government printed money, that means they are not available for the private sector to utilize in car or computer production (or any other productive enterprise that meets consumer demand.)

A quick demonstration of why printing money does not create more wealth.

Say we have an economy that normally produces goods and services in the following ratios:



Will printing money change the size of the pie or will it simply change the ratios?  What the Keynesian nut jobs argue is that printing money actually causes the pie to expand because the new money will somehow put more resources to work.

What actually happens is quite different.  It should be obvious to anyone with a brain that printing money will not make a country richer (more abundant goods and services.)  It can only change who controls already existing goods and services.

I already covered why printing money distorts interest rates, which in turn, effects the structure of production.  So what you end up with is something that looks like this:



In the process of altering the structure of production through the lowering of interest rates, unemployment will INCREASE from this.  As we can see, as housing expands, consumer goods manufacturing decreases.  The people who previous worked in consumer goods are diverted into housing production, and in the interim, will be unemployed.  Also, since a bubble in housing has been created, when it finally bursts it will create massive unemployment.  This is because while the diversion into housing production was a slow process, the unwinding of the bubble is a fast process, which creates a tidal wave of unemployment once it finally bursts.

This is why in a comparison of unemployment rates, it appears as if unemployment is lower during the run up to a bubble bursting.  The truth is unemployment is exacerbated at both ends, marginally while going up and tremendously when coming down.

In order to actually grow the pie, the economy has to undergo an increase in productive capacity.  These increases in productive capacity can’t come about through wealth redistribution (inflation), they can only occur either by an increase in production efficiency or by more workers and resources becoming available to the entire economy.

If we add more workers and discover more physical resources, like mines, oil wells, fusion power, etc.. we can have an expansion of the pie that looks like this:



The increase of real wealth within a society can only occur by an expansion of the pie.  Printing money does not expand the pie, it can only shift around what is produced within the pie.

I could go on and on with examples of why printing money never produces more economic prosperity.  It necessarily can not do that because money isn’t something that can magically create resources where none existed before.  It is simply a resource allocation mechanism.

[1714019530]

1714019530

[AyeYo]

Go do a little research on why no one uses a gold standard anymore and then get back to us.

[michaelsuede]

Go do a little research on why no one uses a gold standard anymore and then get back to us.

Well lets see:

1.  you can't shove gold down a transmission wire.

2.  the government has attacked private mints who have attempted to issue their own gold backed currency.

3.  the government went off the gold standard itself in order to pay for the Vietnam war, which was an act of default.

4.  governments hate the gold standard because it constrains their spending.

5.  banks hate the gold standard because they can't bloat their debt issuance due to the higher interest rates that result from it

6.  banks own our government, so it comes as no surprise that the government doesn't want a gold standard

[cypherdoc]

michael,

keep up the good fight.  i've followed your threads over on Mises.  tough group over there.

btw, i've sold off all my silver bullion and most of my gold bullion for bitcoins over the last 2 mo.  hope we're right.

[AyeYo]

Go do a little research on why no one uses a gold standard anymore and then get back to us.

Well lets see:

1.  you can't shove gold down a transmission wire.

2.  the government has attacked private mints who have attempted to issue their own gold backed currency.

3.  the government went off the gold standard itself in order to pay for the Vietnam war, which was an act of default.

4.  governments hate the gold standard because it constrains their spending.

5.  banks hate the gold standard because they can't bloat their debt issuance due to the higher interest rates that result from it

6.  banks own our government, so it comes as no surprise that the government doesn't want a gold standard

Pretty simple article that dispells a few common myths: http://www.theatlantic.com/business/archive/2007/12/why-is-the-gold-standard-crazy/2407/

[michaelsuede]

Pretty simple article that dispells a few common myths: http://www.theatlantic.com/business/archive/2007/12/why-is-the-gold-standard-crazy/2407/

Thanks for sharing the article.  It provides me with another list of ridiculous assertions by Keynesian economists who don't understand business cycles.  Particularly her first claim, which is utterly preposterous on it's face considering that it wasn't until we had the Fed that the economy experienced the first great depression.  It also demonstrates her ignorance of economic history surrounding the period of relatively free banking during period leading up to the creation of the Fed and what went on with the issuance of private bank notes.

