Why is deflation bad? NYTimes link

[AaronM]

http://krugman.blogs.nytimes.com/2010/08/02/why-is-deflation-bad/

His reasons for deflation being a problem seem cogent enough.  I'm curious as to what all of you have to say about this.

[silversurfer]

Deflation is less relevant to us because Bitcoin is not a debt-based system like the US.  The 'credit crunch' of 2008-2009 was the problematic kind of deflation.  Not the appreciating currency of a budding virtual economy.

And... Keynesian economists should be ignored.

[benjamindees]

Paul Krugman -- Deflation is bad because that makes it hard for central planners to fiddle with the economy and trick people into working more than they need to and dumb irresponsible people who do pointless jobs and borrow money they can't pay back end up being worse off.

Here's a picture of forced monetary inflation:

[kristoffernolgren]

Paul Krugman -- Deflation is bad because that makes it hard for central planners to fiddle with the economy and trick people into working more than they need to and dumb irresponsible people who do pointless jobs and borrow money they can't pay back end up being worse off.

Here's a picture of forced monetary inflation:

http://filthyrichbuddha.com/wp-content/uploads/2011/02/carrot1.jpg

I wish there was a likebutton for this!

[caveden]

Paul Krugman doesn't deserve credit. Just for you to have an idea of how bad he is, he still believes in the broken window fallacy, something already demonstrated as false by Bastiat in the 19th century! http://www.youtube.com/watch?v=QG4jhlPLVVs

He has been defied by Robert Murphy to a debate, if he accepts, a charity institution would earn something like $60K, and Krugman hasn't yet accepted. http://www.thepoint.com/campaigns/campaign-0-1240

[goatpig]

Deflation is less relevant to us because Bitcoin is not a debt-based system like the US.  The 'credit crunch' of 2008-2009 was the problematic kind of deflation.  Not the appreciating currency of a budding virtual economy.

And... Keynesian economists should be ignored.

This. Deflation would be a catastrophe with a debt-base currency... which is a catastrophe to begin with.

[bittersweet]

Deflation is bad because it makes credits expensive, which discourages people from getting into debts and banks can't profit on them. It's especially dangerous if you combine it with decentralized currency like Bitcoin, because government can't make everyone poor by printing more money and bailout banks at will. As you see, it's very, very bad and for your own good you should stop using this evil cryptocurrency right now.

[mp420]

This. Deflation would be a catastrophe with a debt-base currency... which is a catastrophe to begin with.

I for one do think a debt-based currency has its uses. It's very useful in a rapidly growing economy, since it strongly encourages lending and thus makes credit (liquidity) very easily available.

In a steady-state or a contracting economy, I would say a debt-based currency has systemic issues that have never been solved adequately.

In my view the timing of abandoning precious metals as the primary vehicle of trade has not been an accident. Precious metals themselves are very useful as a currency as long as the economy does not grow much more rapidly than the money base grows (via mining). During a period of rapid expansion (which, in turn, has historically stemmed from the increased availability of primary energy in the society), using only precious metals would constrain the availability of liquidity, so people will naturally make various kinds of contracts on paper, backed by the institutional violence of the state where contract laws exist, or straightforward threat of violent action by participants where they do not exist. As the largest bully of the playground the state then obviously wants to issue its own contracts, paper money, and everyone will accept it just because everyone else does.

I think Bitcoin or a similar electronic currency could be beneficial in a contracting economy. We need something else during rapid expansion.

[goatpig]

During a period of rapid expansion (which, in turn, has historically stemmed from the increased availability of primary energy in the society), using only precious metals would constrain the availability of liquidity

No. Precious metals, especially gold, can be spread pretty damn thin. Precious metals have been historically used as currency because they fit the bill. They are durable, hard to counterfeit/easy to recognize, internationally accepted AND easy to divide into lesser amounts. If the government wanted to support market liquidity by providing smaller units of exchange, they could have simply minted coins with lower gold and silver content.

I for one do think a debt-based currency has its uses. It's very useful in a rapidly growing economy, since it strongly encourages lending and thus makes credit (liquidity) very easily available.

One of the ideas behind fiat currency is to force the economy into a debt spiral. The fact that your dollars are steadily losing in value forces you to invest it somewhere. This spurs poor investing practices. The pretense that a deflationary currency would halt economic growth is ludicrous. It would limit malinvestment while switching the economy to a savings basis for investment. Only efficient businesses would be able to raise capital through debt, not to mention the superior buying power of the laboring classes.

[TradersEdgeDice]

Krugman deserves his Nobel prize even less than Obama.

Captain Obvious says that deflation is bad for printed currency based on debt.

Thank God for the New York Times or I might never know that.

[Enky1974]

One of the ideas behind fiat currency is to force the economy into a debt spiral. The fact that your dollars are steadily losing in value forces you to invest it somewhere. This spurs poor investing practices. The pretense that a deflationary currency would halt economic growth is ludicrous. It would limit malinvestment while switching the economy to a savings basis for investment. Only efficient businesses would be able to raise capital through debt, not to mention the superior buying power of the laboring classes.

Absolutely, avoiding malinvestment you help preserve the planet reducing waste of resources and less pollution.

[tomcollins]

KRUGTARD!

[da2ce7]

Deflation is very destabilising on a system that can only function, by design, with inflation.  That system is debt based money.

If you generalize that to every money you have made a big mistake... Just because something is bad for one thing, doesn't make it bad for everything.

Deflation is bad when 'every' bit of money needs to be repaid.  Therefore you have a fixed monetary cost (the repayment of the debt), and a increasing real cost.

