Economic of Deflationary Spiral

[jtimon]

... but shreiking about 'fractional reserve banking' being a scam is like accusing a clock hanging on a wall of making time out of nothing.

Fractional reserve is not a scam but an arbitrary regulation. The government says how much the banks must have in reserve.
In a free market different banks would have different reserves. Even different types of accounts within the same bank would have diffrent fractions of reserve. The customer and the bank would agree in how the customer will be rewarded for not having full reserve for his account.

[1714866686]

1714866686

[1714866686]

1714866686

[BitterTea]

... but shreiking about 'fractional reserve banking' being a scam is like accusing a clock hanging on a wall of making time out of nothing.

Fractional reserve is not a scam but an arbitrary regulation. The government says how much the banks must have in reserve.
In a free market different banks would have different reserves. Even different types of accounts within the same bank would have diffrent fractions of reserve. The customer and the bank would agree in how the customer will be rewarded for not having full reserve for his account.

Most importantly, in a free market, banks cannot stretch their reserves too thin, otherwise they are putting themselves at risk of a run. Contrary to popular belief, bank runs are a good thing, they keep banks honest.

A must read: What Has Government Done to Our Money?

[no to the gold cult]

Yes, it's called the liquidity ratio. Banks need enough liquidity for when customers want cash, but enough assets on their books (paper, mortgages, stuff like that) to keep profits up. They have to balance between the two.

[jtimon]

Yes, it's called the liquidity ratio. Banks need enough liquidity for when customers want cash, but enough assets on their books (paper, mortgages, stuff like that) to keep profits up. They have to balance between the two.

But...Do you like the way is regulated today?
I mean, why 10% (or whatever it is in the country you want)?
Why not 25% or 1%? Where the lawmakers got that number from?

[no to the gold cult]

Yes, it's called the liquidity ratio. Banks need enough liquidity for when customers want cash, but enough assets on their books (paper, mortgages, stuff like that) to keep profits up. They have to balance between the two.

But...Do you like the way is regulated today?
I mean, why 10% (or whatever it is in the country you want)?
Why not 25% or 1%? Where the lawmakers got that number from?

Whatever the requirement is is not necessarily enforced anyway so it's somewhat a moot point. Corporations are out to make profits and to calculate risks they think they can get away with, clever people are paid millions to get around all sorts of impediments to profit.

Personally I believe in fettered capitalism, made to serve society and pay for minimal standards of decommodified human space (healthcare, housing, education etc, the stuff of basic social dignity) like a fire kept in a fireplace as opposed to the 'burning house' situation espoused by some, where everything is for sale and the government's just there to provide mercenaries and cops.

Anyway back to your question, central banks are generally instructed to do two things, control inflation and control unemployment through monetary policy (emphasis being a policy decision of government of course).

Central banks can attempt this control by raising or lowering interest rates or changing the supply of money, they can control the supply of money via Open Market Operations (buying and selling paper to governments and banks) and by also by Funding (ratio requirements etc) to try an force banks to follow the requirements.

They can get the balance wrong of course, and the people that run these organizations are probably subject to the influence of their friends and allies down at the golf club or the expensive tastes of their wives and mistresses (or husbands and toy-boys) and so on, political ideologies, prejudices, preferences, imperfect information, the never-ending quest to maximize ones own utility... they're human beings at the end of the day.

I like bitcoin because I think it can make a lot of this monetary muddle redundant.

[kiba]

Personally I believe in fettered capitalism, made to serve society and pay for minimal standards of decommodified human space (healthcare, housing, education etc, the stuff of basic social dignity) like a fire kept in a fireplace as opposed to the 'burning house' situation espoused by some, where everything is for sale and the government's just there to provide mercenaries and cops.

I don't believe in making it look like providing dignity. I want real dignity.

I want the cheapest and highest quality of housing, education, healthcare, so that the greatest amount of humanity is educated and ready to change the world for the better.

I don't want a fuckup of a government service with no fucking sense of self-analysis and regard for the powerful force of economic incentives.

[QuantumMechanic]

For the deflation alarmists:

Here's a 2004 article from a couple of Federal Reserve economists: citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.147.6290&rep=rep1&type=pdf.

