Inflation vs. Deflation

[Kushinator]

Depends on how you define a positive impact, I guess:


We actually had more total credit market debt as a percentage of GDP in the early 1930s than we did in the aftermath of WWII.

(Source: PIMCO - Bill Gross June 2010 Investment Outlook)​

Note that debt peaked in 1932 as the economy contracted, and then slowly declined until it trended up again during the war years. The problem now is we don't have a whole lot of room to borrow more money. We now have more debt than at any time in our history. $54 trillion is a lot of bread. We're tapped out. Broke.

It's more than an opinion piece. It's a description of what people who control billions of dollars and who move financial markets are actually doing with their money instead of what some post-Kenesian academic tells me they're expected to do with their money.

I love it when people forget to cautiously read the commentary that goes along with an image they are using to prove a point. From the Bill Gross article:

Fiscal tightening, while conservative in intent, leads to lower and lower growth in the short run. Tougher sovereign budgets produce government worker layoffs, pay cuts, reduced pension benefits and a drag on consumption and the ability of the private sector to accept an attempted hand-off from fiscal authorities. Recession becomes the fait accompli, and the deficit/GDP ratio moves ever higher because of skyrocketing risk premiums and a plunging GDP denominator. In many cases therefore, it may not be possible for a country to escape a debt crisis by reducing deficits!

Several months ago I rhetorically asked whether it was possible to get out of debt crisis by increasing debt. Yes – was the answer, but it was a qualified yes. Given that initial conditions were favorable – relative low debt as a % of GDP, with the ability to produce low/negative short-term policy rates and constructively direct fiscal deficit spending towards growth positive investments – a country could escape a debt deflation by creating more debt. But those countries are few – the U.S. among perhaps a handful that have that privilege, and investors, including PIMCO, have strong doubts about U.S. fiscal deficits leading to strong future growth rates.

Fiscal tightening and budget conservatism may have come too late for Greece and its global lookalikes. Continued deficit spending may be an exorbitant privilege extended to only a few. Caught in the middle are many developed countries that likely face New Normal growth rates and a continued bumpy journey toward that destination.

None the less, i am willing to speculate that a sizable chunk of the total debt accumulated through the early 1930's was defaulted or written down. It is silly to believe we as a nation paid off all of that debt during one of Americas darkest periods.

 

[washunut]

Imagep:

Thanks. I can agree with your definition of the super rich. I am not sure why congress has not suggested having more tiers in the graduated income tax. That level can increase by a good amount without adversely impacting the economy.

As to demand and consumption, I am on the fence. While I understand that we need more consumer spending to get out of the recession we are in. I also know that too much spending by government and consumers was a bubble that had to burst. Consumers just like the government has to delever.

So are we better off letting things find their natural bottom ( which we will get to eventually) quickly or continue to keep interest rates low and have government stimulus spending, get there more slowly but perhaps have to dig out of a deeper hole.

Economists who are a lot smarter than me disagree on this point, not an easy one.

 

[Ahlevah]

I love it when people forget to cautiously read the commentary that goes along with an image they are using to prove a point.

Who says I didn't "cautiously read" it? I think what he's saying is in the short run a country like Greece is screwed. He's not saying unless we spend more money we're screwed. The United States may be able to avoid a debt crisis because it has its own currency and can use fiscal stimulus to generate demand--in the short run, like last year when we had Cash for Clunkers and TARP funding so people with 621 FICO scores could buy cars at 0% interest for 72 months on the taxpayer's dime. What you failed to note was the text immediately following that part of the commentary, which I already previously quoted:

Investors, including PIMCO, have strong doubts about U.S. fiscal deficits leading to strong future growth rates.

It seems that, as we've assumed more and more debt in this country, government's ability to use traditional Keynesian-style pump-priming to goose the economy is becoming less and less effective. Recoveries from the last few recessions have all been "jobless." At this point, more than two years after the latest recession began, we should be adding at least 500-600,000 jobs per month to our economy, and yet we're barely keeping up with the people entering the work force.

