Where can we see deflation being more contributive than inflation ?

[Nicolas Dorier]

Maybe by reading Minsky, I'll understand more how banking system works, Milton Friedman does not go in great length about it.

But still, why does the creation of FED lowered reserve to deposit ratio ? If it is not by the confidence of FED to inject liquidities instead of private banks ?
This is again, a quote from milton friedman I took in earlier post.

I suspect also, that before, multiple clearing house existed, or else, why not calling the one central bank.
If JP Morgan had not injected liquidity with the clear house. The effect of the crisis would be more or less local to member banks.
Also, maybe other member banks with better liquidity would have helped instead of JP Morgan.
The net result is that disaster and fire would be local, and the responsability to make the system work is in the hand of people who profits from it.

If every banks depends on FED for liquidity, contrary to before, this put tredemous power in the hand of one man. (or one board)
A failure of such man translate into a failure of the whole system.
More over, contrary to a bank, the FED will never close its door, which give it no incentive to make things work. Worse.
Any failure of FED will make them earn even more power because they are credited to save the system afterward. (Great depression)

If the responsability of providing liquidity would be in the hand of member banks (which coincide with their self interest to prevent a crisis), the whole forest would not burn because of the failure of one man whose own business does not depends on its performance.

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[twiifm]

Maybe by reading Minsky, I'll understand more how banking system works, Milton Friedman does not go in great length about it.

But still, why does the creation of FED lowered reserve to deposit ratio ? If it is not by the confidence of FED to inject liquidities instead of private banks ?
This is again, a quote from milton friedman I took in earlier post.

I suspect also, that before, multiple clearing house existed, or else, why not calling the one central bank.
If JP Morgan had not injected liquidity with the clear house. The effect of the crisis would be more or less local to member banks.
Also, maybe other member banks with better liquidity would have helped instead of JP Morgan.
The net result is that disaster and fire would be local, and the responsability to make the system work is in the hand of people who profits from it.

If every banks depends on FED for liquidity, contrary to before, this put tredemous power in the hand of one man. (or one board)
A failure of such man translate into a failure of the whole system.
More over, contrary to a bank, the FED will never close its door, which give it no incentive to make things work. Worse.
Any failure of FED will make them earn even more power because they are credited to save the system afterward. (Great depression)

If the responsability of providing liquidity would be in the hand of member banks (which coincide with their self interest to prevent a crisis), the whole forest would not burn because of the failure of one man whose own business does not depends on its performance.

W Fractional Reserve lending there is supposed to be a cap limit ratio like 1:10 or something like that.  But in real life if somebody wants a loan the bank will write the loan and find the reserves later through interbank lending.  You can see in practice that there's no limit except by demand on loans.

The way clearing house associations work were like this:  Member banks get together and deposit reserves (gold) in the clearing house balance sheet.  The clearing house issue clearing house certificates (CHC).  The member banks uses these CHCs as money.  At the end of day they settle there balance w the clearing house.  In times of crisis, the clearing house issues a clearing house loan certificate (CHLC).  The CHLC is NOT backed by the reserves of the clearing house it is credit.  If a member defaults on loan the other members absorb the loss and kick out the defaulting member. 

I think you have the cause/effect opposite of how I see it

Private banks have incentive to maximize profit.  The clearing isn't created for the purpose of preventing crisis.  Its created so banks have an efficient credit system.  Crisis happens because of some external event. 1907 crisis happened after 2 guys tried to corner the copper market and failed.  In the event of crisis, there needs to be a "lender of last resort" to inject liquidity into illiquid credit market.

1) Clearing house only has self interest.  -->Profit motive to save their own members first.
2) Central Bank has no profit motive.  --> Incentive to look after the system

(BTW, Not only JP Morgan & NYCHA; Rockefeller, Rothchilds & the Treasury also committed funds to inject liquidity into the banks.  JP Morgan gets credit for leading the campaign to do this.)

The debate is which motive is more effective?  Self interest or the systems interest? 

Friedman is a free market believer so he says people do a better job when looking after their own money.  This may be true to a degree but it may also lead to "Tragedy of the Commons" type scenario.  And when crisis happens it takes a volunteer like JP Morgan to intervene.  W a Central Banks its their job to intervene in crisis

OTOH, without profit motive there might not be adequate reward to do a good job.  Most govt agencies are slow and incompetent, stuck in bureaucracy, etc..

