Topic: Is deflation truly that bad for an economy? - page 2. (Read 24946 times)

Why do millions of people suffer from low interest rates?  It's a good time to borrow money if you qualify.

Apple benefits from low interest rates as well.  They did huge buyback this year.

Investments banks provide services to investors.  With out them there would be no capital markets and capital markets are essential for Capitalism.  Apple, Google, Walmart, et al wouldn't exist without a capital market

And keep a strong military in case any country questions or rebels agains the hegemony

At the same time as #3, also establish the petro dollar and global reserve currency status (significantly increasing the global demand for USD).

To defeat the evil, you must become the greater evil  

Today's system is transformed from a legit and honest system little by little

1. Use fractional reserve on gold (40%) to create partially backed fiat money
2. Over decades, slowly reduce that reserve ratio
3. Eventually remove gold backing, replacing it with debt backing
3. Increase the money supply slowly following the GDP development
4. Over decades, increase the money supply faster and faster
5. Eventually dramatically increase the money supply and increase the debt exponentially during a crisis, so that everyone is heavily debt laden

If you want to invent an alternative system, better take the same approach, do little change at a time. Most of the people are short sighted and ignorant, they will adopt to changes without question when the change takes decades to happen

Goldman Sachs exemplifies a financial institution that benefits from low interest rates whilst millions of people suffer from it.
Google or Apple at least have a decent value chain, they provide value for your money.

The problem with financial institutions is not those who make more than them (e.g. Google, Apple) but with the way they handle their affairs, just watch the movie "Margin Call" (based on true story) and see what I'm talking about.

Thats BS.  A lot of companies make a lot more money than GS.  Apple, Google, Wal Mart, Exxon, etc..

GS is not as powerful as you make them out to

The real "smart" people are those who make lots of money and can afford paying for the things you mentioned.
Have you watched the movie "Margin Call"?
Or what about Alessio Rastani's famous Youtube video?

Alessio said "Goldman Sachs rules the world", they tell the government what to do, they control so many things and make billions of $$$ on a monthly basis.

When you study business you learn that organizations and firms are companies ranging from small to big - but institutions - these are very large organizations ... educational institutions such as universities and colleges dictate our lives when it comes to studies ... and financial institutions such as Goldman Sachs dictate our financial lives.

Is it fair? No.
But what can you do about it? If you can't beat 'em join 'em.

There is a fine line between inflation and deflation which is the balance of economy is the best to run the government, either to the extreme to inflation or deflation is unhealthy and can be disastrous to the government and its people, it is inevitable that a country should face both of them and rebounding to a balance for the government to run well.

Yeah unless you are born into wealth and inheritance, most people require debt to spread the expenses of current consumption into the future.  Those that have assets that generate passive income, are the ones that benefit from the system.  That is, they are able to make income without having to invest their own time, or investing very little time.  An example of this would be a landlord that leases land or property.

Inflation also helps those with assets, and hinders those without, widening the gap and making it more difficult for the have-nots to become part of the haves.

I think the system is devised SO that you are a debt slave from day one, regardless of whether you're an idiot or not. How many people are able to pay, in full, for their house, car, education, and healthcare? Please tell us how you save(d) for these things with rampant inflation.

In this fucked up system, one could argue that "idiots" actually do better, since they clamor for assets, while "smart" people try to save in a currency not meant for saving.

Thanks for the info.  That's pretty crazy for government bonds lol.  So for people already holding bonds, with that type of increase to yields, the price would have already dropped significantly.  New bondholders should understand the risk and be compensated with a higher yield.

Any insight into who the main bondholders are that would suffer from a default?  Greek citizens or foreign investment?

The increase has been more than a slight adjustment. Greek bond yields have continuously increased since Sep-2014. I wonder how much higher they can go.

Sep-14 : 5.9%
Oct-14: 7.3%
Nov-14: 8.1%
Dec-14: 8.4%
Jan-15: 9.5%
Feb-15: 9.7%
Mar-15: 10.5%


http://www.ecb.europa.eu/stats/money/long/html/index.en.html

Given the financial state of Greece, I'd assume that the bond yields would have somewhat adjusted (increased) given the higher level of risk?

I haven't been keeping a very close eye on Greece's situation lately.  Since they don't have their own monetary policy, who is the main lender? ECB?

Imagine what happens if Greece defaults on government bonds. What will people around the world think of government bonds in general, when they understand that their pensions are basically government bonds? There could be a violent contraction of credit, thus general price deflation. On the other hand, they could just blame it on one bad government, their own might be okay. Impossible to know.

I don't think the only way to increase the deflation rate is to destroy money.  It would be more based on the velocity of money and the volume of money changing hands in the form of transactions.  Even with a high money supply where no money is being destroyed, if there aren't many transactions happening (perhaps because the interest rate is high and people are encouraged to save rather than consume) it may theoretically cause deflation as sellers of goods/services would need to lower prices to sell non-essentials assuming elastic demand.

Also, it would be possible for the deflation rate to be very large; it's just that the stimulus-addicted government wouldn't think to do it.  Theoretically speaking, imagine if interest rates went to 30% tomorrow.  It would be sort of like hyper-deflation.  Spending and consumption would drop so significantly, that prices would need to fall to sell non-essential products, which would slow down retail, then slow down manufacturing, and wages would need to fall along with higher unemployment.  Realistically, this wouldn't happen though, but it is in the spectrum of possibilities.

