Topic: Inflation and Deflation of Price and Money Supply - page 63. (Read 1425163 times)

If so, then the problem with inflation and deflation for the reason of prices, wages, etc being inelastic is certainly not the only one, right?

Yes that's what I said in the parenthesis you quoted.
Yes that's what I said in the rest of the post showing how hoarding is not even necessary to cause a liquidity trap.
Yes, if the government prints money to go to a special group, then price and wage elasticity will not help. 

I'm glad you agree with everything I said.

The problem with such logic is that the newly printed money in reality doesn't enter the economy uniformly. In fact, even if government creates money, it may not flow into the economy at all (so called "liquidity trap"). So, even if prices, wages, etc were were perfectly elastic, that wouldn't mend matters much better...

The only problem with inflation and deflation is that prices, wages, bank accounts, and contracts are "sticky" in terms of the number that shows up on shelves, paychecks, bank statements and contracts.  If our perceived valuation of the currency immediately changed in proportion to the money supply (that is, if all those number affixed to everything immediately changed), then nothing would change from an increase or decrease in the money supply (assuming the increase in the supply were spread around according to where the existing money is such as in the bank accounts).

So rather than letting the tail wag the dog, the money supply should follow the perceived valuation that was expected when the numbers for the prices, wages, and contracts were selected.  This would allow the (von Mises) "price signal" to accurately reflect the relative value of things in society to each other rather than to an artificially contrived currency "value". Keynes, Hayek, and Benjamin Graham agreed that a basket of commodities was the way this should be done.

Bitcoin is a largely reactionary movement to the inflationary theft that is occurring.  Trying to imitate gold is not such a bad thing, but not ideal to classical economists and most of the modern ones.  Radical republicans think it is, but Austrians who follow Hayek do not think gold is ideal (search "basket commodities hayek"), same as Keynsians who follow Keynes do not like uncontrolled printing.

Worse than inflation, the printing is not going towards M2, but towards buying toxic assets off the banks at the future expense of the taxpayer.  This is why inflation is not (yet) worse now than in the 1990's.  Once the banks' balance sheets are secure, they'll try to stop the printing and the interest rates will rise (bank profits), again at taxpayer expense (and existing bondholder expense).  But that will cause housing values and Fed bonds to go down from the rising interest rates and since those assets are now held by the taxpayer through the Fed, the government has to print away the increasing interest rates, but this time it might go into M2 (inflation) and keep the unemployment numbers from looking too bad for awhile.  

November unemployment report looks great, showing steady improvement compared to last year in all 7 categories they mentioned (manufacturing was the only category that went down but they neglected to mention the decrease).   But based on percent of population "not in labor force" (a more honest measure of unemployment), there was 0.6% increase in unemployment year over year, rather than the reported 0.8% decrease. So they report everything is better, and yet there was a 1.4% increase in the percent of the population that is not employed.  This decrease is because the $1 trillion was printed to continue buying toxic assets from the banks so that banks could drive up stock prices instead of being sent to main street.  From TARP until now is when the theft has occurred, not what happened before TARP.

Lol. Why even bring up voluntary unemployment (structural and frictional, is the correct name by the way). You know what I meant.

As for the Phillip's Curve, I said "for argument's sake, let's say it holds".... which it often does seem to hold, except in times of stagflation. That's why they use the expectations augmented Phillip's Curve. Anyway, the problem with trying to lower cyclical unemployment and fight inflation is that there's (most often) a trade-off between the two.... AND... we have monetary AND fiscal policy. Even for Keynesians, why not devote one to each? Further, having the dual mandate leaves one of the two (inflation or unemployment) being favored over the other within the monetary policy framework. Having the dual mandate also encourages bubbles. How? Well, it encourages more targets (inflation and unemployment), and therefore, more proactive monetary policy. We get more situations were interest rates are altered to stimulate growth. This leads to excess supply or excess demand (bubbles). We also get a bigger likelihood of money printing.

Long story short, the dual mandate is not a wise decision because, for the most part, there's a direct trade-off between unemployment and inflation rates (expected or even current). 

If we exclude voluntary unemployment (which by definition doesn't make much sense to fight with unless we're in a communist state or on something else beyond economics), what exactly are you blaming Keynesianism in? What's inherently wrong in trying to lower involuntary unemployment and keep inflation within the limits? As far as I remember, the Phillips curve is nowadays considered as being too simplistic and the relationship is not actually observed in the long term...