None the less, i am willing to speculate that a sizable chunk of the total debt accumulated through the early 1930's was defaulted or written down. It is silly to believe we as a nation paid off all of that debt during one of Americas darkest periods.

:doh Um, since we were in the middle of a depression that sounds like a reasonable assumption to make. The question is whether we're at a similar tipping point:

At some point, capital betrayed into unproductive works has to either be repaid or written off. If either is inhibited by reflation or regulatory forbearance, then a cost is imposed on productive works, whether through inflation, higher interest, diversion of consumption, or taxation to socialise losses. Over time that cost ultimately hollows out the real productive economy leaving only bubble assets standing. Without a productive foundation, as reflation and forbearance reach their limits, those bubble assets must deflate.

London Banker: Fisher's Debt-Deflation Theory of Great Depressions and a possible revision

 

[imagep]

Imagep:

Thanks. I can agree with your definition of the super rich. I am not sure why congress has not suggested having more tiers in the graduated income tax. That level can increase by a good amount without adversely impacting the economy.

As to demand and consumption, I am on the fence. While I understand that we need more consumer spending to get out of the recession we are in. I also know that too much spending by government and consumers was a bubble that had to burst. Consumers just like the government has to delever.

Belive it or not I agree that we may have been better off letting our economy bottom out naturally. Personally, I really dont know that more tiers are needed, but I would definately support raising the starting point of the highest bracket level so that only the super rich are affected by it and then possibly increasing that rate - as a trade off for also raising teh starting point of the lowest bracket (higher personal deduction and standard deduction) and the rate on that bracket a little (or a lot).

 

[imagep]

It's a case of the golden rule: He who has the gold rules. But it depends on what you mean by a "force that tends to redistribute wealth." A progressive income tax system is such a force. So is Hugo Chavez. The former I can live with. The latter? No thanks.

I agree totally that the progressive income tax system is such a force. I think without it, and without inheritance tax, things could possibly be much worse now.

I will have to remember "the golden rule" as you define it. Thats terribly funny, but terribly accurate at the same time.

 

[oldreliable67]

First, kudos to all who have contributed to a very interesting thread...and it has remained a very civilized discussion as well! Good job, all!

Second, a small observation: in this thread and many discussions of "why aren't the banks lending?", a fairly significant point is too often overlooked. That is: it takes two to tango. As for the party of the first part, the banks are lending, just as fast as prudent lending policy will permit. But the party of the second part, the consumer, he just ain't borrowing. In the aggregate, consumers are continuing to de-leverage.

As a former bank lending officer, I can assure you - and it should come as no surprise - that during periods of economic stress, the overall credit worthiness of those seeking to borrow declines rather precipitously. Moreover, as business declines, so does the aggregate need for loans. The well-managed enterprise adjusts its expectations downward, borrows less because it is purchasing fewer raw materials and will have lower inventory to finance, sells less, and has fewer receivables to finance. Capital expenditures are scaled back along with profitability expectations. Consequently, less working capital is required, resulting in lower bank borrowings.

Do lending standards tighten during contractions? Of course. It is unfortunate, perhaps, that tighter standards accompany the portion of the cycle in which some borrowers find themselves in the tightest of straits. But never forget that banks are not lending the banks money; they are lending depositors money. Prudence (read loss avoidance and regulatory supervision) dictate stricter standards, usually accompanied by gnashing of teeth and cries of "foul!' from those equally quick to criticize when the list of failed banks increases as a result of loan losses.

That's the corporate sector. Consumers have been paying down debt at historically unheard of rates. Peruse the Fed's G19 and Z1 for evidence.

It is almost axiomatic: During an economic contraction, on balance, the universe of borrowers tilts sharply toward the less credit worthy. During expansions, the rising tide of prosperity lifts all the boats.

 

[imagep]

First, kudos to all who have contributed to a very interesting thread...and it has remained a very civilized discussion as well! Good job, all!

