Where can we see deflation being more contributive than inflation ?

[zimmah]

In a normal economy, it's pretty much impossible to have no inflation or deflation, unless you're constantly mucking with the currency supply for that economy.  So that basically leaves you with a choice between inflation, which theoretically leads to an upward spiral in prices and spending (if xyz is going to cost more tomorrow, I should buy it today while it's cheaper), or deflation, which leads to a downward spiral in prices and spending (if xyz is going to cost less tomorrow, I'll wait until later to buy it).  A little deflation now and then can be ok, but it's easy for it to get out of control.

people will buy things when they need it, which is much better because it prevents buying for 'wants' and encourages buying for 'needs'

which is much better for the environment in the end, and it might reduce greed.

A consumption driven society like we have now is very bad for many reasons. Ever heard of planned obsolescence? That certainly won't happen in an deflationary system.

Inflation encourages wasteful behavior.

I don't disagree that inflation may lead to wasteful behavior and feeds the whole instant gratification mentality.  But what's a better alternative?  Out-of-control deflation (which is often what happens with deflation) leads to depressions--market crashes, very high unemployment, etc.

Is unemployment inherently bad?

I think it's just the fact that unemployed people make no money that is bad. But what if we drastically reduce the amount of hours everyone needs to work in a week, to example 4 or 5 hours. And have machines do all the work. Wouldn't we be better off?

Also depressions are not caused by the lack of selling products, it's by overly high expectations of ever exponentially increasing sales. But deflation or inflation, sales will never continue to grow exponentially. With inflation it may only look like it does because the money supply increase exponentially, but the profit is fake because the value of the money is less. Also with deflation you would not need exponentially increasing sales because even if you make less money each year, you can buy the same products (or even more) with it.

I think many people are stuck in thinking inflation is good becaus they are used to it, but I don't think anyone has ever really tried to have an open mind about honest money (gold/silver/bitcoin) and all honest money by default is deflationary.

Also, remember that inflation and deflation generally affect wages as well as prices.  If we're in a deflationary environment, on average, I can expect to be paid less next year than this year (which could also come in the form of losing my job).  If I believe that to be the case, I'm going to save money as much as I can--only buy the essentials, etc.  If everyone does that, the economy will tank.

If by that you mean we won't buy a new kitchen every 3 years, a new car every 2 years, a new computer  every year and a new phone every 6 months, than yes, the economy will tank.

But do we really NEED to be that wasteful to be happy? Do we?

I hope not, or else the world won't  be able to continue as we know it for the next 50 years or so!

[jambola2]

Was that what you were getting at or did I miss your query? 

I'm not sure if I am going in circles half of the time

Anyways, many people were saying how a deflationary model is superior.
I was simply asking for precedence or hypothetical examples.

The computers one seemed sensible from my perspective , didn't realize that deflationary couldn't be applied to only a specific field.

[AZwarel]

Here is an excellent explanation about inflation. By the way, it comes from a non-economist, Andreas M. Antonopoulos

http://youtu.be/KLj2X8ml-CI?t=34m36s  just watch till 41:20 (but i advise to watch the whole video, VERY educational).

He explains it through with:
"in a debt based monetary system, deflation sucks, because the biggest debtor is the government, who than would never able to repay the loans if the currency starts to worth more year by year. So they inflate the money into nothingness."

and also:
"deflation in a debt based currency can lead to a catastrophic collapse of the demand, BUT in an asset based currency - Bitcoin -, it does not."

[twiifm]

Was that what you were getting at or did I miss your query? 

I'm not sure if I am going in circles half of the time

Anyways, many people were saying how a deflationary model is superior.
I was simply asking for precedence or hypothetical examples.

The computers one seemed sensible from my perspective , didn't realize that deflationary couldn't be applied to only a specific field.

