Imagine that in the distant future, we are all as rich as Bill Gates. Would the price of bathroom cleaning be higher or lower? Would the price of a restaurant meal cost more or less, in real terms? Imagine there is no money, and we only exchange assets. Would these things require more or less assets in the distant future?

Are you sure? What's stopping the govt. from having the treasury stop printing money and passing a law outlawing fractional reserve banking above a certain percentage?

Ah......it's permanent because living with it is better than deflating.

Nothing is stopping the govt. from stopping its continued growth though.

Maybe the price of bathroom cleaning is the same because a robot does it, and the resteraunt meal is cooked by a robot better at cooking than any human and yet its price is the same.

Nothing is inhriently stopping them other than themselves, its what im advocating. But so far in the past they havent done it. So something needs to change, we need to vote for politicans behind either forcing the Fed to clear their balance sheet or removal of the Fed all together. Like Ron Paul. Which goes back to the original point of this thread as to why inflation is as bad as Ron Paul makes it out to be.

Thats all im advocating. That the money printing stop.

The problem isn't the Fed; it's that there is no competition in banking and currency.

Exactly, you cant really deflate and go back because that would harm the economy even more. Whats done is done. But you can stop the Fed from ever having any future money printing adventures.

What if there were no robots, as was the case from 1800 until recently? You are complaining about the price of things like this going up, but robots don't make them, and we are 20x richer than we were in the year 1800. That wealth helped prices to rise.

They [the banks] will not hesitate to plunge the whole [world] into wars & chaos in order that the earth should become their inheritance. Otto Von Bismark, Chancellor of Germany

Lyric so your telling me you dont want the Federal Reserve to change from any of its policies in the last 50 years and that your OK with the status quo? Because the whole point of my argument is that the Fed either needs to change its game plan dramatically or be eliminated all together.

No one is stopping anyone from trading. This does not mean that the conditions for all possible trades will always occur in the market. For example, if I wanted to trade some belly button lint for a Ferrari, it wouldn't happen. Is it bad that I am being "prevented" from trading this way? Of course not.

Now you are talking about unpredictability. Yes, something that is unpredictable is probably bad, although there are ways even around that with futures markets, hedging, etc... These actions tend to stabilize things.

But let's take this unpredictability out of the equation. You said that just the mere act of something being in fixed supply in a growing economy (basically "deflation" in your terms) would be a bad thing for a currency. There would not be anything unpredictable about it. So what makes this bad? Because certain loans would not happen?


He thinks it's 2% because it is 2%. It only becomes harder for him to come up with the money to pay back if he is less efficient than the average of the economy. Deflation like this would only occur if the economy was growing. It only grows if people become more productive over time. If people become more productive, as long as the person borrowing the money is able to keep up with everyone else, it's no harder to pay back. If he is slower, it means he is below average at producing things economically, which means it probably is a foolish loan for him to take out and it's good that capital moves to more productive means. If he does outpace the economy, paying back the money is not a problem at all. In the pig farmer example, if he is loaned wine, redeems that for 12 pigs, turns those pigs into 100 pigs, paying back 24 pigs to get the wine back is not really a big deal. He can make a productive investment. If he can only turn them into 20 pigs, then it's a bad investment since other forms of investment were better on average (such as letting the wine age).

The wine example is particularly bad since the wine doubling in value by merely sitting somewhere would be extremely unlikely to happen. If it requires no cost to maintain, is easy to store, is unlikely to spoil or break, and low risk of being stolen, anyone who didn't purchase wine to store it with whatever goods they had would be a fool. But everyone throwing all their resources trying to purchase wine would do one thing to it- drive the price up. Eventually the price would level off very close to the value it would be in a year minus any cost of carrying it minus a value for having to wait a year to redeem it.

It is also a terrible example since wine aging in such a short time to increase its value tremendously would be much faster than the rest of the economy. This would mean that wine in this case would not have much monetary value since almost all of its value would be determined by its consumption use. If it were indeed valued as money, it's value would be only marginally affected by aging since most people would be using it for monetary transactions and not for consumption which would give it most of its value.

