patrick.net

Bellingham Bill says

yeah, well, the price of food, housing, health care, and goods from China isn't going down anytime soon.

Yes, it will. Deflation exempts no prisoners.

The yuan gaining on the USD is INFLATIONARY not "deflationary"

I just said above that I believe the dollar will increase in value, not decrease. That includes against the Yuan/Renminbi. Most of the world's debt is denominated in dollars. When deflation strikes in earnest, it is the dollar that be sought out as the best possible safe haven.

Nothing against China. It's just that the U.S. is a debtor nation and they are a creditor nation. They hold $2 trillion dollars of U.S. Treasuries. Why would they want the stronger currency in a deflationary environment? Their $2 trillion is going to buy a lot of deflated U.S. companies and real estate when the time comes.

darlag says

But I am also a deflationist which is where your confusion comes from I suppose.

Deflation or inflation are strictly a matter of money supply and nothing else.

The deflation will be shocking because of the leverage of the fractional reserve system. But it is still just a matter of money supply.

Bellingham Bill says

The yuan gaining on the USD is INFLATIONARY not "deflationary"

Say what? Not for either country.Bellingham Bill says

Deflationary collapse a la the early 1930s is certainly possible

It does not matter in deflation the prices would simply go down. The terrifying thing is when a FDR gets power or an equally terrifying Obama gets power. They are not only stupid, but worse yet don't realize the are stupid.

indigenous says

Deflation or inflation are strictly a matter of money supply and nothing else.

Not really. But accepting your argument for the moment... assuming you mean the money supply (M3/MZM) is the combined total of all money and credit (debt) in the system, then my point is still valid. That is, in a deflationary collapse, credit/debt is destroyed (thus reducing the money supply).

I believe your point is that the FED can control the money supply (the amount of money and credit in the system), thereby controlling deflation.

My assertion is that they can only control the amount of money, not the amount of credit. If you can't control both then you can't control deflation. When no one wants anymore credit, and that day has pretty much arrived, the money supply will collapse and deflationary debt destruction will begin.

You can argue that I am wrong until the cows come home, but that is how it works. When people stop borrowing and start saving, the velocity of money slows, liquidity dries up, defaults rise, prices spiral downward and deflation takes center stage.

And there is nothing anyone can do about it until the mass psychology begins to believe again that price stability has been achieved. I will repeat what I said earlier -- Deflation is a wholly and totally psychological phenomenon over which the FED has no control.

Last word is yours. I'm done on this subject for now.

darlag says

My assertion is that they can only control the amount of money, not the amount of credit. If you can't control both then you can't control deflation.

Agreed, although Friedman might argue with you regarding them allowing the runs on the banks, but that is sort of a tangent.

Since the Fed has always been about inflation I never thought about the other. But I really didn't say anything about the Fed. All I was saying is that deflation or inflation is a matter of money supply. Although they could easily shrink the money supply by raising the reserve currency requirement.

Regarding the credit market though it tends to be self correcting and quickly as it is free market. Bill showed how quickly credit was reigned in in 2008 on one of his ubiquitous graphs. But I agree this is bigger danger because the credit market is so much bigger.

darlag says

You can argue that I am wrong until the cows come home, but that is how it works. When people stop borrowing and start saving, the velocity of money slows, liquidity dries up, defaults rise, prices spiral downward and deflation takes center stage.

So what? the only guys who really get hurt are the ones who bought assets that were overpriced. IOW if you own MBSs or Bonds or RE or Stocks (damn that is a pretty big list, thanks Benny you asshole) yeah you are screwed. But for the rest who did not own such it will actually be good because the value of their dollar will go further.

The negative consequences that people associate with the depression were created by FDR and HH. Have you read any of the crap these megalomaniacs pulled?

https://www.youtube.com/watch?v=K8E_zMLCRNg

indigenous says

Seized all privately held gold and arbitrarily set the value of the dollar which had a very disruptive effect on the economy.

