Mish on deflation

[Hawker]

The problem is that we don't know if deflation is really that bad a problem.  The only modern example available to us is Japan where deflation has been around for 20 years now.  Japanese society is having a demographic crisis caused by low birth rates.  If your population is going to fall by over a third over the next generation, the value of houses and land will also fall since there is too much.  So the Japanese domestic economy is theoretically screwed and empirically we can see deflation has taken root there.  

Yet the Japanese have low unemployment and a great standard of living.  For example, there are more Michelin star restaurants on Tokyo than most other cities.  I don't know of any way in which life in Japan could be said to be worse than life in the UK or US.  

One could be forgiven for wondering whether deflation is really such a bad thing?

The Japanese economy over the last 20 years is considered catastrophic for good reason.  That nation had a growth curve like a bat-out-of-hell and has now under performed so badly and for so long that it's GDP is now HALF what it was anticipated to be by now.  Neighboring nations like South Korea which were far behind Japan have nearly reached parity in PerCapita GDP and if things continue will PASS them.  That is like the US being Passed in PCGDP by MEXICO.  No person in Japan will describe the last 20 years as anything but an economic disaster.

Your correct that Japanese SOCIETY has not crumbled, but that is because the Japanese have one of the most resilient social structures on Earth and a VERY extensive welfare state that's kept people out of poverty.  Just because they haven't been broken dose not mean they are not stressed and 'in a bad place' with the present economy.

Lastly, if your arguing that deflation only occurs when a society is already 'screwed' by demographics or other calamities that eliminate or reduce the potential for future growth then why did the US experience it so frequently in periods that deflation defenders like yourself describe as high-growth such as after the CivilWar?  Japan had and still has an export based economy, NOT one based on internal consumption, their demographic problems present a challenge but they are not a fundamental limiter of their growth when automation is everywhere, the total world trade continued to grow after Japan stagnated, and their is no reason that Japan could not have continued to at least maintain if not grow it's share of that market had it continued to be healthy.

Everything you say is true except for the fact that Japanese people have not been affected that much.  Their living standards compared to the rest of us are the same now as they were 20 years ago.  Individual hard cases must exist but overall the Japanese people have a fine lifestyle.  The fact that the Koreans worked their way out of abject poverty doesn't detract from this point.

[1714771345]

1714771345

[Impaler]

I didn't say the Japanese standard of living declined, I said it stagnated.

Your confusion seem to be that your not willing to accept that stagnation and 'lost decades' are not actually losses because material standards of living did not decline in absolute terms.  If THAT is what you need to see to consider it a 'bad' economy your demanding full on Great Depression or Civil-war levels of collapse.

But real people make their assessments of economics by comparison with their region or the world, and the last 20 years have seen growing GDP and rising standards of living in virtually every country on EARTH, particularly in Asia, hell even most countries in Africa have seen substantial rises in PCGDP and material standards of living.  For ONE nation to see virtually no growth in that period puts them at the bottom of the barrel and shows that their economy is very sick.

[Hawker]

I didn't say the Japanese standard of living declined, I said it stagnated.

Your confusion seem to be that your not willing to accept that stagnation and 'lost decades' are not actually losses because material standards of living did not decline in absolute terms.  If THAT is what you need to see to consider it a 'bad' economy your demanding full on Great Depression or Civil-war levels of collapse.

But real people make their assessments of economics by comparison with their region or the world, and the last 20 years have seen growing GDP and rising standards of living in virtually every country on EARTH, particularly in Asia, hell even most countries in Africa have seen substantial rises in PCGDP and material standards of living.  For ONE nation to see virtually no growth in that period puts them at the bottom of the barrel and shows that their economy is very sick.

The Japanese standard of living hasn't fallen behind.  They have as many iPhones as we do.  They have lower unemployment than we do.  Deflation didn't hurt them.

The US and UK have experienced growth but its been growth for the 1%.  Ordinary workers have seen their standards of living improve but not more than the Japanese workers have.  Our rich are richer and have more yachts than they used to.

Again, we are disagreeing about whether or not it matters, not about whether or not deflation happened.  It appears to me that the Japanese case shows that deflation doesn't matter that much for most people.

[Impaler]

Again your refusing to either understand or acknowledge my main point, that Japan lost RELATIVE to everyone else.  And that profoundly DOSE matter.  If were watching a race and the lead runner is 100 yard ahead of the pack and someone shoots him in the leg and he falls down and starts crawling and the pack of other runners start rapidly closing the 100 yard distance but haven't yet over taken the now crippled runner.  You can not rationally claim that because the shoot runner hasn't fallen behind (yet) that being shot 'wasn't so bad'.