The debate w Friedman boils down to less regulation vs more regulation.  In the 1980's, the influence of Friedman led to policies of deregulation which people blame for the bubbles and subsequent crash so we are back to Keynes (neo-Keynesian & post-Keynesian).  Minsky & Modern Money Theory is considered post-Keynesian.  Its still heterodox and not mainstream but I think Minskys ideas are gaining more popularity now after his Financial Instability Hypothesis explained the 90s Asian Financial Crisis & predicted the bubble burst

http://www.levyinstitute.org/pubs/wp74.pdf

[Nicolas Dorier]

Thanks for the course on clearing house, does minsky explain that in details ? it is interesting.

I would point out that JP Morgan lead the campaign for its own self interest because they also have incentive to prevent the crisis from spreading. (I think we agree on that)

The debate of self interest versus system interest is clear for me. My background as an entrepreneur in one of the worse bureaucratic country in the world, a whale out of control, does not help. (France)
But from Game Theory, there is some kinds of problem (prisoner's dilemma problem), that might be solved more effectively by adopting a system view. (Which is why I'm not completely against gov)
But it is not proved that the money system can be modeled as a prisoner's dilemna problem.

I come from a developer background, so I primarily see Central Bank as a single point of failure of the whole system.

Clearing house members have incentives to kick a member that default on loan, because they don't want to absorb losses forever.
Also, I suspect there were lots of clearing houses, and so the failure of a big member bank in one clearing house will not make other clearing house member to absorb the big loss. (except with the psychology impact on depositors)

With the FED system, a bank that is too big will never fail, because member banks don't have incentives to kick them out (they does not loss from a default, since the gov will bailout the big dying whale).
If one day gov decides to not bailout by not emitting bonds (This is how money get printed as I understand), then the member banks of the FED will have to absorb the loss, and the whole system will get out of whack.

[twiifm]

Thanks for the course on clearing house, does minsky explain that in details ? it is interesting.

I would point out that JP Morgan lead the campaign for its own self interest because they also have incentive to prevent the crisis from spreading. (I think we agree on that)

The debate of self interest versus system interest is clear for me. My background as an entrepreneur in one of the worse bureaucratic country in the world, a whale out of control, does not help. (France)
But from Game Theory, there is some kinds of problem (prisoner's dilemma problem), that might be solved more effectively by adopting a system view. (Which is why I'm not completely against gov)
But it is not proved that the money system can be modeled as a prisoner's dilemna problem.

I come from a developer background, so I primarily see Central Bank as a single point of failure of the whole system.

Clearing house members have incentives to kick a member that default on loan, because they don't want to absorb losses forever.
Also, I suspect there were lots of clearing houses, and so the failure of a big member bank in one clearing house will not make other clearing house member to absorb the big loss. (except with the psychology impact on depositors)

With the FED system, a bank that is too big will never fail, because member banks don't have incentives to kick them out (they does not loss from a default, since the gov will bailout the big dying whale).
If one day gov decides to not bailout by not emitting bonds (This is how money get printed as I understand), then the member banks of the FED will have to absorb the loss, and the whole system will get out of whack.

Minsky doesn't talk about clearing houses.  I think its from Allyn Young's book

Your intuition maybe correct about individual incentives.  But I think you are too hung up on political disapproval of the Fed or Central Banks.  What I mean is you seem to want to conclude that Central Banks don't work or cause harm so you are looking for justification of your hypothesis instead of looking at the empirical data.

The reason I bring up Minsky is because his view of money is endogenous.  That banks create loans then find reserves after.  This view is more accurate about what goes on in banking rather than Friedmans exogenous money supply view.  

Minsky says the mechanism of financial crisis come from the borrowers.  There are 3 categories of borrowers; hedge/ speculative/ finance.  When times are prosperous, when the borrower has excess cash he takes more speculative risk due to "euphoria".  The influx of speculative investors create speculative bubbles.  The last to enter are Ponzi borrowers.  In the case of the Ponzi borower, the investor relies on the appreciating asset to cover the debt.  When the asset fails to appreciate to cover the debt the Ponzi borrowers money gets 'frozen' and he's forced to liquidate the position.  When many investors are forced to do this you have a crash.

Personally, I think Minsky's idea is the most accurate understanding of markets.  It is inline w Keynes except Keynes description is a vague "animal spirits".

(BTW Keynes was an investor so his view comes from being a market participant)

Friedman tend to take a position of "efficient market hypothesis" because he follows Adam Smith.  Whatever the market determines is the correct (natural) state

[PodBayDoors]

It's depressing to see people in this thread talk about "mild inflation" as though it's accepted to be something good. It's like saying "mild theft of your bank account is OK". As central banker Paul Volcker said "a 2% inflation target means that a worker loses 70% of his savings during a 30-year working life".