 

Any money that isn't debt based is immune to the so-called 'problems' of deflation, because as the buying power of the monetary unit increase, everyone who owns the money becomes richer and gains purchasing power, (even if the money is on loan, the person who has claim to the loan has more value).  This means that people who have money are 'encouraged' to spend it, rather than save it for the debt repayments.

Take it from another prospective. In a society that uses debt based money, (aka fiat money), the entire society is in debt to the reserve bank.  If the buying power of the money increased from shortage, the society still needs to pay back it's debt.  Thus reducing the available money supply again.  It is a viscous circle.

It is like holding all the food of the town on ransom, and issuing 100 credits for all of it.  If only one credit gets lost, somebody is going to have to starve, and the 99th credit is going have virtually unlimited value.  But It is worse than that, if somebody  somehow trade to get two credits (eg. a saver), they are holding the food for the last person at ransom and can set any price.

Debit based money is inherently evil, once you understand what it dose... It is a way for setting people against each other economically.

Deflation is good if you have good money.  Inflation is the lesser of two evils if you have evil money to start with.

[tomcollins]

Krugman deserves his Nobel prize even less than Obama.

Captain Obvious says that deflation is bad for printed currency based on debt.

Thank God for the New York Times or I might never know that.

Krugman's "Nobel" prize isn't even a real Nobel prize.  The Economics prize has NOTHING to do with the organization that awards the other Nobel prizes.  It's awarded by the Central Bank of Sweden.

However, most accounts say that Krugman is actually decent at his specialty area that he won the prize in, but he's just a political hack who either does not understand some of the most basic concepts, or intentionally distorts them for his own benefit.

[caveden]

Krugman's "Nobel" prize isn't even a real Nobel prize.  The Economics prize has NOTHING to do with the organization that awards the other Nobel prizes.  It's awarded by the Central Bank of Sweden.

Seriously? I did not know that! No wonder why such an incompetent "economist" won it then...

haha, the "economy Nobel prize" is given by a central bank.. how ironic...

[BitterTea]

Krugman's "Nobel" prize isn't even a real Nobel prize.  The Economics prize has NOTHING to do with the organization that awards the other Nobel prizes.  It's awarded by the Central Bank of Sweden.

Seriously? I did not know that! No wonder why such an incompetent "economist" won it then...

haha, the "economy Nobel prize" is given by a central bank.. how ironic...

Wow, I didn't know that either. From the horse's mouth:

The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel

In 1968, Sveriges Riksbank (Sweden's central bank) established the Prize in Economic Sciences in Memory of Alfred Nobel, founder of the Nobel Prize. The Prize is based on a donation received by the Foundation in 1968 from Sveriges Riksbank on the occasion of the Bank's 300th anniversary. The first Prize in Economic Sciences was awarded to Ragnar Frisch and Jan Tinbergen in 1969.

The Prize in Economic Sciences in Memory of Alfred Nobel is awarded by the Royal Swedish Academy of Sciences according to the same principles as for the Nobel Prizes that have been awarded since 1901.

edit... Unless there are some shenanigans happening, it appears that it is as legitimate as the rest of the Nobel prizes (see bold above, also below)

The Royal Swedish Academy of Sciences is responsible for selecting the Laureates in Economic Sciences. The Academy has 350 Swedish and 164 foreign members. Membership in the Academy constitutes exclusive recognition of successful research achievements. Its working body is the Prize Committee, elected from among its membes for a three-year term.

[tomcollins]

Krugman's "Nobel" prize isn't even a real Nobel prize.  The Economics prize has NOTHING to do with the organization that awards the other Nobel prizes.  It's awarded by the Central Bank of Sweden.

Seriously? I did not know that! No wonder why such an incompetent "economist" won it then...

haha, the "economy Nobel prize" is given by a central bank.. how ironic...

Wow, I didn't know that either. From the horse's mouth:

The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel

In 1968, Sveriges Riksbank (Sweden's central bank) established the Prize in Economic Sciences in Memory of Alfred Nobel, founder of the Nobel Prize. The Prize is based on a donation received by the Foundation in 1968 from Sveriges Riksbank on the occasion of the Bank's 300th anniversary. The first Prize in Economic Sciences was awarded to Ragnar Frisch and Jan Tinbergen in 1969.

The Prize in Economic Sciences in Memory of Alfred Nobel is awarded by the Royal Swedish Academy of Sciences according to the same principles as for the Nobel Prizes that have been awarded since 1901.

edit... Unless there are some shenanigans happening, it appears that it is as legitimate as the rest of the Nobel prizes (see bold above, also below)

The Royal Swedish Academy of Sciences is responsible for selecting the Laureates in Economic Sciences. The Academy has 350 Swedish and 164 foreign members. Membership in the Academy constitutes exclusive recognition of successful research achievements. Its working body is the Prize Committee, elected from among its membes for a three-year term.

It's presented by the same group.  It has some association, but it's completely separate.  It's like how the Paralympics has a loose affiliation with the Olympics, occur in the same city, but are different awards.

[BitterTea]

All I'm saying is that according to the Nobel site, that does not seem like the case. Do you have a citation for that claim?

[2_Thumbs_Up]

All I'm saying is that according to the Nobel site, that does not seem like the case. Do you have a citation for that claim?

The name for the prize is actually something like "The Swedish Riksbank's economic prize in the memory of Alfred Nobel" roughly translated. The swedish central bank created the prize by donating a bunch of money to the Nobel committee on their 300 years jubilee. I'm not sure on who is actually choosing the winner, but the prize is a disgrace to Nobel's will regardless of who it is.

[tomcollins]

All I'm saying is that according to the Nobel site, that does not seem like the case. Do you have a citation for that claim?

It looks like the association has gotten tighter over the years.  It does have a separate name compared to the others due to that origin, but it appears you are correct it's under closer control.