The abstract: "Are deflation and depression empirically linked? No, concludes a broad historical study of inflation and real
output growth rates. Deflation and depression do seem to have been linked during the 1930s. But in the rest
of the data for 17 countries and more than 100 years, there is virtually no evidence of such a link."

During the 1930s, deflation was a monetary phenomenon.  Even though they were under a gold standard, the money supply was still able to significantly contract due to the fractional reserve nature of the banking system.  This was due to massive deleveraging.

If Bitcoin were to ever become so dominant that a discussion about the macroeconomics of it is actually relevant, then one must consider the fact that the base money supply would be a good measure of the money supply since people would not need the traditional fractional reserve banking system to store their bitcoins.  Thus, contractions of the money supply are probably impossible, and they will not be the source of any deflation.

So with deflation and depression linked in only one relatively short historical period, and given that such a significant deflation would not even have occurred in this period had there been a Bitcoin-dominant economy, what is the worry?

[no to the gold cult]

Personally I believe in fettered capitalism, made to serve society and pay for minimal standards of decommodified human space (healthcare, housing, education etc, the stuff of basic social dignity) like a fire kept in a fireplace as opposed to the 'burning house' situation espoused by some, where everything is for sale and the government's just there to provide mercenaries and cops.

I don't believe in making it look like providing dignity. I want real dignity.

I want the cheapest and highest quality of housing, education, healthcare, so that the greatest amount of humanity is educated and ready to change the world for the better.

I don't want a fuckup of a government service with no fucking sense of self-analysis and regard for the powerful force of economic incentives.

You don't want bad, corrupt, un-democratic control-freak government. Fair play, I agree.

[kiba]

You don't want bad, corrupt, un-democratic control-freak government. Fair play, I agree.

Wrong, I hate democratic governments.

I despise governments because the only thing that they know how to use is force. They have no regard for subtlety, or for self-analysis of their goal system.

Forcing millions or billion of people to choose their representative when they don't know anything about the issues of society is a definition of insanity.

Governments are bad for a reason. It's not because they're bad men, but because the incentive is set that way to encourage bad things happening and craft bad men.

At least business can be seen as transparently greedy. Politicans? They kiss babies for victories.

[asdf]

Anyone wants to say openly that deflation is better than stable prices?

I'll go out on a limb here and boldly claim that an inelastic money supply is better than an elastic money supply. Inflation/Deflation is moot. Or, if you really want to get to the root the ideology; free markets in money are better than regulated markets in money.

Free market money tends toward using commodities such as gold and bitcoin, which are inelastic, which tend toward deflation (in a growing economy). So deflation isn't "better" so much as unregulated money is better.

Stable prices are an illusion; relative prices will always change even though the cpi might be stable. Prices are not stable by their very nature. Why do you want to fix nominal prices? Is it really that important? We seem to be getting by today with constantly changing prices, what's the problem you're trying to solve?

People seem to have a real fetish for this "stable prices" dogma
http://www.economicenquiry.com/archives/75

feedback?

[kiba]

We gotten off topic: http://bitcointalk.org/index.php?topic=6394.0

[Littleshop]

Have you purchased a pizza?   Why?  If you wait a year, you can buy it for cheaper.  http://bitcointalk.org/index.php?topic=137.0

Because you might need to eat before then.

[jtimon]

I'll go out on a limb here and boldly claim that an inelastic money supply is better than an elastic money supply. Inflation/Deflation is moot. Or, if you really want to get to the root the ideology; free markets in money are better than regulated markets in money.

Free market money tends toward using commodities such as gold and bitcoin, which are inelastic, which tend toward deflation (in a growing economy). So deflation isn't "better" so much as unregulated money is better.

Interesting. Can you give me your opinion on the terra?
Would it achieve stable prices?
http://en.wikipedia.org/wiki/Terra_(currency)

Stable prices are an illusion; relative prices will always change even though the cpi might be stable. Prices are not stable by their very nature. Why do you want to fix nominal prices? Is it really that important? We seem to be getting by today with constantly changing prices, what's the problem you're trying to solve?