The individual banks weren't on a 100% gold standard from the beginning, which is why we had bank runs prior to the Fed.  Since the individual banks were engaged in fractional reserve lending, they would occasionally find themselves in default when their debt pyramids collapsed.

The Fed makes the monetary system more stable from the standpoint that it prevents bank runs due to ponzi schemes collapsing, but it makes the monetary system far more unstable in the fact that the debt ponzi it facilitates is the cause of business cycles.

Eventually fractional reserve banking leads to the situation we have today:

If the Fed does not print money, the banking system will collapse into a deflationary default spiral.

If the Fed continues to print money, we will end up with a completely destroyed economy and most likely a worthless dollar.

I noticed that article was written back in 2007, where she goes on and on about how there is no inflation present.  Well, if we look at prices today, we see MASSIVE inflation in energy, consumer goods, and food prices -all the things Austrians were saying would experience heavy inflation from the bailouts and stimulus spending.

[AyeYo]

Thanks for sharing the article.  It provides me with another list of ridiculous assertions by Keynesian economists who don't understand business cycles.  Particularly her first claim, which is utterly preposterous on it's face considering that it wasn't until we had the Fed that the economy experienced the first great depression.  

Try again.  Like I said, please educate yourself on actual historical events before trying to make these bold claims.  The business cycle has existed for long as data has been recorded.

http://www.bloomberg.com/news/2010-09-20/u-s-business-cycle-expansions-and-contractions-throughout-history-table.html


You are grossly oversimplifying many issues, completely misquoting historical evidence, and just generally getting things wrong.  Do some more studying before you try to shoot down PhD level economists.

[michaelsuede]

Thanks for sharing the article.  It provides me with another list of ridiculous assertions by Keynesian economists who don't understand business cycles.  Particularly her first claim, which is utterly preposterous on it's face considering that it wasn't until we had the Fed that the economy experienced the first great depression.  

Try again.  Like I said, please educate yourself on actual historical events before trying to make these bold claims.  The business cycle has existed for long as data has been recorded.

http://www.bloomberg.com/news/2010-09-20/u-s-business-cycle-expansions-and-contractions-throughout-history-table.html


You are grossly oversimplifying many issues, completely misquoting historical evidence, and just generally getting things wrong.  Do some more studying before you try to shoot down PhD level economists.

I'm not grossly oversimplifying anything.

Business cycles can not exist without inflation.

Inflation of the money supply existed BEFORE the fed was created.

The banks were all engaged in fractional reserve banking from the start and had a habit of inflating their notes well beyond their reserves.

You should do some more studying before relying on left wing economists from the Atlantic who don't know their ass from a hole in the ground.

Go ask your glorious economist why banks experienced bank runs prior to the Fed and see what kind of lame answer she provides you.

Here's an article by a real economist that explains it in detail:
http://www.lewrockwell.com/rothbard/rothbard163.html

[AyeYo]

Thanks for sharing the article.  It provides me with another list of ridiculous assertions by Keynesian economists who don't understand business cycles.  Particularly her first claim, which is utterly preposterous on it's face considering that it wasn't until we had the Fed that the economy experienced the first great depression.  

Try again.  Like I said, please educate yourself on actual historical events before trying to make these bold claims.  The business cycle has existed for long as data has been recorded.

http://www.bloomberg.com/news/2010-09-20/u-s-business-cycle-expansions-and-contractions-throughout-history-table.html


You are grossly oversimplifying many issues, completely misquoting historical evidence, and just generally getting things wrong.  Do some more studying before you try to shoot down PhD level economists.

I'm not grossly oversimplifying anything.

Business cycles can not exist without inflation.

