[nmmoooreland20]

So we have inflation, which is essentially an increase in the CPI, which is comprised of the prices we pay for certain goods and services.

We also have inflation-linked prices like tolls.

Now, if inflation goes up, tolls go up....which in turn would increase the CPI and consequently inflation, right?

Seems like a fucked up circular reference.

[Asaxon]

Economic systems are complex and full of feedbacks and circles, you are right. However, inflation is absolutely preferrable to deflation which would bring an economy crashing down. To ward off this danger most countries set an "inflation target" of 0.1 - 3% p.a. and implement this through monetary policy. Officially inflation-adjusted or linked prices make up a tiny amount of daily goods and services so the referenced circle effect is rather small.

[ABDada]

The Austrian School defines inflation as such: "Inflation is an increase in the overall supply of money."

The effect of inflation is higher prices. But, higher prices is NOT inflation. Higher prices is...higher prices.

Causes of higher prices can be reduced supply of a good or service or increased demand of a good or service.

When you increase the money supply, people feel wealthier so they spend the new money, and that causes an increase in demand, causing a decrease in supply, causing prices to go up.

Inflation != higher prices, as a definition.

[ElJefe]

(01-30-2013 11:04 AM)Asaxon Wrote:  

Economic systems are complex and full of feedbacks and circles, you are right. However, inflation is absolutely preferrable to deflation which would bring an economy crashing down. To ward off this danger most countries set an "inflation target" of 0.1 - 3% p.a. and implement this through monetary policy. Officially inflation-adjusted or linked prices make up a tiny amount of daily goods and services so the referenced circle effect is rather small.

I really wonder if that is true. Does deflation really have that impact?

People already discount future utility rather aggressively, I'd say. More so than a few decades ago. Do we really need inflation on TOP of that to encourage even more instant gratification?

I wonder if deflation (0% nominal interest rate) would not be better for society, given how people perceive utility and what with easy-credit and spending habits. Milton Friedman wrote an interesting article on this a few years back... can't remember the titel, unfortunately.

With deflation, you'd essentially increase the value of savings, and people would increasing savings ratios - which are WAY too low. Capital would accumulate, debt-levels would diminish. Americans would start to own their own shit again. You'd pummel the certain industries, like fashion and housing, but seriously... fuck those turds. We need to get people back into making shit that people can use to make more shit, not dress like faggots and congratulate each other on Facebook.

Right now all the Fed is doing is buying all the shitty assets in the economy at overprice with paper money, so that the shitty assets arent priced the way they're supposed to, including shitty Federal bonds. Was this the AA, we'd call them enablers for the alcoholic Obama administration. And that money isn't going out to the people, that cash is hoarded by banks who are pushing up equity prices because the fundamentals of the US economy is supremely fucked for so many reasons, Obama being the main one.

/end rant

[Asaxon]

Deflation is absolutely crippling because people are rewarded for being inactive and holding on to funds instead of using them to purchase someone else's goods or services, thereby slowing economic activity and turnover.
Example: You have $10000 and want to buy a car. Instead of spending it now on a PT Cruiser you just wait 5 years to purchase a much nicer car. Over your lifetime that means fewer purchases, less consumption, fewer jobs etc because people only spend the absolutely necessary amounts, waiting for their money to be worth more, a vicious cycle ensues.
I agree with you that a lot of consumption is superfluous and we are way too expansionary in our monetary policy right now but in the end I prefer to live in this environment while personally saving up instead of having everyone hoard cash, buy little and put me out of work...

[BIGINJAPAN]

Give me a break deflation is bad a thing.

You think it is horrible to pay less for food, gas, rent, clothing, insurance, booze, custom suits, cigs, vehicles ?

If we paid less for all that shit we would have more money to spend on other things.

Central banks have been spouting deflation as a bad thing because it hurts banks. By pumping out that blatant lie over and over again it gives them the excuse to print, print, print.

Just think how many people would have died during the great depression if prices hadn't dropped significantly throughout the 30's ?

As for now, if 1 in 7 americans wasn't on ELECTRONIC food stamps you would be having mass die offs because of inflation.

Why deflation is bad for banks is because they rely on CREDIT. If credit shrinks they are fucked. As for us commoners WE SHOULD be relying on our capital. WHich is scarce and needs to be rewarded with higher interest rates. Not inflation inducing 0% rates.

