Deflation Is Nothing to Fear
We have had some discussions about deflation in a recent comment thread. I am too busy right now to finish the Robert Murphy/Mises series (I think I have 5 posts to go), but in the meantime, I thought it might be fun to let you hear the subject of deflation discussed by a couple of people who are much smarter than I am. The video is about 11 minutes and worth your time if you’re interested in the topic.
Woods discusses the topic in even more depth here, although I prefer Herbener to the guest on this podcast: Phillip Bagus. (No offense is intended to Bagus, but in my view Jeff Herbener is The Man when it comes to economic issues.)
UPDATE: Even more here!
Ding.
Patterico (fecd9b) — 9/21/2015 @ 9:07 pmDeflation screws most people. Producers find that their product sells for less than the last batch did, but the precursors were bought at last month’s prices. Somehow they have to build that into their sales in the face of ever lower product prices.
Their natural inclination is to produce less. Which costs jobs. Which reduces the liquid money supply, which causes deflation.
You can have a deflationary spiral, too.
But the real issue is that idea of “money” has nothing to do with any fixed commodity, or even paper money itself. A stable money is one where the ready supply of money matches the ready supply of goods. The job of a central bank is to attempt to keep this balance, although they always err on the inflationary side because that is somewhat easier to control and has happier ephemera.
The problem comes up when the politicians and/or the bankers decide to ramp this money supply up faster than the economy can support to temporarily create “properity.” Then they see the piper coming and panic, much as they are doing now.
Kevin M (25bbee) — 9/21/2015 @ 9:22 pmCan anyone point to a deflationary period in a modern economy with widespread prosperity?
Kevin M (25bbee) — 9/21/2015 @ 9:27 pmMilton Friedman pointed out deflation is very easy to cure. Just print more money.
Karl Lembke (cd9062) — 9/21/2015 @ 9:30 pmKevin M,
I believe all your questions and objections are addressed at the links.
Patterico (fecd9b) — 9/21/2015 @ 9:34 pm“Deflation Is Nothing to Fear”???
Nothing is anything to fear.
Ain’t nobody getting out of here alive, except the One, and he died too. Pain and Death are our natural state and our heritage.
Fred Z (5db617) — 9/21/2015 @ 9:35 pmIf you don’t have time to peruse the links:
If the deflation continues regularly and is expected, the prices of the inputs lower as people anticipate this. Jeff Herbener says it better than I do, so if you want to take issue with me, try listening to his argument first.
Patterico (fecd9b) — 9/21/2015 @ 9:36 pmThis is addressed in the links as well, better than I can. My addition is to wonder why we would think this is the one area where central control would be better than the distributed intelligence of the marketplace. Me, I don’t think that.
Patterico (fecd9b) — 9/21/2015 @ 9:37 pmThat may be, but I have neither the time nor inclination to read 50,000 words of economic theory that I believe has a foundation of sand since it tells me things that I do not see happen in the real world.
Kevin M (25bbee) — 9/21/2015 @ 9:38 pmDepends on what you mean by “modern” but Woods cites a study in his talk in the last link.
If you get too “modern” then you get to a point where we have abandoned hard money, and then deflation occurs for different reasons than natural growth. And why it happens matters.
Anyway, I know people’s time is short, but if you can’t read or listen to the stuff now, bookmark it if you have any interest. When people come on here and make arguments that are directly addressed and (I believe) refuted in my links, it gives me some hope that they might be interested in the content of those links at some point when they have time.
Patterico (fecd9b) — 9/21/2015 @ 9:40 pmExcellent. Then stick with your preconceptions and please don’t bother with anything that challenges them. Allow me to point out, for the benefit of others who might have some willingness to explore views other than the conventional ones Big Media spoonfeeds us all, however, that the conventional wisdom you are spouting here is fairly well shot down in the links that I have provided that you aren’t bothering with.
Hopefully this post will not be a waste of time for everyone, even if it obviously was for you.
Patterico (fecd9b) — 9/21/2015 @ 9:43 pmThere was a “real world” before you were born, Kevin M, in which monetary growth and deflation went hand in hand. The information is available to anyone with an open mind who hasn’t decided that what he sees in today’s “real world” represents the limits of all possible human knowledge.
Patterico (fecd9b) — 9/21/2015 @ 9:44 pmFinal point: all three of the links are audio files. So it’s not like you clicked and saw that there was a 50,000 word wall of text. You just ignored the links I posted and came and spouted off.
Forget it, it’s the Internet.
Patterico (fecd9b) — 9/21/2015 @ 9:46 pmPatterico, “central control” can work for a single aggregated statistic like “on-sale wealth” that changes at a slowly-changing rate that is easily observed and responds gradually to stimuli.
As opposed to central control of the “need” for bacon or tulips or televisions.
Sure, if someone finds a $50 trillion in easily mined diamonds all of a sudden, there can be problems, but mostly for people who own diamonds as the reset of the economy has inertia.
