Its been pointed out to me that deflation causes incomes to fall and also that debt, in real terms, rises as a consequence. These two factors would combine to retard business investment and therefore economic growth. Is this true?
Centaris paribus, when the economy grows, the supply of goods tends to increase and the general level of prices falls. The purchasing power of each monetary unit increases; debtors will repay lenders with money worth more in real terms. However, the burden of debt does not necessarily increase. Economic growth enables the debtor to produce more with less, and so debtors have no more difficulty maintaining nominal income.
You buy a house for $100K
Your house payment is $900, safely within your means to pay.
Each year, your house declines in raw dollar value, due to deflation.
Each year, your income declines in raw dollar value, due to deflation.
Soon, your house is worth $50K, but you still owe $75K on it.
Soon, $900 per month is more than your entire income.
See, your original loan remains in the original units, that are getting more valuable every day.
Even if you paid cash, you'd be throwing away your money, as your house would decline in value every year,
You should have kept the cash, and rented for the rest of your life...but I can't imagine where you'll find someone willing to own the house and be your landlord, since the price he pays for the rental property is money he should have just held onto, the way you are.
On the other hand, an excess demand for money really does cause all those problems you describe. The money supply (real or nominal) must rise to bring supply and demand back into equilibrium. This is not optional.
If the money supply is static, your above scenario LEADS to an excess demand for money.
The money supply, like the shoe supply and the carrot supply, needs to be responsive to changes in demand...including the very growth of the economy, itself. That growth produces a demand for more money.
The money supply (real or nominal) must rise to bring supply and demand back into equilibrium. This is not optional.
How do you know this?
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Kaz, by "natural price", do you mean "current market-clearing price"? If so, I'm not sure how Smiling Dave could disagree with that, and it's therefore probably just a semantic mismatch between you two.
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Autolykos: Kaz, by "natural price", do you mean "current market-clearing price"? If so, I'm not sure how Smiling Dave could disagree with that, and it's therefore probably just a semantic mismatch between you two.
If thats what it means, then how could oil be 700% higher than the current market clearing price in 2008?
And how could inflation distort the current market clearing price? The price is what it is, whether influenced by inflation or not. Of course inflation may change the price, but thats not the same as distorti8ng it
By "natural price" I generally mean the price it would have in a free market, meaning outside of government coercion.
In the case of oil I was being lazy and thinking of a subset of that: The price of oil, before seven years of foreign policy insanity drove it up on the government-imposed commodities/futures market, almost purely through speculation, into a massive price bubble.
In 2000, oil was around $20/barrel.
In 2008, it was around $140/barrel.
This was not due to 700% inflation, or else we'd have $14 bread and $140,000 Toyota Celicas.
It's due to our wars in two oil-important regions, our government's efforts to start a war with a third, its belligerence to a fourth, et cetera.
The foreign exchange "weakness" of the dollar (a good thing for the US, overall) is only a small part of that...it would explain oil in the mid to high thirties, at worst.
I'm saying that, even if we accept the government's normal meddling with oil, if you simply got rid of the neocon foreign policy oil would still be under $30/barrel, after inflation and everything.
Kaz:I'm saying that, even if we accept the government's normal meddling with oil, if you simply got rid of the neocon foreign policy oil would still be under $30/barrel, after inflation and everything.
Uhm, Austrian economics fail. You cannot possibly know that.
Welcome to the forum btw.
The real Austrian economists were not so dogmatic as to refuse to ever examine conditions and guess as to what should have happened.
Only Rothbard was, and only when it suited his agenda.
I cannot know it, in the sense that Mises, Einstein, and Popper believed in Fallibilism...and so do I.
But I can see the effects and offer a strong guess. We can't KNOW that a free market would work better than socialism, by the same fallibilist measure. But we can look at the evidence and say "it sure seems likely".
Oh, and thanks for the welcome. I have posted on occasion, probably for years, but got carried away today.
Kaz: Uhm, Austrian economics fail. You cannot possibly know that. The real Austrian economists were not so dogmatic as to refuse to ever examine conditions and guess as to what should have happened.
Guessing is not knowing. Please do not conflate your guesses with science.
I have posted on occasion, probably for years, but got carried away today.
You really have. Please stop bumping 3 year old threads.
Oh, I replied to the second oldest thread on the board just because you had commented about "what's with you guys doing that" and that inspired me, so that one doesn't count.
The others were all on the topmost page, sorted by recent replies.
Either way, if the reply is cogent, how does it matter when it's from?
