I got exhausted trying to make the same point. It's not even a macroeconomic debate it's simple micro supply and demand.

Because if deflation was 5% from the time you borrowed it to the time you came and paid me the 102, I'd have $107.00 in purchasing power, compared to the $100 I had when I loaned it to you.

Because at the time you paid me off, I could take approx $95.00 and buy the equivalent and what I could have with the $100 I loaned you, if I had spent it back then.

Imagine I want to loan you a case of wine (we use wine as money), and each bottle is worth about as much as a pig in our simple economy. You take the loan and trade them for pigs because you are a pig farmer.

Now imagine it is a fine wine, and is going up in value over time. At the end of the year, each bottle is trading for two pigs. When you want to pay me back at year's end, you must trade 24 pigs for 12 bottles of wine in order to repay the loan.

What was supposed to be a free loan just cost you 12 pigs, just because wine went up in value (deflated).

So why is this a problem? Someone is just less likely to take this loan, right? (if I have to pay back $102 in a stable currency that's easier than having to pay back $107 in a deflationary currency). Take me to how this is a problem in your mind.

I understand how this would work. So I would be less likely to take the loan as a pig farmer, correct? So this keeps me from investing in an area of the economy where it's a bad idea to invest. Where is the problem?

No, you're missing the point. The person making the loan cannot make a free loan if he makes the loan in wine (the current money). In order to make a zero or low interest loan he will have to select something else, perhaps cheese, to loan to the pig farmer.

It isn't that the loan is a bad idea, it's that the deflationary currency (wine) makes it difficult to issue a profitable loan that is a good idea for the farmer and the lender. The deflation is making productive loans more difficult to issue.

How is it a productive loan? I am taking an asset that will be considered more valuable, and diverting it to a resource that is considered less valuable by the time it will be repaid. If you cannot make use of a loan to make things more productive than the original resource, you probably shouldn't be borrowing it.

Can you explain why you would consider the pig loan to be productive?

The pig farmer creates wealth by raising pigs. He is able to create new wealth (pig meat) over time using his intelligence and labor. He is able to borrow wealth to acquire more pigs, knowing that if he borrows 12 pigs today, he can turn them into 100 pigs by the next year.

If he borrows 12 pigs and must repay 24 pigs at year end, he has still used the loan productively, but that is not the issue. The problem is that he would like to make an arrangement to borrow 12 pigs and repay 12 pigs, and he is unable to easily do that if the unit of account (wine) does not have a stable value. He would like to be able to accurately predict exactly what the loan will cost him, and if he makes an agreement to take a free loan from another man, they cannot use wine as the unit of account. They are forced to use another asset as the medium of exchange/unit of account.

An ideal currency makes accurate predictions about the future easier, and remains stable in value so that one does not have to both guess about the money's future value and guess about the profitability of the loan if his first guess proves correct.

Also, it isn't as if when the pig farmer accepts the wine, he destroys it or converts it into his pig farming operation. He trades it to another man for pigs, and the wine still exists, but in another man's wine collection.

The problem is that his debt still remains denominated in wine, and because wine is used as the unit of account, his future debt will depend on the future value of the wine he no longer holds.

So it isn't a question of "converting" one asset into another. The issue is which unit of account to use when writing the loan contract.

If he borrows 12 pigs and can raise 100 from it, then paying back 24 pigs is not a problem. If he cannot profitably get to >24 pigs, then how is it a profitable investment? He took something that would be worth more to just hold and got pigs for it, and in the end ended up with fewer wealth. Not letting that loan go through is a net positive for the economy.

Again, this is only a problem when he cannot profitably take the pigs and invest them. Someone is trading him pigs for wine. For something as easy to store as wine, no one would be trading it now at such a discount anyway since it would be more valuable in the future. If he trades the wine to another pig farmer, and it is nearly certain that it will be worth 24 pigs in a year's time, why would the pig farmer not demand something closer to 22 pigs for it? Does speculation not exist in your magical world where unproductive loans are somehow productive?

If you are nearly certain that dollars will be worth $0.95 in a year's time, why are they not trading at that price now?

Did you understand when I agreed with this, and said that the men would choose to issue the loan in another asset, and use cheese or pigs as the unit of account instead of the deflationary currency? Do you understand that a deflationary currency is less preferable than a stable currency for this reason, and that free men would choose to write contracts in a stable asset instead of a deflationary asset?

How do you trade a dollar for a dollar? This makes absolutely no sense.

And yes, future inflation is priced into things. People will buy gold in the anticipation of inflation. Also, there is no guarantee that there will be inflation, some people are thinking it will be minor, some major. But this gets priced in.


There is an incentive for a borrower to make a loan in an inflationary asset, just as it makes sense for a lender to offer a loan in a deflationary asset. Why are you only looking at one side of the equation?

You never have answered my question on why an unprofitable investment would somehow become profitable. Why is the guy borrowing wine to invest in pigs, when pigs are a terrible investment compared to the rest of the economy? How is preventing this malinvestment a negative thing?

In practical terms banks get money to lend out from a central bank and my claim is that this "central bank money" they get is not backed by assets 100%.

So here's pretty damning evidence that the expansion of the Fed's balance sheet is the source of all inflation the last 50 years.

First we have this graph:



This shows a 30x increase in base money supply over the last 50 years from around 30 billion to close to 1 trillion. So where did all these greenbacks come from?

Why the Fed's balance sheet of course!

Fed's balance sheet last 50 years (on page 8 of the PDF):

http://www.imf.org/external/pubs/ft/wp/2009/wp09120.pdf

Note how the fed's balance sheet has gone from 30 billion or so up to around 1 trillion right before the Great Recession of 2008. Coincidence? How else did all this money get in to the base money supply?

And what do you think was getting added to the Fed's evergrowing balance sheet this whole time? US T-bills of course! At least until 2008, when the bailout occured and Wall St. decided to join in on the money printing fun!



So before 2008, it was just the Fed govt robbing us through inflation, but now its Wall Street AND the Fed govt doing the robbing!

Actually most buy because they are fooled into thinking they can anticipate the market.

Yes and your claim is wrong.

US GDP

He isn't "borrowing wine to invest in pigs." He is borrowing wealth to acquire pigs, and it doesn't matter what form of wealth he borrows. What matters in considering a loan is only what the unit of account will be.

By the way, note the awesomely mysterious explosion of "Other Assets."

Weird, in your scenario he was borrowing wine. Somehow wine turns into wealth. Was this Jesus's encore after turning water into wine?

Banks create new money when they make new loans; new money is not created by the Fed unless the Fed is engaged in quantitative easing activities.

US dollars are "backed" by real assets in that they can be "turned in" at the bank to acquire the cars and homes that form the basis of new loans, and new currency.

what does GDP have to do with anything? Sure GDP is growing, but the money supply is growing quite a bit faster, hence the inflation and hence the robbery.

Wine is a form of wealth, just like cheese, cars, homes, and dollars.

This isn't mysterious considering the way the Fed is trying to calm the current economic situation. Sure you think it is the wrong thing to do and the wrong institution doing it but your use of 'awesomely mysterious' is disingenuous at best and just pandering to your fanbase.