Most of the time there is a problem with central control, it is when the controllers go crazy and destabilize rather than stabilize. The fact that they can do this is a much better argument against a central bank than them no knowing what is going on. Large statistics never have big surprises, and weather ought to be the biggest unknown.
A few times there have been big disruptions badly managed. The post-Civil War economic boom and the 20 year depression that followed (with a steady annual deflation) had more to do with the twin disruptions of the railroads and the end of slavery. The economic boom and bust of the 1920-1940s had a lot to do with the twin disruptions of the telephone and automobile making many impossible things possible, making whole professions redundant, altering the costs of raw materials and utterly changing economic patterns unpredictably. These were also deflationary times, cured by a world war. The Internet and the boom and bust that accompanied it seem reminiscent.
It may be that this idea of central contol of a single token commodity (money) isn’t going to work in the future due to constant rapid change, but making it LESS flexible doesn’t seem the answer. We may have to move to money 3.0, whatever that is, instead.
Kevin M (25bbee) — 9/21/2015 @ 9:55 pmPatrick, my point is that somewhere in that pile of words, you divide by zero to get your answer and I don’t have the time, patience and probably wit to kind it for you. So my answer is kinda going to be like the guy who won’t read the Bible yet still thinks himself capable of discussion social issues.
Kevin M (25bbee) — 9/21/2015 @ 9:59 pmPatterico, that 50,000 word remark had to do with your recent 10-part text onslaught, which I believed that you were referring to. I have read a lot similar stuff over the years (e.g. Rothbard) and at one time found it interesting. Don’t any more.
Kevin M (25bbee) — 9/21/2015 @ 10:04 pmIt is Patterico’s party. He invites all kinds of people. Even if I don’t share his interests, I always encourage him to post the things he is interested in…and I can usually find a few new ideas to toss into my mental hopper.
Besides, it’s nice of him to create a forum for people…some of whom (like me) he has never met. And in the final analysis, Patterico stood up for me when he didn’t have to. I owe him for that.
Simon Jester (d43440) — 9/21/2015 @ 10:14 pmHere’s an interesting chart showing long-term changes in the value of a dollar, along with a calculator. When the gold standard disappears, so does the heretofore ubiquitous deflation. It also matches the most significant long-term economic boom in world history.
Here is the US GDP under the gold standard, from 1870-1935 onwards
http://www.usgovernmentspending.com/spending_chart_1870_1940USb_16s2li011mcn__US_Gross_Domestic_Product_GDP_History
Here is the US GDP since the end of the gold standard, 1935 to 2010
http://www.usgovernmentspending.com/spending_chart_1935_2010USb_16s2li011mcn__US_Gross_Domestic_Product_GDP_History
Kevin M (25bbee) — 9/21/2015 @ 10:15 pmI…didn’t understand most of that, but if you were trying to say that you are going to opine without bothering to read the links I put together, and are therefore like other people who run their mouth about how others are wrong without bothering to learn their position, then I can’t really argue with you and I give you points for self-awareness at least.
Patterico (bd44cc) — 9/21/2015 @ 10:16 pmSorry about those charts, they aren’t adjusted for inflation.
Better (2009 dollars, per capita)
1870-1935:
http://www.usgovernmentspending.com/spending_chart_1870_1935USd_16s2li011mcn__US_Gross_Domestic_Product_GDP_History
1935-2010:
http://www.usgovernmentspending.com/spending_chart_1935_2010USd_16s2li011mcn__US_Gross_Domestic_Product_GDP_History
Kevin M (25bbee) — 9/21/2015 @ 10:19 pmYou probably didn’t bother to read the links in my posts on the uselessness of the GDP number either, Kevin M, so I guess it’s going to be useless to try to explain why a system that allows unrestrained government borrowing and spending can jack up the GDP without reflecting actual economic growth in the private sector. What did you think of the study described by Woods in link #3 that reflects a positive correlation between deflation and economic growth? (Correlation does not equal causation, but when people tell me the two cannot exist at the same time, correlation can at least serve to refute that narrow argument.) Wait, I forgot, you’re not bothering to learn about that study because something something divide by zero 50,000 words.
You are at least serving as the perfect example of a know-it-all who doesn’t even bother to learn his opponent’s argument before mocking it. It may serve some purpose in that people may investigate the links just so they don’t come across the way you are coming across right now.
Patterico (bd44cc) — 9/21/2015 @ 10:23 pmI don’t need to look at your 50,000 word charts to know you’re wrong. /Kevin M
Patterico (bd44cc) — 9/21/2015 @ 10:24 pmBetween 1870 and 1935 there was less that one percent inflation TOTAL. $100 in 1870 was worth 100.78 in 1935.
Between 1935 and 2010, inflation averaged 3.78% annually, for a total inflation of 1600%
Kevin M (25bbee) — 9/21/2015 @ 10:27 pmWhatever.
