Deflation - not a bad thing?

For some reason, you quoted everything but the final sentence, which was the most important:

In 5 months of deflation, prices fall 1% each month, your wage falls when CPI falls. You save 10% of your income each month.

You make $100 a month, here is what happens to your cash:

Month 0 - earn $0 ; save $0
Month 1 - earn $100 ; save $10
Month 2 - earn $99 ; save $9.9
Month 3 - earn $98 ; save $9.8
Month 4 - earn $97 ; save $9.7
month 5 - earn $96 ; save $9.6

the $10 you saved the first month, buys you more goods in month 2 than it did the month it was earned, it buys even more goods the next month, and even more each consecutive month so long as prices are falling. The same is true for each dollar you save in those following months...they buy more and more goods in consecutive months.

The $9.8 you saved in month 3, increases in value and buys more in consecutive months...as does the $9.7 saved in month 4 and $9.6 in month 5.

So I have illustrated for you that, while wages and prices fall, the value of cash increases...the purchasing power of cash is increasing. No contradictions and no logical errors.

 

No, because you have less money saved.

If you didn't have deflation, you would have saved $50 instead of $49, and your purchasing power would be about the same.

The purchasing power of a dollar has increased, but the purchasing power of individuals doesn't change because their incomes (and thus ability to save) are decreasing.

And that's assuming you don't have any fixed obligations like a mortgage or car loan or student loans.

 

actually, half would expect their income to fall more than the deflation rate and half would expect it to fall less so in aggregate you would have an incentive not to buy today . This is what they teach in Econ 101 class one day one and why the Fed will not allow deflation. Before you try to reinvent the wheel you should know what a wheel is. Got in now?

 

I'm ONLY referring to the cash. I'm not making a judgement about wellbeing. Purchasing power is increasing. Wellbeing is not increasing, and I never stated such. They are two independent concepts.

In the example, when you say that because the person only saved $49 compared to $50, and state purchasing power did not increase, this is wrong. The $49 is a whole dollar less than the $50, yet that $49 buys the same amount of goods as the $50... that is the definition of increasing purchasing power. You buy the same amount of goods with fewer dollars or you can buy more goods and services with the same amount of dollars.

If we look at the exact opposite situation, if we see 1% inflation per month, you can say the $51 you save at the end of 5 months has less purchasing power than if you had saved $50 in a zero inflation environment. This person is no richer or poorer...but they have experienced decreasing purchasing power.

 

I've acknowledged multiple times that the purchasing power of a dollar increases. That leads to the investment disfunctions you get with deflation I pointed out earlier.

But the purchasing power of the individual in your example isn't increasing. Without deflation he saves $50 and can buy a tire (or whatever) for $50. With deflation you save $49 and can buy the same tire for $49. His purchasing power hasn't increased at all. he can't buy more goods and services. He can buy the same amount of goods and service because you have the same purchasing power.

 

That is a function of an individuals situation, not the aggregate. With deflation the general expectation is that incomes will be decreasing. If you have deflation and you expect your income to be steady you'll be more likely to buy because you know that your real income will be increasing. Same thing if there was inflation, but you expect your income to be increasing more than inflation.

Got it now?

 

We both acknowledge the same points - purchasing power of the dollar is increasing, purchasing power of the individual stays the same. My argument is based on purchasing power of the dollar. This logical error you claim I made never existed.

1st point, do you agree that in deflation, the money you saved in the past increases in value?
2nd point, do you agree that in inflation, the money you saved in the past decreases in value?
3rd point, do you agree that deflation incents saving?
4th point, do you agree that inflation incents borrowing?
5th point, in deflation, do you agree that prices of assets would fall?
6th point, if you agreed with points 1 and 5, in deflation, do you agree that it would be easier to buy assets with cash?
7th point, if you agreed with point 6, do you agree that in inflation, it would be harder to buy assets with cash and that credit would be preferred (cash is decreasing in value)?
8th point, if you agreed with point 7, do you agree that inflation creates a general predisposition to using credit?
9th point, if you agreed with points 6 and 7, do you agree that assets can be capitalized in an economy that is deflating? And secondarily, do you agree that if this is true, the idea that inflation drives investment is false?
10th point, do you recognize the only inflation causing forces in any economy are the Central Bank and by proxy, private banks through fractional reserve banking, and to a much lesser extent, counterfeiters?
11th point, do you recognize that the first parties to Central Bank induced inflation are Bankers?
12th point, do you recognize that this treatment is not extended to regular citizens?
Last point, do you recognize that special treatment is a subsidy? If so, you agree with my argument that inflationary economics is maintained to the bankers interest and has nothing to do with the well being of the economy. The necessity of inflation is a political illusion.