Second, a small observation: in this thread and many discussions of "why aren't the banks lending?", a fairly significant point is too often overlooked. That is: it takes two to tango. As for the party of the first part, the banks are lending, just as fast as prudent lending policy will permit. But the party of the second part, the consumer, he just ain't borrowing. In the aggregate, consumers are continuing to de-leverage.

As a former bank lending officer, I can assure you - and it should come as no surprise - that during periods of economic stress, the overall credit worthiness of those seeking to borrow declines rather precipitously. Moreover, as business declines, so does the aggregate need for loans. The well-managed enterprise adjusts its expectations downward, borrows less because it is purchasing fewer raw materials and will have lower inventory to finance, sells less, and has fewer receivables to finance. Capital expenditures are scaled back along with profitability expectations. Consequently, less working capital is required, resulting in lower bank borrowings.

Do lending standards tighten during contractions? Of course. It is unfortunate, perhaps, that tighter standards accompany the portion of the cycle in which some borrowers find themselves in the tightest of straits. But never forget that banks are not lending the banks money; they are lending depositors money. Prudence (read loss avoidance and regulatory supervision) dictate stricter standards, usually accompanied by gnashing of teeth and cries of "foul!' from those equally quick to criticize when the list of failed banks increases as a result of loan losses.

That's the corporate sector. Consumers have been paying down debt at historically unheard of rates. Peruse the Fed's G19 and Z1 for evidence.

It is almost axiomatic: During an economic contraction, on balance, the universe of borrowers tilts sharply toward the less credit worthy. During expansions, the rising tide of prosperity lifts all the boats.

Dang dude, now I have to look up "axiomatic". You guys are wearing out my dictionary.

OK, I'm back...I agree with most of that. Which once again leads me to the conclusion that at this particular point in time, with this particular weird and complicated recession - that the value of "capital providers" is diminished. Thus supporting "Supposn's" argument that the capital gains tax "discount" is not justified.

The only thing that I dont completely agree with is that "rising tide" metaphor. The thing about a rising tide is that regardless of the size of the boat, the draft stays the same and each boat rises at the same rate. When we compare incomes of unusually high income earners to the salaries of "regular folk", while rising tides may have lifted both, during the past 30+ years they were not lifted equally. Which once again supports "Supposn's" arguement against "special strokes for special folks".

 

[washunut]

Dang dude, now I have to look up "axiomatic". You guys are wearing out my dictionary.

OK, I'm back...I agree with most of that. Which once again leads me to the conclusion that at this particular point in time, with this particular weird and complicated recession - that the value of "capital providers" is diminished. Thus supporting "Supposn's" argument that the capital gains tax "discount" is not justified.

The only thing that I dont completely agree with is that "rising tide" metaphor. The thing about a rising tide is that regardless of the size of the boat, the draft stays the same and each boat rises at the same rate. When we compare incomes of unusually high income earners to the salaries of "regular folk", while rising tides may have lifted both, during the past 30+ years they were not lifted equally. Which once again supports "Supposn's" arguement against "special strokes for special folks".

As the economy continues to strengthen ( we hope) then lending and capital formation will grow. Let's remember that the venture guys who fund cmpanies and allow them to grow have an important function. As well public companies issue stock to grow, to compensate their employees, make acquisitions etc.

Increasing the capital gains tax will mean that all of the investors that allow the above to happen will need a higher pre-tax return to get to a desired after tax return. Thus increasing the capital gains tax, increasing the cost of capital for our corporations. This would give their foreign competitors, in countries with a lower capital gains tax a competitive advantage.

 

[imagep]

Increasing the capital gains tax will mean that all of the investors ...will need a higher pre-tax return to get to a desired after tax return.

Here's the one thing - the "desired after tax return" is all the money in the world! Litterally. Seriously, if you asked me what I desired, I would tell you "everything". If the government asked me what tax rate I would prefer to pay, I would say the zero tax rate.