Deflation is also otherwise known as "productivity". Humanity becomes more productive in things like agriculture, IT, manufacturing and the cost of goods is supposed to go down. Guess what, under that system the standard of living also goes UP.

But oh no, banks want to sell more debt and protect existing debtholders (even if insolvent) so they hire politicians and academics to spout absolute rubbish about how "oh oh inflation is good, really, no, no, really". Lower prices keeps people from buying things, oh, oh wouldn't want them to actually SAVE any money now would we? OK genius riddle me this: if LOWER prices mean people buy LESS, then why do companies like Amazon and Walmart do everything they can to make their prices CHEAPER? This reasoning would say oh no just raise prices and people will want to buy more.

Let's see, it's better for me if A. I go to the store and receive the same quantity of goods as last time I was there, or B. I go to the store and receive LESS goods for my money than last time. Select ONE scenario that makes you WEALTHIER. This is not rocket science

[twiifm]

It's depressing to see people in this thread talk about "mild inflation" as though it's accepted to be something good. It's like saying "mild theft of your bank account is OK". As central banker Paul Volcker said "a 2% inflation target means that a worker loses 70% of his savings during a 30-year working life".

Deflation is also otherwise known as "productivity". Humanity becomes more productive in things like agriculture, IT, manufacturing and the cost of goods is supposed to go down. Guess what, under that system the standard of living also goes UP.

But oh no, banks want to sell more debt and protect existing debtholders (even if insolvent) so they hire politicians and academics to spout absolute rubbish about how "oh oh inflation is good, really, no, no, really". Lower prices keeps people from buying things, oh, oh wouldn't want them to actually SAVE any money now would we? OK genius riddle me this: if LOWER prices mean people buy LESS, then why do companies like Amazon and Walmart do everything they can to make their prices CHEAPER? This reasoning would say oh no just raise prices and people will want to buy more.

Let's see, it's better for me if A. I go to the store and receive the same quantity of goods as last time I was there, or B. I go to the store and receive LESS goods for my money than last time. Select ONE scenario that makes you WEALTHIER. This is not rocket science

Short answer:  Because mild inflation is easier to control than deflation or runaway inflation.

Amazon or Walmart arent good examples.  Thats micro.  Were talking about macro.

People buy more when economies are robust and people have money to spend.  Deflation is usually a sign of recession

[ShakyhandsBTCer]

As long as bitcoin does not become the uniform measure of how things are priced then economies will be safe from the dangers of deflation.

Up until the point that all 21 million BTC are mined, bitcoin will technically be inflationary because more bitcoin will be in circulation then the previous day. The reason why people call bitcoin deflationary today is because it is expected that the price of bitcoin will increase over time, which has the same effect as deflation (one dollar tomorrow buys more goods/services tomorrow then it does today)

[Nicolas Dorier]

People buy more when economies are robust and people have money to spend.  Deflation is usually a sign of recession

There is two kind of deflation.
The good one, and the bad one, you are referring on the bad one, that gave us a traumatic experience.

Good deflation happens results from technological progress that supply an excess of goods.
This is good for customer which will see price shrink.
The stocks will likely stay ahead, the technological progress backing faith in the future.

Bad deflation happens when customers save money for future incertainty. When they fear a crash, and consequently, provokes it, by holding their money.
In other words, the reduction of price does not come from technological advancement.
It can be triggered by stocks fall, as the great depression. (that can come from multiple reason that goes from bad monetary policy, to lack of technological advancement to boost the demand)

[twiifm]

People buy more when economies are robust and people have money to spend.  Deflation is usually a sign of recession

There is two kind of deflation.
The good one, and the bad one, you are referring on the bad one, that gave us a traumatic experience.

Good deflation happens results from technological progress that supply an excess of goods.
This is good for customer which will see price shrink.
The stocks will likely stay ahead, the technological progress backing faith in the future.

Bad deflation happens when customers save money for future incertainty. When they fear a crash, and consequently, provokes it, by holding their money.
In other words, the reduction of price does not come from technological advancement.
It can be triggered by stocks fall, as the great depression. (that can come from multiple reason that goes from bad monetary policy, to lack of technological advancement to boost the demand)

Not quite.   You have to measure inflation/ deflation on basket of goods (CPI).  Not just individual categories of goods.   If you look at historical data,  most deflation occurs in recession times.

