Mish on deflation

[MoonShadow]

Economic illiterates will tell you that deflation (for this example defined as falling prices) is a bad thing. They will tell you that when prices fall, people will delay purchases waiting for still more falling prices, and then consumers will not buy goods and employment will drop and a downward economic spiral will ensue.

That is the theory of people in ivory towers who read books and articles by economists who cannot find their ass with two hands and a road map.

If falling prices stopped people from buying goods, no computers, TVs, monitors, or electronic goods would have been purchased for years.

Just yesterday I bought a 27 inch high-end NEC monitor for $800. It was one of the top-rated monitors for digital photography display that I could find.

It beats hands down my Dell 24 inch monitor I bought a few years ago for $2400. Will monitors be better and cheaper next year. Of course. Did that make me wait? Not in the slightest.

http://globaleconomicanalysis.blogspot.com/2013/12/economic-illiterate-proposal-inflation.html#rMYzZkAfFCzAbtyF.99

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[tutkarz]

I am not economist expert but I will tell you why I am spending bitcoins and I am not concerned about deflation. Because I know, later I will have even more purchasing power which gives me sense of safety that I won't be left with fiat that loses value and items that are losing value also. That way I can go shopping now and don't have to wait for my situation to be more secure like better job or more stable world economy.

[Etlase2]

I have to strongly question the intelligence of the author of that article as well as yourself Moonshadow for perpetrating bullshit like this.

A currency that is deflationary IS NOT EQUAL TO a specific product or industry that experiences deflation in an otherwise inflationary currency. They are COMPLETELY DIFFERENT economic situations.

This is in no way an argument for a deflationary currency. It is asinine to think so.

[MoonShadow]

I have to strongly question the intelligence of the author of that article as well as yourself Moonshadow for perpetrating bullshit like this.

A currency that is deflationary IS NOT EQUAL TO a specific product or industry that experiences deflation in an otherwise inflationary currency. They are COMPLETELY DIFFERENT economic situations.This is in no way an argument for a deflationary currency. It is asinine to think so.

In what way, Etlase2?  A currency is simply a market product with a well defined trade value, by whatever means that trade value is defined.  The laws of supply & demand most certainly do apply to currencies.  I know of no economic laws that do not apply to currencies.  If you do, feel free to share your insights.

[Wekkel]

I have to strongly question the intelligence of the author of that article

I think you should read up on his blog posts from 2005 until now and ask yourself that question again. The guy is total common sense. Not that he is fault free, but he surely is intelligent.

[Entropy-uc]

Sorry, but I have to weigh in whenever Mish is cited as any kind of authority.

Mish is a fraud looking to get rich quick.  He is the Ron Hubbard of financial advisors.

I knew him back in the 1997-2003 timeframe when he was on silicoininvestor (talk.techstocks.com for the archives).  He often spouted about what a scam being a financial advisor was.  Later, the quit his job as an engineer and became a financial advisor.  He spent a lot of time developing himself as a pundit as a marketing ploy.

Go read the archives.  You will see what he really thinks (and he was a pretty lousy investor too).

[Wekkel]

Go read the archives.  You will see what he really thinks (and he was a pretty lousy investor too).

I know what he thinks and he has been right about 8 years in a row already. The Big Picture, not investments.

[Etlase2]

In what way, Etlase2?  A currency is simply a market product with a well defined trade value, by whatever means that trade value is defined.  The laws of supply & demand most certainly do apply to currencies.

Because somewhere I stated or implied that the laws of supply and demand do not apply here.

I think you should read up on his blog posts from 2005 until now and ask yourself that question again. The guy is total common sense. Not that he is fault free, but he surely is intelligent.

He is considering prices in a vacuum, which the same mistake everyone who says "herp a derp look at electronics" makes. With wages increasing at the same time certain products' prices are decreasing, the marginal propensity to consume the products with falling prices can only increase as income becomes comparatively more disposable.

On the other hand, if wages are decreasing, as they must in a deflationary currency, the marginal propensity to consume is unaffected assuming that prices are falling at around the same rate. If prices on certain products are falling faster, then it is a wash to the scenario above.

Personally, I think the whole "people won't spend in the face of falling prices" is either misinterpreted or argued incorrectly. It is not the basic consumer that anyone has to worry about, it is the investor and job creator that one has to worry about stopping cash flow through the economy, causing job losses which then do cause less consumer spending, and spiraling downward economic output. Deflation vs. inflation will hardly affect those who spend the vast majority of their income, assuming wages and prices are reflected similarly. Basic arguments about consumption totally ignore the greater systemic risk posed by deflation.