Kevin M (25bbee) — 9/21/2015 @ 10:30 pmPat, how much of the economic theory that opposes your favorite texts have you read? I guarantee that what you quote from and link is not the body of all economic knowledge, yet you cite it as presumptively true.
Kevin M (25bbee) — 9/21/2015 @ 10:32 pm7. If the deflation continues regularly and is expected, …
So is unexpected deflation something to fear?
James B. Shearer (29df46) — 9/21/2015 @ 10:39 pmWoods cites the periods of 1820-1850 (omitted in your charts) and 1865-1900 as periods of economic growth paired with lowering general price levels. He also cites this study which looked at the experience of 17 countries and found deflation to be more linked with growth than depression.
This is all in the third link above but for the benefit of those not bothering to click, there you have it.
I don’t cite all this as presumptively true. I am looking for an exchange of ideas with people who have the decency to consider the evidence I am spending so much time to set forth, rather than people who arrogantly dismiss it with an airy wave of the hand in the manner generally displayed by leftist trolls.
Is there anyone who fits the description of the former type of commenter I am looking to discuss this with, who would care to join the discussion? Because I am quickly tiring of the commenter who fits the latter description.
Patterico (fecd9b) — 9/21/2015 @ 10:40 pmIs unexpected deflation something to fear? I think it depends on what is causing it. If it’s an explosion of economic growth not accompanied by an explosion in the money supply, I don’t think it is, though the idea that this would catch absolutely everyone totally unawares seems a little far-fetched. Sudden deflation caused by government monkeying with the economy would certainly be disconcerting, by contrast.
Patterico (fecd9b) — 9/21/2015 @ 10:43 pmI’m well into Friedman’s Capitalism and Freedom, which opposes the Austrians in several respects. I’m taking an online course that contrasts the standard Samuelson and Nordhaus text with Austrian theories. I have read chunks of George Reisman’s “Capitalism” which rejects Austrian principles in favor of classics economics in several areas, some of which I find persuasive. And within the Austrian school there are plenty of disagreements, including on fractional reserve banking, the dangers of monopoly, etc. I listen regularly to Russ Roberts’s podcast, which features guests that run the gamut from Piketty to Friedman (when he was alive) to Keynesians and everyone in between. And of course I read Krugman semi-regularly, as well as the Bryan Caplan critique of Austrianism and several rebuttals.
So, you know, pretty much I just question nothing and never think for myself, in contrast to the incredible intellectual curiosity you have displayed in this thread.
Patterico (bd44cc) — 9/21/2015 @ 10:50 pmAlso, I have probably read more online critiques of Austrian economics in the past year than you have read stories about Hillary Clinton, although they are from random sources (ranging from Brad DeLong to the Keynesians living in their mom’s basements). I could not possibly cite them all, but I like reading them to see if they have a point. Usually they don’t really understand what they are critiquing and attribute straw man positions to the Austrians that they probably picked up from Salon.
Patterico (bd44cc) — 9/21/2015 @ 10:55 pmBy the way, much of the learning I have done has occurred as a result of people who are listening to what I am saying and are challenging it. When they show they understand my point and they have a response I have not already addressed, that’s when I find I learn the most. Folks like Gabriel Hanna and even James Shearer challenge my views and I appreciate that. When commenters (more rarely) just talk past me and make arguments I have already addressed, I find myself getting annoyed as I do with you right now.
Patterico (bd44cc) — 9/21/2015 @ 10:59 pmWoods mentions around the 6:10 mark that periods of economic depression were more often seen during periods of inflation than during periods of deflation. It got a bit mind boggling as the words “depression” and “deflation” tended to get equated when I first listened to it, but after the fourth try I figured it out. And this was based on a study of 17 countries over periods that did not include the Great Depression.
Kevin may not have experienced any form of deflation in his life time. I certainly haven’t. So I would tend to trust these studies rather than my “instincts”. This is reinforced by the muddle my brain made of the word “deflation” and “depression”, I really need to work at discriminating between the two when listening.
bobathome (a52abe) — 9/21/2015 @ 11:09 pmbobathome,
Thank you for listening to the link. Makes me feel like I’m not completely wasting my time.
Patterico (fecd9b) — 9/21/2015 @ 11:23 pmPat, I went through this many years ago and held many of your views at different times. Mostly from Rothbard, who was the goldbug of that time. I of course got Samuelson in college and have spent not enough time with Friedman. I also have read general histories and such. I also lived through the 60’s and was paying my own way during the Carter inflation, when “money” was something you spent as quickly as possible. Thank God for Ronald Reagan and Paul Volker.
In the end, I have concluded that Keynes had quite a bit correct, and I have also decided that probably the only administrations to do what Keynes suggested were Eisenhower and maybe Kennedy. Maybe Reagan. Keynes did not suggest chronic deficit spending, for example. He thought one should run a deficit during a recession and recoup it in good times. The current regime is out of their minds.