[n0000]

The idea that deflation is bad is pure keynesian propaganda spread by the central banks and establishment economists. Deflation is the natural and beneficial condition that occurs when the quantity of goods in the economy increases. The same amount of money is chasing around more goods, leading to an increase in the buying power of the dollar. In a free market, where money is probably going to be gold based and deflation is the norm, you don't have to venture out into the risky stock/bond market to save for retirement. All you do is hold cash and your buying power appreciates as the economy grow and is able to produce more goods. Falling prices are the wages of a prosperous, free economy.

The idea that individuals "hording" money or hiding it in their mattress is bad is also nonsense. If you take money out of the money supply and bury it in the ground it is a deflationary act. Everyone elses buying power increases because of the decrease in the money supply. We should have government posters encouraging people to lock their money away in the mattress.

The federal reserve is a government backed institution with a monopoly on the printing of money. The legal tender laws restrict the species that are valid for use in contracts. I cannot write a contract to buy a car and pay in gold, only federal reserve notes. The purpose of the federal reserve is to provide as a lender of last resort so banks can print money, causing inflation and decreasing the buying power of the dollar.

Austrian economics describes reality. Keynesian economics is fantasy and is the basis of the welfare/warfare state and out of control government spending that is occuring today. Want to know why the US has gone to war so much as of late without raising taxes? It is because of the ability of the government to run unlimited deficits because of the ability to print money.

The Ludwig von Mises institute has some very good articles
https://mises.org/daily/1241

[ElBorrachoInfamoso]

Commodity based monetary systems had average inflation rates of -0.5 percent per year i.e. deflation. Government monopoly monetary systems without a commodity base have averaged about 15 percent per year. Western government generally keep inflation low NOW, but that hasn't been true historically.

Inflation is how the government gains seignorage revenues i.e. printing money at nearly zero cost and spending it without producing anything of value, thereby increasing inflation and reducing the value of the money in your bank account.

[Asaxon]

Lots of strong opinions and name calling here. Not wanting to get into a fight but someone bringing up "paying less is good, we have more money" misses the mark by a mile. Do you honestly think the world is that simple? It is not about prices per se nor current prices but future expectations. If it is all that obvious to you that deflation is great, feel free to write it up in a coherent paper and claim your Nobel Prize... I am not a proponent of a lot of the expansionary policies these days but whoever touts deflation as a solution needs to ask himself how the "money chasing goods" you brought up, n0000, is supposed to actually chase. It does not chase but lies dormant, awaiting ever larger increases in value while the producers sit on stockpiles.
Also, thanks for resolving the question of Keynes vs Austrians in a single paragraph. Another Nobel Prize is in order for that as the science of economics has (that is, until now...) never found a definitive answer to that.

[kosko]

(01-30-2013 11:47 AM)ElJefe Wrote:  

(01-30-2013 11:04 AM)Asaxon Wrote:  

Economic systems are complex and full of feedbacks and circles, you are right. However, inflation is absolutely preferrable to deflation which would bring an economy crashing down. To ward off this danger most countries set an "inflation target" of 0.1 - 3% p.a. and implement this through monetary policy. Officially inflation-adjusted or linked prices make up a tiny amount of daily goods and services so the referenced circle effect is rather small.

I really wonder if that is true. Does deflation really have that impact?

People already discount future utility rather aggressively, I'd say. More so than a few decades ago. Do we really need inflation on TOP of that to encourage even more instant gratification?

I wonder if deflation (0% nominal interest rate) would not be better for society, given how people perceive utility and what with easy-credit and spending habits. Milton Friedman wrote an interesting article on this a few years back... can't remember the titel, unfortunately.

With deflation, you'd essentially increase the value of savings, and people would increasing savings ratios - which are WAY too low. Capital would accumulate, debt-levels would diminish. Americans would start to own their own shit again. You'd pummel the certain industries, like fashion and housing, but seriously... fuck those turds. We need to get people back into making shit that people can use to make more shit, not dress like faggots and congratulate each other on Facebook.

Right now all the Fed is doing is buying all the shitty assets in the economy at overprice with paper money, so that the shitty assets are not priced the way they're supposed to, including shitty Federal bonds. Was this the AA, we'd call them enablers for the alcoholic Obama administration. And that money isn't going out to the people, that cash is hoarded by banks who are pushing up equity prices because the fundamentals of the US economy is supremely fucked for so many reasons, Obama being the main one.

/end rant

Deflation is bad for unemployment which is why its such a scary thing. Firms unload labour when prices start to plummet, it does reward savers but with savings at historically low levels it does not do much to help the general public. It also makes debt harder to pay which for a over-credit public is not good.

People with no jobs
No money
Unable to make debt payments


Right now the Gov knows it can't blow the roof of the economy and rocket it into the sky via inflation but they are desperate to prevent deflation and will most likely keep the economy in a stagnant comma for many many years (if not decades).