[Wekkel]

I think the basic argument is whether falling prices cause people to postpone purchase of items. I think that in general this is a fallacy. Regardless whether electronics is the best example and whether this can be compared to a deflating currency, I do not believe in the concept of people postponing purchase forever. Now is more valuable than next year. We humans all face an equal and rock solid constraint: time.

[MoonShadow]

I think the basic argument is whether falling prices cause people to postpone purchase of items. I think that in general this is a fallacy. Regardless whether electronics is the best example and whether this can be compared to a deflating currency, I do not believe in the concept of people postponing purchase forever. Now is more valuable than next year. We humans all face an equal and rock solid constraint: time.

In general, it is a falacy, for the obvious reasons that the consumer doesn't delay purchases indefinately.  However, I have to admit that Elase2 does have a point here about the role of investors and speculators in the health of the modern economy.  What I don't believe that s/he understands, is that is a side effect of the outsized role of modern finance, not a requirement of a functioning economy.

The finance industry has become such a huge part of the US economy, that I would say that Elats2's claim that even mild deflation would result in a large pull back from major investment, and result in increased unemployment.  Still, I would consider this to be a symtom of the longstanding effect of mild inflationary policies, resulting in the growth of the finance industy itself.  The problem isn't that investment adviser and bankers can't make money doing what they do; the real problem is that they can make a great deal of money doing what they do, but that they work in the largest 'cost center' industry in the world.  Said another way, the finance industry (on net) does not produce anything of value, but instead offers only to move wealth around in the most efficent manner possible.  Whether or not they live up to that promise is a matter of opinion, but they actually cannot produce value in their own right.  This has much to do with why Mish has, and still does, consider what he does to be a fraud.  Not that he's personally fraudulant in giving advice, but that the entire freaking industry is a fraud; pretending to produce wealth, when mostly they just move it around and take a slice off the top.

A healthy economy does not require the dominate finance industry that has developed in the US and most modern "Western" nations.  We want a healty economy to develop around Bitcoin, and that means that nearly every consumer is also a producer, and that these huge 'cost center' industries never develop beyond a few percent of the gross.  Nor should it require tax benefits from governments to have economic incentives to build factories, nor these power broker parasites that tarvel around the world searching for investment bargins.  Small businesses have always been the bulk of business activity in the United States, and small businesses should be the bulk of the business with Bitcoin as well.  Under such a model, mild deflation is no more (and perhaps less) dangerous to the business climeate than mild inflation.  That is not to say that the significant deflation that we have experienced thus far is a favorable climate, it's certainly not.  So either Bitcoin will mature and stabilize on it's own merits, or fail epicly.  We al place our bets according to which outcome we deem more likely.

[Etlase2]

The finance industry has become such a huge part of the US economy, that I would say that Elats2's claim that even mild deflation would result in a large pull back from major investment, and result in increased unemployment.

Please direct me to where I wrote this. Otherwise that is twice in two posts you have (intentionally?) misrepresented what I've said.

What I don't believe that s/he understands, is that is a side effect of the outsized role of modern finance, not a requirement of a functioning economy.

...

  Still, I would consider this to be a symtom of the longstanding effect of mild inflationary policies, resulting in the growth of the finance industy itself.  The problem isn't that investment adviser and bankers can't make money doing what they do; the real problem is that they can make a great deal of money doing what they do, but that they work in the largest 'cost center' industry in the world.

Your entire premise is not defending deflation nor deriding inflation but deriding the financial system. We can both agree that there is *a lot* to be desired with the financial system. It, however, does not prove or argue any point regarding deflation's superiority.

Small businesses have always been the bulk of business activity in the United States, and small businesses should be the bulk of the business with Bitcoin as well.  Under such a model, mild deflation is no more (and perhaps less) dangerous to the business climeate than mild inflation.

Would you care to provide any evidence to back this up rather than idle and wanton speculation? Because small businesses tend to operate on very strict amounts of capital, cash flow that is almost universally derived from credit. Small businesses tend to balance a very fine line between profitability and bankruptcy. Mild deflation (you imply here that bitcoin would have mild deflation, based on what? and what do you consider to be mild?) that is just a smidgen more than expected can and will cause a slew of bankruptcies. There is simply no other way. You cannot have credit in a deflationary economy without bankruptcy being the equalizer. There simply will not be sufficient money to pay off debts without an equivalent and unsustainable increase in velocity. You could argue then that those businesses did not deserve to survive, and in effect you are arguing against small business and for large business where costs can be reduced as economies of scale take precedence. You could argue that small businesses should not run on credit, but then I'd just have to laugh at how little you understand the real world.