I am also not convinced that central banking is the way to go — I call it Money 2.0, but I do think it an improvement over a fixed standard as a modern economy needs something more responsive. I am coming to the idea that a central back is not responsive enough to fundamental disruptions and the next goal is something very distributed, and preferably out of human control, but I haven’t a clue what. But it isn’t going back to Money 1.0.
Kevin M (25bbee) — 9/21/2015 @ 11:25 pmI will listen to your links tomorrow.
Kevin M (25bbee) — 9/21/2015 @ 11:28 pmThe third link incorporates the first video, so after a few minutes you’re done if you already watched the video. I have not read the entire study he mentions and don’t know if the whole thing is freely available online (damned academic paper racket) but their conclusion would be startling to people who blithely assume depression and deflation go hand in hand.
I have to say that while I love a lot about Friedman, his account of the Great Depression leaves me shaking my head, as he talks about how awful it is that “otherwise sound banks” went under — just because they couldn’t pay their depositors. Keep in mind, these depositors were people who were promised they could have their deposits any time, and they decided that they wanted to hold money in uncertain times and didn’t trust the banks to keep it for them. (Imagine!) As an opponent of fractional reserve banking, calling banks “otherwise sound” except that they could not pay their depositors is like calling the Clintons “otherwise honest” once you place to one side the dozens of lies they have been caught in over the years.
Patterico (fecd9b) — 9/21/2015 @ 11:43 pmBut that’s another topic so forget I brought it up.
Thank you for saying you will listen to the links, Kevin M. Whether you agree or not, you will at least see that several questions you came at me with out of the gate are directly addressed — some in a manner that might surprise you (I’m thinking of the deflation study mentioned in the third link in particular).
Patterico (fecd9b) — 9/21/2015 @ 11:47 pmThe best way to get total benefit of deflation is to tax the cause of it. Instead, we devalue our currency to purposely kill the benefit. The benefit still goes somewhere. Ours goes to foreigners. China, in particular.
The biggest lie is how they compare the situation from the Smoot-Hawley era to today’s situation. We could have been using the taxation of imports to pay our tax burden without devaluing our dollars.
jcurtis (f30359) — 9/22/2015 @ 2:31 amAlthough the article loses tight control toward conclusion, a useful primer on the past century over Federal Reserve and US currency regimes.
http://www.zerohedge.com/news/2015-09-21/established-order-will-be-challenged
Deflation is a necessary and restorative conclusion to the business cycle. That said, we have avoided the normal reallocation of resources marking deflationary righting of the economic ship for so long, blowing our sails full out in complete disregard for orthodox business activity that our economy is now hollowed out with little but ag and energy to sell the world once the tsunami passes.
Trillions in notional assets will disappear overnight and the ship will be tossed and shattered shortly.
DNF (36ae6c) — 9/22/2015 @ 3:31 am28.Is unexpected deflation something to fear? I think it depends on what is causing it. …
The usual bogeyman is an unexpected demand for money that feeds on itself until it causes severe problems.
Consider an analogy. Suppose a rumor went around that the US was about to run out of toilet paper. If enough people initially believe it, it can set off a self-fulfilling cycle as people who were originally skeptical (or unaware) of the rumor see the stores are getting low and decide to stock up just in case.
Why can’t you have a similar cycle in which some people become nervous about the economy and decide to delay purchases and hold money just in case? The shortfall in demand will cause production cuts and job losses spreading fear and further increasing the demand for money in an self re-enforcing destructive cycle.
James B. Shearer (29df46) — 9/22/2015 @ 5:35 am36 I have to say that while I love a lot about Friedman, his account of the Great Depression leaves me shaking my head, as he talks about how awful it is that “otherwise sound banks” went under — just because they couldn’t pay their depositors. Keep in mind, these depositors were people who were promised they could have their deposits any time, and they decided that they wanted to hold money in uncertain times and didn’t trust the banks to keep it for them. (Imagine!) As an opponent of fractional reserve banking, calling banks “otherwise sound” except that they could not pay their depositors is like calling the Clintons “otherwise honest” once you place to one side the dozens of lies they have been caught in over the years.
So if a bank goes under because of a rumor that it has made a bunch of bad loans you don’t think it matters whether or not the rumor was true?
You may think fractional reserve banking is inherently dishonest but society (wisely or unwisely) has decided otherwise.
James B. Shearer (29df46) — 9/22/2015 @ 5:44 am40. “Shortfall in demand”
Currently inventories are running 1.35 x sales while real incomes have slipped to 1989 levels. Profits have been flat for 7 consecutive quarters obscured by corporate levered buybacks.
That train has left the station. The collapse of oil prices far below the cost of production is initiating a collapse in credit as everyone, everywhere loses their bets made with free money.