Yes our growth in the US/UK has been going all to the 1% POST REAGAN/THATCHER, before that growth got distributed a lot better.  Japan though has always had higher equality both Before AND After it's lost decades, it is simply a part of their culture.  CEO's of huge Japaneese companies make only 10x what a line-worker makes, inheritance taxes are up in the 90% range and their Gini values are one of the best outside of Europe.  But their is nothing to suggest a link between a nations income-inequality and it's growth or lack of growth.

You argument that deflation doesn't matter is absurd particularly when applied to Japan, IF that economy had continued to grow the 99% would have been the primary beneficiaries, they would have seen living standards grow to perhaps the highest in the world.  The disaster is the difference in what could have been and what actually happened.

Now apply the same deflationary economy to an highly UN-equal society and you will actually ratchet DOWN the wealth and standard of living of the 99% as every downward dip will pick the pocket of the worker and every recovery is funneled to the 1%.  An unequal society only lets the common man improve his living standards when their is an all out BOOM, that's why we have such a huge emphasis on achieving high growth.

[MoonShadow]

I disagree with the premise that Japan's deflationary environment for the past 20 years or so was a bad thing, just because a majority of the formerly 3rd world nations around their region are now nipping at their collective heels economicly.  Regardless, I don't think that Japan's experience with deflation is particularly instructive in any sense with regard to Bitcoin's own experiences.  I don't think that Japan can be generalized, since the culture and economy is both so complex and so unique.  Even if there is something instructive with Japan's example, I don't think that it would be obvious nor without cavets.  I'm not sure that any existing example would be instructive for Bitcoin, because the economy that can be expected around Bitcoin is entirely voluntary, and that might make it rather unique as well.  Some things are universal, of course, but applying the macro lessons from nations using fiat is bound to be fraught with error.

[solex]

Indeed. We can still consider the general macro-evidence...

Japan: deflation = stable living standards, wealth preservation.
Venezuela, Argentina: inflation = decreasing living standards, destruction of wealth.
Zimbabwe: hyperinflation = destruction of living standards, endemic subsistence poverty.

[Hawker]

...snip...

You argument that deflation doesn't matter is absurd particularly when applied to Japan, IF that economy had continued to grow the 99% would have been the primary beneficiaries, they would have seen living standards grow to perhaps the highest in the world.  The disaster is the difference in what could have been and what actually happened.

Now apply the same deflationary economy to an highly UN-equal society and you will actually ratchet DOWN the wealth and standard of living of the 99% as every downward dip will pick the pocket of the worker and every recovery is funneled to the 1%.  An unequal society only lets the common man improve his living standards when their is an all out BOOM, that's why we have such a huge emphasis on achieving high growth.

http://www.nationsonline.org/oneworld/human_development.htm - the Japanese are about the same as the rest of us.  If GDP were higher, the Japanese rich would have bigger yachts. 

You look at Japan and think that they could be so much better off if they had higher GDP.  I look at Japan and see that they have a fine standard of living with full employment, a fine health system and long lifespans.

I don't think we will agree as you think that growth can improve living standards for all of society and I think growth can only benefit those who have capital. 

[kjj]

In a sense yes, bankers and entrepreneurs are together doing all investments and my earlier comments on opportunity cost show that it doesn't matter WHO is providing the money, the interest rate gives the same incentive to DO or not do the investment if it is with borrowed money or your own money because the interest rate is for EVERYONE in an economy including the entrepreneur, it is as they say the most important price in the whole economy.

Your whole description of inflation and deflation in terms of 'pay in advance' vs 'pay after' is missing the point.  Every possible investment activity involves turning liquid money into illiquid goods and then back into (hopefully) more money MANY MANY times in the course of a year, ideally as fast as you possibly can.  The distinction of starting with your own money from savings or with loaned money is irreverent.  What matters is your internal rate of return vs your interest rate.  You must exceed interest rates to be considered 'a good investment' even if your self capitalized.

If your enterprise can't at least match the global growth rate, perhaps the world would be better off without you doing it, leaving that capital available to those who can.

[MoonShadow]

Indeed. We can still consider the general macro-evidence...

Japan: deflation = stable living standards, wealth preservation.
Venezuela, Argentina: inflation = decreasing living standards, destruction of wealth.
Zimbabwe: hyperinflation = destruction of living standards, endemic subsistence poverty.

Selection bias, I'm afraid.  Hyperinflation has always been a political act, not solely a monetary one.  There is no obvious economic lesson to be learned from hyperinflationary events such as Zimbabwe or the Weimar Republic, but plenty of political lessons.

[MoonShadow]

I don't think we will agree as you think that growth can improve living standards for all of society and I think growth can only benefit those who have capital. 

You are both right, but I don't think that you would agree on what 'capital' actually is.

[Impaler]

If your enterprise can't at least match the global growth rate, perhaps the world would be better off without you doing it, leaving that capital available to those who can.