What would happen if you asked the poor lazy person how much money that he would like to get from the government? He would say: "I'll take all your money please". What would happen if I applied for a job and the HR Manager said "you are hired, now how much money would you like to make?" i would say that I would like to make all the companies money.

Fortunantly for other people, we don't have those choices. We eather have to earn what we make, or get really lucky. We shouldn't get just because we want. We should get because we earned, and earned unsubsidised.

It's not a matter of our government manipulating our tax code to benefit one particular group of people (investors), it' s a matter of investors making the wisest investment choices that they can, and then them yielding profits based upon the merits of their investments - however much that happens to be. The government should not be setting up one group for guaranteed success, while on the other hand transfering the cost (in this case the cost is the taxes that investors did not have to pay) to another group (people who work jobs for a living). That is re-distribution of wealth from the middle class to the investor class!

Take a look at what would happen if we totally eleminated taxes on the investor class. We would be forced to raise income taxes on the consumer class. The consumer class would then be forced to reduce their consumption, companies would loose sales, profitability of corporations would drop, investment yield rates would fall, and then investors wouldn't have any motivation to invest. Consumers may also be forced to reduce what they invest 9because they are now paying additional taxes on the money that they earn from working), thus corporations would loose access to capital. It's a loose-loose situation.

Now take a look at wht would happen if we increased the tax rate on capital gains and in a tax revenue neutral type of way decreased income taxes. Then our consumer class would have more money to save, more money to invest, and more money to consume. Each individual in the consumer class would make the best decision for their particular situation as to do with that extra money. Some of them would invest more, some would consume more, and most of them would to a little of both. So at this point, corporations have the opportunity to earn larger profits since they are selling more goods, and corporations have more opportunity to aquire capital since more individuals are investing. it's a win-win situation.

Taking this train of thought one step further, investors are able to invest because they have extra money. If taxes on the profits of investments were reduced, where would investors come up with more money to invest? The only reason they would have more money to invest is because they would have had some tax savings. Thus, at that point, the government is subsidising investors.

Now lets say that government increased taxes on investments. What would investors then do with their extra money? Would they just burn it? Of course not. As long as there is a reasonable likelyhood of making a profit on a given investment, investors will go for the profit. Now if their ownly choice is to make a profit at and have to pay X% in taxes, they will invest no more or no less if X% increases or decreases - they still want to make a profit! It's really not like if capital gains taxes were reduced that investors would just go "poof" and magically appear some more money to invest.

Taxing different forms of income at different tax rates is subsidising and penalizing different income generation methods. Should the government really be subsidising anything? Or is it simply better to let the market work things out. Personally, I would vote to let the market work things out. I trust capitalism over the wisdom of government deciding what to subsidise.

Lets end the policy of penilizing work by ending the policy of subsidising the incomes of investors - and charge the same income tax rate for all income sources.

 

[imagep]

Thus increasing the capital gains tax, increasing the cost of capital for our corporations. This would give their foreign competitors, in countries with a lower capital gains tax a competitive advantage.

These countries have a higher capital gains tax than the US:
Denmark
South Korea
Sweden
Australia
UK

These countries have lower capital gains taxes:
Indonesia
Mexico
Malaysa
Thailand

Now which of these two lists seem to be more prosperous? Obviously the ones that have higher capital tax rates. I really don't know that this proves anything, probably not. But I really dont think that we should worry to much about trying to aquire capital investment from countries like Malaysa - they don't seem to have a lot of capital to invest.

 

[washunut]

Here's the one thing - the "desired after tax return" is all the money in the world! Litterally. Seriously, if you asked me what I desired, I would tell you "everything". If the government asked me what tax rate I would prefer to pay, I would say the zero tax rate.

What would happen if you asked the poor lazy person how much money that he would like to get from the government? He would say: "I'll take all your money please". What would happen if I applied for a job and the HR Manager said "you are hired, now how much money would you like to make?" i would say that I would like to make all the companies money.