They were paid for the gold.

Congress then devalued the dollar, making US exports attractive to other nations and turned the US into the industrial powerhouse it was from mid-1930s through the 1960s.

Its amazing what freeing up hoarded capital will do. WHAT AN ASSHOLE!

control point says

Its amazing what freeing up hoarded capital will do. WHAT AN ASSHOLE!

A powerhouse you say, hmm where was the abundance created by this powerhouse, through the great depression?

Yup and it only took how many years to work his magic? About 10 or so living in relative squalor for .many of the Americans.

Now you will say and look at how WWll got us out of the depression. It didn't and FDR drove Japan to declare war on the US, which got how many Americans killed? 420,000

Yup definitely an ASSHOLE...

indigenous says

A powerhouse you say, hmm where was the abundance created by this powerhouse, through the great depression?

The executive order was in 1933. This was the year of the bottom for GDP(73B), and the peak for unemployment(25%).

In 4 years (by 1937) GDP rose to 105B and unemployment went near 10%.

Sorry, 4 years, 9.5% annual GDP growth, and nearly 15% reduction in unemployment wasn't good enough?

Then a few"classical" economists cried about monetary expansion, dollar weakness, fears of inflation, and deficit spending - caught the ear of FDR's Treasury and right leaning congressmen (both D and R) - and forced FDR to cut New Deal programs and other Federal Spending, which sent us back into a recession in mid 1937.

Basically what Paul Ryan was trying to do this time.

control point says

Sorry, 4 years, 9.5% annual GDP growth, and nearly 15% reduction in unemployment wasn't good enough?

What occurred was the foreign countries bought war goods from the US. To attribute this to FDR is specious.

control point says

and forced FDR to cut New Deal programs and other Federal Spending, which sent us back into a recession in mid 1937.

Not that federal spending had anything to do with economic growth.

indigenous says

control point says

Sorry, 4 years, 9.5% annual GDP growth, and nearly 15% reduction in unemployment wasn't good enough?

What occurred was the foreign countries bought war goods from the US. To attribute this to FDR is specious.

The war started in 1939.

indigenous says

Not that federal spending had anything to do with economic growth.

Citation (non Mises) please.

control point says

indigenous says

control point says

Sorry, 4 years, 9.5% annual GDP growth, and nearly 15% reduction in unemployment wasn't good enough?

What occurred was the foreign countries bought war goods from the US. To attribute this to FDR is specious.

The war started in 1939.

I may have to take that back. I had that idea in my head and it may still be true but I'm seeing other causes being talked about.

control point says

Citation (non Mises) please.

I will use your example from the other day except a little later, the fed has spent 4 trillion dollars in the last 6yr. And we will probably have another recession this year.

indigenous says

control point says

Sorry, 4 years, 9.5% annual GDP growth, and nearly 15% reduction in unemployment wasn't good enough?

What occurred was the foreign countries bought war goods from the US. To attribute this to FDR is specious.

So what was good can't be attributed to FDR but what's bad was of course all FDR's fault. That makes sense, in an indegious kind of way.

indigenous says

Yup and it only took how many years to work his magic? About 10 or so living in relative squalor for .many of the Americans.

There were 10 years of relative squalor, but 4 of them happened before FDR was elected. Check you time frames again.

bob2356 says

So what was good can't be attributed to FDR but what's bad was of course all FDR's fault. That makes sense, in an indegious kind of way.

No I think that FDR did a lot of good for America after April 1945.

In fact I would say that the only reason America recovered after the war was because of the actions he took during this time period.

bob2356 says

There were 10 years of relative squalor, but 4 of them happened before FDR was elected. Check you time frames again.

No argument HH was almost as bad as FDR

darlag says

We're beating dead horses here...