Also the CPI is a dodgy metric. During the Clinton years they goofed around with the formula to understate inflation to save money on Social payments.

Inflation is closer to 6% vs the 1.7% BLS reports monthly.

[jmoney29]

If tolls raise at same rate as inflation, the real price should remain constant or raise at a lower rate than inflation.Wage increases lag behind inflation.

[BIGINJAPAN]

Losing jobs is part of a re-balancing act that needs to take place if a firm has over extended itself. WHich is usually what happens when a firm expands on credit instead of capital. If we had a functioning economy that grew off of real capital investment not credit there would be no reason to fear deflation. You will never stop job losses at certain times, but how could anyone argue that falling prices is a bad thing ? Yeah having the stock market/real estate fall sucks, but everyone on the planet is not affected by that. We are all affected by the price of food, fuel, clothing and housing.

A comment for Asaxon. I didn't see any name calling what so ever. I think everyone made valid arguments against your view. Basically you think an economy grows based on consumption. The rest of us argue a real lasting economy grows on savings and capital. The last few years have shown that sustainable growth comes from the latter and consumption can only be attained through massive credit expansion. Meaning debt.

[Samseau]

First of all, neither deflation or inflation kills or makes jobs. The fact is, both camps are wrong.

There are periods in history with massive inflation, and extreme unemployment, and there are periods with massive deflation, and extreme unemployment.

What appears to cause unemployment are extreme swings in EITHER direction towards deflation or inflation, the goal should be to have close to zero inflation or deflation.

But of course, since you can't have both, and the money supply will either contract slowly or increase slowly, at a minimum, the question is: which is better?

Today, in our world of globalization, inflation has the competitive advantage. Cheaper currencies allow countries to export their goods.

However, inflation makes it impossible to collect savings over the long term, which means citizens cannot save for the future. And if men can't save for the future, it will be harder for men and women to start families.

I think, for the long term growth of a nation, deflation is a preferred outcome. It allows men who toil slowly over decades to save up cash that keeps value, which in turn allows men to start families or start up businesses that end up returning more value to the economy as a whole.

[clever alias]

deflation as a bad thing based on the "people will wait to buy, thus slowing economically activity" is false. the price of electronic goods tend to decrease every year, but we still buy them today.
deflation is largely feared because of how it would mess with credit.
1) If you have 10,000 $ in loans that you want to pay off, it is easier to do that in a period of inflation than deflation. The prices of things won't just go down, everything would follow, including wages.
2) For deflation to happen you would need banks to stop loaning essentially, and credit can be a goood thing when used responsibly

[ElBorrachoInfamoso]

What Samseau said. Rapid inflation and rapid deflation are both bad. A steady rate of either is preferable. Inflation driven by a central bank with monopoly over the printing of money is a sneaky tax on holders of the currency. A steady rate of deflation is associated with technological progress in monetary systems with less government control than we currently have. The systems with less government involvement have historically been more stable. 50 year corporate bonds won't sell today because of all the uncertainty about government monetary policy, but these bonds were normal before the era of central banks.

Another thing to note is that most periods of rapid inflation/deflation were caused by either government policy or natural disaster.

[BIGINJAPAN]

Quote:

Today, in our world of globalization, inflation has the competitive advantage. Cheaper currencies allow countries to export their goods

Exporting doesn't affect every citizen in a country. Very few peoples jobs are determined by exports in North America.

But what does affect everyone in North America is a weak currency. We consume non stop and therefore a strong currency is beneficial for every single person in North America.

So no Inflation does not have a competitive advantage for us. It destroys our standard of living. Cheaper currencies measured against real goods and not other paper dollars reveals we are being butt fucked everyday.

[east and west]

can some one with a economics background please clear the argument on inflation once and for all?

[WestIndianArchie]

(01-30-2013 02:44 PM)east and west Wrote:  

can some one with a economics background please clear the argument on inflation once and for all?

Unpossible. Professional economists argue bitterly about this.

What you see on this board is the parroting of what the experts have said. There is no misinformation, just competing theories, none of which are powerful enough to explain the past, much less predict futures.

It's even worse on Financial boards.

WIA

[Samseau]

Also, the idea that deflation means people won't spend is pure bullshit.

If prices are FALLING, how is it possible that more people won't be buying these cheap goods?

Think about it - if you're running a business, and you lower prices, more people will buy your shit.