Computer prices is not "deflation" -- its scale of manufacturing.   Please don't listen to these uneducated people who learn economics from youtube & fringe lunatics like Molyneux and Adropolous

Here's some historical examples of deflationary periods:  Theres a lot more examples but I just copy & paste this from some website

Post Panic of 1837―United States
Following the Panic of 1837, which was spurred by all banks' insistence on accepting payments in either silver or gold coinage alone, there was a five-year long period of economic recession in the US during which the money supply in the US economy had decreased by almost 30%.

The Great Deflation―United States
This was a 20 years long period, spanning from 1870-1890, in the US when there was a drastic decline in the prices of goods, raw materials, labor and services throughout the country. This was a rare instance of a nation actually gaining from deflation as due to the low cost of materials and labor, the just-beginning-to-industrialize US economy of those times was better able to swiftly inundate itself with industries and set up factories and production units at a lower cost. During this time, the well-established industrial nations such as Great Britain suffered economically due to a fall in demand and prices. The cause of this deflationary period is attributed to the return to gold standard post Civil War.

The Great Depression of the 1930s
The Great Depression is, perhaps, the most notorious among all historical periods of deflation. It started with the catastrophic US stock market crash on 29th October, 1929. This phenomenon is also known as the Wall Street Crash and the day it happened is grimly remembered as Black Tuesday. The Great Depression was born of manifold reasons, such as massive failures in financial structures like banks and stock markets, contraction of money supply by the US Federal Reserve, decision to return to the Gold Standard by Great Britain prior to World War 1, etc. The ripples of this depression was felt worldwide, with most countries experiencing its onset at different times during the 1930s, till the early 1940s.

The Financial Crisis of 1997―Asia
It all started when the Thai Baht collapsed, as a result of the Thai government's decision to float the national currency by cutting down its peg to the USD. This decision was spurred by failure to support the Baht exchange rate after long periods of financial extensions, most of which was extended towards real estate. Thailand was already under a staggeringly high foreign debt, way before the Baht crashed, and was technically seeing bankruptcy in the eyes at that time. The currency crash only added fuel to the already raging fire of an economic collapse. Starting from Thailand, the Asian Financial Crisis spread its ominous grip upon a large part of Asia, including Indonesia, South Korea, Laos, Malaysia, Hong Kong and Philippines were the countries that received a major blow due to this crisis. Other Asian countries like China, India, Singapore, Taiwan, Vietnam and Brunei also felt the ripples, though on a much smaller scale.

The Japanese Deflation of the 1990s
Starting in the early part of the 1990s, the deflation in Japan, was a result of a combination of various economic and demographic dissonances. Chief among them were asset price deflation, investment in insolvent companies, extension of non-performing loans by banks, etc. Also, due to the large incidence of banks involved in non-performing loans, people in Japan prefer investing their savings in Treasury Bonds rather than in bank accounts, further pushing these banks towards insolvency. Another major concern is Japan's negatively lopsided demographics. A significant part of the Japanese population consist of individuals above the age of 60. This part of the populace is headed towards a decline and a higher death rate, which significantly exceeds the birth rate in Japan, making such demographics a major issue.

Financial Crisis of 2007-2010
The recent recession that rocked the global economy started with a decline in the liquidity that took place in the US banking sector. Widespread unemployment in terms of drastic decline in recruitment and a peak in firings by companies all over the world was witnessed during the period starting from December 2007 till June 2009. Repercussions and ripples of economic depression can still be seen and felt at present, though on a much smaller scale than when it started. This is why despite recession having officially ended in June 2009, the threat of a deflationary rebound still lingers in our minds.

That was a brief overview of the major deflationary occurrences in world history. Although there are certain technical differences between recession and deflation, both cripple the economy. Compared to deflation, inflation is the lesser evil as people don't lose employment and the aggregate demand keeps mounting, leading to increased production of goods and services which require employment and recruitment of more people. In fact, within a certain limit, a small dose of inflation now and then is actually good for any economy.
Read more at Buzzle: http://www.buzzle.com/articles/historical-periods-of-deflation.html

[STT]

Although there are certain technical differences between recession and deflation, both cripple the economy.

