How do you borrow 1.75 trillion?

[Toke]

I still don´t get why deflation would be a big problem if a goverment can just print some more money and spend it.
It sounds like a politicians wet dream, print and spend a few trillions, above the usual buget.
Where is the problem?

 

[Tippit]

I was just thinking that the thread was missing some about-backwards crackpot analysis . Of course, the reverse is true--allowing deflation to propagate via lending curtailment and destruction of enterprise value and avoidable layoffs etc. is what is immoral. The reason why is that it is contrary to, and negligent of a central bank's mandate which is a publicly enshrined directive set up in the interests of the society.

Pot, kettle, black. I've anticipated all of this and made lots of money. If the price of that is being called a crackpot by an ignoramus, so be it.

If the problem is the destruction of capital, why doesn't the central bank print money and distribute it proportionally to everyone, instead of arbitrarily enriching the already rich (and currently risk averse) banker class at the expense of everyone else? Once again, it was fiat money and fractional reserve banking which caused the deflation. The lower cost of capital of the fiat money regime resulted in people getting loans for a variety of things that they wouldn't otherwise get loans for. This inevitably resulted in malinvestment and wanton speculation, the results of which we're suffering from now.

In the interests of full disclosure, don't you work for a bank? It might be helpful to point out that you have a vested interest here.

As you know from previous discussions which you were compelled to agree with eventually, no transfer occurs (which would anyway be in favour of the owner of new currency not the issuer) unless unanticipated price level shifts occur because of it. And, of course, pretty much the entire basis of open market operations is to avoid unanticipated price level shifts, which is why "price stability" (universally understood as stable, low, positive inflation) is part of the operating mandate of central banks.

No, I'm never compelled to agree with someone whose analysis consistently fails. Price stability means relatively unchanging prices, not constantly rising prices. Justifying the failure of central banks by claiming that they really mean "stable rate of inflation" as opposed to "stable prices" is just dishonesty. Money creation always reflects a transfer of wealth, regardless of what happens to the general price level. If the money supply increases but the general price level doesn't budge, then the money creator has enjoyed the necessarily productivity gains at the expense of the currency holder. When productivity remains constant, zero inflation is equivalent to constant final demand. Stability of final demand requires a deflation rate equal to minus the rate of productivity growth. If monetary excess occurs and the price level doesn't budge, then the bankers have skimmed off of the top. This is an elementary concept to understand.

Moreover, with falling prices--anticipated or not--floating interest rates cannot adjust correctly to compensate borrowers who seek to substitute future spending with present spending, with the predictable result that both borrowing and present spending grind to a halt, that conventional economic policy levers are fully powerless to reverse.

Thus, standing aside and allowing deflation to propagate is a gross dereliction of duty on the part of a monetary authority and fits any definition of immoral.

The bankers propagated the inevitable deflation by decades of monetary excess. It's called the business cycle, and they are directly responsible for it. The question is, why do we as a society continue to allow the blind and immoral to control and manipulate our money?

 

[Francesca R]

No, I'm never compelled to agree [ . . . ]

You have previously accepted that money creation does not necessarily increase the general level of prices, and that floating interest rates compensate holders of currency for anticipated increases in the general price level anyway:

Of course [money creation] is inflationary - not necessarily of the general price level, but of the money supply.

Interest rates compensate people primarily for the time value of money, and [for] some measure of expected inflation.

Thus, insofar as motive for your fraud is concerned, you require an elitist conspiracy to self-enrich, and for means you are forced to scrape the barrel of official deceipt about the published CPI coupled with repeated price shocks about which the public is never informed.

So to repeat, yes--I call that crackpot.

 

[Meadmaker]

But the price is not "going down". The yield is.

We were discussing the limits on government borrowing. As government tries to sell more and more debt, eventually, the price would have to go down. i.e. the yield would have to go up. Obviously, that limit hasn't been reached, because right now, the price is very high.

Of course....

And bonds can be valued too. Actually they are rather expensive.

So yes, I understand the relationship between price and yield. The question is whether anyone knows where the limits are on the government's ability to borrow. As we approach that limit, we will see the government getting lower prices for the bonds, i.e. they will have to pay a higher interest on their debt.