[n0000]

Quote:

Lots of strong opinions and name calling here. Not wanting to get into a fight but someone bringing up "paying less is good, we have more money" misses the mark by a mile. Do you honestly think the world is that simple? It is not about prices per se nor current prices but future expectations. If it is all that obvious to you that deflation is great, feel free to write it up in a coherent paper and claim your Nobel Prize... I am not a proponent of a lot of the expansionary policies these days but whoever touts deflation as a solution needs to ask himself how the "money chasing goods" you brought up, n0000, is supposed to actually chase. It does not chase but lies dormant, awaiting ever larger increases in value while the producers sit on stockpiles.
Also, thanks for resolving the question of Keynes vs Austrians in a single paragraph. Another Nobel Prize is in order for that as the science of economics has (that is, until now...) never found a definitive answer to that.

You ask 5 different economists and you get 5 different answers. This is not physics or chemistry where you can empirically verify your hypothesis by rerunning the experiment and altering one variable. The economic fallacy most prevalent today is that economics is an empirical science. You cannot rerun the course of history altering only one variable.

These two rap battles should teach you more about economics, particularly austrian business theory cycle theory vs the keynesian explanation of the market cycle than a year of college level economics courses.

[Jaydublin]

(01-30-2013 11:56 AM)Asaxon Wrote:  

Deflation is absolutely crippling because people are rewarded for being inactive and holding on to funds instead of using them to purchase someone else's goods or services, thereby slowing economic activity and turnover.
Example: You have $10000 and want to buy a car. Instead of spending it now on a PT Cruiser you just wait 5 years to purchase a much nicer car. Over your lifetime that means fewer purchases, less consumption, fewer jobs etc because people only spend the absolutely necessary amounts, waiting for their money to be worth more, a vicious cycle ensues.
I agree with you that a lot of consumption is superfluous and we are way too expansionary in our monetary policy right now but in the end I prefer to live in this environment while personally saving up instead of having everyone hoard cash, buy little and put me out of work...

Sooo. Savings are bad? It's bad for the economy if people save money?

Where does investment capital typically come from? Assuming it isn't coming from a printing press?

[T and A Man]

That's not the reason that deflation is bad.

Deflation distorts production levels. if costs are falling, and the sale of a good proceeds the cost of inputs, producers may not even re-coup their costs.

In terms of behavioural finance, it can lead to a downward spiral of inertia.. and overall consumption can succumb to the paradox of thrift.

Up above, the Austrian school's defintion is wrong, Austrians are good at being wrong, I think they have made that their life mission.

Inflation is not the increase in money supply, it is the increase in prices in window of time. For deflation to be avoided, the money supply has to increase in line with the increase in chain volumes, or the advent of new product coming to market.

For the OP, inflation linked items are usually are small component, or maybe omitted altogether, in terms of the composition of a CPI table. The feedback response is minor, or even zero.

[T and A Man]

(01-30-2013 12:58 PM)Asaxon Wrote:  

Lots of strong opinions and name calling here. Not wanting to get into a fight but someone bringing up "paying less is good, we have more money" misses the mark by a mile.

In an abstract way, that is the essence of improving one's quality of life. Physical exertion brings ones product to market (with the aid of capital), and how much it can be exchanged for determines quality of life.

We have the intermediary commodity of money as a proxy to represent the value of the product we bring to market.

The more stuff we get for a day/weeks/years output, the better out quality of life is.

Quote:

Do you honestly think the world is that simple? It is not about prices per se nor current prices but future expectations.

Yes, that's called price stablility, because many items can not be purchased with one weeks wages. So we take on debt. Repaying debt is better managed when prices are more stable.

Quote:

If it is all that obvious to you that deflation is great, feel free to write it up in a coherent paper and claim your Nobel Prize... I am not a proponent of a lot of the expansionary policies these days but whoever touts deflation as a solution needs to ask himself how the "money chasing goods" you brought up, n0000, is supposed to actually chase. It does not chase but lies dormant, awaiting ever larger increases in value while the producers sit on stockpiles.

Well no, this is where keynes has killed everyone else, and why his much misunderstood 'aggregate demand' is important.

Producers will not keep adding to a stock pile ad infinitum. If no customers pursue, or more importantly, can't afford their product, producers won't make it.

That typically means less employees, which means less customers being able to afford others product.

This has been the malaise of the western world, they have forfeited their own middle and working class customers, the means in which they have to afford product, and sent it offshore.

However with diminished wages, those foreign workers havent; turned out to be customers of equal value, and the rich reaping increased dividends are not making up the short fall.

They are rich because by observation, they do not spend all their money. That reduces monetary velocity.

Quote:

Also, thanks for resolving the question of Keynes vs Austrians in a single paragraph. Another Nobel Prize is in order for that as the science of economics has (that is, until now...) never found a definitive answer to that.

