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Author Topic: The deflationary spiral question ...  (Read 4448 times)
kiba
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May 08, 2011, 04:02:21 PM
 #21

I think a deflationary spiral is a good thing if caused by the general public being afraid of something and wants to save their money to spend it in the future in case of an emergency. Sure businesses would fail, but not all. Essential goods would still get bought since we can't live on air and without heat or a roof over our heads but the resources for the rest of things would get saved and used to produce later when people decide to spend more.

The least efficient companies will fail, leaving the more efficient companies alive.

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hazek
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May 08, 2011, 04:12:49 PM
 #22

I think a deflationary spiral is a good thing if caused by the general public being afraid of something and wants to save their money to spend it in the future in case of an emergency. Sure businesses would fail, but not all. Essential goods would still get bought since we can't live on air and without heat or a roof over our heads but the resources for the rest of things would get saved and used to produce later when people decide to spend more.

Well the Great Depression was a well known deflationary spiral and most people thought it was a pretty big problem at the time Wink Lots of people were unemployed and many starved during the Great Depression (about 7 million in the US I believe).

During a deflationary spiral some people are sacrificing their consumption, the question is who? One one possibility is the lenders, they are the ones hoarding so one possibility is that they are the ones sacrificing? I don't believe this is the case. Those with enough money to lend already had all the money they needed to meet their spending requirements, in fact they had so much money that they started lending some of it out. They will still be able to meet their needs and buy the things they want.

So what about the borrowers? And those employed by businesses that borrowed? These people become unemployed whilst often being heavily indebted. They have plenty of desire for material things, but no currency to pay for them. They "sacrifice" their consumption because they have no choice. So the economy contracts so as to fulfil the needs of those that do have money, and no longer meet the needs of those that do not have money.

If money available dictates goods and services available then don't you think it's a good way to know how we as a society should figure out when to to save vital resources and when to overproduce?

It would be fine for a society as a whole to decide that they wanted to save some resources and deliberately produce less. However, when a quirk of the money system forces it upon people, to the degree that many of them starve ... well then that's a problem.


Oh buddy! Did you just really try to tie a deflationary bust caused by governments centrally planed boom and severely prolonged and worsened by government medling not letting the bubble to quickly and completely deflate to a free market driven deflationary spiral?

Buddy, you better brush up on your history lessons. And don't do it by reading government issued textbooks either, but rather try mises.org. The biggest lesson I'd like you to learn while you're at it is the deflationary recession in 1921 which was over in a flash and almost no suffering because the government stayed out of the way and how many resources the government destroyed in the great depression while trying to prop up prices causing the people to starve.

My personality type: INTJ - please forgive my weaknesses (Not naturally in tune with others feelings; may be insensitive at times, tend to respond to conflict with logic and reason, tend to believe I'm always right)

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hazek
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May 08, 2011, 04:13:50 PM
 #23

I think a deflationary spiral is a good thing if caused by the general public being afraid of something and wants to save their money to spend it in the future in case of an emergency. Sure businesses would fail, but not all. Essential goods would still get bought since we can't live on air and without heat or a roof over our heads but the resources for the rest of things would get saved and used to produce later when people decide to spend more.

The least efficient companies will fail, leaving the more efficient companies alive.

Maybe not even efficient but those who actually produce goods and services that the market actually needs and wants.

My personality type: INTJ - please forgive my weaknesses (Not naturally in tune with others feelings; may be insensitive at times, tend to respond to conflict with logic and reason, tend to believe I'm always right)

If however you enjoyed my post: 15j781DjuJeVsZgYbDVt2NZsGrWKRWFHpp
Tom
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May 08, 2011, 04:44:05 PM
 #24

Oh buddy! Did you just really try to tie a deflationary bust caused by governments centrally planed boom and severely prolonged and worsened by government medling not letting the bubble to quickly and completely deflate to a free market driven deflationary spiral?