People seem to have a real fetish for this "stable prices" dogma
http://www.economicenquiry.com/archives/75

By stable prices I mean the absence of deflation and inflation. The changes in relative prices move the economy to what the demand wants. But when everything is rising or falling people have to calculate which things are rising/falling faster in order to do successful business.
Maybe those cycles are unavoidable as you probably think.
I think those cycles come from the liquidity premium of scarce money.
Maybe you're right, the unelastic money is better and the monetary system cannot be designed to avoid these cycles.
I think (don't know for sure) that according to you're definition ripple would be an elastic monetary system. I also think that a ripple network would tend to set the liquidity premium at zero. Maybe it could not avoid inflation/deflation neither.
It's also free software (so "free market money") and hopefully will have a p2p implementation.
I started a thread here about "stable prices" here (well, I didn't say it clearly at first) and people answered like if the title was "Inflation rocks and deflation sucks":

http://bitcointalk.org/index.php?topic=3816.msg54368#msg54368

[asdf]

I'll go out on a limb here and boldly claim that an inelastic money supply is better than an elastic money supply. Inflation/Deflation is moot. Or, if you really want to get to the root the ideology; free markets in money are better than regulated markets in money.

Free market money tends toward using commodities such as gold and bitcoin, which are inelastic, which tend toward deflation (in a growing economy). So deflation isn't "better" so much as unregulated money is better.

Interesting. Can you give me your opinion on the terra?
Would it achieve stable prices?
http://en.wikipedia.org/wiki/Terra_(currency)

Without thinking too hard about it, I'd just say that I think bitcoins are much better. Interesting idea, though, but once again, I don't feel the need to maintain a stable CPI. All you really want to do here is make sure that prices are the same on average, why? Especially when the only solution is to reallocate resources by giving someone new money.

Stable prices are an illusion; relative prices will always change even though the cpi might be stable. Prices are not stable by their very nature. Why do you want to fix nominal prices? Is it really that important? We seem to be getting by today with constantly changing prices, what's the problem you're trying to solve?

People seem to have a real fetish for this "stable prices" dogma
http://www.economicenquiry.com/archives/75

By stable prices I mean the absence of deflation and inflation. The changes in relative prices move the economy to what the demand wants. But when everything is rising or falling people have to calculate which things are rising/falling faster in order to do successful business.

But everything will be rising and falling anyway. The price of electronics goes down while oil prices go up. This still happens with a stable CPI.

If there's no innovation and supplies are stable and the money supply is fixed, then prices will be stable. If some innovation means that a good can be produced at half the cost, why shouldn't the price half? Why do you want to inject more money into the economy just so the $ tag on the item stays the same?

Maybe those cycles are unavoidable as you probably think.
I think those cycles come from the liquidity premium of scarce money.

What cycles? Do you mean the Business Cycle? Austrian economics has it that this is a problem with central banking. Anyone correct me if I'm wrong on that.

Maybe you're right, the unelastic money is better and the monetary system cannot be designed to avoid these cycles.
I think (don't know for sure) that according to you're definition ripple would be an elastic monetary system. I also think that a ripple network would tend to set the liquidity premium at zero. Maybe it could not avoid inflation/deflation neither.
It's also free software (so "free market money") and hopefully will have a p2p implementation.
I started a thread here about "stable prices" here (well, I didn't say it clearly at first) and people answered like if the title was "Inflation rocks and deflation sucks":

http://bitcointalk.org/index.php?topic=3816.msg54368#msg54368

I don't know about Ripple.

[jtimon]

Without thinking too hard about it, I'd just say that I think bitcoins are much better. Interesting idea, though, but once again, I don't feel the need to maintain a stable CPI. All you really want to do here is make sure that prices are the same on average, why? Especially when the only solution is to reallocate resources by giving someone new money.

I don't think that the only solutions is to reallocate resources by giving someone new money. If it were, I should agree with you. The reallocation would be worse than not having the convenience of stable price level (supposedly what CPI measures)

But everything will be rising and falling anyway. The price of electronics goes down while oil prices go up. This still happens with a stable CPI.

If there's no innovation and supplies are stable and the money supply is fixed, then prices will be stable. If some innovation means that a good can be produced at half the cost, why shouldn't the price half? Why do you want to inject more money into the economy just so the $ tag on the item stays the same?

