OK here's a thought:

Deflation is definitely economically ineffecient. There's no question it leads to this dilemma where no one wants to borrow if their rate of return is less than the deflation rate (assuming interest rates have been pushed close to 0%).

So how about a govt program where the govt prints and gives money to anyone who makes a business loan below 0% (to push it back above 0% to market-clearing interest rates). Since this policy causes future inflation and ultimally leads to redistribution of wealth from money-holders to the borrowers, maybe the govt gives slightly better than market-clearing interest rates so that the wealth is spread between lender and borrower.

This would put an end to the problems of deflation very fast. If deflation doesnt go away oh well, free money for everyone. And sooner or later all that free money should put an end to the deflation.

See the problem is the Fed likes to print money and the federal govt likes to run huge deficits every year. So yes, excessive govt spending does lead to inflation. The fed govt steals from everyone that holds a US dollar because they cant stop spending money. The Fed is their enabler, and thats why they have to go.

You dont think the federal govt can just make 14 trillion dollars appear for free do you? They just take it from the people indirectly through inflation instead of directly like taxes. I think its pretty clear whats going on here.

And your comment that it accquires all its money from others is complete BS. The combination of it borrowing money (the natl debt) and that the t-bill notes dissapearing from people's hands in favor of fresh greenbacks (the whole QE thing) means that the govt just made those fresh greenbacks appear out of thin air.

But the best part of the whole magic trick is the final act of fooling the american people (even famed economists!) into thinking it's in their best interests when its just straight-up robbery.

does it really matter? At the very worst Japan can just start printing money and giving it to poor/unemployed people who need it. Maybe there will still be deflation but no one will be in poverty so it wont really matter.

True. The only problem is that we don't actually have any mechanism in place to do that. Friedman did suggest helicopter drops ...

This is massive bull**** unless you believe the Fed will one day decide to burn all the treasuries they have on their balance sheet and tell the government that they don't actually have to pay them back.

And if you do believe that, I strongly suggest you buy a tin foil hat.

Sure we do, its called welfare checks. GWB's stimulus checks are probably a fairer option however, given that I generally dislike the idea of welfare. It really doesnt matter if everyone just saves the money (which is what happen in GWB's case). The point is no one is short of purchasing power to buy the goods they want. At the end of the day, thats all that counts.

I dont think anyone can complain about be poor while saving the money the govt has given, instead of spending it on living neccessities to get out of poverty.

Btw im referring to extreme cases of deflation like Japan here. In cases of moderate deflation I like my negative interest rate idea of my first post as it considerably more fair.

Sure they wont burn them, but they have no means to ever make the fed govt pay them back. What is Ben Bernanke going to do, tell congress they suddenly have to cough up all the money for those t-bills that US govt owes? Ive never once heard of the Fed demanding the govt pay its debts. All they get to do is charge interest. And if that interest rate happens to be below the inflation rate, well the fed govt is just slowing stealing money from the Fed too.

Wow.... are you really this misinformed?

First of all, nobody can force the US government to pay its debt. The US has the biggest military in the world, so if it decided to default, even China couldn't force it to pay.

That doesn't prevent the US government to actually always pay its debt. They do it every single time a treasury bond arrives at its maturity, regardless of who owns the bond at that time. Every single time with no exception whatsoever.

Yeh except for the fact that the government has the nasty habit of paying back its govt bonds with more govt bonds in the case of its borrowing from the Fed. And if at maturity the Fed wants to keep the cash and doesnt want to lend the US govt anymore money, too bad. Hence what I was saying about the Fed being an enabler.

if the Fed doesn't want to buy treasuries, someone else on the market will, presumably at a slightly higher price. That means the Fed has decided that rates need to rise because it thinks the recession is over. How is that too bad ????

It is my understanding that if I buy a 5 year treasury bill and hold it to maturity, the government is obligated to pay me face value for that bill. I don't have to sell it on the open market, thru a broker, and hope I get what I paid for it after sales expenses.

Since the govt. borrows 40% of everything it spends, they obviously auction off 40m in new treasuries for every 100 million that is redeemed.

amirite?

So what's the problem? You can't have a negative price on things, oh no.

Because the Fed will never do that to the extent that it will ever cost the fed govt seriously. Theyd get too much political pressure. The prices never get high enough to count for anything. They never make the fed govt pay the interest they should on their debt. If they ever did, that interest rate would be so high it would kill the entire economy.

Unless Al Gore magicially became president and wanted to start paying down the national debt, we auction 100m in new treasuries for every 100 million that is redeemed.

My bad.......I was thinking payment of the interest on the debt. Nap woke me up.

I don't understand. Can you elaborate on this?

Yep!

Yeh if trust them to do the right thing and actually control inflation at the cost of high interest rates. I dont.

And then theres the fact they are stilll stealing 3-5% or whatever their inflation target per year is from everyone that holds a US dollar. Even if the Fed does what you say, they still enable the fed govt to steal form its citizens through "normal" inflation.

The Fed is not a government agency. It has half its board selected by government, but the other half is privately selected. You are speaking about the Fed as if it is the government. Do you understand that they are separate organizations, and that the government cannot tell the Federal Reserve what it should do, or how many dollars to print, or which of its assets to sell back to the market?

All of the Fed's profits, save 6%, goes back to the US treasury at year's end. Any interest they pay to the Fed is refunded each year.

if you believe that congress or the president cant put political pressure on the Fed when they get charged an undesirable interest rate I have this bridge to sell you...

The proof is in the pudding, the Fed has slowly been monetizing US govt debt for decades to keep interest rates down (for the good of the economy of course!). Whether or not they're directly controlled by the fed govt, at the end of the day it has the same effect as the fed govt just printing away its debts.

Your just helping along my point. If you what you say it true, that means effectively the fed govt pays zero interest on money they owe the fed!

Tom, do you really not understand why someone might want to make a loan at a low rate? I am at a loss for why you cannot see this to be a problem that would be solved by switching to another currency or asset.

Say I want to loan you money, as a friend, at zero percent interest, just because I like you. I can't do that with a deflationary asset/currency. I would have to loan you $100 and tell you to pay me back with $95 next year. This is certainly possible, but having inflation or deflation of the unit of account is a problem for lenders and borrowers, who would much prefer to have a unit that doesn't change in value over time.

I agree with you here Lyric. Deflation definitely screws up the natural business investment process.

Why does it matter if the currency being paid back is deflationary? There is default risk, so say he loans it at a low rate of 2%. He wouldn't loan money at a negative rate, you are correct. Why is this a problem?

Is it a problem that I don't want to hit myself in the face as well?

If I loaned you money as a friend and required you pay me back $102, explain what the problem is? That you as a borrower wouldn't want to do this? Spell it out for me, I'm apparently really stupid.