[STT]

Stocks falling in 1929 onwards was a symptom not the cause of economic decline.   It may have been abrupt and disrupting to people, shares are forward looking but not the determiner of a companies fortunes.     I think then like now that bonds are far more important to funding companies balance sheets

With the FED system, a bank that is too big will never fail,

Seems like too absolute a statement.   FED can end up spinning its wheels at some point, they can only redirect value but they are not a creator or even a holder I think.  That would take real reserves and we know dollar is not backed or linked to solid value, FED is just forcing adjustments to what system dollar market participants populate.   Banks will fail and FED will do nothing as it will be too occupied trying to save itself, in the end it will sacrifice others for its own continuation

Deflation is usually a sign of recession

Deflation in prices while dollar loses value also would be surprising if demand were higher, it does seem to indicate a problem then.   The problem we got today is they are trying to force higher prices in order to create growth, thats such mixed up logic.   It cannot work that way, thats like me grabbing the cart and pulling the horse.   So long as the cart is going a good speed, the horse is doing just fine or maybe I pushed them both over a cliff

http://en.wikipedia.org/wiki/List_of_fallacies
I think this part of wiki must read like my first abc book of government -

[tee-rex]

Can someone explain to me :-
1- Why mild inflation (2.5%) is beneficial to an economy ? Has been answered repeatedly
2- If mild inflation is beneficial, shouldn't Bitcoin, as a deflationary currency, be counter-intuitive?

There are two functions that money plays in the economy (besides being a measure of value), i.e. a store of value and a means of exchange, and these functions are obviously contradicting each other. To be a good store of value, a currency should not be depreciating in time, whereas to be a good medium of exchange, it should. Bitcoin by its deflationary nature is more suitable as a store of value, not as a medium of exchange, that's why it seems to you counter-intuitive.

[Erdogan]

From experience we see that when the value of money goes down, we have more export and less bankruptcies, and house owner with debt profits. The problem is that we do not want this, we want cross border trade to be neutral, bancruptcies to exist for creative destruction, and we do not want the spenders to profit off savers. When the euphoria passes, we have a non-optimal capital structure and most people lose wealth and immediate spending power.

[CoinsCoinsEverywhere]

From experience we see that when the value of money goes down, we have more export and less bankruptcies, and house owner with debt profits. The problem is that we do not want this, we want cross border trade to be neutral, bancruptcies to exist for creative destruction, and we do not want the spenders to profit off savers. When the euphoria passes, we have a non-optimal capital structure and most people lose wealth and immediate spending power.

Who are you referring to when you say "we" in "we do not want this, we want cross border trade to be neutral, bancruptcies to exist for creative destruction, and we do not want the spenders to profit off savers"?   Corporations that export goods like a weak currency because their goods are more competitive overseas.  Banks certainly don't want bankruptcies.  And the spenders, which seem to outnumber the savers, obviously prefer to profit.  So it would seem like a majority of people prefer things the way they are (at least until they blow up).  So by "we", are you just referring to those of us who would actually prefer a more stable economic/financial system?

[theonewhowaskazu]

From experience we see that when the value of money goes down, we have more export and less bankruptcies, and house owner with debt profits. The problem is that we do not want this, we want cross border trade to be neutral, bancruptcies to exist for creative destruction, and we do not want the spenders to profit off savers. When the euphoria passes, we have a non-optimal capital structure and most people lose wealth and immediate spending power.

Who are you referring to when you say "we" in "we do not want this, we want cross border trade to be neutral, bancruptcies to exist for creative destruction, and we do not want the spenders to profit off savers"?   Corporations that export goods like a weak currency because their goods are more competitive overseas.  Banks certainly don't want bankruptcies.  And the spenders, which seem to outnumber the savers, obviously prefer to profit.  So it would seem like a majority of people prefer things the way they are (at least until they blow up).  So by "we", are you just referring to those of us who would actually prefer a more stable economic/financial system?

He's saying the economy as a whole. Without bankruptcies (or at least repayment with a positive real interest rate) money is valueless. Without valuable money, savers don't have a reliable store of value and thus must speculate to preserve their wealth. Forced speculation creates uncertainty. Uncertainty is a net destroyer of wealth as it discourages investment. Without savers and investment, the future holds less wealth than the present, which is basically the ultimate sin of any monetary system.

[CoinsCoinsEverywhere]

From experience we see that when the value of money goes down, we have more export and less bankruptcies, and house owner with debt profits. The problem is that we do not want this, we want cross border trade to be neutral, bancruptcies to exist for creative destruction, and we do not want the spenders to profit off savers. When the euphoria passes, we have a non-optimal capital structure and most people lose wealth and immediate spending power.