Well it's certainly true that the Great Depression is not the same as a BitCoin depression would be, for one thing during the Great Depression everyone was on a fiat fractional reserve currency and I think we can all agree that that is a "bad thing" Wink

In any case it sounds like we agree:
- A currency based on a fixed money supply can be prone to deflationary spirals due to positive feedback systems.
- That these deflationary spirals can lead to quite pronounced economic contractions.

However, where we disagree is that I think a currency system should be designed to prevent unnecessary economic shocks due to quirks of the monetary system. Whereas, I get the impression you're more of the view that this is the market rebalancing itself and that it is a necessary thing.

This is perhaps simply a difference in value judgement Wink

The biggest lesson I'd like you to learn while you're at it is the deflationary recession in 1921 which was over in a flash and almost no suffering because the government stayed out of the way and how many resources the government destroyed in the great depression while trying to prop up prices causing the people to starve.

I tend to believe that sometimes governments help, sometimes they make things worse. Just the same as any other actor in the economy. I would neither argue that "all government intervention is bad" nor that "government intervention is never harmful".
hazek
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May 08, 2011, 05:06:53 PM
 #25

However, where we disagree is that I think a currency system should be designed to prevent unnecessary economic shocks due to quirks of the monetary system. Whereas, I get the impression you're more of the view that this is the market rebalancing itself and that it is a necessary thing.

This is perhaps simply a difference in value judgement Wink
Have you seen http://www.youtube.com/watch?v=GTQnarzmTOc yet? I especially like when "Hayek" says:

the lesson I’ve learned? It’s how little we know,
the world is complex, not some circular flow
the economy’s not a class you can master in college
to think otherwise is the pretense of knowledge

I mean if there is one single person somewhere on the planet smart enough to design an economy of almost 7 billion people better than they collectively through market forces could then by all means lets have that person run the world! But there is no such genius out there and any other person trying to "run" the economy will subject it to his flaws. That's why central planing doesn't work and always, ALWAYS  leads to mass starvation and unimaginable hardship.

Quote
I tend to believe that sometimes governments help, sometimes they make things worse. Just the same as any other actor in the economy. I would neither argue that "all government intervention is bad" nor that "government intervention is never harmful".

Government intervention is always bad precisely because of that reason. Politicians simply do not poses any extraordinary powers whereby they could make all the perfect decisions and so every idea how ever well intentioned will usually have some bad unintended consequences which politicians will want to "fix" with further intervention all of which then spirals down to more government caused problems and more government control.

So it's not only a practical issue of politicians not being smarter then the market place but also a philosophical one. And I'm sorry but I want to be in charge of my own life and live free.

My personality type: INTJ - please forgive my weaknesses (Not naturally in tune with others feelings; may be insensitive at times, tend to respond to conflict with logic and reason, tend to believe I'm always right)

If however you enjoyed my post: 15j781DjuJeVsZgYbDVt2NZsGrWKRWFHpp
Tom
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May 08, 2011, 05:30:21 PM
 #26

I mean if there is one single person somewhere on the planet smart enough to design an economy of almost 7 billion people better than they collectively through market forces could then by all means lets have the person run the world! But there is no such genius out there and any other person trying to "run" the economy will subject it to his flaws. That's why central planing doesn't work and always, ALWAYS  leads to mass starvation and hardship.

And yet BitCoin has been designed to behave a certain way. It was designed to have no inflation beyond a certain point, and to be hard to counterfeit, etc. If an economy grew up based on BitCoins then the design of that currency would have material effect on the economy.

Government intervention is always bad precisely of this reason. Politicians simply do not poses any extraordinary powers whereby they could make all the perfect decisions and so every idea how ever well intentioned will usually have some bad unintended consequences which politicians will want to "fix" with further intervention all of which then spirals down to more government caused problems and more government control.