And if their are idle resource and people then your argument falls apart because idle resource simply decay (both human and machine) and produce ZERO returns, any positive return is better then that.  The history of interest rates clearly shows that interest dose not ONLY reflect an average of growth rates or even the average return on investment activity (which is what you meant to say).

[Impaler]

http://www.nationsonline.org/oneworld/human_development.htm - the Japanese are about the same as the rest of us.  If GDP were higher, the Japanese rich would have bigger yachts.  

You look at Japan and think that they could be so much better off if they had higher GDP.  I look at Japan and see that they have a fine standard of living with full employment, a fine health system and long lifespans.

I don't think we will agree as you think that growth can improve living standards for all of society and I think growth can only benefit those who have capital.  

Japans GINI value blows your argument out of the water, it is NOT a winner take all society in which all wealth goes to the 1%, how many times do I have to point this out for you to get it through your thick skull.  Just because that is what we in the US and UK and other unfortunate places get dealt dose not mean it is a universal quality of all society.  Show me a scrap of data that actually supports your argument and I'll reconsider but right now your just massive projecting your view of your own society onto a foreign one.

Even if I agreed with your 'capitol' statement your interpretation probably neglects Human capitol which is a huge portion of any societies capitol stock and which is spread quite widely through the population.

[MoonShadow]

If your enterprise can't at least match the global growth rate, perhaps the world would be better off without you doing it, leaving that capital available to those who can.

And if their are idle resource and people then your argument falls apart because idle resource simply decay (both human and machine) and produce ZERO returns, any positive return is better then that.  The history of interest rates clearly shows that interest dose not ONLY reflect an average of growth rates or even the average return on investment activity (which is what you meant to say).

This statement is easily disprovable.  Just because some resources are economicly 'idle' doesn't mean that they are in decay, some improve with the wait for increased demand.  A great example is that of contruction quality timber, a field that I have recently aquired better than a layman's education due to a move of mine to a large piece of rural propery with a great deal of (mostly) wild woods.  While there are some things that a tree-herder could do to improve the marketable yield of a few acres of woodland, forestry does pretty well as a zero-intervention resource, happily growing without humankind.  Obviously, as those trees age and grow, they become more economicly valuable for construction timber.  I can think of several situations that an 'idle' resource is economicly best to wait.  Another is wine, for well known reasons.  Bourbon is another for similar reasons.  Even beekeeping falls into this catagory under certain conditions, since both honey and wax have no known spoiling rate while inside of a living hive and, so long as the hive has room to grow, the hive won't consume more than they need whether or not they have it.  Some hobby beekeepers have been known to let hives grow for many years before taking any honey or wax, and both can keep inside jars for centuries.

Another, more modern, example is likely one that you have not even considered.
http://en.wikipedia.org/wiki/Yucca_Mountain_nuclear_waste_repository

Yucca Mountain Repository is claimed to be designed to house spent nuclear fuel rods from US light water reactors for thousands of years, but no one who is involved with it's design actually expects them to be there that long.  The reason for this is, 1) the technology exists to recycle spent fuel and is already in service in Europe and 2) the US has no natural uranium mines.  Almost all of US fuel supplies come from Austrailia.  US law requires spent fuel to be stored; not because it can't be recycled, but because it can and storing the spent fuel just in case we (as in the US govenrment, military, etc) are cut off politically or economicly from Austrailia and can no longer buy more fuel (either commercial or military) internationally.  Such a "waste" storage facility could literally pay dividends, both by keeping hazardous materials away from geologically unstable regions with high groundwater tables (i.e. where most of the human population actually lives) in the short term, but potentially to become a primary source for uranium 235 during periods of extreme scarcity.

[kjj]

If your enterprise can't at least match the global growth rate, perhaps the world would be better off without you doing it, leaving that capital available to those who can.

And if their are idle resource and people then your argument falls apart because idle resource simply decay (both human and machine) and produce ZERO returns, any positive return is better then that.  The history of interest rates clearly shows that interest dose not ONLY reflect an average of growth rates or even the average return on investment activity (which is what you meant to say).

If the growth is happening elsewhere, perhaps the capital owner should consider scrapping the equipment and recycling it into a more productive industry.  (Note that this is a restatement of my previous post.  Recycling equipment is an example of "leaving that capital available to those who can [at least match the global growth rate]".)

Just as an aside, in the situation where capital is idle and literally rotting in place, where is the growth coming from that is causing deflation?  You do remember that when the money supply is fixed, deflation comes from the growth of wealth (which includes capital), right?  And that growth isn't delivered by angels or storks, but by the application of capital.

In that situation, growth would be low, and thus deflation would be low.  People would have an incentive to lend at low rates during those times.  I really do wish that you had paid more attention in high school chemistry class so that you could see dynamic equilibrium as a thing of beauty.  It must be hell seeing the world through your eyes as the struggle between various external ghosts and spirits.