Deflation has nothing to do with money... nothing. It is wholly and totally a psychological phenomenon whereby people are not willing to buy something/anything at any price due to a belief that the PRICE is going to fall further and thus they will be able to procure it cheaper in the future. It's as simple as that.

In the tech sector (consumer electronics in particular), deflation is a very real and observable and is related to Moore’s Law (a computing term which originated around 1970; the simplified version of this law states that processor speeds, or overall processing power for computers will double every two years). So in the simplest terms, one would expect “deflation” because the cost of production goes down over time (when processing power is held constant). The not so secret, secret in the tech sector to keep the consumer engaged by using Moore’s Law to ones advantage (i.e. over time the feature set and fit and finish of the iPhone 1 is eclipsed by the iPhone 2, etc.).

HOWEVER, with populations growing and decreasing raw stock (i.e. old growth lumber, ever more difficult to extract iron ore, copper, etc.), combined with the fact that the FED can create “credit” out of thin air and place it on a balance sheet, the probability of “DEFLATION” is close to nil.

In terms of economics as it relates to the real world this means it is highly unlikely that one day your house was worth 300,000 and the next 150,000.

Another way to grasp why IMHO deflation isn’t in the cards, take a look at the oil industry. Back when Colonel Drake, first drilled for oil in the 1860’s, all he had to do was drill a hole 70 ft down in the State of Pennsylvania. Fast forward to the year 2010 and consider the Macondo blowout (ya might know it better as the BP disaster in the Gulf of Mexico). Basically as time goes forward technology does make cost of production less expensive, but that factor is over whelmed by the fact that easy to extract resources are used up first and with ever growing populations wanting to live the “American” dream, costs go upward because of decreasing supply.

Bottom line, since global population is increasing, the supply of credit-money “unlimited” and the supply of goods unable to keep up with ever increasing expectations (i.e. yesterdays luxury product becomes todays necessity: land lines lead to smart phones, bikes for transportation lead to cars, etc.), expect at best moderate “inflation” or perhaps more likely the new long term normal of “stagflation.”

indigenous says

control point says

Citation (non Mises) please.

I will use your example from the other day except a little later, the fed has spent 4 trillion dollars in the last 6yr. And we will probably have another recession this year.

I have no idea what example of mine you could be talking about.

The fed injected 4 trillion dollars in the last 6 years, and the economy has growth by more than 4 trillion dollars.

And we will certainly NOT have a recession this year, though all of these cutbacks rammed through the past 2 years haven't been helping.

indigenous says

may still be true but I'm seeing other causes being talked about.

LOL.

control point says

The fed injected 4 trillion dollars in the last 6 years, and the economy has growth by more than 4 trillion dollars.

So you consider the economy is in great shape? I don't even think Paul Krugman would say that.

control point says

And we will certainly NOT have a recession this year, though all of these cutbacks rammed through the past 2 years haven't been helping.

I'm reading that we will and are.

control point says

indigenous says

may still be true but I'm seeing other causes being talked about.

LOL.

Yeah but it was not because of FDR's doing. I have to read up on that some more.

I just wanted to throw out my understanding of the relationship between money supply and price inflation or deflation.

An increase in the money supply will cause inflation in a closed economy with all other factors held constant. A 5% increase in money will cause a 5% increase in all prices if supply and demand remain constant. This is of course strictly textbook and will never happen, but it makes a good start point.

If the supply of money went up 5% and economic activity went up 5%, then prices won’t change. For instance, an economy grew 5% more grain, built 5% more cars, had 5% more haircuts and employed 5% more people to do everything. Once again, never actually happens.

Practically every economy now is an open economy, so the trade imbalance affects the relationship between money supply and inflation. Increasing the money supply won’t affect local prices if that money leaves the economy via a trade imbalance.

The relationship between money supply and price inflation is also confounded by the velocity of money. Recently much of the new money has become excess reserves, which has a velocity of 0. For purposes of inflation, this money doesn’t exist. Also, when confidence falls and people spend less (increasing savings) then the velocity of money falls which can negate or overwhelm an increase in the money supply.