ETA: And, as with so many other economic shocks to the system, people will pay too much for bonds for a while, before they realize that they really aren't such a good investment. It happened with stocks. It happened with real estate. It will happen with government bonds. Wherever the herd is streaming because they lost money last time will be the next investment to fail. Could we be in the midst of a "bond bubble?"

 

[Francesca R]

We know where the limits are with many sovereign governments because they have been broken before. But the creditworthiness of any sovereign changes over time and the willingness of investors to substitute government bonds with other assets changes over time too. Since its inception the US has not experienced a sovereign debt funding crisis. The UK has, but even so that does not mean that recreation of the exact conditions today (if that was possible) would produce the same outcome.

 

[Meadmaker]

I still don´t get why deflation would be a big problem ...?

More than anything else, you want stability, so that people can make wise, informed decisions about what to do with their money.

Suppose you are thinking about buying a house. You know that it will cost you, but you will have a nice place to live, and besides, you can eventually sell it when you are too old to live there, or leave it as part of your estate. Your decision is based on whether you would rather live in a nice house, or purchase more consumer goods with the money. That's a relatively straightforward analysis. Based on my income, I can afford more stuff, or a better place to put it. Which would I rather have?

Suppose you decide the house is your higher priority, and you take out a loan. Enter deflation... Your salary goes down. Your mortgage payment doesn't. Oops.... You can't afford your house. In a normal, mild inflationary, scenario, when you can't afford your house, you have to sell it back to the bank. It's worth more than when you bought it, so you leave with no house, but you have a couple of thousand bucks in your pocket to rent an apartment until you get a new job, and what the heck, buy a wide screen tv while you're at it.

Not so with deflation. You sell your house, but you don't have enough to cover your mortgage. Now, you are homeless and have several thousand dollars in debt. Not so good.

In general, you want stability, so that economic decsions can be made based on priorities and desires, not on currency speculation.

 

[macdoc]

Your mortgage payment doesn't. Oops..

that's the sucker play the banks want you to buy into.

The same scenario plays out with a rental unit you can't afford BUT you move to a lower rent or a different city where the the jobs are.

Housing SHOULD be treated like any other service and next year it should be CHEAPER as with many other categories - you like it when your car is paid off and runs well....the banks don't - take that up the line.

Good article here

http://firedoglake.com/2007/12/22/cruficied-by-your-house/

Only 1/3 of Swiss own homes.....think about that.

 

[Toke]

More than anything else, you want stability, so that people can make wise, informed decisions about what to do with their money.

Suppose you are thinking about buying a house. You know that it will cost you, but you will have a nice place to live, and besides, you can eventually sell it when you are too old to live there, or leave it as part of your estate. Your decision is based on whether you would rather live in a nice house, or purchase more consumer goods with the money. That's a relatively straightforward analysis. Based on my income, I can afford more stuff, or a better place to put it. Which would I rather have?

Suppose you decide the house is your higher priority, and you take out a loan. Enter deflation... Your salary goes down. Your mortgage payment doesn't. Oops.... You can't afford your house. In a normal, mild inflationary, scenario, when you can't afford your house, you have to sell it back to the bank. It's worth more than when you bought it, so you leave with no house, but you have a couple of thousand bucks in your pocket to rent an apartment until you get a new job, and what the heck, buy a wide screen tv while you're at it.

Not so with deflation. You sell your house, but you don't have enough to cover your mortgage. Now, you are homeless and have several thousand dollars in debt. Not so good.

In general, you want stability, so that economic decsions can be made based on priorities and desires, not on currency speculation.

Yes, I see that deflation is a bad thing.
My question is why it is considered a problem.
It should be easy to solve.

I still don´t get why deflation would be a big problem if a goverment can just print some more money and spend it.
It sounds like a politicians wet dream, print and spend a few trillions, above the usual buget.
Where is the problem?

 

[drkitten]

Yes, I see that deflation is a bad thing.
My question is why it is considered a problem.
It should be easy to solve.

