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Fear Not Deflation

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Re: Fear Not Deflation

#41

Post by eli_gottlieb »

pash wrote: post #14
eli_gottlieb wrote: post #4

This has got to be one of the dumbest fucking things I've ever seen. Its only real point is that commodity-based currencies and deflations weaken government. Furthermore, its idiotic praise of societal-level saving is pure nonsense. My income is someone else's expenditure, my credit is someone else's debt. Money can obscure this fact, not alter it. In order for me to save, someone else must spend. Do they have to spe…

> This has got to be one of the dumbest fucking things I've ever seen. It's pretty dumb. Really, thoroughly dumb. But you've added some real bloopers of your own: > If we have a standard-issue modern currency, ie: slow but steady rate of inflation targeted by a central bank, then some amount of new money enters the economy each year. As long as total new savings in the year don't exceed this amount, then and only the…

I did make the awfully common mistake of conflating money supply and price inflation/deflation. My bad.

However, my point about savings stands, because I was talking about money, not wealth. The whole point is that money is an economic lubricant, and if an economy goes into a deflationary spiral or debt-driven financial crisis, the whole problem is that real wealth ceases to be represented accurately by money, yet almost all transactions continue to be denominated in money. The map ceases to represent the terrain.

Re: Fear Not Deflation

#42

Post by Tycho »

josephlord wrote: post #9
Tycho wrote: post #6

Earlier quoted context omitted.

Wouldn't this be compensated for by lower rates for lending?

Interest probably wouldn't fall below zero. Also no incentive to lend money rather than hold so not so much incentive to offer good rates anyway. Savings rates might well go negative though. Steve Keen as linked to is well worth a read rather than my first approximation guesses.

Doesn't inflation just encourage a different type of hoarding (ie. in physical assets like real estate or gold)?

Re: Fear Not Deflation

#43

Post by slurry »

goodcanadian wrote: post #39
slurry wrote: post #33

Earlier quoted context omitted.

> Personally, I don't consider mild deflation to be any worse than mild inflation. A priori this sounds reasonable. But would you rather live/invest in 1990s Japan (mild deflation) or 1990s America (mild inflation)? Mild deflation is absolutely terrible in practice. Mild inflation is good/not so bad.

All else being equal, I don't consider mild deflation to be any worse than mild inflation. Comparing 1990s Japan to 1990s America is not an "all else being equal" situation. Really, economics is such a complex beast, it would take an incredibly complicated analysis to demonstrate which is better.

I'd be interested to know of examples where sustained mild deflation has been accompanied by steadily high economic growth and steadily low unemployment.

Re: Fear Not Deflation

#44

Post by jvm »

goodcanadian wrote: post #40
jvm wrote: post #34

Earlier quoted context omitted.

The advantages of monetary stability come with a stable growth rate, because contracts are bets on the future growth rate of money and stability means those bets can be made reliably. You have proposed a stable CPI growth rate of 0%. There are two problems with this: the first (more important) problem is that arguably stable money supply is more desirable than stable CPI. During a downward supply shock, tightening th…

But you should recognize that moving from 2% to 0% would itself be a strong downward demand shock that in most countries would likely cause a recession. Any sudden policy change is going to lead to turmoil and a likely recession. I did not suggest the change should be sudden. Also, a target of 0% does not prevent appropriate price increases or decreases any more than a target of 2%. It is a goal not a mandate. As lon…

> As long as everyone knows what to expect, plans can be made reliably.

Expectations are the flaw with CPI targeting.

Toy example: imagine NGDP is $100 and the CPI is 100. Fed guidance says 0% CPI growth. I have income $10 (note that NGDP is aggregate nominal income). I sign a deal with you for you to finance my house and promise you for $7 next year, assuming I"ll live off of $3.

Now a supply shock hits, with enough pressure to raise CPI to 110. The fed responds by dropping NGDP so now national income is $90 (I know the math here isn't exact but it's irrelevant to the point). If I'm the average person, I take a 10% income hit, dropping me to $9. I still owe you $7. My consumption now has to drop from $3 to $2, a 50% drop! I might not be able to do it so I might default on my loan. In any case I'm really screwed, and if I do default (and many other people also default) we'll have a financial crisis on top of our supply shock. One way to think about this is that the debtor has to eat the creditor's consumption haircut. Europe, cough cough.

In contrast, under NGDP targeting, NGDP remains the same, prices rise 10%. Now my income will still be $10, I will pay my creditor $7, and my only hit is the 10% inflation. My creditor has the same exposure.

I'm not trying to create sympathy for debtors, of course you could argue that they were over-leveraged and deserved what they got. But under NGDP targeting, debts will always be repayable in principle (because enough money will exist in the system) so systemic risk is minimized; minimizing that systemic risk is good for everyone.

Re: Fear Not Deflation

#45

Post by josephlord »

Tycho wrote: post #42
josephlord wrote: post #9

Earlier quoted context omitted.

Interest probably wouldn't fall below zero. Also no incentive to lend money rather than hold so not so much incentive to offer good rates anyway. Savings rates might well go negative though. Steve Keen as linked to is well worth a read rather than my first approximation guesses.

Doesn't inflation just encourage a different type of hoarding (ie. in physical assets like real estate or gold)?

Well when you buy real assets someone is selling and they are left with inflating cash they need to spend on something.

If someone is investing in productive assets (companies, rentable property) for their sustained revenue potential that isn't a bad thing. Spending on goods and services will add demand to the economy and money will circulate.

There is also more reason to borrow in an inflating economy which adds money and demand to the economy. Obviously borrowing can get too high and needs moderation if bubbles are to be avoided but gentle adjustment is needed to prevent massive swings in aggregate demand.

Also I'm not arguing for high inflation just that even a couple of percent deflation could be really bad.

Re: Fear Not Deflation

#46

Post by Tycho »

josephlord wrote: post #45
Tycho wrote: post #42

Earlier quoted context omitted.

Doesn't inflation just encourage a different type of hoarding (ie. in physical assets like real estate or gold)?

Well when you buy real assets someone is selling and they are left with inflating cash they need to spend on something. If someone is investing in productive assets (companies, rentable property) for their sustained revenue potential that isn't a bad thing. Spending on goods and services will add demand to the economy and money will circulate. There is also more reason to borrow in an inflating economy which adds mon…

Ok. Thanks. One more question.

Isn't there some circular logic at play when you say that deflation would cause people to simply hold onto cash rather than invest in productive enterprises. Because if nobody invests in productive assets, then there will be no more goods entering the economy, therefore there will be no deflation of the currency to worry about in the first place...

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