I certainly agree that governments can cause problems, but the idea that no action a government has ever taken has been of ever benefit to society is a bit of an extreme position to my mind Wink

Also although I think markets are a remarkable mechanism I do not think that the market always makes perfect decisions either. For example take fishing. Fishing depletes fish stocks, this makes it harder to find fish. This means less fish are found. This raises the price of fish. This creates further incentive to fish more heavily, further depleting fish stocks and so on. The end result without intervention: fish stocks totally depleted, virtually all fishermen unemployed.

The logical thing to do would be to fish only as fast as the fish stock could regenerate, but that isn't the "decision" the market makes in this case.

As I see it a market is a system like any other, it has positive feedbacks and negative feedbacks. Most of those feedbacks are beneficial and help society function, some of them are negative and have to "interfered" with. The market is after all just a means to an end.
abyssobenthonic
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May 08, 2011, 06:03:42 PM
 #27

Also although I think markets are a remarkable mechanism I do not think that the market always makes perfect decisions either. For example take fishing. Fishing depletes fish stocks, this makes it harder to find fish. This means less fish are found. This raises the price of fish. This creates further incentive to fish more heavily, further depleting fish stocks and so on. The end result without intervention: fish stocks totally depleted, virtually all fishermen unemployed.

There is an "intervention" (negative feedback) provided by the market: the increasing price relative to other things will cause demand for fish to shift to other things.  The high prices will also generally incentivize development of methods to increase fish stocks (e.g. fish farming and maybe even cloning fish).

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hazek
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May 08, 2011, 06:14:37 PM
 #28

Also although I think markets are a remarkable mechanism I do not think that the market always makes perfect decisions either. For example take fishing. Fishing depletes fish stocks, this makes it harder to find fish. This means less fish are found. This raises the price of fish. This creates further incentive to fish more heavily, further depleting fish stocks and so on. The end result without intervention: fish stocks totally depleted, virtually all fishermen unemployed.

I see you have an open mind and are using it which is good but your world view is flawed. You're logic is also flawed.

Take your fish example for instance:
Fishermen don't fish because the fish have a certain price, they fish specific fish because other merchants pay them a certain price for them. Those merchants are usually supplying businesses which transform the fish into some form of edible good. It is the market demand for these edible goods that gives the fish a market in the first place. So lets say like in your example some specie of fish that the market really enjoys starts dying out. Since there are less fish of that kind, less are being caught and if the demand of the market for the edible goods stays the same the prices start to rise. But only to a point. And that point is as much as the market meaning people sitting in restaurants and ordering the food are willing to pay for those fish. As soon as the fish become too expensive to eat the market demand for those fish collapses and so does it's price rendering further fishing unprofitable. And the fish don't get extinct. Not to mention all the ideas the market would try to implement in order to artificially breed those fish.

It would be really cool if you went over to mises.org and studied Austrian economics and learn how the world really works.

My personality type: INTJ - please forgive my weaknesses (Not naturally in tune with others feelings; may be insensitive at times, tend to respond to conflict with logic and reason, tend to believe I'm always right)

If however you enjoyed my post: 15j781DjuJeVsZgYbDVt2NZsGrWKRWFHpp
kiba
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May 08, 2011, 06:32:01 PM
 #29

In any case it sounds like we agree:
- A currency based on a fixed money supply can be prone to deflationary spirals due to positive feedback systems.
- That these deflationary spirals can lead to quite pronounced economic contractions.

The bitcoin economy did not contracted, but expanded. More goods and services are being sold than ever before, but there is quite severe deflation.

hazek
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May 08, 2011, 06:45:32 PM
 #30

The bitcoin economy did not contracted, but expanded. More goods and services are being sold than ever before, but there is quite severe deflation.

Let us be careful with all these term we throw around here and lets call things by their proper names.

There is no deflation, there is only a built in monetary inflation of on avg. 50BTC per 10min. There is however a growing demand for Bitcoins which is a cause of price deflation.