It's easy to print money. It's not so easy to get it into circulation.

Part of what causes deflation is a reduction in the circulation of money, as people put off purchasing (because they can spend money NOW to get what they want, or they can spend money LATER and spend less to get more).

Which should I do -- buy a new refrigerator at $800, or spend $200 on repairs so that the old one will last two more years? Well, if I expect that the refrigerator prices will go up, and in two years refrigerators will cost $1500, I might as well buy it now. If I expect prices to go down, however, and I expect to be able to buy a new refrigerator for $500, then I can actually save money by putting off the purchase.

The problem is, almost everyone will be thinking this way, and so the refrigerator company will be making very little money; it will have to either go out of business (which is bad) or lower prices even further (which contributes to further deflation). So it's a self-perpetuating cycle.

Similarly, suppose I want to expand my business, and it will cost $100,000 to do so now, or $50,000 to do so in two years. Doesn't it make more sense to put off taking out the loan? So even if the bank has money to lend, no one wants it NOW. (And the only way the bank can continue to stay in business is by raising the interest on the loans it does make, which contributes even more to the problem of no one wanting loans.)

Now, suppose that the government prints $1000 and gives it to me. Does the fact that the government gave me $1000 change my decision to buy or not buy the refrigerator? Probably not --- instead I might as well just put it in the bank. So the effect is that there's more money, but it's not moving -- it's just sitting there in a bank (and not even being lent out).

 

[oggiesnr]

The Wall Street Crash was 1929, the Great Depression really kicked a couple of years later because people stopped spending because they were scared and they thought they'd get it cheaper later.

A real life example. I am a market trader (as in Market Square not financial). If I have a good day then I buy that record from another trader before someone else bys it and he has a better day. If I have a bad day I don't buy it and so he doesn't get the sale and he doesn't buy that toy for his dog form another trader etc etc. A market is actually a fairly close knit community so we do buy from each othe if possible but we rely on the general public injecting cash into the market for us to spend with each other. No cash from the GP we don't spend.

Deflation adds yet another layer of complexity because if I think my mate isn't going to sell that LP at it's asking price I don't need to spend my money today, I can sit on it for a few weeks and see what happens. I get nowt for my cash because savings rates are so low, he doesn't make the sale and with a bit of luck I pick it up cheaper down the road. BUT he now has to replace his stock, and live, and has less money to do so so he spends less and etc etc.

If the western economies hit deflation then all bets are off as to how long this reccession will last. The calculation is which is worse, deflation or a return to double digit interest rates down the road to pull any inflation back in line.

Steve

 

[Toke]

It's easy to print money. It's not so easy to get it into circulation.

Part of what causes deflation is a reduction in the circulation of money, as people put off purchasing (because they can spend money NOW to get what they want, or they can spend money LATER and spend less to get more).

I see, getting the money to circulate is the problem.
Thank you, I knew there was some problem with deflation, just didn´t know it.

 

[Meadmaker]

Housing SHOULD be treated like any other service and next year it should be CHEAPER .

Housing is cheaper this year than last year, now that the housing market has undergone some deflation.

However, I didn't borrow "a house payment". I borrowed 125,000 dollars. That isn't the bank's fault. They want 125,000 dollars to be paid back. They don't want "the price of a house payment".

 

[Puppycow]

M3 is the over all money supply

OK, now what you wrote makes more sense to me. I still think you could just write "financial institutions" or "banks, etc." instead of "institutions chartered for fractional lending" and your posts would be more comprehensible to laypeople.

 

[Puppycow]

Deflation is a boogie man scared up to protect vested interests. I live in a deflationary business and have for 25 years. It's tricky but if we ALL took the view that good things will get cheaper and our pay cheque will go farther next year it would be an excellent mind shift.

This I think is the Utopian problem here. Most people won't take that view. They want their paycheck to increase each year or they will feel like they are getting poorer. Any solution that relies on everyone looking at things in a new way won't work in practice.

Plus, in deflation the best investment would simply be to stash as much cash as you can and keep it. We want people to invest in productive things and new technologies.