Who are you referring to when you say "we" in "we do not want this, we want cross border trade to be neutral, bancruptcies to exist for creative destruction, and we do not want the spenders to profit off savers"?   Corporations that export goods like a weak currency because their goods are more competitive overseas.  Banks certainly don't want bankruptcies.  And the spenders, which seem to outnumber the savers, obviously prefer to profit.  So it would seem like a majority of people prefer things the way they are (at least until they blow up).  So by "we", are you just referring to those of us who would actually prefer a more stable economic/financial system?

He's saying the economy as a whole. Without bankruptcies (or at least repayment with a positive real interest rate) money is valueless. Without valuable money, savers don't have a reliable store of value and thus must speculate to preserve their wealth. Forced speculation creates uncertainty. Uncertainty is a net destroyer of wealth as it discourages investment. Without savers and investment, the future holds less wealth than the present, which is basically the ultimate sin of any monetary system.

Ah, I see.  Thanks--that's a good explanation.  As repayment with a positive real interest rate is generally more desirable than debt destruction (default/bankruptcy), does this basically imply that inflation is required for a healthy economic system?

[Nicolas Dorier]

Ah, I see.  Thanks--that's a good explanation.  As repayment with a positive real interest rate is generally more desirable than debt destruction (default/bankruptcy), does this basically imply that inflation is required for a healthy economic system?

Repayment is debt destruction. Sure, it is not a default, but the whole debt can never be repaid by repayment (mathematically speaking).
They talk about it in https://www.youtube.com/watch?v=iFDe5kUUyT0 at 13 minutes.
I advice you to look at the whole Hidden Secrets of Money series.

[Erdogan]

From experience we see that when the value of money goes down, we have more export and less bankruptcies, and house owner with debt profits. The problem is that we do not want this, we want cross border trade to be neutral, bancruptcies to exist for creative destruction, and we do not want the spenders to profit off savers. When the euphoria passes, we have a non-optimal capital structure and most people lose wealth and immediate spending power.

Who are you referring to when you say "we" in "we do not want this, we want cross border trade to be neutral, bancruptcies to exist for creative destruction, and we do not want the spenders to profit off savers"?   Corporations that export goods like a weak currency because their goods are more competitive overseas.  Banks certainly don't want bankruptcies.  And the spenders, which seem to outnumber the savers, obviously prefer to profit.  So it would seem like a majority of people prefer things the way they are (at least until they blow up).  So by "we", are you just referring to those of us who would actually prefer a more stable economic/financial system?

With we, I mean I.

[Erdogan]

From experience we see that when the value of money goes down, we have more export and less bankruptcies, and house owner with debt profits. The problem is that we do not want this, we want cross border trade to be neutral, bancruptcies to exist for creative destruction, and we do not want the spenders to profit off savers. When the euphoria passes, we have a non-optimal capital structure and most people lose wealth and immediate spending power.

Who are you referring to when you say "we" in "we do not want this, we want cross border trade to be neutral, bancruptcies to exist for creative destruction, and we do not want the spenders to profit off savers"?   Corporations that export goods like a weak currency because their goods are more competitive overseas.  Banks certainly don't want bankruptcies.  And the spenders, which seem to outnumber the savers, obviously prefer to profit.  So it would seem like a majority of people prefer things the way they are (at least until they blow up).  So by "we", are you just referring to those of us who would actually prefer a more stable economic/financial system?

He's saying the economy as a whole. Without bankruptcies (or at least repayment with a positive real interest rate) money is valueless. Without valuable money, savers don't have a reliable store of value and thus must speculate to preserve their wealth. Forced speculation creates uncertainty. Uncertainty is a net destroyer of wealth as it discourages investment. Without savers and investment, the future holds less wealth than the present, which is basically the ultimate sin of any monetary system.

Ah, I see.  Thanks--that's a good explanation.  As repayment with a positive real interest rate is generally more desirable than debt destruction (default/bankruptcy), does this basically imply that inflation is required for a healthy economic system?

I don't want inflation. Inflation means money creation, the money goes to friends of the government. We get a capital structure that is satisfactory for yesteryear. We get too much vertical integration. We get businesses queuing outside government offices in stead of making the best goods and services they can. We get the rich spenders if they are lucky. We get poor savers. We get eye catching public works. We get increased number of government services. This is the same every time. It was also the case for the Weimar hyperinflation (they had other things also, war reparations and an open ended general strike in Ruhr). Lots of politicians know this, but restraint is always next time - else the voters get upset. There seems to be no way around this. Except, maybe, if the public by themselves preferred to use sound money. With gold, this has not been the case. With bitcoin? Maybe.