Deflation is in the monetary base used to transact in an economy.   Recession refers to the productive growth of the economy or GDP, especially with more people in a country its natural for more business to be conducted but it is separate from numbers of currency notes or digital transactions done daily.
   They are not linked in effect and vice versa; unfortunately neither do we grow automatically as a country because we have inflation.

The biggest point here is government debt.   That is the elephant on the see-saw.    Over 50% of GDP is done via politics so this is where the whole gravity of any argument starts to revolve to anything which can justify or make easier that burden of taxation, debt and so on.   In that context we cheer inflation especially now as many governments have no way to repay their debts up front.

Extreme levels of inflation in a currency and also deflation would mean price instability.   This represents inefficiency and possibly a restriction on business as contracts can no longer be written reliably.  One reference to that might be the airlines trying to account for oil prices.   We have giant reserves and production even with various wars and USA as a free country is a big producer however oil price can spike and that is a price instability partly stemming from easy money policy.


The ideal is perfect pricing or zero inflation and zero deflation, stable value to currency hence why gold was used as an element its unchanging where as politics can cause a countrys promise to repay debt become very unstable and so now its currency.   People argue against bitcoin as has no link to anything fixed, so it represents instability and a challenge for business so if it were deflationary that might be a step up as a recognisable trend

[Erdogan]

Was that what you were getting at or did I miss your query? 

I'm not sure if I am going in circles half of the time

Anyways, many people were saying how a deflationary model is superior.
I was simply asking for precedence or hypothetical examples.

The computers one seemed sensible from my perspective , didn't realize that deflationary couldn't be applied to only a specific field.

Computer prices is not "deflation" -- its scale of manufacturing.   Please don't listen to these uneducated people who learn economics from youtube & fringe lunatics like Molyneux and Adropolous

Here's some historical examples of deflationary periods:  Theres a lot more examples but I just copy & paste this from some website

[...]

Great overview, thanks. These episodes are examples of abrupt deflation due to clearing of debt. When debt is paid back or it is evident that the debt can not be paid back, and therefore written off. Since debt is a part of the money supply, that means when there is clearing of debt, the money supply goes down.

I still do not think that should be messed with, because the threat of debt having to be written off, is what should hold the market back to not create too much debt. I understand that this can be argued both ways.

What is interesting, is the question: Why do the neo-keynesians, who believe that the money supply should increase when economic activity goes down, why do they insist that the new money is created in the form of debt? Because the debt, since it can be cleared, makes the total money supply much more instable. If they instead insisted on printing paper dollars, they would exist forever, and a panic could not reduce the money supply.

Of course I have an opinion of this, that it is a form of deception, since the market does not necessarily understand that debt increases money supply, and it is easier for the government to get a sanction for it. But if there is another explanation, I would like to know it.

[twiifm]

The idea is when you have recession the interest is lowered to encourage lending and when economy recovers the debts are paid down. 

BTW so far the QE doesn't have the effect its intended to have so you can say the theory is flawed.  The problem is you can't force someone to borrow money even if you make it cheap to do so. 

As for why The Treasury don't print paper money?  The short answer is that's not how it works.  They're not allowed to.

The Treasury issues bonds and the Fed buys them off the open market.  They do this to affect interest rate.  If they just printed a truckload of bills what are they gonna do with it? 

I wouldn't say there is any deception there.  If you go to the federal reserve website, its all explained.

[Nicolas Dorier]

The idea is when you have recession the interest is lowered to encourage lending and when economy recovers the debts are paid down.  

BTW so far the QE doesn't have the effect its intended to have so you can say the theory is flawed.  The problem is you can't force someone to borrow money even if you make it cheap to do so.  

As for why The Treasury don't print paper money?  The short answer is that's not how it works.  They're not allowed to.

The Treasury issues bonds and the Fed buys them off the open market.  They do this to affect interest rate.  If they just printed a truckload of bills what are they gonna do with it?  

I wouldn't say there is any deception there.  If you go to the federal reserve website, its all explained.