Fortunantly for other people, we don't have those choices. We eather have to earn what we make, or get really lucky. We shouldn't get just because we want. We should get because we earned, and earned unsubsidised.

It's not a matter of our government manipulating our tax code to benefit one particular group of people (investors), it' s a matter of investors making the wisest investment choices that they can, and then them yielding profits based upon the merits of their investments - however much that happens to be. The government should not be setting up one group for guaranteed success, while on the other hand transfering the cost (in this case the cost is the taxes that investors did not have to pay) to another group (people who work jobs for a living). That is re-distribution of wealth from the middle class to the investor class!

Take a look at what would happen if we totally eleminated taxes on the investor class. We would be forced to raise income taxes on the consumer class. The consumer class would then be forced to reduce their consumption, companies would loose sales, profitability of corporations would drop, investment yield rates would fall, and then investors wouldn't have any motivation to invest. Consumers may also be forced to reduce what they invest 9because they are now paying additional taxes on the money that they earn from working), thus corporations would loose access to capital. It's a loose-loose situation.

Now take a look at wht would happen if we increased the tax rate on capital gains and in a tax revenue neutral type of way decreased income taxes. Then our consumer class would have more money to save, more money to invest, and more money to consume. Each individual in the consumer class would make the best decision for their particular situation as to do with that extra money. Some of them would invest more, some would consume more, and most of them would to a little of both. So at this point, corporations have the opportunity to earn larger profits since they are selling more goods, and corporations have more opportunity to aquire capital since more individuals are investing. it's a win-win situation.

Taking this train of thought one step further, investors are able to invest because they have extra money. If taxes on the profits of investments were reduced, where would investors come up with more money to invest? The only reason they would have more money to invest is because they would have had some tax savings. Thus, at that point, the government is subsidising investors.

Now lets say that government increased taxes on investments. What would investors then do with their extra money? Would they just burn it? Of course not. As long as there is a reasonable likelyhood of making a profit on a given investment, investors will go for the profit. Now if their ownly choice is to make a profit at and have to pay X% in taxes, they will invest no more or no less if X% increases or decreases - they still want to make a profit! It's really not like if capital gains taxes were reduced that investors would just go "poof" and magically appear some more money to invest.

Taxing different forms of income at different tax rates is subsidising and penalizing different income generation methods. Should the government really be subsidising anything? Or is it simply better to let the market work things out. Personally, I would vote to let the market work things out. I trust capitalism over the wisdom of government deciding what to subsidise.

Lets end the policy of penilizing work by ending the policy of subsidising the incomes of investors - and charge the same income tax rate for all income sources.

Perhaps I used a poor term saying the " desired" rate of return. Better said, increasingly people look at where they can get the best returns on their investment, taxes being only one element in the decision making. As you know the way people value an investment is to look at a future stream of expected cash flows, put probability factors see what the investment costs versus some long term value.

So we can lower these returns and allow people to earn less and let others ( wageearners) earn more. Sounds great. I am all for it. The issue is how do you balance the competing interests of a " fair" tax system and a system which allows our economy to grow faster than most of the developed world. Without growth, there are fewer jobs, less than revenue etc.

Just saying that a lot of this stuff has impacts in a lot of ways. By no means am I saying that the current system is perfect, but people need to be careful with the tinkering. " Fixing" some inequity may cause another problem to rise.

Here is another one for you. How about eliminating the deduction for mortgage interest on second homes. That is something that certainly would impact our wealthier folks. On the other side would it make our housing problems worse.

 

[oldreliable67]

Lets end the policy of penilizing work by ending the policy of subsidising the incomes of investors - and charge the same income tax rate for all income sources.

Well, then, lets quit penalizing work and reduce or eliminate unemployment insurance of the extended kind. Most analysis, including one by Larry Summers (can't put my hands on it just now, but will find a link and post it if anyone wants), indicate that extended unemployment insurance benefits are a strong disincentive to seeking employment.