No, they pretty much love Keynesianism. Monetarism is more towards a self-regulator style than Keynesianism is. Politicians prefer to spend without consequence because they prefer to be able to be re-elected and want to reward the special interests that got them the money to get them where they are. As for the Fed, and monetary policy, they have the dubious task of the dual mandate. For argument's sake, let's say the Phillip's Curve holds, how the F are they supposed to do their job? Fight unemployment, you get more inflation. Fight inflation, you get more unemployment. Trying to fight both is Keynesianism idealism at it's stupidest.

The most recent US recession was caused by Monetary Policy. The Fed kept interest rates low for too long post-9/11 (and the 01 recession). This price ceiling (or better put, interest rate ceiling) built a bubble in housing via excess demand. How? Well, as we all know the fed funds rate leads mortgage rates. With rates artificially low and kept low for too long, excess demand built, pushing house prices higher. Speculators jumped in, demand grew more, prices pushed higher. Further gov't jumped in, tried to push homeownership even higher, demand increased more. Meanwhile, at the height of the housing bubble 50% of all mortgage originations were ARMS. Then around 2004/2005 the Fed decided to start increasing rates. Well, when you increase rates and a bunch of people had ARMS, guess what happened. Some couldn't afford their mortgage. Those in the know started to recognize it. Speculators bailed. Demand retrenched. It got nasty because now a lot of the risky mortgages were packaged into MBS/ABS. It caused contagion. Add in CDS/CDOs... and you get an all out disaster. 

Who caused the recession? A lot of people. Who was most to blame?

THE FED.

Why? Because of: Keynesianism.

Heh.  I never said you were wrong.  I said that your argument is circular.  Being circular, it does not support your conclusion.


This is the issue under current discussion.  "Deflation is causing harm in Japan."

In support of your claim, you say:


Paraphrase:  "bad things are happening"


Paraphrase: "some guy says that deflation is bad"

These do not add up to your conclusion, except in the circular case where you've already decided that your conclusion is true.

So you didn't say a word to actually substantiate your judgment beyond just claiming that I'm wrong. Surely, this is not what I expected to hear, and if you really thought that such an answer would make me think of your opinion as something reasonable or well-founded, then you chose the wrong person to debate with. That said, I suggest we leave the matter where it is now...

If I call you a criminal and then wrestle you to the ground for a citizen's arrest, a third party wouldn't take my words (the accusation) or actions (wrestling) as proof that you are actually a criminal.

In the same way, just because a central banker says that deflation is bad, and then prints money to fight it, you shouldn't take him at his word.  He may sincerely believe that deflation is bad, and he may be willing and able to act on his belief, but none of that suggests that his belief is correct.

I don't know the solution for Japan.  I've never claimed to.  But, I have a pretty good idea of what doesn't work.

If a doctor told you that you were sick because your humors were out of balance, and that draining some blood would cure you, and it instead made you sicker, would you believe him when he tells you that you didn't drain enough?  How about if every patient he treated died?  Doctors of the pre-scientific era at least had the advantage that some of their patients got better despite their efforts.

If you wouldn't make it so... well, then it wouldn't. I didn't actually get what you meant by saying that their statements and actions did not constitute an argument in favor of their claim... What should they actually do? Please expand more on this. I think it is fair now to ask for a thorough explanation from you. Just shaking your head wouldn't do ..

Here we go again with the duplicitous meanings of inflation and deflation. "We are in disagreement about whether or not Japan experienced deflation because obviously deflation means a reduction in the money supply, and this won't happen with bitcoin until 2140..." Of course, nowhere in the world does deflation mean that except for on bitcointalk.org.

Do you have anything better?


No, you just presume for the sake of whatever sake. To conflate, obscure, and whatever else rather than actually talk about economics. Because if you were to do that, bitcoin looks pretty stupid.

The current discussion is in the context of bitcoin's limited supply being bad.  When the subsidy stops, bitcoin supply growth will turn very slightly negative.  The current, and often repeated, claim is that when inflation stops and turns negative, we go into a death spiral, and bitcoin will fail for that reason.  I see no real reason to come to that conclusion, and I'm refuting those claims.  I have no particular desire to get into a discussion about whether inflation is the money printing itself, or the money that is printed.  But don't let me stop you...

For example of what I'm arguing against:


This is circular.  The Bank of Japan asserts that deflation is bad and must be stopped, so they print money.  Their statements and actions do not constitute an argument in favor of their claim.  They had a lost decade between 1990 and 2001, then they started intervention.  Now they've had a second lost decade, and are looking at a third.  The claim is, of course, that they didn't meddle enough the first time.