 

[Francesca R]

This I think is the Utopian problem here. Most people won't take that view. They want their paycheck to increase each year or they will feel like they are getting poorer. Any solution that relies on everyone looking at things in a new way won't work in practice.

macdoc fails to differentiate between a subset of prices falling (usually due to rapid productivity growth or to substitution) and economy-wide prices falling. To equate the two is severe folly. The former is fine, the latter very bad.

 

[Skeptic Ginger]

...

If the western economies hit deflation then all bets are off as to how long this reccession will last. The calculation is which is worse, deflation or a return to double digit interest rates down the road to pull any inflation back in line.

Steve

Deflation has already occurred. What are you including in your calculation? Try adding housing and the average stock share and redo your totals.

 

[Francesca R]

Housing (apart from rent and mortgage interest) and shares are investment items not consumption items. Capital asset prices rarely if ever get included in consumer price index baskets, for all kinds of good reasons, the main one being that they are not consumption.

 

[Skeptic Ginger]

Lol at this thread. The main reason why debasing a currency to offset price deflation is problematic is because it's immoral. Whether by illegal counterfeiters or central bankers, money creation is a de facto transfer of wealth from the existing holders of the debased currency to the issuers of the new currency. It's no different than if they picked your pocket, but since the concept is slightly more abstract it is tolerated by modern society, strangely enough. Bankers get to decide where the new money goes, so I guess it's not so surprising who the beneficiaries of the recent bailouts have been.
....

While I lean more toward your view of the world than Francesca's, I think this rather oversimplifies an issue which is much more complex.

I posted this link in a different thread. It was a "controversial interview with American Monetary Institute director, Stephen Zarlenga". The AMI states it is "dedicated to the independent study of monetary history, theory, and reform" The interview is from 2000. It's short and worth reading whether you agree with the guy's solution or not. There is a lot of insight here regarding the shift away from the gold standard in the 30s.

... History shows money is an abstract institution of society and government. As far back as 340 BC Aristotle wrote: "Money exists not by nature but by law." He's saying true money is a fiat (decree) of the law. Of course, say fiat to a hard money advocate and it's like waving garlic in front of a vampire....

....An inflationary depression is theorized to occur when the government rescues banks, with the liquidity created to bail them out causing runaway inflation, but it doesn't have to happen that way....

[the 100% Reserve Solution] avoids collapse by changing outstanding bank credit into actual cash. First, banks (including the Federal Reserve Banks) are required to establish 100% reserve backing for all deposits. To do this, the US Treasury loans them (at interest) freshly printed US currency to bring their cash reserves up to 100 %. Treasury paper held by banks, gets credited against these borrowings; canceling an equal amount. Banks are then confined to lending existing funds.

This elegant reform transforms the private bank credit money created out of thin air for decades, into US legal tender -- real money. All US debt held by the banking system is canceled out by the banks borrowings from the Treasury. ...

This reform wouldn’t be inflationary or deflationary - it simply makes tangible what had been thought to be the existing money supply. This reform removes the money issuing power from private banks and places it in the US Treasury. Its not paper money that's immoral; its the private issuing of it....

[Austria] can't imagine this solution because they view money as a commodity -- or an economic good -- that can't be brought into existence out of thin air. But if you understand money as an abstract legal power, then a nation can successfully create and substitute cash for the already existing and suspect bank credit.

...the nation has the power to avoid [a U.S. banking collapse]. But considering how myopic American bankers have been, almost anything is possible...

Here's a short but in depth review of Zarlenga's views:
Review of Stephen Zarlenga's The Lost Science of Money. He ends with the following criticism:

The problem is that the commercial banks are not beneficiaries of the current system. Even the Federal Reserve Banks have restrictions imposed by law of their distribution of profits to member bank shareholders. The primary beneficiary is the United State government, which, as I have explained earlier, along enjoys the power to self-create credit. Neither government nor privately-owned banks ought to have this destructive power. Purchases up to some relatively low value level can be adequately handled by fiat coins of nominal intrinsic value without risking the integrity of the system. However, paper currency must be denominated in quantities of specific goods and services over which the issuing deposit bank has control (and its delivery thereof upon demand is appropriately guaranteed by governmental regulation, independent auditing and required insurance coverage).