Please let me know where the logical error is at the # question - that will keep the discussion organized.

 

That's weird. Normally I see inflation vilified.

 

no dear , we are talking about all individuals. The Fed was created to prevent deflation for all individuals. Certainly you understand now?

- - - Updated - - -

Yes, the Fed was created to prevent inflation because it distorts price signals and thus makes economy very inefficient.

 

Wrong of course, the longer you wait the more your income is worth. 1+1=2
No need for a liberal to reinvent the wheel before he's taken Econ 101

 

And here is a critical point:

You can't have a systematic bank failure without a fractional reserve lending system. The fact that banks lend out dollars that hold the second condition of being available for withdrawal creates the risk that puts an economic system in jeopardy. Fractional banking creates an illusion, a ponzi scheme, that one dollar can essentially be counted twice in the economy. It is fake growth and the only way to maintain is to continue to print money. It's a building erected on a sand foundation and it is perpetually at risk of toppling.

Solution:
stop printing money. End fractional lending.

How would we get by?
Do the same thing big time investors do: hedge funds and private equity funds. Alternative asset managers take actual money from investors and cut off their ability to withdraw. In essence they bank with the reserve set to 100%. The investors know this before forking the money over and if the managers lose their money, it is not a surprise and hurts no one but the people involved with the investment - Fractional banking can ultimately destroy the assets of depositors that had no interests in investing! This is the fallacy of fractional reserve...the most unacceptable part is that it is not even necessary.

 

wrong of course, if a bank or banks make bad loans, say into the housing market, that can cases a runs on all banks and thus systemic failure of the banking system and the economy. Make sense now?

 

Assuming you keep it in cash, yes. If you have it in investments, no.

Assuming you keep it in cash, yes. If you have it in investments, no.

Possibly somewhat.. There are many factors that affect the savings rate. It incentivizes hoarding cash over investment.

I agree it facilitates it.

Yes.

It's not easier, but the one dollar will buy more assets.

It's not harder, but one dollar buys less assets.

I agree that borrowing is facilitate with inflation over deflation.

You'll have to explain what you mean by "assets can be capitalized in an economy that is deflating"?

No. Inflation encourages investment over hoarding. As you pointed out, with deflation, dollars increase in value, and thus have independent investment value, encouraging people to horde.

With inflation, a dollar decreases in value, encouraging people to invest as opposed to hoard.

I agree that in a fiat monetary system, the actions of the Central Bank and velocity of money through the banking system through fractional lending affects the money supply, which affects inflation and deflation.

No, the first party is the Central Bank itself. The Central Bank creates money; banks expand deposits by fractional lending.

Only banks can lend deposits. Regular citizens can open a bank if they want.

I don't see how it is a subsidy.

I have to disagree with that. Banks perform an very valuable and important function. The match people with money to people who want to borrow it and thus give entrepreneurs and businesses the capital to expand and individuals the capacity to buy a home, for example.

Inflation encourages investment over hoarding and thus serves to "lubricate" capital market and investing and growth, for all the reasons I mentioned earlier in the thread you have ignored.

See comments above.

 

1. do you realize that the US Fed has multiple ways to increase the money supply. Printing money is just one. Their first choice is setting the federal funds rate. the federal funds is ONLY available to bankers. This makes bankers the 1st party to national money supply actions.

2. You misunderstood what i meant by treatment. The treatment i am referring to is only bankers get access to federal funds rates.

3. Now you should see how it is a subsidy. It is a government sponsored benefit that excludes on the grounds of profession.

4. If you followed 1-3, you should see how inflationary economics benefits bankers first and always.

I'll follow up in a separate post clarifying the purchasing power argument as you requested explanation on deflating assets being able to be capitalized.

 

dear, of course that is 100% mistaken. The banks are praying for increased fed fund interest rate( lower inflation) since then they can charge more interest for loans and make more profit. 1+1=2

 

Fractional lending, developed about 200 years ago, is what has powered two centuries of economic growth, innovation, and a middle class.

Relying on the wealthy being willing to part with their money for a time period drastically reduces the amount of capital available for business expansion.