Not all things follow a linear path, you argue that deflation is a simple transition from inflation while we argue that there is a phase change involved. I think that your argument of linear transition doesn hold, as agents in a deflationary environment alter their behaviour substantiantly. That is you cannot draw analogies between inflationary equilibriuoms and deflationary. Phase change is never symmetrical

I was talking about 3% inflation and 2% real interest, as you seem to have failed to notice. Is it not possible? If it is (possible), then according to your logic (deflation mirrors inflation), the same should necessarily hold true for deflation, right? If it doesn't after all (which is obviously not possible due to the lower limit of 0 for the nominal interest rate under deflation), then your logic is not consistent,  your premises are wrong ("all other things being equal"), and your inferences are false ("deflation mirrors inflation"). As simple.

Why do you continue arguing, for the sake of argument?

dinofelis, I have another perspective of what the natural interest rate is.

Adam Smith estimated that the natural, riskless interest rate would be varying around 3% in a fairly stable, developing economy. Mises and others has allocated this to the time preference.

Examplifying: It is always better to have goods now than later. But generally (generalizing here, because the larger number of participants have more weight in the aggregate) there is value to having means in reserve. Generally, what the middle class (those who have access to slightly more means than they feel they need at the moment) wants is security. Example, I could wish that I had a super luxury car, but the certainty that I can replace my standard car, should I unexpectedly lose it, is of higher value. Therefore I like to have some economic means in reserve. I could store this value as money, but I could also invest, or let others use the money in the mean time. They might feel the need to consume or invest now. Or I could invest directly myself (in my own business or as part of a business run by others). Those who want the means now, in effect use (for consumption or investment) the means that I have opted to defer use of, have to pay a compensation for that. It's called time preference, and is the root of the interest phenomenon.

There is a connection, and that is the value of money. Look beyond using money as a reference of value, (the so called unit of account function of money, which I think is overbought and can only work in a situation of stability), and you will see that there is a market also for the money. That means that the value of money increases with a shift to more saving in the general, which leads two these two things: Interest goes down (more money-value is available for loans), and consumption by the savers go up. Both forces work against the appreciation of the value of money. Conversely, with growth, investments are needed, which reduces the value of money and increases the interest rate, the same as the effect of savings rate going down.

A side effect of more investments, in the aggregate, (assuming a free market) is that everybody wins, but the individual actor will not normally take that into account.

I would like to remind you that what I'm trying to discuss are the intrinsic differences of light, steady inflation, and light, steady deflation, of which I claim that there are NO economic differences (apart from the existence of a huge financial sector, but let us put that aside for a moment).  But I'm NOT discussing the effects of a TRANSITION from one regime to another.  I'm only considering steady, long term inflation versus steady, long term deflation.  In both cases, I assume that all economic actors in the examples are well-aware of this inflation or deflation, and adapt their previsions to it.

Because that's the question we want to answer: is (light) deflation *intrinsically* economically any different from (light) inflation ?  My statement is: no.  While a lot of common wisdom says yes. 

So I want to compare a deflationary monetary system to an inflationary monetary system, all else equal.

As such, if you say that during deflation, all prices fall, including wages, the mirror situation is that in inflation, all prices rise, including wages, of course.  And that people KNOW this.

So in as much as during inflation, I know perfectly well that if I earn $1000 today, I will earn $1020 next year, now, I know perfectly well that if I earn $1000 today, I will earn $980 next year.

So if I have to consider to buy a smartphone that costs me $500 today, or that will cost me $490 next year with my income of $980, or I have to consider to buy a smartphone that costs me $500 today, and that will cost me $510 next year with my income of $1020, what difference could that possibly make for me to decide to buy it now or next year ?

In both cases, I can choose between spending half of my salary on a smart phone today, or next year.

I consider the economic situation to be identical, so my risk to lose my job is the same in both cases.  My uncertainties are the same.
How could I be more inclined to buy now in one case, and to buy next year in the other case ?

You cannot have 3% deflation and only 2% real interest rate in steady state, long term.

Because the *source* of deflation is also the *source* of real interest, namely economic expansion ("more goods chasing the same amount of gold").

The ONLY way to obtain a stronger deflation rate than the economic expansion rate (in steady state, long term) is when money is DESTROYED systematically.  If gold is regularly dumped in the ocean or sent in deep space or so.  If bitcoins become un-spendable (hehe!). 

On the other hand, upward, inflation wise, there is no limit.  You could print so much money that you get 80% inflation if you want to, as a matter of speaking.

What I meant with "deflation mirrors inflation" is for those sets of numbers that make sense.  Of course inflation can be made arbitrarily big, while deflation not.  But *for those sets of numbers that are possible* the two mirror situations are dual.  There are indeed number combinations of inflation possible, that are not possible with deflation.  But that's not the point.  For those that are both possible, they are mirrors of each other.

Look at it this way: I could say, in some or other mechanical problem, that "the mass increase is a mirror to the mass decrease".  But then of course, a mass increase is always possible, and, as you cannot get a negative mass, the mass decrease is limited to the original mass.