This debate is far from over, of course. Although Stephen Zarlenga is more comfortable with government in full control of money issuance and circulation than I am, the introduction of a long list of other reforms might persuade me that government had reached a point of sufficient public trust to trust government to introduce and maintain sound money.

And while I'd like to be able to read the following paper and I can't without paying, the abstract notes that Zarlenga's ideas leave out some basic economic theory. I put this here before someone else points it out with the false assumption I am unaware of major economic theories.

Evaluating Stephen Zarlenga's treatment of historical monetary thought

Purpose – The aim of this paper is to examine the proposition that the monetary reform movement has correctly identified the central importance of money-issue whilst, simultaneously, not appreciated the sophistication of previous monetary theorists. Design/methodology/approach – The Classical, Keynesian and Marxian monetary traditions are explored within the context of the views of the monetary reformers, as espoused by Stephen Zarlenga of the American Monetary Institute. Findings – The monetary reform movement has presented a far too simplistic view of previous monetary theorists yet identified an underdeveloped arena for research. Practical implications – The development of understanding towards a state theory of money. Originality/value – The paper contributes to theoretical knowledge regarding the political economy of money creation

I think a bit of what Zarlenga said in 2000 is corroborated by what is happening now. And even though he talks about gold prices not being guaranteed and we see the price greatly increased since 2000, it isn't too hard to conclude there is panic buying inflating the price of gold. If I had gold right now, this would be the time to sell.

 

[Francesca R]

Skeptigirl I think that's better in a new thread . . .

 

[Skeptic Ginger]

Housing (apart from rent and mortgage interest) and shares are investment items not consumption items. Capital asset prices rarely if ever get included in consumer price index baskets, for all kinds of good reasons, the main one being that they are not consumption.

Those may be the 'official' prices counted, but so what? Are we puppets which follow the string holders or can we not look and see the world for ourselves?

As for the housing prices not being consumption, sure they are, because it affects all the building materials that go into new homes.

The politics of counting

Dazzled by the political arithmetic - benefit cuts and tax increases without a vote! - the Senate Finance Committee assembled a panel of worthies, led by Bush's chief economist Michael Boskin, to study the index; all were known to be keen on the idea of ratcheting it down. The Committee and its experts concluded, on the basis of not much evidence, that the overstatement is 1%....

....Gadgets that plummet in price, like VCRs and computers, aren't weighted heavily enough. ....BLS overadjusts for quality improvements. ... in practice, quality changes are very hard to measure, both with goods and services. Sure the MegaWarehouse is cheaper, but is shopping in a barn a decline in quality? Cheesy jewelry only a phonecall away - progress? Certainly people feel that the quality of lots of services has declined....

....Economist Laurence Kotlikoff has made a brand name of himself - appearing even in Rock the Vote documents - by promoting something called generational accounting (GA). GA tries to put hard numbers on one of the austerity cops' favorite images, the deficit as theft from the future. ... that future generations - represented in TV ads by cute, scared X-ers - will face a lifetime tax rate of 84%, compared to 24% for those born in 1900 and 34% for those born in 1993.

Robert Haveman took GA apart in the Journal of Economic Perspectives (Winter 1994). As Haveman wrote, only governmental takings enter into the generational accountants' spreadsheets; the positive effects of today's spending on education, research, health, and infrastructure on future lives is ignored.

...Deconstructing AGK's devious arithmetic doesn't mean that the deficit isn't a problem. Debt increases capital's power over the state; if you have to sell lots of bonds, you have to keep your bankers happy, and the servicing of debts takes priority over more fetching possibilities. Because the government borrows from rich people rather than taxing them, interest on the federal debt means a transfer from the bottom 90% of the population, who own few if any Treasury bonds, to the richest 10% who own them in quantity. By playing games with time, GA completely obscures the fact that debts and interest payments occur between classes of people in the present. GA replaces class war with a spurious generational war.

We see the world through different lenses, Francesca. I'm confident mine are quite clear.