[MoonShadow]

The finance industry has become such a huge part of the US economy, that I would say that Elats2's claim that even mild deflation would result in a large pull back from major investment, and result in increased unemployment.

Please direct me to where I wrote this. Otherwise that is twice in two posts you have (intentionally?) misrepresented what I've said.

I was paraphrasing my own interpretation of your statements.  I'd say that I was giving your viewpoints unearned credit out of kindness for your perspectives.  You'd be wise not to attempt to disprove that.

Small businesses have always been the bulk of business activity in the United States, and small businesses should be the bulk of the business with Bitcoin as well.  Under such a model, mild deflation is no more (and perhaps less) dangerous to the business climeate than mild inflation.

Would you care to provide any evidence to back this up rather than idle and wanton speculation? Because small businesses tend to operate on very strict amounts of capital, cash flow that is almost universally derived from credit. Small businesses tend to balance a very fine line between profitability and bankruptcy. Mild deflation (you imply here that bitcoin would have mild deflation, based on what? and what do you consider to be mild?) that is just a smidgen more than expected can and will cause a slew of bankruptcies. There is simply no other way. You cannot have credit in a deflationary economy without bankruptcy being the equalizer. There simply will not be sufficient money to pay off debts without an equivalent and unsustainable increase in velocity. You could argue then that those businesses did not deserve to survive, and in effect you are arguing against small business and for large business where costs can be reduced as economies of scale take precedence. You could argue that small businesses should not run on credit, but then I'd just have to laugh at how little you understand the real world.

Why is my speculation "idle and wanton" while your's is not?  By mild deflation, I mean something very close to 0% APR, as in less than 2%, or closer to 0% than the normal inflationary "targets" of central bankers worldwide.  I was not implying that Bitcoin would necessarily achieve this anytime soon, but I do expect it to happen eventually should Bitcoin ever become an international reserve currency.  I have no better evidence to support that last position than you have for discounting it, which is to say nothing more than intuition.

[Impaler]

MoonShadow:  Your straying into a petulant tone which is uncalled for, when you misrepresent what someone is saying you apologize, you don't try to blame them and throw down the gauntlet as you just did.  Debate people respectfully and you'll get a lot more fruitful of a discussion.


P.S.  The 'mild deflation' definition being the reciprocal of what we consider mild inflation ~2% seems reasonable.  I don't have any faith that BTC would every reach that rate, but I'm sure it would never have any real economic usage until it DOSE reach that level or less.

So I think this thread is no longer about BTC and what rate it may/might ultimately have, but rather a discussion of a Central Bank POLICY of 2% deflation (and possibly a 0% policy of equal avoidance of both inflation and deflation) and if that is or is not better then the current orthodoxy of 2% inflation policy.  This may help you two to focus the discussion on JUST the merits of inflation and deflation.

[sublime5447]

I have to strongly question the intelligence of the author of that article as well as yourself Moonshadow for perpetrating bullshit like this.

A currency that is deflationary IS NOT EQUAL TO a specific product or industry that experiences deflation in an otherwise inflationary currency. They are COMPLETELY DIFFERENT economic situations.

This is in no way an argument for a deflationary currency. It is asinine to think so.

+100 you gotta be a special kinda retard to equate falling prices that are result of greater efficacy and new technology with falling prices that are a result of a deflationary currency..

Falling prices are good inflation and deflation are bad.   

[Impaler]

+100 you gotta be a special kinda retard to equate falling prices that are result of greater efficacy and new technology with falling prices that are a result of a deflationary currency..

Falling prices are good inflation and deflation are bad.   

In his defense this error is the NORM in the BTC universe and the broader gold-buggery communities.  It's repeated like a kind of mantra by the deflationary faithful.  Part of the error lies in the gold-bugs refusal to look at economic choices and incentives from the perspective of ANY other person in the economy other then speculators like themselves.  When your holding a deflating currency, and really any asset that is rising in value (such as homes in the housing bubble) you DO experience a kind of 'wealth effect' in which you feel wealthier and become a bit looser with discretionary spending.  The individual will logically adopt a 'shaving' policy of selling off a % of their asset LESS then the yearly appreciation rate so they can milk it indefinitely.  So gold-bugs then blithely claim this wealth-effect spending will make the economy prosperous and all opposing arguments can be dismissed out of hand.