Maintaining aggregate demand and price stability, vs preventing manipulation of the money supply.. thus you'll see Austrians cling to gold despite its disinflationary (deflationary) nature.

[ElJefe]

(01-30-2013 04:58 PM)Samseau Wrote:  

Also, the idea that deflation means people won't spend is pure bullshit.

If prices are FALLING, how is it possible that more people won't be buying these cheap goods?

Think about it - if you're running a business, and you lower prices, more people will buy your shit.

Not necessarily.

If you're on the housing market, and you expect prices to drop 10% in the next year, you will wait.

Prices drop.

Now, was that your fault, or was that the market? It becomes a self-fulfilling prophecy.

That said, I don't believe falling prices need be a bad thing. People should buy stuff when they NEED it, not because they're speculating as to which way the market's headed.

Inflation renders simple savings worthless over time and essentially compels the little man to buy investment services. I am not sure if it's a good thing.

T & MAN had some important points I forgot. Other points include menu costs, sticky prices and nominal wage theory. It's much harder to get people to accept a fall in nominal wages than it is to undermine the value of their wages through inflation.

[T and A Man]

(01-30-2013 12:36 PM)n0000 Wrote:  

The idea that deflation is bad is pure keynesian propaganda spread by the central banks and establishment economists.

yeah, except no.

Quote:

Deflation is the natural and beneficial condition that occurs when the quantity of goods in the economy increases.

Yup that's true, but behaviour changes when you move beyond a barter economy.

Quote:

The same amount of money is chasing around more goods, leading to an increase in the buying power of the dollar.

OK.... but the point about deflation is its impact on producers, particuarly with long time frames.

The point is if petroleum for your car is $1.80/gal today...and $1.30/gal next year.. winner!!!.

Except for the organisationh that outlays $10 billion and spends 8 years building a oil producing facility from scratch.

After 8 years, your scenario sees $0.55 /gal, and they'll never recoup their money.

So they don't build extra production facilties.

Deflation inhibits production, the argument has nothing to do with consumer setiment towards lower prices.

Quote:

In a free market, where money is probably going to be gold based and deflation is the norm, you don't have to venture out into the risky stock/bond market to save for retirement. All you do is hold cash and your buying power appreciates as the economy grow and is able to produce more goods.

More goods don't appear if producers are disincentivised.

Quote:

Falling prices are the wages of a prosperous, free economy.

No they aren't, constant prices in an economy with increasing wages are propserous.

Quote:

The idea that individuals "hording" money or hiding it in their mattress is bad is also nonsense. If you take money out of the money supply and bury it in the ground it is a deflationary act. Everyone elses buying power increases because of the decrease in the money supply.

When nobody buys stuff, thus production stops and people lose their jobs, their buying power becomes zero.

Quote:

We should have government posters encouraging people to lock their money away in the mattress.

If you want to fuck government over, you should barter. it can't be taxed.

Quote:

The federal reserve is a government backed institution with a monopoly on the printing of money. The legal tender laws restrict the species that are valid for use in contracts. I cannot write a contract to buy a car and pay in gold, only federal reserve notes. The purpose of the federal reserve is to provide as a lender of last resort so banks can print money, causing inflation and decreasing the buying power of the dollar.

Well that's its current mandate. mandates can change.

Quote:

Austrian economics describes reality.

No, Austrian economics is based on cynicism, and wants to eliminate all structures that can be manipulated.

Quote:

Keynesian economics is fantasy

The keynesian era was 1945 - 1975, its was first disrupted in 1971 with Nixon going off the U.S. gold exchange standard, and put down with Reagan pursuing the Milton Friedman-esque fantasy.

The 1945-75 era of the west was to most prosperous era in human history. The middle class burgeoned to a greater size that ever sen before, technical progress was unparalleled and 'all boats rose' with every person getting a claim.

Since the scholl of Chicago started making the rules, we've seen 3 major global contractions in 1982, 1991 and 2007. One may argue the one in 1982 was a residual effect from things changing.. but the other 2 were worse than anything that ever happened in the keynesian era, the worse being 1961.

Quote:

and is the basis of the welfare/warfare state and out of control government spending that is occuring today.

yeah, but no.

that is not the basis of it all, considering keynesian policies were dismantled 30 years ago.

Quote:

Want to know why the US has gone to war so much as of late without raising taxes? It is because of the ability of the government to run unlimited deficits because of the ability to print money.

So the same method of the confederacy in 1861-1865..... 70 years prior to keynesian policies being invented?

history shows printing money is not a keynesian invention.