Yes, it did and is still a problem there. 2001 was the second worst year in post-war Japan with more than 19,000 companies going bankrupt whose liabilities were 10 million yen or more (an increase of 1.9 percent from the previous year and the largest number since 1984), the real situation being even worse as small business bankruptcies were not accounted for at all. In 2002 Masaura Hayami, then a Bank of Japan governor, said he expected that the Japanese economy would remain in a severe state as prices continued to fall and preventing the economy from falling into a deflationary spiral would pose a significant challenge...

If deflation didn't cause harm and was not at the root of Japan's problems, then what was the cause and why then the government and Bank of Japan took to an expansionary monetary policy in the first place? As with anything, you can always claim deflation is only a symptom and there are some underlying causes hidden somewhere beneath, but does it actually makes things better or render them more clear?

You asked whether we know of any deflationary episode which didn't follow closely a period of state meddling. I gave you such an example. Now you say that Japan is an odd culture and all that. What is your point really?

As far as I remember, a modern economic theory based on Keynesian is called Neo-Keynesian economics. And Monetarism (in its present state often referred to as Neo-Monetarism) is also a modern economic theory. In fact, I don't remember the textbooks I happened to read calling the Keynesian economic theory as just "Economics"...

Yes, governments may love Keynesianism, but to say that they they love only Keynesianism would be a bit far-fetched (mildly speaking). They employ Monetarism principles just as easily, especially in questions of money supply and central banking

Assuming the sky is blue, no shit. Inflation and deflation aren't spontaneous, they are results of changes in the money supply and/or the velocity of money. Money supply increases due to Keynesian economics employed by governments is not equal to some bad word known as "inflation", it is a cause of inflation--a cause that has very intended side effects which we all know and love [/sarcasm]. Conflating Keynesian economics with money supply increases is mostly a red herring, as there is nothing that says there can't be a decentralized currency employing some method of money supply increases which would, no doubt, act magnificently different from government/bank manipulation of the money supply.

It is therefore not an honest line of argument to compare bitcoin to government money. An inflationary, decentralized cryptocurrency can be just as Austrian as bitcoin, and then all of your pro-deflation arguments based on a lack of meddling hold little water. Deflation does not equal Austrian and inflation does not equal Keynesian--these are gross oversimplifications.

Yes.  Modern economic theory is Keynesian.  It can get confusing sometimes, because the textbooks just say "Economics", and not "Keynesian Economics".  A shame really, because Keynes himself isn't so bad compared to those that formed the school around his name.

Governments love Keynesianism, because governments love to meddle, and Kenyesianism says that meddling is good.


Japan is an odd culture, and the Japanese people have a gigantic demographic problem that has been building since the war. 

Again, I'm skeptical of claims that deflation is causing harm in Japan.  It seem more likely to me that deflation, assuming there really is any, is a symptom.

I think your view of the recent bubble/burst is overly simplistic.  I hope you don't take it the wrong way when I say that you appear to have swallowed the populist line about greedy bankers hook, line and sinker.  That episode was far too complicated to blame on one party (unless that party is government*).  Basically everyone in the country was an active participant in that fiasco.

It would take a while to sort that whole mess out and identify all of the groups participating, and what they did wrong.  The short version is that "greedy lending" takes two: a lender and a borrower.

The credit freeze was an overreaction, but a temporary one.  No one knew if they were solvent, and no one knew how creditworthy any potential borrowers were.  The rules had been on vacation for a long time, and it took a while to adjust when they got back.  Lending is once again constrained by the credit demand of creditworthy borrowers, which is a much smaller market than the credit demand of everyone with a pulse.

The most important part missing from your description is the malinvestment.  During the bubble, the markets were sending the wrong signals to the wrong places.  Millions of new houses were built.  Everyone and their cat got a real estate license.  Home improvement stores sprang from every corner, and the manufacturers of the goods sold in such stores expanded capacity.  We ended up with a glut of things that we don't need, and a shortage of things that we do need.  We've also made the, erm,  "bold" decision to do everything in our power to prevent those malinvestments from clearing.

In my opinion, it looks like the deflation was caused by the mess, rather than the other way around.


Hyper-deflation would probably be horrible.  But I can't imagine any realistic way that it could ever happen.


The properties you describe don't seem to have anything to do with "stake", assuming that such a thing has meaning.  Bitcoin's subsidy decreases to zero because we want it to, not because proof-of-work requires it to.

* Government gets special mention for shielding pretty much everyone from individual risk.  Since no one had their own skin in the game, they all had incentives to be stupid.  In a free market, those that take bad risks end up losing their capital and they have to sit out the next round.