But when you look from the perspective of the entrepreneur you see how this falls apart.  The entrepreneur in a capitalist society has to borrow money to make purchases of capitol goods and that means the interest rate is a KEY factor in determining how much money entrepreneur will be lent.  Some entrepreneur will have highly profitable ideas/opportunities some will have less, a whole spectrum will exist but only the entrepreneur with an expected return above the rate of interest will be funded.  In addition the entrepreneur will keep a higher percentage of their return because the entrepreneur share is the real rate minus the interest rate, so lower rates encourage more people to take the risk and commit the great personal investment of time and energy to BE entrepreneurs and seek out and create the ideas/opportunities that are the basis for entrepreneurial-ism.

This is why we lower interest rates to stimulate the economy, it causes more money to flow into the hands of entrepreneurs and more to be invested.  Deflation raises interest rates because potential lenders are happy to just hold money and the prospective investment has to have a real rate of return greater then the interest rate.  An idea that promises to return 4% is not funded when interest rates are 5%, and an idea that promises 6% will yield only 1% left over for the entrepreneur after interest has been payed back, hardly much incentive for the entrepreneur to try the idea or even seek a loan.

[sublime5447]

I would make the point that saving assets that appreciate in value is not immoral, while saving a currency and gaining purchasing power is.

Assets and money (not currency) have value

Currency has no value, but is a representation of value. Similar to the way that an inch has no length but represents length. Holding currency and gaining value is like holding an inch and gaining length.     

[solex]

It is not the basic consumer that anyone has to worry about, it is the investor and job creator that one has to worry about stopping cash flow through the economy, causing job losses which then do cause less consumer spending, and spiraling downward economic output. Deflation vs. inflation will hardly affect those who spend the vast majority of their income, assuming wages and prices are reflected similarly. Basic arguments about consumption totally ignore the greater systemic risk posed by deflation.

This is a fallacy. People will always buy what they need, which puts a floor under any deflationary spiral. In the current system people are encouraged to consume for the sake of consumption, buying what they don't need, and worse, borrowing to do it. With a sound monetary system borrowing would be done for purposes of new and increased production - driven by legitimate market forces (not excessive FRB and CB-spiked money creation).

Further. Bitcoin is not even a deflationary currency. It just inflates at a smaller and smaller rate. The inflation rate in Bitcoin right now is about 11%, which is larger than any real GDP growth! Eventually it will be less than real GDP growth, but even then, lower prices and wages will not reduce living standards.

[Etlase2]

This is a fallacy. People will always buy what they need, which puts a floor under any deflationary spiral. In the current system people are encouraged to consume for the sake of consumption, buying what they don't need, and worse, borrowing to do it. With a sound monetary system borrowing would be done for purposes of new and increased production - driven by legitimate market forces (not excessive FRB and CB-spiked money creation).

Further. Bitcoin is not even a deflationary currency. It just inflates at a smaller and smaller rate. The inflation rate in Bitcoin right now is about 11%, which is larger than any real GDP growth! Eventually it will be less than real GDP growth, but even then, lower prices and wages will not reduce living standards.

All you are doing is thumping on the same bitcoin bible. People can't buy what they need if they don't have jobs. Consumerism, as I stated, is mostly irrelevant and is only good for distracting from the real topic regarding what effects deflation will have on investment and job creation. And arguing about what the word deflation means is the typical bitcoinomics cherry on top.

[Kreigyr]

I've been rather happy to buy things with my finite amount of Bitcoins simply because of the deflation. I used them on the ride up at around 400$. I used them near the peak at 1200$. I used them at the bottom at about 500$. I used them yesterday at 700$.

Would I in a bear market? Possibly. It all depends on how much of my total wealth I'm expending to buy an album or seven. It has nothing to do where the price is going, but only where it is.

My 8$ and some change.

[sublime5447]

I've been rather happy to buy things with my finite amount of Bitcoins simply because of the deflation. I used them on the ride up at around 400$. I used them near the peak at 1200$. I used them at the bottom at about 500$. I used them yesterday at 700$.

Would I in a bear market? Possibly. It all depends on how much of my total wealth I'm expending to buy an album or seven. It has nothing to do where the price is going, but only where it is.

My 8$ and some change.

I have no clue what you are trying to say. When you say "simply because of the deflation" what are you talking about? Are you saying you used your coins because the price went down?