Cliff notes: It's only harder to repay in a deflationary currency if you make worse than average investments with the loan.

The Fed is a standard private bank, operating in the same way as myriad banks have done over the course of history. The only problem with the current system is that the Fed has no competition. It is illegal to start a currency that will compete with the US dollar and the Fed.

Tom,

It's not any harder for him to come up with the $102.00 if he hasn't taken a cut in his hourly wage and his net take home pay is the same.

However, that doesn't change the fact that he is giving you $107.00 in purchasing power compared to the $100.00 in purchasing power he borrowed.

How difficult it is to pay back the loan is inconsequential. It's the value of what he is paying you compared to the value of what he borrowed that determines his net cost of borrowing.

cliff note: Sorry, but I wasn't interested in your story about pigs and wine.

How difficult it is to pay it back is entirely the issue. Let's forget about consumption loans and talk about investment loans for now. If you are investing money, whether or not to take a loan out is based on if you'll be able to pay the money back and if you'll make enough profit for it to be worthwhile. For example, if I can borrow $100, invest it in a widget factory, and produce $110 worth of widgets before it gets destroyed, it is easy for me to pay back the loan, and I get back $8 profit (which in a deflationary model would buy me a present value of $8.40. If I can only get back $102, it wouldn't be worth it, and if I can get back $100, it's a loss.

Now the money I pay back is worth more. But so what? By borrowing money, I am saying that I can use it more productively than the person who has it. If I can, and it's enough to make up for the risk, then it's a good idea. If I can't, then it's a bad idea.

So what is the problem? What scenario is this going to cause problems?

I suppose the "problem" is that not enough money is loaned. But all that happens in that case is some money either used for consumption or for savings that might have been loaned before. Only the most profitable investments will occur, those who save help the economy by freeing up more resources for investment into those areas and they can consume when there are more goods available in the future. Money is not going to be a means of production but a way of pricing it. There will exist the same amount of means of production at any individual point in time, and those means will either be moved towards consumption, investment in the future, or be saved for later.

If the currency is deflating growth is (much) harder to achieve. Most modern first world countries buy goods not because they need them but because they have an incentive to buy a better newer model now than later when it becomes a necessity. This is a huge problem.

To take the two extremes in a deflating economy either

1. Prices fall as the same supply is met to still make it attractive to buy a fridge or a car or whatever now and not next year. This means wages and/or employment is that industry and any business that services that industry fall. This means growth falls in that industry.

2. Less supply is produced to meet the lower demand. This means less employment, (and to a lesser extent wages as the demand for workers in that industry is less),and any business that services that industry fall. This means growth falls in that industry.

Nowhere between these two extremes does growth occur.

Yes people will offer bad loans. The problem is nobody will take them. And yes people will take good loans. The problem here is nobody will offer them. With inflation* the gab between these two is much wider than it is in a deflationary economy because in one the economy is growing and in the other it isn't.

* And yes I am well aware that high inflation is bad. I am also aware it isn't bad simply because something that costs $10 today will cost $20 next year it is bad because the higher it gets the less certain the price will be next year and this makes investment uncertain and therefore contract. Deflation makes it contract even without that uncertainty.

But it only deflates if there is growth.

It means people consume less. You are correct. However, consumption still occurs. Look at any technology company for examples on this. We literally throw away 10 year old computers that are working perfectly well because they are worth nothing, yet they cost $2000 when we bought them. We could have waited 10 years and bought them for $1 each.

Less supply of consumer goods. This frees up resources for investment. People are able to invest more cheaply, which produces more goods in the future which makes people better off then. Some consumption will happen now because people always want stuff now. But they might be willing to wait a bit longer if it will be cheaper.

Strange, because there is lots of growth in technology, electronics, etc... and all of them suffer from extreme deflation.