As Milton Friedman would say, the root of the problem is that banks are relying on the central bank to provide liquidity if there is any crisis.
The net effect is that any mismanagement on the central bank part will crash the whole system. (It is a single point of failure)

Most of the bank run of the past (1907) were quickly resolved after short suspension of payment.
Some bank failed, but most survived, because they knew they would not count on the money printer to save them.

It is similar to the analogy of forest and underbrush in thieves emporium.

It is maintaining a forest by preventing any fire to catch.
The net result is that the underbrush will expand so much, that the odd of the first fire to consume the entire forest go very high.

Another way of maintaining the forest is to regulary light fire when the underbrush is not big enough to spread. The small stuff get cleared away, preventing a fire to consume the whole forest afterward.

The central banks are preventing any fire to catch, but the underbush grew so much that a spark can now consume the forest.

[AZwarel]

Was that what you were getting at or did I miss your query?

I'm not sure if I am going in circles half of the time

Anyways, many people were saying how a deflationary model is superior.
I was simply asking for precedence or hypothetical examples.

The computers one seemed sensible from my perspective , didn't realize that deflationary couldn't be applied to only a specific field.

Computer prices is not "deflation" -- its scale of manufacturing.   Please don't listen to these uneducated people who learn economics from youtube & fringe lunatics like Molyneux and Adropolous

First, deflation is the increasing purchase value of the currency (yes, we all know it is not that simple, and it has many angles/subtext etc. We here are talking about bitcoin as a currency vs. fiat as a currency, and the inflation/deflation about these two. We do not care about CPI core rate, consumer price index vs. PPE...).

It does not matter, why computers are cheaper/better, if i can by a better for the same money as 1 year ago, my currency have more purchasing power relative to a past date FOR computers (and this was only an example, we all know, that one segment doesn't make the WHOLE currency higher in value..)

About the personal and insulting remarks. You do not even know me, and you call me (and others) uneducated. And you CAN watch MIT lectures on youtube, does that make them "fringe lunatics" as well? You call Antonopoulos (you couldn't even spell hes name correctly) a lunatic in a Bitcoin forum. Do you know who that man is? How he is one of the core developers, and researcher of the blockchain? How he is involved in the betterment and education about bitcoin, and leading speaker in every great bitcoin conference? Which i guess you never were, troll.

By the way, who are you? How many code you wrote to the protocol? Do you have a successful crypto start-up? Have you have written a new economic theory book?

If no, than you should not throwing poo on everyone you can just see.
Let me assume something about your knowledge as well: you are one of those autoriter professor fatishist, who only cares about who says thing, and not what they say.

[twiifm]

The idea is when you have recession the interest is lowered to encourage lending and when economy recovers the debts are paid down.  

BTW so far the QE doesn't have the effect its intended to have so you can say the theory is flawed.  The problem is you can't force someone to borrow money even if you make it cheap to do so.  

As for why The Treasury don't print paper money?  The short answer is that's not how it works.  They're not allowed to.

The Treasury issues bonds and the Fed buys them off the open market.  They do this to affect interest rate.  If they just printed a truckload of bills what are they gonna do with it?  

I wouldn't say there is any deception there.  If you go to the federal reserve website, its all explained.

As Milton Friedman would say, the root of the problem is that banks are relying on the central bank to provide liquidity if there is any crisis.
The net effect is that any mismanagement on the central bank part will crash the whole system. (It is a single point of failure)

Most of the bank run of the past (1907) were quickly resolved after short suspension of payment.
Some bank failed, but most survived, because they knew they would not count on the money printer to save them.

It is similar to the analogy of forest and underbrush in thieves emporium.

It is maintaining a forest by preventing any fire to catch.
The net result is that the underbrush will expand so much, that the odd of the first fire to consume the entire forest go very high.

Another way of maintaining the forest is to regulary light fire when the underbrush is not big enough to spread. The small stuff get cleared away, preventing a fire to consume the whole forest afterward.