So to determine the effect of money supply on prices, all you have do is account for changes in economic activity, trade imbalances and the velocity of money. It’s as easy as that.

control point says

I have no idea what example of mine you could be talking about.

The other day you gave the example that

"We just had a recession in 2008/09. Says Law is disproven anytime oversupply is observed"

Regarding inflation:

From 1776 to 1912 (136 years), the value of the dollar, relative to the Consumer Price Index, increased by 11%. A dollar could buy 11% more goods in 1912 than in 1776. Thus, if in 1776, you sat on your savings pile of $1,000,000 for 136 years, it would then be worth $1,110,000 in purchasing power (it will have appreciated in value by 11%). A loaf of bread for Thomas Jefferson cost the same as a loaf of bread for Lincoln 50 years later and again the same for J.P. Morgan 50 years after that.

From:

http://www.lewrockwell.com/2009/07/erik-voorhees/the-record-of-the-federal-reserve/

The point is that the Fed creates inflation

Since 1913 the dollar has depreciated to about 4 cents IOW a dollar in 1913 would be worth $24.08 today

It's awfully strange that during the 40s, 50s, and 60s, when corporate taxes were high, income taxes on the top earners were high, government meddling in production was high, and union membership was at all time historical highs, that the purchasing power of all Americans - from the bottom 10% to the top 1%, exploded.

Government debt was also declining in the post war period. That includes the Marshall Plan and all kinds of WW2 loans that didn't get paid back, ever.

Compare that to the poorly named "Great Moderation". The only moderation is in the standard of living for the bottom 80%.

One thing to keep in mind is that a mother of a 16-year old teen in the mid 70s was more likely to be at home than a mother of a 6-month old today. So these Great Moderation "gains" look even worse, since two-income families became standard; for the 1947-1979 chart, most of the families are one-income.

thunderlips11 says

It's awfully strange that during the 40s, 50s, and 60s, when corporate taxes were high, income taxes on the top earners were high, government meddling in production was high, and union membership was at all time historical highs, that the purchasing power of all Americans - from the bottom 10% to the top 1%, exploded.

Yup except consider that all the industrial producers of the time had been razed...

That there were so many loop holes in that tax rate that no one paid that level of taxes.

Interesting discussion from a British Economist-Technocrat on the events of the late 70s.

http://www.b0y0r3I0kAIt=43m11s

Disturbing - and plausible.

indigenous says

So you consider the economy is in great shape? I don't even think Paul Krugman would say that.

I made no statement of opinion on the overall health of the economy, only that the Liquidity injection of 4 trillion occurred at the same time that more than 4 trillion of economic growth occurred.

indigenous says

I'm reading that we will and are.

Your readings are misguided and incorrect.

I Said:
indigenous says

"We just had a recession in 2008/09. Says Law is disproven anytime oversupply is observed"

Has nothing to do with:

indigenous says

Not that federal spending had anything to do with economic growth.

control point says

I made no statement of opinion on the overall health of the economy, only that the Liquidity injection of 4 trillion occurred at the same time that more than 4 trillion of economic growth occurred.

That is the point isn't it?

Interesting discussion from a British Economist-Technocrat on the events of the late 70s.

Broke link

indigenous says

control point says

I made no statement of opinion on the overall health of the economy, only that the Liquidity injection of 4 trillion occurred at the same time that more than 4 trillion of economic growth occurred.

That is the point isn't it?

The point of what?

control point says

The point of what?

Your view that government spending creates economic prosperity.

Austrian Economics doesn't predict skyrocketing prices. It predicts a skyrocketing money supply. And it's been RIGHT for decades. It's those who like to use the two-faced definition of inflation for their own ends in economic arguments who like to claim the Austrians were "wrong" about inflation.