The illustration, investors holding back owing to uncertainty does not pertain as collateral is wildly insufficient to cover losses. Companies and EM countries are busted and there is nothing to stanch the bleeding.
DNF (36ae6c) — 9/22/2015 @ 6:13 amThere was to be a downturn in 1929, that was cyclical, like 1873 and 1893, it took govt policy to turn into an apocalypse as we have seem in the current crisis.
narciso (ee1f88) — 9/22/2015 @ 6:26 amWell, society seems to have decided a lot of things, including the wisdom of running up trillions upon trillions in debt. To me, the fact of the status quo is not an argument. There’s a very good argument to be made that this particular aspect of the status quo gave us both the Great Depression (by making bank runs inevitable) and the Great Recession (because we responded to the possibility of bank runs, not by during the disease, but by creating a “too big to fail” mentality).
Patterico (fecd9b) — 9/22/2015 @ 6:50 amOf course closing the gold window, in 1971 was a great idea.
narciso (ee1f88) — 9/22/2015 @ 7:00 amIt’s pretty much impossible for me to picture such a situation without government overreacting and doing all sorts of crazy things to monkey with the economy and try to stimulate demand. Genius things like ordering the destruction of crops and livestock such as our Fearless Leader FDR did. If such a situation occurred because of mere psychological panic and not government manipulation of the economy, and if government avoided panicking and doing exactly the wrong things in response, I believe the general flow of supply and demand would mean the market would self-correct. But as long as government has control over the money supply (or we get another strong believer in laissez faire in the Oval Office) we will never know whether I am right. The best evidence I have is not conclusive; no analysis based on economic history ever can be. But we responded to the depression of 1920’by doing nothing and got out of that one quickly while our overreaction to that of the early 30s was followed by two severe downturns. As Milton Friedman said in Capitalism and Freedom, we had a much smoother economy without a central bank than we have had with one.
Patterico (fecd9b) — 9/22/2015 @ 7:07 amThis is true for more statist frameworks like Wagner and Moller’s that had been running things from Bismarck to credit anstalt. Its arguable the dawes act was a patch, but couldn’t mediate havenstein’s failures.
narciso (ee1f88) — 9/22/2015 @ 7:20 amWhile we’re playing the “why couldn’t there be a giant psychological panic?” game, it’s more likely in today’s environment that there is a sudden decision that the dollar will be worth nothing and hyperinflation ensues. In other words, sudden widespread panics are not limited to deflationary scenarios.
In an environment where everybody except Matthew Yglesias understands that you can’t run up a debt forever, yet we clearly are proceeding as if we can, it’s just a matter of time until a critical mass says “no more.” That’s now bubbles end: with a pop and a sudden reaction. Everyone knows the current situation is unsustainable, but everyone knows they’re better off riding the bubble . . . until they aren’t. So everyone acts as though everything is normal, but eyes all other participants warily. Once that critical mass of “no more” is reached, it all ends very suddenly — because everyone knew it was coming, at some point. It happened with the stock market bubble and the housing bubble, and it will happen with the government debt bubble. The question is not whether this will happen. The ONLY question is when.
The point of the post is not that we should never fear deflation. It is that deflation is not necessarily something to fear, simply because it’s deflation. It matters why it is happening. If it’s due to steady economic growth, that’s a good thing.
Patterico (fecd9b) — 9/22/2015 @ 7:26 amYup, if running up unsustainable debt is your thing, that enabled it more than anything.
Patterico (fecd9b) — 9/22/2015 @ 7:26 amyes I was using shorthand, Greenspan and Bernanke showed how clearly the Fed shouldnt be trusted with monetary policy,
narciso (ee1f88) — 9/22/2015 @ 7:38 amI mentioned above that I’d never personally experienced “deflation”. I thought I’d better check this, so I found this website with data on a number of economic statistics including M2. As you can see from this graph, M2 has been increasing at varying rates since the 1960s, with the only steady period occurring during the early part of Clinton’s presidency. So my recollection is correct.
This brings to mind a concern I’ve expressed before about the Federal Reserve’s current policy of both greatly expanding their portfolio of Federal debt and extending the maturities. In the past, the Fed kept their total holdings in the range of a few hundred billion dollars, and they bought bonds (notes) that would mature within a year or two. This allowed them to pump money into the economy, but they could recover those dollars either by selling their portfolio of bonds on the open market, or simply waiting for them to mature, remembering that the Fed just “evaporates” those dollars as them come in. This is the reverse of creating the dollars when they “buy” them. But with longer term bonds they now have only one mechanism of reclaiming those dollars should inflation hit, and this is to sell them on the open market. Needless to say, if inflation hits, 10 year bonds yielding 2% will have a very low market value, meaning that the Fed will only be able to reclaim a fraction of the dollars they created.
bobathome (a52abe) — 9/22/2015 @ 7:43 amyes, they are creating another bubble, this is their pattern ,tech in the 90s, subprime in the 00s, everything the next time around,
narciso (ee1f88) — 9/22/2015 @ 8:10 amPatterico, at 28 – unexpected deflation is definitely something to fear if a large percentage of your population has debt denominated in nominal dollars. If someone’s debt’s *real value* is increasing over time, then either their income’s real value needs to do so as well, or they get screwed – and it can be very difficult to arrange an increase in your income’s real value.
