Molyneux on Deflation - Video

[evoorhees]

A decent overview of why deflation may not be the boogeyman so many believe it to be. I wish he'd spent more time discussing the economics of falling prices, but I guess that's "Deflation 102" and better for a follow-up lesson.

http://www.youtube.com/watch?v=a6E1k2YO9qU

[1715439629]

1715439629

[herzmeister]

Thesis: Inflation
Antithesis: Deflation
Synthesis: ? ? ?

[ribuck]

The only people who love inflation are those who are in debt. The government loves inflation.

[BitterTea]

Thesis: Inflation
Antithesis: Deflation
Synthesis: ? ? ?

You cannot both inflate and deflate the money supply, but you can do neither. That's essentially what Bitcoin will do around 2032.

[herzmeister]

That's only if we no longer multiply and stay on this planet. 

[BitterTea]

That's only if we no longer multiply and stay on this planet. 

I don't get it.

[Litt]

That's only if we no longer multiply and stay on this planet.  

I don't get it.

He actually believes that money supply needs to increase in quantity rather than value because he can't comprehend the concept of private wealth preservation.

[herzmeister]

oh the internet and ad hominem attacks, how i missed thee.

i merely meant that in order for the bitcoin value to stagnate in ~2030 as prospected by @BitterTea, so does have economic growth. this will likely happen (assuming bitcoin has by then become world currency ) when population growth on this planet has stopped and we have overcome the infinite economic growth paradigm. how much people can and will still hoard bitcoins as private savings in such a scenario is another (albeit interesting) discussion. either way, when we set out to colonize other planets, our species can multiply again, thus bitcoin definitely can and will deflate again, and that is really all i wanted to point out.

but this all is separate from my original question.

[BitterTea]

oh the internet and ad hominem attacks, how i missed thee.

i merely meant that in order for the bitcoin value to stagnate in ~2030 as prospected by @BitterTea, so does have economic growth. this will likely happen (assuming bitcoin has by then become world currency ) when population growth on this planet has stopped and we have overcome the infinite economic growth paradigm. how much people can and will still hoard bitcoins as private savings in such a scenario is another (albeit interesting) discussion. either way, when we set out to colonize other planets, our species can multiply again, thus bitcoin definitely can and will deflate again, and that is really all i wanted to point out.

but this all is separate from my original question.

I said nothing of the value of a Bitcoin. I was referring to the fact that 99% of all Bitcoins will be in existence by 2032. The value has little to do with population, and much to do with the quantity of goods and services that can be bought with them. With a fixed money supply, and zero population growth, the value of Bitcoins will rise if the output of the Bitcoin economy increases.

[melvster]

A decent overview of why deflation may not be the boogeyman so many believe it to be. I wish he'd spent more time discussing the economics of falling prices, but I guess that's "Deflation 102" and better for a follow-up lesson.

http://www.youtube.com/watch?v=a6E1k2YO9qU

Nice wrap up.

Inflation is a tax, yes.

But I'm not convinced it is always necessarily bad. 

What if $10,000 were put in your bank account to stimulate the economy, would you complain?

What if money printing was used to pay of the national debt as it comes due?

I agree with his deflation argument.  But what about those that hoard huge amounts of money, does it mean the rich become richer?

I'm still undecided on this one, but I'm thinking about the "inflation used for the public good" concept, maybe being the best way.

[BitterTea]

The only people who love inflation are those who are in debt.

And those who like commerce.

Are you saying that decreasing prices is a detriment to commerce? Increasing prices are benefit?

[BitterTea]

What if $10,000 were put in your bank account to stimulate the economy, would you complain?

If $10,000 were put in everybody's bank account? Yes. All dollars are now worth ($10000 * # of bank accounts) / (previous total dollars in circulation) less.

What if money printing was used to pay of the national debt as it comes due?

What do you think will happen when 14 trillion dollars is created out of thin air? It rhymes with "sniper damnation".

I agree with his deflation argument.  But what about those that hoard huge amounts of money, does it mean the rich become richer?

It means everyone's money has more purchasing power. Those who "hoarded huge amounts of money" are now more tempted into spending it, due to this. There's an equilibrium here that you're not seeing. Money hoarded -> purchasing power (for everyone) increases -> money spent -> purchasing power (for everyone) decreases until a balance is reached.

