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Author Topic: Deflationary economics?  (Read 781 times)
flailing Junk
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July 05, 2011, 02:40:26 AM
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Anyone have some good sources on this? I have been trying to wrap my head around what banking would look like in a permanently deflationary environment and I am having little luck.
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Stephen Gornick
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July 05, 2011, 02:59:28 AM
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Anyone have some good sources on this? I have been trying to wrap my head around what banking would look like in a permanently deflationary environment and I am having little luck.

Are you asking about simply banking services such as checking / savings / vaulting, or are your referring to lending?  (and if so, full reserve or fractional reserve lending?)

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July 05, 2011, 03:14:19 AM
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Yes lending, I don't understand it well enough to say whether fractional or full reserve would be a more useful analysis.  Full reserve I suppose, should be able to infer the consequences for fractional reserve from that.
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July 05, 2011, 03:23:16 AM
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The best source Ihave found so far is this: http://mises.org/journals/scholar/salerno.pdf

Basically an Austrian Economist saying that deflation is generally a good thing with the exception of confiscatory deflation, but he does not address permanent deflation due to a fixed supply of a medium of exchange.
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July 05, 2011, 04:47:54 AM
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If an economy was permanently deflationary, I would probably save most of my money and be very stingy, especially when it came to investing opportunities. If my money will certainly be worth more tomorrow (a no-risk investment, really) I would probably be less inclined to spend money on ventures with actual risk.


That's just me though
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July 05, 2011, 05:33:30 AM
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If an economy was permanently deflationary, I would probably save most of my money and be very stingy, especially when it came to investing opportunities. If my money will certainly be worth more tomorrow (a no-risk investment, really) I would probably be less inclined to spend money on ventures with actual risk.


That's just me though

By this logic, I feel it is safe to assume that your credit cards are maxed out today?  And that you have as many loans as you can convince banks to give you?

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July 11, 2011, 01:07:14 AM
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Well in absence of useful sources I refreshed my memory from my college economics classes and did some net present value calculations and it appears that this type of decision making is pretty much the same for inflationary and deflationary environments.

So, net present value of 15k revenue 5k expenses compared to 10% investment.

5% inflation compared to 15% investment(10% above inflation)

((15000/.95^x)-(5000/.95^x))/1.15^x


No inflation/deflation comparing revenue stream to 10% investmet:

10000/1.1^x


5% deflation compared to 5% investment(10% above "negative" 5% inflation)

((15000/1.05^x)-(5000/1.05^x))/1.05^x'



So there are no disasters apparent in a simple NPV analysis.
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