The central banks are preventing any fire to catch, but the underbush grew so much that a spark can now consume the forest.

Where does Friedman say that?  Heres a quote from an interview where he recommends QE to the BOJ


"Now, the Bank of Japan's argument is, "Oh well, we've got the interest rate down to zero; what more can we do?" It's very simple. They can buy long-term government securities, and they can keep buying them and providing high-powered money until the high-powered money starts getting the economy in an expansion."

Its true he wanted to abolish the Fed but not for the reason you state

[twiifm]

Was that what you were getting at or did I miss your query?

I'm not sure if I am going in circles half of the time

Anyways, many people were saying how a deflationary model is superior.
I was simply asking for precedence or hypothetical examples.

The computers one seemed sensible from my perspective , didn't realize that deflationary couldn't be applied to only a specific field.

Computer prices is not "deflation" -- its scale of manufacturing.   Please don't listen to these uneducated people who learn economics from youtube & fringe lunatics like Molyneux and Adropolous

First, deflation is the increasing purchase value of the currency (yes, we all know it is not that simple, and it has many angles/subtext etc. We here are talking about bitcoin as a currency vs. fiat as a currency, and the inflation/deflation about these two. We do not care about CPI core rate, consumer price index vs. PPE...).

It does not matter, why computers are cheaper/better, if i can by a better for the same money as 1 year ago, my currency have more purchasing power relative to a past date FOR computers (and this was only an example, we all know, that one segment doesn't make the WHOLE currency higher in value..)

About the personal and insulting remarks. You do not even know me, and you call me (and others) uneducated. And you CAN watch MIT lectures on youtube, does that make them "fringe lunatics" as well? You call Antonopoulos (you couldn't even spell hes name correctly) a lunatic in a Bitcoin forum. Do you know who that man is? How he is one of the core developers, and researcher of the blockchain? How he is involved in the betterment and education about bitcoin, and leading speaker in every great bitcoin conference? Which i guess you never were, troll.

By the way, who are you? How many code you wrote to the protocol? Do you have a successful crypto start-up? Have you have written a new economic theory book?

If no, than you should not throwing poo on everyone you can just see.
Let me assume something about your knowledge as well: you are one of those autoriter professor fatishist, who only cares about who says thing, and not what they say.

Your post is full of irony.  LOL

[Nicolas Dorier]

As Milton Friedman would say, the root of the problem is that banks are relying on the central bank to provide liquidity if there is any crisis.
The net effect is that any mismanagement on the central bank part will crash the whole system. (It is a single point of failure)

Most of the bank run of the past (1907) were quickly resolved after short suspension of payment.
Some bank failed, but most survived, because they knew they would not count on the money printer to save them.

It is similar to the analogy of forest and underbrush in thieves emporium.

It is maintaining a forest by preventing any fire to catch.
The net result is that the underbrush will expand so much, that the odd of the first fire to consume the entire forest go very high.

Another way of maintaining the forest is to regulary light fire when the underbrush is not big enough to spread. The small stuff get cleared away, preventing a fire to consume the whole forest afterward.

The central banks are preventing any fire to catch, but the underbush grew so much that a spark can now consume the forest.

Where does Friedman say that?  Heres a quote from an interview where he recommends QE to the BOJ


"Now, the Bank of Japan's argument is, "Oh well, we've got the interest rate down to zero; what more can we do?" It's very simple. They can buy long-term government securities, and they can keep buying them and providing high-powered money until the high-powered money starts getting the economy in an expansion."