The convenience of having stable prices (of course, one certain good can decrease or increase in price due to market forces)  is that in a market with unstable prices, speculators (or just trend analyst) are rewarded over other entrepreneur or business men.
For example, imagine that you and I have competing businesses and we sell, for example, wood chairs.
Imagine that our products have the same quality but I'm more efficient producing them.
With stable prices I would have more success than you.

Imagine now that we're under deflation (or inflation), you know it and know how to do about it but I don't.
You will buy the wood at the right time and prices and I won't. You'll sell your products at the right prices and I won't.
Thus you will be more successful than me, it doesn't matter that I'm a more efficient producer than you.

During inflation/deflation there's a transfer of wealth that doesn't seem much fair to me. Inflation hurts lenders and deflation hurts borrowers.
Inflation artificially stimulates the economy. This artificial stimulus can spring bubbles as we have seen lately.
Deflation slows down the economy (I know kiba, people won't stop eating or having sex because of deflation).
It promotes hoarding and the medium of exchange gets out of the market. It makes exchanging (commerce) more difficult.

I don't want all the products in the market to have a stable value (that's impossible), I just want to prevent inflation and deflation. Not even that, I just want to prevent its effects.
I think demurrage could prevent the worse effect of deflation (slow down commerce). But with demurrage you lose the quality of store of value. I think store of value is not a necessary quality of money. It's just a good characteristic for a commodity to become money.
For more on demurrage:

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

What cycles? Do you mean the Business Cycle? Austrian economics has it that this is a problem with central banking. Anyone correct me if I'm wrong on that.

I'm just starting to learn Austrian economics but I doubt that they state that deflation/inflation cycles didn't exist before central banking.

I don't know about Ripple.

Here's the site:

http://ripple-project.org/

[Mashuri]

The convenience of having stable prices (of course, one certain good can decrease or increase in price due to market forces)  is that in a market with unstable prices, speculators (or just trend analyst) are rewarded over other entrepreneur or business men.

You need to understand that there is no difference between a speculator and an entrepreneur.  Both are attempting to predict future market preferences by risking their own capital.  Also, your dream of stable prices are unobtainable without heavy market intervention (and, even then, one could only achieve stable prices in the short term).  Stable prices not only require a stable currency but also stagnant demand and stagnant supply.  Consumer preferences change dynamically as does supply.  Intervening to stabilize prices with money supply manipulations and/or price controls only serves to distort prices away from reflecting true supply / demand dynamics and will cause even more instability in the long term.

[tomcollins]

The convenience of having stable prices (of course, one certain good can decrease or increase in price due to market forces)  is that in a market with unstable prices, speculators (or just trend analyst) are rewarded over other entrepreneur or business men.

You need to understand that there is no difference between a speculator and an entrepreneur.  Both are attempting to predict future market preferences by risking their own capital.  Also, your dream of stable prices are unobtainable without heavy market intervention (and, even then, one could only achieve stable prices in the short term).  Stable prices not only require a stable currency but also stagnant demand and stagnant supply.  Consumer preferences change dynamically as does supply.  Intervening to stabilize prices with money supply manipulations and/or price controls only serves to distort prices away from reflecting true supply / demand dynamics and will cause even more instability in the long term.

Speculators also help cause stable prices.  Think of having two goods that are sold for different prices in different regions.  One region it is high, one reason it is low.  If the cost of transporting a good from one region to the other is low, then a smart entrepreneur would buy in the cheap area, and sell in the high area at a slight discount.  If enough people did this, the prices would stabalize between regions.  A speculator does this, but between two different times rather than two different locations.

[jtimon]

@Mashuri @tomcollins
You've opened my eyes. Speculators serve society in their way. [No sarcasm]

@Mashuri
I just want a currency that performs the function of measure of value. If the only way to achieve this is by heavy market intervention, I'm out. In fact, if there's needed any market intervention I'd probably don't like it.
I think Ripple or Terra (none of them public) could achieve this.

[FreeMoney]

@Mashuri @tomcollins
You've opened my eyes. Speculators serve society in their way. [No sarcasm]

Very cool. This is what should be happening on the internet. (Not that I mind cleverly placed carrots and pancakes)

[pusle]

If speculators become too powerful/too few they can game the market to their advantage.
Examples are buying up large quantities of a commodity to make a fake scarcity or downright fraud and manipulation with the production chain (Enron)