Economics Questions

Re: Questions about inflation...

hugolp — Mon, 25 Jan 2010 18:07:07 GMT

Kenneth:

With regards to question #1

So your saying that the dotcom bubble completed its recession cause I thought that the dotcom bubble never fully burst. In that case, the housing bubble and dotcom bubble have no connection so there was no bubble substitution.

No, I am not saying that. If you read again, I said one bubble was substituted with the other one, but not for the reasons you stated, but because another reason, that I tried to explain but obviously was not clear enough for you.

Re: Questions about inflation...

BibleLibertarian — Mon, 25 Jan 2010 16:48:05 GMT

1. Obviously when the government passes certain deficit spending laws that inflation transfers wealth from the national populous to certain sectors, banks, organizations, or individuals whom the laws delineate as recipients of funds.

When laws do not specify recipients directly but either hide them or propose general programs that transfer the wealth indirectly, those who are involved in the programs receive the funds. Inflation occurs by removing purchasing power from those who produced it to give to those who fail or malinvest.

To elaborate on your example of Greenspan's low interest rates policy, I argue in my debates on economics that the lower the interest rates become the more people spend on more expensive assets. The lower the interest rates the more people are enticed to borrow money and purchase things that they otherwise would have to spend more time saving to purchase. Artificially low interest rates ultimately lead more banks to become risky for insolvency, more people to be in debt, and more malinvestment in unnecessary cars and houses. Luxury and expensive asset providers become overly dependent upon an artificially high market for buyers keeping prices high that most are unprepared when the bills become due and demand declines as those in debt must repay their obligations.

2. I would surmise that in a hyperinflationary situation wealth constantly transfers to the government (or the banks in charge of money production). The government refuses to cut back and simply funds its operations through hyperinflation while the populous must continue to spend everything that they have as quickly as possible to minimize the heavy taxation that hyperinflation costs them.

Re: Questions about inflation...

Kenneth — Mon, 25 Jan 2010 15:59:43 GMT

With regards to question #1

So your saying that the dotcom bubble completed its recession cause I thought that the dotcom bubble never fully burst. In that case, the housing bubble and dotcom bubble have no connection so there was no bubble substitution.

Re: Questions about inflation...

hugolp — Mon, 25 Jan 2010 15:14:29 GMT

Kenneth:

1. How can governments transfer inflation from one sector of the economy to another? I surmise this is what happened in the dotcom bubble where the Greenspan transferred the bubble into the housing market. How do they do this?

The goverment does not control directly where the new inflation goes. They just put the conditions, by lowering interest rates. It is true that they can try to control it through regulations or through media propaganda, but that's it. At the end, where the new inflation will go its not controlled, but once a bubble starts it will attract big part of the new money because of the mania.

The inflation of the dotcom bubble did not go into the housing bubble. The inflation from the dotcom bubble leaked into other areas when the dotcom bubble was happening. I think you are refering to something people like Peter Schiff say a lot: "Greenspan lowered interest rates to substitute the dotcom bubble with the housing bubble". They are not saying that the inflation from the dotcom bubble went into the housing bubble. After every bubble you need a recesion to "cure" the effects of the bubble. The people and resources that were employed in the bubble industry need to be realocated into a new area. But this take time, because the market participants need to discover useful activities. This time while people is trying to discover and switch to useful activities is what we call a recesion. But Greenspan to avoid this needed recesion, created the housing bubble that made all resources go to building excessive housing. It hide the structural problems of the USA economy created by one bubble with another bubble. Basically it delayed the crisis at the price of making it bigger.

2. To whom is the wealth transferred in a condition of hyperinflation? If there were no hyperinflation then we'd just pay our debts to China but if the debt will vanish under hyperinflation, who will get the money?

The emiters of the new money, basically the goverment, banks and the ones that get the money first. But the real problem is that because of the hyper-inflation there will be wealth destruction, not only wealth realocation.

Questions about inflation...

Kenneth — Mon, 25 Jan 2010 14:19:17 GMT

1. How can governments transfer inflation from one sector of the economy to another? I surmise this is what happened in the dotcom bubble where the Greenspan transferred the bubble into the housing market. How do they do this?

2. To whom is the wealth transferred in a condition of hyperinflation? If there were no hyperinflation then we'd just pay our debts to China but if the debt will vanish under hyperinflation, who will get the money?