I mean it's also one of the reasons why this whole thread is silly. The OP is confusing monetary deflationary spiral with a price deflationary spiral where the former isn't even possible with Bitcoins.

My personality type: INTJ - please forgive my weaknesses (Not naturally in tune with others feelings; may be insensitive at times, tend to respond to conflict with logic and reason, tend to believe I'm always right)

If however you enjoyed my post: 15j781DjuJeVsZgYbDVt2NZsGrWKRWFHpp
Tom
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May 08, 2011, 08:10:38 PM
 #31

Take your fish example for instance:
...

If we can't agree that the market is unable to effectively manage fish stocks in order to maintain maximum long term yield then I don't think we are going to agree on much Wink As I see it the market has already failed to manage the resource effectively. Since there is widespread agreement among scientists that fish stocks have already been severely depleted and that this has cut the longterm maximum yield of many species of fish.

The OP is confusing monetary deflationary spiral with a price deflationary spiral where the former isn't even possible with Bitcoins.

The OP is not confused at all on that matter.

My goal with this post was to improve my understanding by having my ideas challenged. Personally I think my understanding has improved a great deal, it's really helped to clarify my thinking. I still think the argument stands, but I have a better idea now of the main counter arguments and how they relate to my original post.

If someone else thinks that there is an identifiable flaw in the logic of the argument then I'd still love the opportunity to explore the issue, otherwise I'm done for now Smiley

Cheers for the discussion, really enjoyed it Smiley
abyssobenthonic
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May 08, 2011, 08:30:58 PM
 #32

I mean it's also one of the reasons why this whole thread is silly. The OP is confusing monetary deflationary spiral with a price deflationary spiral where the former isn't even possible with Bitcoins.

At some point (arbitrarily soon after the reward for solving a block drops to zero), the money supply will start to monotonically drop to zero (barring private keys being rediscovered... as time approaches infinity, it may be more profitable for miners to hunt for private keys (which have hopefully been lost...) than to solve blocks) as private keys are lost.

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hazek
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May 08, 2011, 08:38:43 PM
 #33

At some point (arbitrarily soon after the reward for solving a block drops to zero), the money supply will start to monotonically drop to zero (barring private keys being rediscovered... as time approaches infinity, it may be more profitable for miners to hunt for private keys (which have hopefully been lost...) than to solve blocks) as private keys are lost.

Sure that will happen in a certain amount but it isn't what the OP had in mind when he's talking about deflation.

My personality type: INTJ - please forgive my weaknesses (Not naturally in tune with others feelings; may be insensitive at times, tend to respond to conflict with logic and reason, tend to believe I'm always right)

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kiba
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May 08, 2011, 09:34:50 PM
 #34


If we can't agree that the market is unable to effectively manage fish stocks in order to maintain maximum long term yield then I don't think we are going to agree on much Wink As I see it the market has already failed to manage the resource effectively. Since there is widespread agreement among scientists that fish stocks have already been severely depleted and that this has cut the longterm maximum yield of many species of fish.

It simply means that nobody figured out how to own school of fishes.

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May 08, 2011, 10:22:47 PM
 #35

It simply means that nobody figured out how to own school of fishes.

+1 in spirit.

Tragedy of the commons.

While the linked wiki article argues that the global fish population is difficult/impossible to privatize, it would appear to me that allowing title to be held over sufficiently large portions of the ocean conferring the exclusive right to fish there may be a solution.  The ocean-properties would be rationally valued as the sum of expected future discounted cash flows and if fishing is the primary source of those cash flows, then overfishing the area would decrease the expected sell-on value.  If I make an extra 1k currency units from extra fishing but my extra fishing reduces the sell-on value by 1k units then I'm likely to decide that I'd rather stay on shore and, say, have sex with my spouse than go out fishing.  Additionally, per Coase there would be an incentive for neighboring property owners to pay each other not to overfish (because overfishing one property would probably lead fish to cross the property line thus harming the value of the neighboring properties).

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