Its true he wanted to abolish the Fed but not for the reason you state

Friedman tolerates the FED because it is established.
But given its existence, he would probably have said if alive that even our last crisis QE was the right response. (Even if he would prefer a world without central bank)

But to quote him :

"If the pre 1914 banking system rather than the FED had been in existence in 1929, the money stock almost certainly would not have undergone a decline comparable to the one that occurred. Comparison of the 1907 banking panic under the earlier system and the closely similar liquidity crisis which began in late 1930 offers strong evidence for this judgment. If the earlier system had been in operation and if everything else had proceeded as it did up to December 1930, the experience of 1907 strongly suggests that there would have been a more severe initial reaction to the bank failures than there was in 1930, probably involving concerted restriction by banks of the convertibility of deposits into currency"

[The deposit resrve ratio] rose again after establishmetn of the FED which both lowered legal requirements and gave banks confidence that, in case of need, they had a ready "lender of last resort" to fall back on. THe monetary collapse from 1930 to 1933 changed the picture profoundly. [...]
The 1930-33 experience taught banks not to rely on the FED for liquidity.

So the failure of liquidity was partly because by blind trust into the FED reflected by the low reseve deposit ratio before 1930.
I don't find again where he is talking about how the big banks would have stepped in and helped a concerted action to restrict withdrawl instead of just hoping the FED to help them.

The analogy I made, is not from him, but from thieves emporium.

[twiifm]

Its no secret Friedman wanted to replace the Fed with a computer that set inflation at 3%

But its not because of "lender of last resort" issue.  Its because of his politics.

He preferred the clearing house system.  But for sure he blamed the Fed for the Great Depression of not responding w QE in a timely

After all he is the founder of monetarism

[CoinsCoinsEverywhere]

Also, remember that inflation and deflation generally affect wages as well as prices.  If we're in a deflationary environment, on average, I can expect to be paid less next year than this year (which could also come in the form of losing my job).  If I believe that to be the case, I'm going to save money as much as I can--only buy the essentials, etc.  If everyone does that, the economy will tank.

If by that you mean we won't buy a new kitchen every 3 years, a new car every 2 years, a new computer  every year and a new phone every 6 months, than yes, the economy will tank.

But do we really NEED to be that wasteful to be happy? Do we?

I hope not, or else the world won't  be able to continue as we know it for the next 50 years or so!

Yes, I'm just talking about the way things are, not the way they ought to be.  I completely agree that there is a lot of unnecessary waste that should be cut out, even though it would hurt the economy in the short term.  My family and I generally try to drive things into the ground before we replace them.

[Nicolas Dorier]

Its no secret Friedman wanted to replace the Fed with a computer that set inflation at 3%

But its not because of "lender of last resort" issue.  Its because of his politics.

He preferred the clearing house system.  But for sure he blamed the Fed for the Great Depression of not responding w QE in a timely

After all he is the founder of monetarism

Without a FED, he would argues that banks would have kept reserve to deposit higher.
Sure, some banks would have failed. But the result of low reserve to deposit combined with the failure of the fed to provide liquidity made it catastrophic.

Without FED, reserve to deposit would be higher, and would not have resulted in a whole forest burning, to come back to my analogy.

[twiifm]

Its no secret Friedman wanted to replace the Fed with a computer that set inflation at 3%

But its not because of "lender of last resort" issue.  Its because of his politics.

He preferred the clearing house system.  But for sure he blamed the Fed for the Great Depression of not responding w QE in a timely

After all he is the founder of monetarism

Without a FED, he would argues that banks would have kept reserve to deposit higher.
Sure, some banks would have failed. But the result of low reserve to deposit combined with the failure of the fed to provide liquidity made it catastrophic.

Without FED, reserve to deposit would be higher, and would not have resulted in a whole forest burning, to come back to my analogy.

Yes thats what I said.  Friedman is not against QE.  He has political preference for free markets.

He wants controls on money supply.  But he wants it from a computer rather than a chairman to make decisions

Youre trying to bend Friedmans ideas to align w your beliefs.  Friedman is a monetarist.  He can be both hawkish and dovish on monetary policy.  I don't know where he said "if there wasn't a Fed, the Great Depression wouldn't have happened".  Can you link me where he said that?  I all found is that he blamed the Fed for letting GP happen b/c they didn't do QE when things started to get bad.  Bernanke quoted Friedman on this to justify his decision to my MBS off the banks.