If you just said that we didn't experience a depression prior to the creation of the Fed, now you're saying that of course we had depressions prior to the Fed.  Which is it?

[michaelsuede]

If you just said that we didn't experience a depression prior to the creation of the Fed, now you're saying that of course we had depressions prior to the Fed.  Which is it?

No, I said the country didn't experience a great depression until the existence of the Fed.

There is a massive difference between a brief recession and a great depression.

The fact that banks were forced to keep their inflation in check by the markets without the Fed and FDIC there to bail them out meant the business cycles that resulted from their fraud were minor and brief.

Why You've Never Heard of the Great Depression of 1920 | Thomas E. Woods, Jr.

[MoonShadow]

I'm not grossly oversimplifying anything.

Business cycles can not exist without inflation.

Sorry, but the business cycle exists regardless of inflation or deflation.  It will exist in Bitcoin as well.  The business cycle is an aggregate phenomonon that exists despite the Federal Reserve.  In fact, elimination of the business cycle was one of the original missions of the Federal Reserve, but in practice the actions of the Fed only act to delay the correction phase, not eliminate it.  Since the market has more time to build up inefficiencies before the correction phase wipes them out, those correction phases tend to be deeper and longer than without monetary intervention from the Fed.

[michaelsuede]

I'm not grossly oversimplifying anything.

Business cycles can not exist without inflation.

Sorry, but the business cycle exists regardless of inflation or deflation.

No, I'm sorry to tell you that it does not.

Only inflation of the money supply causes business cycles.  Period.

Garrison's lecture is just one of many.  If you don't believe it, then explain to me why you don't believe it.  I can produce an absolutely epic volume of literature that demonstrates exactly what causes business cycles and they all say the same thing.

[MoonShadow]

I'm not grossly oversimplifying anything.

Business cycles can not exist without inflation.

Sorry, but the business cycle exists regardless of inflation or deflation.

No, I'm sorry to tell you that it does not.

Only inflation of the money supply causes business cycles.  Period.

Garrison's lecture is just one of many.  If you don't believe it, then explain to me why you don't believe it.  I can produce an absolutely epic volume of literature that demonstrates exactly what causes business cycles and they all say the same thing.

http://en.wikipedia.org/wiki/Austrian_business_cycle_theory

Considering an expansion of credit to be the same as inflation is a loose definition, but in a temporal fashion, a valid one I suppose.  Still, the business cycle is created by the expansion and resultant contraction of credit within an economy.  Credit can exist without expansion of the monetary base (inflation), thus inflation does not cause the business cycle.  Although inflation can (and does, that's one intent) affect the credit markets, thus altering the timeline and severity of the cycle.

[michaelsuede]

http://en.wikipedia.org/wiki/Austrian_business_cycle_theory

Considering an expansion of credit to be the same as inflation is a loose definition, but in a temporal fashion, a valid one I suppose.  Still, the business cycle is created by the expansion and resultant contraction of credit within an economy.  Credit can exist without expansion of the monetary base (inflation), thus inflation does not cause the business cycle.  Although inflation can (and does, that's one intent) affect the credit markets, thus altering the timeline and severity of the cycle.

That is simply the semantics of how one defines inflation.

In our monetary system, which is entirely predicated on the notion that debt = money, there is little difference between "credit expansion" or "printing money".

[MoonShadow]

http://en.wikipedia.org/wiki/Austrian_business_cycle_theory

Considering an expansion of credit to be the same as inflation is a loose definition, but in a temporal fashion, a valid one I suppose.  Still, the business cycle is created by the expansion and resultant contraction of credit within an economy.  Credit can exist without expansion of the monetary base (inflation), thus inflation does not cause the business cycle.  Although inflation can (and does, that's one intent) affect the credit markets, thus altering the timeline and severity of the cycle.

That is simply the semantics of how one defines inflation.

In our monetary system, which is entirely predicated on the notion that debt = money, there is little difference between "credit expansion" or "printing money".