I don't deny that a lot of people who call themselves Austrian Economists have been wrong for decades because they also define inflation two ways. It is from them you receive your ammunition - not the theory.

indigenous says

control point says

The point of what?

Your view that government spending creates economic prosperity.

That strawman isn't my view.

Trade and commerce create economic prosperity.

Separately...

Interest payments on Federal Debt are set to double approximately every two years. Why do we pay those? Why should we continue to? Federal debt doesn't matter if the Austrians are wrong in the ways you imply.

And lastly, real estate IS "hoarded capital", Control Point. I agree, let's "free some up"!

Assuming you are talking to me.

deepcgi says

Interest payments on Federal Debt are set to double approximately every two years.

WHUT? Certainly untrue.

deepcgi says

Why do we pay those?

We can either tax those with all the capital or borrow from them. We have chosen to borrow.

deepcgi says

Why should we continue to? Federal debt doesn't matter if the Austrians are wrong in the ways you imply.

Because we spend more than we take in. If we don't pay our debt obligations, we won't be able to borrow anymore. That means spending cuts.

Federal debt does matter. In the most simple way, we buy stuff from China in dollars. China doesn't buy anything from us, so they use those dollars to buy natural resources and our debt, the dollars come back. Without debt (and the payment of interest on the debt) the feedback loop stops.

China gets more and more of our dollars with only natural resources to spend them on. China competes against us to buy natural resources with more and more of our dollars, prices of natural resources go up.

Hello Control Point. It's nice to meet you.

No, those first points weren't aimed at you specifically. I just liked the last one because I'm predicting a New Bastille Day in the coming years.

I didn't have long to research, because I won't be able to post later, but the best data I could find on short notice was last year's from the Congressional Budget Office FY 2023 Projection of interest payments quadrupling over the ten year period from 2013 to 2023. I admit that my prediction would have made that 500 percent rather than 400, but then these are government numbers that don't account for interest rates on that being anything but ridiculously low forever - so, I'm not saying I'm wrong on that one at all.

On why we keep paying it...I agree. We have to don't we? So, how much spending is too much? Only as long as the "wealth" created is fractionally greater to those responsible for the payments?

Our interest payments on the Federal Debt year-to-date are at about 400 Billion. Last year's total was about 415 as I recall, and we are at 400 in the middle of August. Hmm. Is it too late for me to predict payments GREATER than doubling every two years?

deepcgi says

So, how much spending is too much?

Or alternatively--how little revenue is too little?

deepcgi says

but the best data I could find on short notice was last year's from the Congressional Budget Office FY 2023 Projection of interest payments quadrupling over the ten year period from 2013 to 2023. I admit that my prediction would have made that 500 percent rather than 400, but then these are government numbers that don't account for interest rates on that being anything but ridiculously low forever - so, I'm not saying I'm wrong on that one at all.

Just FYI -

Impact over 10 year period of interest payments doubling every 2 years would be:

2^5 = 32x. Slightly more than 500 percent (or 400 percent).

Today $1. 2 years from now($1x2), $2. 4 years from now $2*2 $4. 6 years from now ($4x2) = $8. 8 years from now $8x2 = $16, 10 years from now, $16x2 = $32.

deepcgi says

Our interest payments on the Federal Debt year-to-date are at about 400 Billion. Last year's total was about 415 as I recall, and we are at 400 in the middle of August. Hmm. Is it too late for me to predict payments GREATER than doubling every two years?

Fiscal Years will get you every time.

http://www.treasurydirect.gov/govt/reports/ir/ir_expense.htm

We are 10 months into FY 2014, and at $384B. Add another $50B for the final 2 months and we have $434B. This would be a 5% annual growth.

FYI again, number of years to double at 5% annual growth is about 14.

..So the government is predicting a major increase in interest rates if they are predicting interest payments to quadruple in 10 years. That is about a 13% annual growth rate in interest payments.

deepcgi says

Interest payments on Federal Debt are set to double approximately every two years.