But regardless of Friedman.  The idea that fractional reserve affects lending is not correct.  Doesnt work like that in real life.   Banks create loans then find reserves later.  In essence there are no reserve restrictions as long as there is demand for loans

I recommend you look into Minsky.  His view is more consistent w how banking works in real life

[Nicolas Dorier]

Its no secret Friedman wanted to replace the Fed with a computer that set inflation at 3%

But its not because of "lender of last resort" issue.  Its because of his politics.

He preferred the clearing house system.  But for sure he blamed the Fed for the Great Depression of not responding w QE in a timely

After all he is the founder of monetarism

Without a FED, he would argues that banks would have kept reserve to deposit higher.
Sure, some banks would have failed. But the result of low reserve to deposit combined with the failure of the fed to provide liquidity made it catastrophic.

Without FED, reserve to deposit would be higher, and would not have resulted in a whole forest burning, to come back to my analogy.

Yes thats what I said.  Friedman is not against QE.  He has political preference for free markets.

He wants controls on money supply.  But he wants it from a computer rather than a chairman to make decisions

Youre trying to bend Friedmans ideas to align w your beliefs.  Friedman is a monetarist.  He can be both hawkish and dovish on monetary policy.  I don't know where he said "if there wasn't a Fed, the Great Depression wouldn't have happened".  Can you link me where he said that?  I all found is that he blamed the Fed for letting GP happen b/c they didn't do QE when things started to get bad.  Bernanke quoted Friedman on this to justify his decision to my MBS off the banks.

But regardless of Friedman.  The idea that fractional reserve affects lending is not correct.  Doesnt work like that in real life.   Banks create loans then find reserves later.  In essence there are no reserve restrictions as long as there is demand for loans

I recommend you look into Minsky.  His view is more consistent w how banking works in real life

I already quoted 2 sentences from the monetary history of united state where he points finger at the FED that provoked low reserve-desposit ratio in banks. So when they failed to do a QE, banks had not enough liquidity to face the withdrawl of deposit.

I am not bending him to my idea, and I don't even see where we disagree since, I never denied that he agrees on QE.

And also, I can't understand how we could deny the idea that when banks count on a central authority to provide liquidity, and that central authority fails to do that, all the banks that depended on it will crash.
As a developer I call that single point of failure.

The point to which we disagree, to which I did not want to imply it came from Friedman, is that the FED incentivize big banks to take toxic loans.
Why ? Because Bernanke will always tries to save them. Why ? Because it is the subject of its thesis. He is interested on non monetarism mechanism of the propagation and spreading of a crisis.

So, in other word, he will prevent any big bank to fail to stop a crisis to propagate. He is right, and that's its job. But it also means that it gives no incentives for big banks to be careful about toxic loans. (Even more if such toxic loan are called AAA by Buffet)

What if banks (potentially big) where allowed to take fire more often ? There would be more bank failure for sure, but local one. And then a recession would not spark a global economy crash.

I'll look Minsky nevertheless.

[twiifm]

Its no secret Friedman wanted to replace the Fed with a computer that set inflation at 3%

But its not because of "lender of last resort" issue.  Its because of his politics.

He preferred the clearing house system.  But for sure he blamed the Fed for the Great Depression of not responding w QE in a timely

After all he is the founder of monetarism

Without a FED, he would argues that banks would have kept reserve to deposit higher.
Sure, some banks would have failed. But the result of low reserve to deposit combined with the failure of the fed to provide liquidity made it catastrophic.

Without FED, reserve to deposit would be higher, and would not have resulted in a whole forest burning, to come back to my analogy.

Yes thats what I said.  Friedman is not against QE.  He has political preference for free markets.

He wants controls on money supply.  But he wants it from a computer rather than a chairman to make decisions

Youre trying to bend Friedmans ideas to align w your beliefs.  Friedman is a monetarist.  He can be both hawkish and dovish on monetary policy.  I don't know where he said "if there wasn't a Fed, the Great Depression wouldn't have happened".  Can you link me where he said that?  I all found is that he blamed the Fed for letting GP happen b/c they didn't do QE when things started to get bad.  Bernanke quoted Friedman on this to justify his decision to my MBS off the banks.