Okay, you're arguing semantics then.  That's fine, so long as we all know that you are using a loose definition of the terms.  There is certainly little difference between those two terms, but there is a little difference.

[michaelsuede]

http://en.wikipedia.org/wiki/Austrian_business_cycle_theory

Considering an expansion of credit to be the same as inflation is a loose definition, but in a temporal fashion, a valid one I suppose.  Still, the business cycle is created by the expansion and resultant contraction of credit within an economy.  Credit can exist without expansion of the monetary base (inflation), thus inflation does not cause the business cycle.  Although inflation can (and does, that's one intent) affect the credit markets, thus altering the timeline and severity of the cycle.

That is simply the semantics of how one defines inflation.

In our monetary system, which is entirely predicated on the notion that debt = money, there is little difference between "credit expansion" or "printing money".

Okay, you're arguing semantics then.  That's fine, so long as we all know that you are using a loose definition of the terms.  There is certainly little difference between those two terms, but there is a little difference.

Yes, to be precise when I say money printing, I'm referring directly to credit expansion.

[MoonShadow]

http://en.wikipedia.org/wiki/Austrian_business_cycle_theory

Considering an expansion of credit to be the same as inflation is a loose definition, but in a temporal fashion, a valid one I suppose.  Still, the business cycle is created by the expansion and resultant contraction of credit within an economy.  Credit can exist without expansion of the monetary base (inflation), thus inflation does not cause the business cycle.  Although inflation can (and does, that's one intent) affect the credit markets, thus altering the timeline and severity of the cycle.

That is simply the semantics of how one defines inflation.

In our monetary system, which is entirely predicated on the notion that debt = money, there is little difference between "credit expansion" or "printing money".

Okay, you're arguing semantics then.  That's fine, so long as we all know that you are using a loose definition of the terms.  There is certainly little difference between those two terms, but there is a little difference.

Yes, to be precise when I say money printing, I'm referring directly to credit expansion.

Based on the perspective that fiat currency represents a debt obligation of the federal government?  I can respect that perspective.  I withdraw my objections.

[michaelsuede]

Based on the perspective that fiat currency represents a debt obligation of the federal government?  I can respect that perspective.  I withdraw my objections.

yes.

Thank you.

[Litt]

Inflation deflation, boom and bust, flooding cycle of the nile are one of the same to me as I see it in the history books. It would not occur unless there is a central control of money supply or in Egypts case, grain/food supply. It is the only reason why boom and bust occurs, anyone denying it need to learn to think critically on your own and study your own economics and start fresh ignoring pretty much everything you ever heard and learned from school/media. Nothing has changed from controlling the food in early civilization to controlling land in the middle ages and on. Wake up people. Once you clear the smoke, everything is very obvious. At least they couldn't make land or grain out of thin air. Today it's changed into controlling the money supply on top of it all and they are printing these like it's no one's business.

[Rassah]

I'm a bit late to this party, but regarding deflation and employment:
I think people as a whole would have a MUCH bigger resistance to their wages doing this:
up, up, up, up, up, up, DOWN, up, up, up, up, up, up, DOWNup, up, up....
in a deflationary environment, than they do to the current inflationary:
down, down, down, down, down, UP, down, down, down, down, down, UP, down, down...

Regardless of the fact that both scenarios are exactly the same in mathematical terms, we humans are just too irrational to accept the scenario where we are hurt quickly and heavily, over a scenario where the pain is drawn out over the course of a year.
Of course we could also just have each paycheck decrease in amount, thus making each payment adjust for deflation and make the pain constant and one we are used to, but, we humans also prefer nice, predictable, round(ish) numbers, and having seemingly randomly calculated (percentage-based) numbers every time will make life rather difficult to plan (how much will I have for bills? Will I have enough to go out to a movie, and what will the price of that be? etc.)

So, my argument, really, is that although deflation and inflation are both mathematically the same in the long run, we humans may just be too irrational to accept it.