Ok, so that was being a bit facetious. There are other perfectly valid arguments for extended unemployment benefits, even if an unintended consequence at the margin is some disincentive to work. But my point is" policymakers have (all too often/not enough - take your pick) employed various modifications of the tax code in order to further some desired aspect of tax payer behavior. But times and economic circumstances change and so do the priorities of policymakers.

For example, in the years leading up to the most recent recession, several prominent congress persons (Barney Frank, Chris Dodd, et al) strongly defended Fannie Mae and Freddie Mac, lauding them for the great job they were doing in promoting home ownership. Moreover, mortgage lenders were encouraged to, and then praised for their 'flexible' lending policies. Now, of course, blame cannot be heaped on these two GSE's, the mortgage industry and Wall St fast enough.

And finally:

> Unemployment benefits are taxed as income. In order to more equalize income taxation, would you propose to eliminate doing so?

> Total deductions for mortgage interest are capped. At high levels ($1mm, $500k if filing separately), but they are capped. Would you propose simply doing away with the deduction altogether or simply reducing the cap substantially?

> Property taxes are also deductible. Would you propose to do away with that deduction?

 

[imagep]

How about eliminating the deduction for mortgage interest on second homes. That is something that certainly would impact our wealthier folks. On the other side would it make our housing problems worse.

I'm all for that.

We should elemenate the mortgage interest for first homes also, and the business deduction for health insurance, and tax deductions for having additional kids. Why should I have to subsidize someone elses mortgage or insurance or family size? I think that we should eliminate all deductions and subsidies. Farm subsidies, fuel subsidies, corporate wellfare, unempoyment, social security, medicare, medicade, the VA, the FHA, SCHIP, pensions, all that stuff needs to "get gone". The government shouldn't be picking and choosing favorites.

 

[Ahlevah]

(T)he VA... needs to "get gone". The government shouldn't be picking and choosing favorites.

I gripe about the VA, but I don't place "subsidies" to veterans who've served this country in the same category as aid to slugs who've never risked a fingernail let alone sworn an oath to forfeit their lives if necessary to defend it. I think we all have an obligation to ensure that these men and women are honored by the nation in a humane and dignified manner. What, for example, would you do with the 131 VA-administered national cemeteries?

 

[imagep]

I gripe about the VA, but I don't place "subsidies" to veterans who've served this country in the same category as aid to slugs who've never risked a fingernail let alone sworn an oath to forfeit their lives if necessary to defend this country. I think we all have an obligation to ensure that these men and women are honored by the nation in a humane and dignified manner. What, for example, would you do with the 131 VA-administered national cemeteries?

My father was injured during the Korean War. He was in a jeep accident, stateside, suffered minor injuries, never served in combat, he was a supply seargent. Exactly what about his experiance in the military qualifies him for free lifelong medical care? He was also a hypochondriac. After he left the military, he decided that he would have the joint removed from his big toe. This was done by the VA at taxpayers expense. Shortly after that, he decided that was not such a good idea, so he got the VA to insert an artificial joint into his toe. Dad had a genetic condition which caused his chest to be somewhat sunken in. The he recieved treatment for that at the VA - they cut apart all his ribs and reshaped them. Later in life he bacame addicted to pain killers - which the VA supplied. He also recieved eye surgery from the VA. A few years ago he killed himself, long story, but the body could not be found for several days, when his body was recovered, we were told that no personal ID would be nessasary as they were able to ID him from all the plastic and pins and other odd medical stuff in his body.

Now I am in no way suggesting that people who are hurt in the military shouldn't recieve medical care for their injuries recieved while in the military, but most certainly the VA should not be responsible for lifelong medical care.

By the way, I spent 11 years in the military.

 

[masonkiller]

We are at an economic crossroads.

The Federal Reserve has pumped over one trillion dollars into the economy. Producer prices have been falling as of late.

Economists have been debating whether the threat to the economy is deflation or inflation.