Now, maybe that’s a short-term problem – one giant disaster to purge the system of the debt and then recovery from the disaster, after which the economy is stable around a new set of assumptions. But, even if it’s only a short-term problem, it’s a gigantic short term problem.
aphrael (4eae3a) — 9/22/2015 @ 9:02 amHaving now listened to all the links, I see that my focus on money deflation is not on topic. Wood’s explicitly says that price deflation is the issue at hand. But even with this correction, I do not recall having ever experienced a situation where the aggregated prices of my annual purchases have fallen. It is true that had I wished to buy a Cray computer in the late 1970s, I could buy the equivalent today for pennies on the dollar, but I never wanted to buy a Cray computer. I do enjoy chicken, eggs, steak, ground beef, onions, halibut, crab, salmon, and garlic, and those prices have always risen. Gasoline prices flop around and an increasing portion of the total price can now be attributed to taxes, but overall the price I pay for gasoline has risen, if not steadily. Certainly the $0.25 I paid for a gallon at the PX in 1970 wouldn’t even begin to cover the taxes that are now collected on that same gallon.
The same website I linked above has this graph of the government’s CPI from 1950 to present, which bears out my recollection, and this is the case despite the government’s proclivity to tweak this index to show as little growth as possible. (Press the MAX button to see the entire range of data.) And if we look at the core inflation rate, we see that there has never been a negative value for this construct since 1958 (again, press the MAX button for the full range of data.)
My point is that all the critics we’ve endured on this site of the a priori nature of Mises economics have never in their own life experienced either money deflation, nor price deflation. They are basically parroting assertions of people like Samuelson and Krugman with no empirical data to support it. The empirical data as quoted by Woods suggests that the truth is exactly opposite of the common knowledge, depression is associated with price inflation, not price deflation. Which leads some of us to ponder the logic that might underlie this observation, while those whose minds are made up bray endlessly about hoarding and the collapse of western civilization.
PS: I’ve changed my handle. Mark Steyn shamed me into it.
BobStewartathome (a52abe) — 9/22/2015 @ 9:48 amI have always commented under my own, true name. But don’t ask for my address.
felipe (b5e0f4) — 9/22/2015 @ 10:15 amIncreased wealth and productivity, reduced financing and leverage. Affordable tangible assets. The anthropogenic control schemes will be hardest hit.
n.n (30a50e) — 9/22/2015 @ 10:49 am1) Time value of money: deflation makes it much harder to lend and invest money. The real riskless return gained by not lending and not investing means that investments that have risk have to pay a much higher real return in order to compete. This makes money harder to borrow.
Inflation, by comparison, makes lending and investment much easier, because people who have money are watching its real value erode unless they do something with it.
2) Your real income depends on your real value added to the economy. Under inflation, your nominal income can keep up because the real value you add is worth more in nominal currency as time goes on. Any money you have borrowed becomes increasingly easier to pay back, because money is lent in nominal currency.
However, under deflation, your nominal income cannot keep up unless the real value you add increase at least at deflation rate. So any money you have borrowed becomes increasing harder to pay, because the value of the nominal payment is increasing relative to your income.
I have provided many worked examples illustrating these problems numerically.
Gabriel Hanna (64d4e1) — 9/22/2015 @ 11:49 amUnder deflation, if it is caused by generally increased productivity throughout the economy, “you” will find that your productivity is also increasing, which means your wage will keep up with your needs. Consider a receptionist/typist. In 1980 this person used an IBM Selectric, the one with a ball. Good typists made few mistakes, but when they did, it was a pain in the butt. Also, their work didn’t make subsequent versions easier. When PCs first appeared, these typists became much more productive. They could save their work on diskettes, and changes to manuscripts became a matter of minutes, not days. And those who wished to stay employed began undertaking additional tasks with the time they saved compared to using the Selectric. As the need for typists disappeared they found themselves doing things that were more interesting to them depending on what they elected to learn. So in the course of time typists largely disappeared, but their counterparts now do a lot more stuff. Of course this means that a number of other jobs have disappeared, but those who did them had the opportunity to embrace the new technology and are probably doing more interesting things today. To argue that we should concern ourselves with those who don’t become more productive when everyone else is (your assumption) is to get into subsidies for buggy whip makers and using tablespoons for excavating highways. Do we really need to revisit those silly arguments?