But regardless of Friedman.  The idea that fractional reserve affects lending is not correct.  Doesnt work like that in real life.   Banks create loans then find reserves later.  In essence there are no reserve restrictions as long as there is demand for loans

I recommend you look into Minsky.  His view is more consistent w how banking works in real life

I already quoted 2 sentences from the monetary history of united state where he points finger at the FED that provoked low reserve-desposit ratio in banks. So when they failed to do a QE, banks had not enough liquidity to face the withdrawl of deposit.

I am not bending him to my idea, and I don't even see where we disagree since, I never denied that he agrees on QE.

And also, I can't understand how we could deny the idea that when banks count on a central authority to provide liquidity, and that central authority fails to do that, all the banks that depended on it will crash.
As a developer I call that single point of failure.

The point to which we disagree, to which I did not want to imply it came from Friedman, is that the FED incentivize big banks to take toxic loans.
Why ? Because Bernanke will always tries to save them. Why ? Because it is the subject of its thesis. He is interested on non monetarism mechanism of the propagation and spreading of a crisis.

So, in other word, he will prevent any big bank to fail to stop a crisis to propagate. He is right, and that's its job. But it also means that it gives no incentives for big banks to be careful about toxic loans. (Even more if such toxic loan are called AAA by Buffet)

What if banks (potentially big) where allowed to take fire more often ? There would be more bank failure for sure, but local one. And then a recession would not spark a global economy crash.

I'll look Minsky nevertheless.

I think are interpreting what Friedman is saying differently from me because maybe you arent looking at the context of history of banking.

Before 1914 instead of Federal Reserve System the big banks used a clearing house system.

This system was an association of private NY banks.  So member banks acted as "lender of last resort".   In 1907,  when there was a bank panic JP Morgan used this clearing house association to inject liquidity into the banking system.  The Federal Reserve System can be seen as a nationalization of this NY Clearing House Assc..   There was political pressure to create a Central Bank b/c this NYCA only served member banks while letting regional banks go insolvent.

So what Friedman is talking about is not single point of failure or fractional reserve.   He thinks the role of lender of last resort is more effective if private than if govt.   That clearing house works better than central bank.   What he says is the Fed is supposed to expand credit in times of crisis but because they failed to do so,  a recession became depression.  In other words they failed their job.

Here's a youtube video of him talking failed monetary policies of the Fed that resulted in Great Depression. www.youtube.com/watch?v=ObiIp8TKaLs

He is against the Fed.   But not for the reasons you think.   He is comparing a private vs govt clearing house system

But I think he got it wrong since the NYCA still exist today.   

[STT]

'Coin money and set the value there of'      Coin gold and silver, not completely make up what they feel like the value should be.

I find it hard to believe Milton is so happy to go along with the Fed when he has so many good ideas normally.  Just his basic premise, free to choose does not tend towards a central bank greater then all others and without choice like we currently have.  It is a system of force not economic competition, he really wanted more of this as a solution?

Capitalism itself is basically defined by the distribution of capital and ownership by the people.  Not a centralised system, not politically controlled for governments own benefit in their spending determination.   Its all warped so badly now, this is not capitalism

[twiifm]

'Coin money and set the value there of'      Coin gold and silver, not completely make up what they feel like the value should be.

I find it hard to believe Milton is so happy to go along with the Fed when he has so many good ideas normally.  Just his basic premise, free to choose does not tend towards a central bank greater then all others and without choice like we currently have.  It is a system of force not economic competition, he really wanted more of this as a solution?

Capitalism itself is basically defined by the distribution of capital and ownership by the people.  Not a centralised system, not politically controlled for governments own benefit in their spending determination.   Its all warped so badly now, this is not capitalism

Friedman is not Rothbard.   He's a follower of Adam Smith.   He just thinks free market comes ups better solutions than govt because of the incentive to profit