Between inflation and deflation, what do you think is the greatest threat to our economy?

Deflation is simply the market reallocating resources and capital to where they are supposed to be. It's a good thing. Prices drop. Buying power goes up. But both are unnecessary and only happen in much smaller scales when you don't have a fed or fiat currency.

 

[imagep]

Deflation is simply the market reallocating resources and capital to where they are supposed to be. It's a good thing. Prices drop. Buying power goes up. But both are unnecessary and only happen in much smaller scales when you don't have a fed or fiat currency.

Deflation is a huge threat to our economy. The only cure to our currrent economic problem is more spending from some source. People tend to spend more (and faster) during inflationary times and less during deflationary times. Personally I need a new washing machine, if prices were tending to fall, I would wait and wait and wait to purchase the washing machine as each day that passes it would be a little cheaper, on the otherhand, if we were currently having a lot of inflation I would be rushing out to replace that machine as quickly as possible before the price goes up. Deflation is a disincentive to purchase.

Deflation is also a disincentive to invest. Why should I risk my money on investments when I can just keep it burried in the back yard and it will increase in buying power?

Now imagine our economy, as bad as it is now, if all non-essential personal spending stopped, and if everyone started pulling their money out of the stock market, if they all put up their real estate for sell (because it is dropping in value), and if businesses all quit purchasing new equipment. It would be a temporary end to nearly ALL employment in the US.

Reverse that senerio (to inflation) and our economy would improve.

 

[masonkiller]

No businesses would employ their workers investing in capital for future growth, i.e. when people start to purchase things again. Inflation is much worse because it creates an artificial boom. I makes businesses think people are spending now, which causes them to make incorrect business decisions that come back to haunt us during the bust.

 

[imagep]

No businesses would employ their workers investing in capital for future growth, i.e. when people start to purchase things again. Inflation is much worse because it creates an artificial boom. I makes businesses think people are spending now, which causes them to make incorrect business decisions that come back to haunt us during the bust.

Why? Whats the step by step mechanism that would create investment?

All I know is that I own a business, if prices started dropping (deflation), and if I had to lower my prices to compete, I would have a heck of a hard time paying my business (and personal) debts. I wouldn't have any money to invest in capital, and even if I did, I wouldn't have any motivation to purchase equipment now when the cost of equipment later would be later. I would also cut back on my inventory - wouldn't want any extra inventory on my floor if I can replace it later at a lower cost.

Inflation is manageable, we have never had an economic crises due to inflation. But deinflation would be an economic catastrophy (ie the Great Depression).

 

[masonkiller]

Thats the other thing. If we totally stopped the federal reserve and had a deflationary period, business would struggle for a while but thats the consequence of getting off the boom and bust cycle. It's either that or inflate into a boom, then extend the bust from happening for a few years, so when it does happen you get the Great Depression and you get what we have now. Major deflation and inflation only happens (or can only happen) because of the federal reserve and fiat currency. Get off of that and the market will avoid the boom and bust cycle by properly allocating resources and time and capital as it should be.

Do you think it's a coincidence that we had two depressions just after 1913? (Depression of 1920, depression of 1929)

Inflation is manageable, we have never had an economic crises due to inflation. But deinflation would be an economic catastrophy (ie the Great Depression).

The great depression was caused by inflation. The federal reserve inflated the money supply to keep interest rates low. It meant great temporary success but then a gigantic dip. Same thing now. The only reason were not starving on the street right now is because each individual, combined with high-tech capital, is able to produce multitudes more than he was able to in 1929.

 

[imagep]

Thats the other thing. If we totally stopped the federal reserve and had a deflationary period, business would struggle for a while but thats the consequence of getting off the boom and bust cycle. It's either that or inflate into a boom, then extend the bust from happening for a few years, so when it does happen you get the Great Depression and you get what we have now. Major deflation and inflation only happens (or can only happen) because of the federal reserve and fiat currency. Get off of that and the market will avoid the boom and bust cycle by properly allocating resources and time and capital as it should be.