BobStewartathome (a52abe) — 9/22/2015 @ 12:26 pmWho are you kidding? We bought our first house in the fall of 1980. Interest rates for 30 year loans were running at 17%. House prices had collapsed, but it was difficult finding a lender. Fortunately for us, the Fed tried their mightiest to help Carter get re-elected, and in October, just before the election, interest rates fell to a mere 13.5%. We locked in our loan, and bought the house. By the time we closed in December, interest rates were back up to 17%.
The Fed has painted itself into a corner, and I won’t be surprised if I see a repeat of this fiasco.
BobStewartathome (a52abe) — 9/22/2015 @ 12:34 pm@BobStewartathome:if it is caused by generally increased productivity throughout the economy,“you” will find that your productivity is also increasing
This is not necessarily true. Your productive value, measured in things that are not money, may not be increasing just because the money supply is not growing as fast as the rest of the economy.
To argue that we should concern ourselves with those who don’t become more productive when everyone else is (your assumption)
No, this is NOT my assumption–and your real world examples take place under INFLATION, not under deflation, so they do not apply to what I am saying.
Deflation is not just any decrease in price. It is a specific type of decrease in price, a decrease due to the money supply not growing at the same rate as the economy.
Who are you kidding? We bought our first house in the fall of 1980…
Do I have to put “all else being equal” after every sentence? I guess I do.
Gabriel Hanna (64d4e1) — 9/22/2015 @ 12:53 pm@BobStewartathome:rtunately for us, the Fed tried their mightiest to help Carter get re-elected, and in October, just before the election, interest rates fell to a mere 13.5%
You’re actually agreeing with me. The Fed raises interest rates to discourage lending–because inflation encourages lending and contributes to inflation.
Gabriel Hanna (64d4e1) — 9/22/2015 @ 1:01 pm@BobStewartathome: To argue that we should concern ourselves with those who don’t become more productive when everyone else is
I think you should stick to arguing with things I actually say, not secret motivations you invent for me for saying what I said.
I am pointing out merely that deflation, mathematically, has two specific consequences which are different from inflation. I am NOT saying
a) those effects are necessarily always bad
Gabriel Hanna (64d4e1) — 9/22/2015 @ 1:12 pmb) that anyone should enact policies that oppose deflation
45. And now that fiat has run its course, we, care of J.P. Morgan, across the street from the N.Y. Fed, have no gold unrepatriated. China, Russia and India snapped it all up while the ‘smart money’ bought ETF shares of virtual metal.
We are well and thoroughly screwed.
DNF (36ae6c) — 9/22/2015 @ 2:53 pm43. There is no longer an easy path to blowing the bubble larger. China and EM markets are defending their currencies and export market share by selling UST and dollar denominated assets to inject liquidity as foreign direct investment sells out.
South Korea, for one, reported exports down 15% for Q2. Car sales are a big part of the downturn but electronics are now commodities, witness the tepid response to Apple’s latest innovations.
Consequently the Fed gave up ‘unwinding’ our debt monetization, its 7 year regime of dollar deflation, because it would have killed exports just as we enter recession, bobathome’s “painted into a corner”.
DNF (36ae6c) — 9/22/2015 @ 3:22 pmWhat did you think of Prof. Herbener’s reply to that argument?
Patterico (fecd9b) — 9/22/2015 @ 5:23 pmBut it would be the case if the deflation were caused by an expanding, ever more productive economy relative to the money supply. Again, it matters why the deflation is happening; is it growth deflation resulting from more productivity, or deflation resulting from government interference with the money supply? The former is benign, and the situation bobathome or whatever he calls himself now — greater worker productivity — would obtain. Again, I do not contend all deflation is benign, just growth deflation.
Did you explore any of the links?
Patterico (fecd9b) — 9/22/2015 @ 5:37 pmBobathome: given the current level of consumer and household debt, it seems guaranteed that a large number of people would be hosed. The ones whose productivity is increasing are fine; the ones who are able to develop new skills fast enough to keep their incomes are fine.
And that doesn’t seem to me to describe a majority of the working population of America today.
aphrael (e0cdc9) — 9/22/2015 @ 6:11 pm@Patterico:Did you explore any of the links?
No, since they’re video/audio. If you have links to the transcripts I’d be delighted to look at them.
What did you think of Prof. Herbener’s reply to that argument?
It’s not an argument. It’s a time value of money calculation. You and I went through it and you didn’t find anything wrong with it. If you can link to a transcript of Herbener’s reply I’ll be happy to look at it, but anything that ignores risk and time value of money is not going to be a valid objection.
But it would be the case if the deflation were caused by an expanding, ever more productive economy relative to the money supply.
We went through this calculation before. Let’s try it again.
Suppose everything but the money supply is increasing at an average rate of 5% per year. So you make 100 widgets per month and 100 widgets sell for 10 g of gold, and 10 g of gold can buy 5 barrels of oil or 500 pounds of broccoli.
So we can price your widgets in oil or broccoli and ignore gold completely.