Why will no loans be offered that are good for both the borrower and the person making the loan? As long as someone borrowing money can invest it more productively than the person who is loaning it out, both parties win.

And remember, price deflation will only occur if the economy is growing. So if as you say growth is an issue, the problem solves itself since there will be fewer goods therefore the prices will stay high. If there are more goods, prices will drop.

This is a good point.

Here's the thing -- in a free banking market, we could all decide what to use as our unit of account. Some of use would write contracts in a deflationary or fixed currency, and others would choose a currency that is stable in value. That is the solution. Each of us should be free to choose our own money.

Imagine ladders are in fixed supply and no more will ever be manufactured. Naturally, as other goods rise in supply, ladders will rise in exchange value because of their limited supply. Further suppose that the existing ladders are almost invincible (like gold).

If the ladders are rising in value at 10% per year, it is still productive to loan them to your neighbor, who will use them to paint houses but earns only 8% on his assets. You are claiming that unless the neighbor can earn over 10% with the ladders, you should keep them stored in your basement, earning 10% per year.

By loaning the ladders to your neighbor, he is able to be more productive than if they remain in your basement, but we cannot use ladders as a unit of account, precisely because they are rising so quickly in value. We must choose another asset for our accounting, even if we wish to loan ladders to our neighbor.

A deflating economy will only grow if the growth is larger than the deflation. But in a deflating economy people are less likely to buy unless they really really need to buy. In the western world this means a large number of industries will contract and this will have the added effect that industries catering for the basic needs of society such as food will have less income to go after as wages fall. So there profits fall too and so do there employees wages. It's hard to keep growth above deflation if this lasts any amount of time.

Yes consumption occurs but modern societies aren't based on barely surviving anymore. I'm hoping you'll agree this is a good thing.

If people are willing to wait longer demand falls. How is this good? Inflation is an incentive to buy now and not tomorrow. Deflation is the opposite. How does this spur growth?

Well record player sales have decreased. And no they don't suffer from extreme deflation. A computer costs less now than it did 10 years ago (if we allow for inflation) because it is cheaper to make for 3 reasons, demand, material and labor costs are all less, all a result of more efficient technologies in making them. With deflation the investment in these technologies would be less simply because long term the demand for the devices would be less.

Loans will be offered, loans will be taken. But the pool of people who will be able to invest it more productively, or more to the point, the pool of people who will be able to convince investors they are able to make a reasonable return will contract.

Fewer goods mean less hours being expended to make, market and sell those goods. Less hours mean less income. Less income mean fewer goods. Fewer goods mean less hours... Do you see where this is going?

With a fixed amount of currency, growth is the only thing that theoretically causes deflation.

Sure but I only concern myself with reality.

Explain?

Available capital is only one of the two components that make companies invest. The other and equally important factor is expected future demand.

Right now there's a historically high amount of cash in private companies books and very cheap money if you want to borrow it. And yet investment levels are quite low. Most companies don't expect much future demand.

This is a very clear case where policy should be to push people to spend more and save less as it would increase demand without hurting available capital for investment. Inflation (or expectation of inflation) is one of the ways to do that. You could also increase redistribution taxes since poor people spend a higher percentage of their revenues than rich ones. Or you could deficit spend. All those would work and yet none of those are really tried .

What economy has ever had a fixed amount of currency?

I always thought that the major reason for investment was the relationship between expected cost of financing the investment and the expected returns.

Available capital & future demand are only two of the micro elements that makeup that relationship. I believe there are many others, such as cost of raw materials, expected wage costs during that time frame, etc., etc.

Cost of capital is based upon many factors, such the interest rate on loans, or the relationship of reissuing stock that the company has, compared to the price they paid to buy it back from the market and it's expected future price if no change in corporate production was made.

I truly believe that there are quite a few more than just 2 factors that determine the profitability of a business investment.

The Great Capitol Hill Baby-Sitting Co-op comes to mind: http://www.slate.com/id/1937/