Do you think it's a coincidence that we had two depressions just after 1913? (Depression of 1920, depression of 1929)



The great depression was caused by inflation. The federal reserve inflated the money supply to keep interest rates low. It meant great temporary success but then a gigantic dip. Same thing now. The only reason were not starving on the street right now is because each individual, combined with high-tech capital, is able to produce multitudes more than he was able to in 1929.

We had booms and busts long before the Fed was ever invented. We also had much faster growth after the fed came to be. Fiat currency has little to do with anything. The alternative to fiat currency is affixing the value of our currency to some random commodity. Individual commidity values fluctuate much more than the US $, to affixing the value of currency to a commodity would only make our dollar valuation artificially fluxuate. Also, our economy is much larger now than back in the days of the gold standard. There is not enough gold (or silver) in existance in the entire world to represent the quantity of currency that we need to make our economic system work.

The value of the dollar is actually based on something - the amount of product or service that people are willing to exchange for it. This is not an artificial valuation, but a true valuation.

 

[masonkiller]

There is not enough gold (or silver) in existance in the entire world to represent the quantity of currency that we need to make our economic system work.

Gold is divisible, and with gold and silver as mediums of exchange you have VERY stable currency to say otherwise is not just empirically incorrect but logically incorrect as well. They fluctuate now because they are not a medium of exchange, only an investment, for some an investment in anticipation of gold becoming a medium of exchange.

Also, don't get me wrong the economy can still grow with fiat money, but much, much more slowly than with gold currency as a result of boom and bust cycles. The value of gold as a medium of exchange is based on its scarcity and as a result (like you said for the dollar) the amount of product or service people will exchange for it. The major difference is, it's stable and unreproducable. It can't inflate, only very slowly deflate as more gold is mined.

 

[imagep]

Gold is divisible, and with gold and silver as mediums of exchange you have VERY stable currency to say otherwise is not just empirically incorrect but logically incorrect as well. They fluctuate now because they are not a medium of exchange, only an investment, for some an investment in anticipation of gold becoming a medium of exchange.

Also, don't get me wrong the economy can still grow with fiat money, but much, much more slowly than with gold currency as a result of boom and bust cycles. The value of gold as a medium of exchange is based on its scarcity and as a result (like you said for the dollar) the amount of product or service people will exchange for it. The major difference is, it's stable and unreproducable. It can't inflate, only very slowly deflate as more gold is mined.

Just a few years ago gold was trading at about $350/oz and a 12 oz bag of Cheetos retailed for $1.49. Now gold is trading at around $1,200/oz and a 12 oz bag of Cheetos retails for $1.59.

Now which has been more stable, the ratio of Cheetos to the US dollar, or the ratio of Gold to the US dollar? I think we need to affix the value of the US dollar to 12 oz bags of Cheetos (they are kind of deep gold in color anyhow). Cheetos seem to be very stable in value. As ludicris as it may sound, that would be much more rational to go onto the Cheeto standard than going back on the gold standard.

 

[masonkiller]

Just a few years ago gold was trading at about $350/oz and a 12 oz bag of Cheetos retailed for $1.49. Now gold is trading at around $1,200/oz and a 12 oz bag of Cheetos retails for $1.59.

Now which has been more stable, the ratio of Cheetos to the US dollar, or the ratio of Gold to the US dollar? I think we need to affix the value of the US dollar to 12 oz bags of Cheetos (they are kind of deep gold in color anyhow). Cheetos seem to be very stable in value. As ludicris as it may sound, that would be much more rational to go onto the Cheeto standard than going back on the gold standard.

Ok explain to me why essentially every economy that was moving away from barter used gold and silver as a medium of exchange.

 

[imagep]

Ok explain to me why essentially every economy that was moving away from barter used gold and silver as a medium of exchange.

Obviously because Cheatos weren't invented yet!