And if you add deflation on top of that, reduces it to virtually nothing. Why would a m/billionaire lend out money when all he needs to do is horde his pile of cash?

 

Fed funds are short term loans be one bank to another to meet short term needs of cash (or its electronic equivalent) to meet reserve requirements. They are not loans directly from the Fed.

They are by definition loans (usually overnight) from one bank to another.

I don't agree that a subsidy is the right word. But banks are heavily regulated because they hold people's money.

You'll have to explain it for me to understand your point.

OK

 

it is the natural way to do it primarily because the wealthy want their money back and thus the entire emphasis is on successful investing and inventing rather than wasting energy, money, and time by spending money that nobody cares about. Now do you understand 1+1=2?

 

1) you mean fractional lending in a capitalist economy
2) fractional lending is neutral since it increases capital and risk.
3) in an ideal world the more and bank lent relative to its capital the higher the interest it could pay and the greater the risk it would incur and the less it lent the less interest but the more safety. Liberal interference prevents this ideal circumstance and the efficieny it would engender .

 

WHO ELECTS CONGRESS?

Sorry, but your underpinning argument is incorrect.

Falling prices happened as a result of the SubPrime Mess and dud-loans (on Bank books) thus caused a Financial Crisis since laws stipulate that Banks must retain a certain amount of their "assets" (read funds) to offset the dud-loans. (Even more complex than we might think because the Banksters were "playing games" on Wall Street futures markets to the extent that some banks were forced into failure.)

This caused banks to restrict loans during the Great Recession of 2008 (and beyond), and it was the reduction of credit-availability (contraction of the Money Supply) that forced some banks to fail and others to retrench all loan activity.

So, the FRB employed Quantitative Easing to remedy the situation, which stopped the collapse on Wall Street, but did not reinstate Consumer Propensity to Spend. (Until very recently, six long years later.)

And because the political situation in Congress (particularly the HofR) prevented any Stimulus Spending by the Federal Government, the employment-to-population ratio stagnated from 2010 to 2014. (See here.)

No new Net Jobs were created during that period and a great many families were hurt in the process. Whist LaLaLand-on-the-Potomac is playing political strategy games, families were suffering in a prolonged unemployment cycle when the US economy was not recreating jobs.

That cycle was almost identical to that of the 1930s, which is why it is called the "Great Recession"; and it was exported to the rest of the world such that the World Economy collapsed as well. Ditto for the Great Recession more recently.

Just because some silly-fools in Congress, owned by and egged on by some rich plutocrats, were playing political-games in DC to get rid of Obama.

One might even say therefore that we, the sheeple, deserve what happened.

After all, we elect Congress ...

 

Agree banks have evolved all sorts of fancy new instruments from mortgage backed securities to credit default swaps, but none of these instruments caused the inflation of housing assets prior to the crash.

You mention subprime. The fact that subprime people could ever get a loan without so much as proving their incomes was a byproduct of Alan Greenspan's easy money policies. He was hailed a hero when he left in 06 and villafied shortly into the crash. Easy money flooded the market exuberantly inflating housing beyond the point of sustainability.

Prior to the Great Depression, fractional reserve limits were set to ridiculously low single digits. This fractional reserve fueled monetary expansion exuberantly inflated stock market assets. It's a wonder to me why historians fail to cite the single digit reserve limits prior to Black Thursday.

In both cases, asset buyers were misled by fractionally induced and or monetary policy induced inflation.

For some reason, as a public, we don't regard rising prices with suspicion...we tend to salivate. And this greed combined with loose credit leads to business cycle crashes everytime.

We will see our next crash probably within the next few years, once housing gets over heated, it'll blow its top like clockwork.

 

Motivated by a concern about speculation in the stock market, the Fed responded aggressively. Between January and July 1928 the Fed raised the discount rate from 3.5% to 5%. Because nominal prices were falling, the latter translated into a real discount rate of 6%, which is quite high in a year following a recession. At the same time, the Fed engaged in extensive open market operations to drain reserves from the banking system. Hamilton (1987) reports that it sold more than three-quarters of its total stock of government securities: “in terms of the magnitudes consciously controlled by the Federal Reserve, it would have been difficult to design a more contractionary policy.”

Furthermore, as Eichengreen (1992) has emphasized, monetary policy was tight not only in the U.S. but also throughout much of the rest of the world.

http://www.frbsf.org/economic-resea...he-great-crash-of-1929-a-bursting-bubble-or-c