This paper by Joseph Salerno may help this discussion: An Austrian Taxonomy of Deflation
Joseph Salerno:There are four basic causes of deflation—two operating on the demand side and two on the supply side of the “money relation.” The economic processes associated with these factors may be categorized as “growth deflation,” “cash-building deflation,” "bank credit deflation,” and “confiscatory deflation.” I will analyze each in turn below and appraise its effect on economic efficiency and consumer welfare.
Government Explained 2: The Special Piece of Paper
Law without Government
The demand for money is the demand for the liquidity of money. 'Keeping money in your pocket'. This is different than putting money in your savingsaccount, because this money is available for people to lend out (with you losing the option to use it as a liquidity option). Just check out wikipedia: http://en.wikipedia.org/wiki/Demand_for_money
Imagine you spending as much money as you always do, but also an increase in your ability to be able to spend money on the spot. That will actually lower your savings - because you'll keep more money in your immediate cash balance.
This differences are blurred in our current monetary system, but they are still relevant.
I do not agree that a rise in a preference for liquidity is bad in anyway - it's just like any other economic decision and if entrepreneurs don't guess it, they will endure losses, so where's the big hazzle?- but there still is a difference between a demand for savings, a demand for money and buying stuff.
Imagine a world where everyone keeps it's money in his cashbalance and nobody saves as such. This will have real effects. I don't think this would be 'bad' - preferences still count and if they are respected... But there is more than 'savings' or 'spending'.
The state is not the enemy. The idea of the state is.
Kaz:By "natural price" I generally mean the price it would have in a free market, meaning outside of government coercion.
Right, I guess I should've said "current unhampered market-clearing price" instead.
Kaz:In the case of oil I was being lazy and thinking of a subset of that: The price of oil, before seven years of foreign policy insanity drove it up on the government-imposed commodities/futures market, almost purely through speculation, into a massive price bubble.
You might find this interesting: http://www.instituteforenergyresearch.org/2008/06/23/speculators-not-to-blame-for-high-oil-prices/
I agree with Liberty Student that no one can know what the current price of oil would be without government shenanigans. We can guesstimate that it would be much lower than it actually is, but nothing beyond that.
Just found a juicy quote from somebody's hero, Hayek.
In his intro to Prices and Production, page xiii, he writes that the goal of the book is 'to demonstrate the cry for an "elastic" currency which expands or contracts with every fluctuation of "demand" is based on a serious error of reasoning."
Read it again, guys. Memorize it. Make it part of your nightly prayers.
Of course, Mises wrote in many places that the whole notion is totally ridiculous. Educate yourselves, guys and read the quarterly journal of economics, vol 1 number 4, pages 25-49. Do a search here for "qjae_1_1_4" to get your free copy.
Somebody linked to it today, but I can't find his post anymore. Hats off to you, whoever you are.
It seems a new strategy here to spread misinformation is to claim that whoever you disagree with is a Rothbardian, and that the truth lies with Hayek and other guys nobody reads. This makes it possible to make up whatever you want. But you have been caught out.
Smiling Dave:If thats what it means, then how could oil be 700% higher than the current market clearing price in 2008? And how could inflation distort the current market clearing price? The price is what it is, whether influenced by inflation or not. Of course inflation may change the price, but thats not the same as distorti8ng it
Good point. I think I meant to write "current unhampered market-clearing price". It seems that Kaz is drawing a comparison to what Mises called "the natural rate of interest", IIRC.
I hate it when Rothbardians annoint their views as "Austrian", as if authoritative.
His analysis contains the usual Rothbardian errors, for example confusing industry and item-specific price changes with "deflation", when that actually contradicts his own previous definition.
Deflation is an OVERALL price drop that results from a change in the supply/demand balance of money.
When a new iPod comes out, and the old one therefore sells for less, that's not deflation. That's normal pricing.
But Rothbard had to pretend, back in the day, that this was a kind of "deflation", in order to explain away the money shortage created by using a government-fiat gold dollar as currency, when its supply could not expand at the rate of demand. He did this because, despite claiming to be anarcho-capitalist, he was advocating a return to a gold dollar, thereby using the authority of government to force it on the economy, and had to explain away the deflation of 1873-1933, with the endless cycle of panics/depressions that era suffered.
On the other hand, I'm glad he does go on to specify that there are BAD forms of deflation, something too many modern Rothbardians fail to do. I'm so tired of seeing Schiff, Murphy, and others on TV saying "nah, deflation lets you BUY MORE STUFF", as if that makes its form of malinvestment good.
Might as well say "inflation lets you make more profits".