I'm still undecided on this one, but I'm thinking about the "inflation used for the public good" concept, maybe being the best way.

There is no such thing as "the public good".

[melvster]

What do you think will happen when 14 trillion dollars is created out of thin air? It rhymes with "sniper damnation".

Why would paying off debt as it comes due (over a 30 year period) cause hyper inflation?

Surely the bonds are considered roughly AAA rated so exchanging them for real cash, as they come due, wont actually increase the money supply?

[BitterTea]

What do you think will happen when 14 trillion dollars is created out of thin air? It rhymes with "sniper damnation".

Why would paying off debt as it comes due (over a 30 year period) cause hyper inflation?

Surely the bonds are considered roughly AAA rated so exchanging them for real cash, as they come due, wont actually increase the money supply?

How can they print money to pay the debt without increasing the money supply?

[BitterTea]

Are you saying that decreasing prices is a detriment to commerce?

Deflation encourages saving and thus necessarily discourages trading, simple as that.

Really, that simple? What does one do with savings?

[melvster]

What do you think will happen when 14 trillion dollars is created out of thin air? It rhymes with "sniper damnation".

Why would paying off debt as it comes due (over a 30 year period) cause hyper inflation?

Surely the bonds are considered roughly AAA rated so exchanging them for real cash, as they come due, wont actually increase the money supply?

How can they print money to pay the debt without increasing the money supply?

Because the money supply was already increased when the bonds were issued?  Paying the bonds is simply fulfilling the original expansion?

(Disclaimer:  This is part speculation / theorizing )

[BitterTea]

Really, that simple? What does one do with savings?

In an inflationary environment you eventually invest or spend those savings. In a deflationary environment you save them some more.

Please, don't be intellectually lazy. What does one do with those savings?

Are you honestly proposing that deflation causes people to accumulate money for the sake of accumulating money, rather than for exchanging for the goods and services that they need to survive or merely desire?

[BitterTea]

Are you honestly proposing that deflation causes people to accumulate money for the sake of accumulating money, rather than for exchanging for the goods and services that they need to survive or merely desire?

Well it depends. If you are forced to use the currency then yes, you would exchange it for goods and services. If use of the currency is voluntary then you are going to use it like a commodity rather than a currency, you'll just sit on it while it appreciates in value until you cash out. See Bitcoin and gold for examples of voluntary deflationary economies.

So... when you convert it into a different asset... is that not "spending"?

[jtimon]

The problem with deflation is that investments, loans and credit shrink.
Maybe from the viewpoint of a consumer not consuming because tomorrow everything is going to be cheaper is "non-sense". But what about the viewpoint of the merchant?
When does the merchant wants his inventory full of wares, with inflation or with deflation?
And of course from the point of view of the investor/borrower.
If I know that a factory will yield 5% of its price and interest rates are at 5%, will I borrow to build the factory?
If there's no deflation, maybe. You can hire yourself as the manager and live on that wage, even if you're not going to make any profit.
But say with 6% deflation. There's no way that you're going to borrow and build the factory on these circumstances.
The the nominal yield of the factory will drop and therefore its price as capital (that is nothing else than the nominal yield * 20 in this 5% interest example). On the other hand, you will have to pay the whole principal of the loan and the interest will stay constant.
And of course, if you think like this as a borrower and investor, you think the same if you're considering to invest with your own money.

Yes, yes "But then all the lenders are enable to find borrowers at 5% interest and will lower the interest competing between them".
That's true.
But how much must interest rates drop for the same factory to be as attractive in the deflation scenario as it is in the stable prices scenario?
They must fall to -1%.
Is that possible? No.
So with deflation, nominal interest rates fall (often they rise, but not for the deflation itself, but because of the previously inflation lent into existence), but only a fraction of the investment that could have taken place without it is actually made. The production of means of production (real capital) is reduced to only the capitals that can beat both nominal interest rates and deflation.

Some people just think that inflation is so bad that deflation must be necessarily good. Aren't they the opposite thing?
By the way, there's already another thread for this topic.

Disclaimer: I'm not for inflation. When I say deflation I mean price deflation (falling prices), not monetary deflation (shrinking monetary base).

[Etlase2]

So... when you convert it into a different asset... is that not "spending"?

You would consider converting USD to EUR spending? lol