Now if the economy except gold is growing at 5%, the price of widgets in terms of broccoli and oil are not changing. But their prices in gold are getting 5% lower every year.
Now your car payment is 2 g of gold per month. That gold is getting 5% more expensive in terms of widgets, broccoli, and oil. If you want your car payment to be the same share of your real income every year, you have to produce 5% more widgets per year. Which may be doable.
Now let’s look at an economy where gold is growing at 5%. Again the price of widgets in terms of oil and broccoli is not changing. And by producing the same 100 widgets per month, your gold income is automatically increasing 5% without you doing anything different. So your car payment is getting cheaper every year and you can keep your real output the same.
What’s demanded of you under inflation and deflation is very different in terms of time value of money.
Gabriel Hanna (2ca835) — 9/22/2015 @ 6:19 pmPatterico – even under growth deflation, gains are going to be unevenly distributed. Eg, even if the average worker’s productivity is increasing, any *individual* worker’s productivity isn’t necessarily.
Bobathome’s argument is that we shouldn’t subsidize buggy whip producers, and that’s fair enough – and yet at the same time, there are people who are actually *unable* to develop new skills in reaction to economic change. Although that’s not a problem which is limited to deflation, it seems like it’s a problem that’s *worse* under deflation.
aphrael (e0cdc9) — 9/22/2015 @ 6:20 pm48 48.While we’re playing the “why couldn’t there be a giant psychological panic?” game, it’s more likely in today’s environment that there is a sudden decision that the dollar will be worth nothing and hyperinflation ensues. In other words, sudden widespread panics are not limited to deflationary scenarios.
So if there was an inflationary spiral taking place would you object to the government trying to stop it?
James B. Shearer (29df46) — 9/22/2015 @ 6:32 pm58 Under deflation, if it is caused by generally increased productivity throughout the economy, “you” will find that your productivity is also increasing, which means your wage will keep up with your needs. …
This is optimistic. In 1920 there were about 25 million horses and mules in the US. By 1960 this number had fallen to about 3 million. The fact of generally increasing productivity in economy was of little comfort to the horses and mules which became economically obsolete.
… To argue that we should concern ourselves with those who don’t become more productive when everyone else is (your assumption) is to get into subsidies for buggy whip makers and using tablespoons for excavating highways. Do we really need to revisit those silly arguments?
Society has to do something with people who are incapable of supporting themselves. What would you suggest?
James B. Shearer (29df46) — 9/22/2015 @ 6:45 pmI never said I agreed with your argument, to be clear. I know you enjoy math, but many people (and I am one of them) have a difficult time following comments that have several equations, each with several variables. I did my best to discern the points you were making with those equations and tried to respond to them, but it would be wrong to assume that I had agreed to some point you were making with all of those equations, simply because I did not correct any math. It’s not the math that is at issue but the conclusions you draw from it, which from my perspective would be more effectively presented if stated in English rather than variables. Again, however, I did make my best effort to understand you and spent a lot of time replying to your points.
In this thread, frankly, I’m not interested in talking to people who don’t want to confront the arguments I took the time to set forth. I don’t have transcripts and if you can’t be bothered to listen to the arguments then I can’t be bothered to respond to your points that talk past arguments made in the links in the post.
For others, I will simply note that the lion’s share of points Gabriel is raising are addressed in those links.
This is the second time in the thread that someone has breezed in and tossed off an argument that is directly addressed by my links, and it gives me the distinct impression that you don’t really care to learn the position of people who question what you say. It’s a shame, because the people quoted in the links are very, very smart people who have spent a lot more time thinking about economics than you have. They might be right and they might not be, but if you’re going to have strong opinions about these things it would be worth your time to listen to them.
Patterico (fecd9b) — 9/22/2015 @ 6:46 pmTypically if there is an inflationary spiral it is due to government action to begin with.
Patterico (fecd9b) — 9/22/2015 @ 6:47 pmI assume you are not suggesting a return to the days of the horse and buggy in order to provide comfort to horses and mules, but if you are not then I am not entirely clear on what your point is.
That seems like a bit of a non-sequitur, but for me, the solution for people engaged in jobs that have become obsolete includes allowing them to find work that does contribute to society, and if they can’t then allow charity to fill the gap.
Patterico (fecd9b) — 9/22/2015 @ 6:50 pmGains are always unevenly distributed, in inflationary and deflationary economies. I can’t see what the one has to do with the other. I don’t mean to jump on everyone in the discussion, but did you check out the links? This is one of those times that there actually is a reason that I put links in the post, and your comments in the thread at times seem to address points that Herbener addressed in the video. It would be a far more productive discussion from my point of view if people commented in a way that took account of the points in the links from the post, which I included in the hope that people would listen to them.
I can’t stop people from commenting without listening to them, of course, but I can’t get excited about having a discussion with someone who is going to make arguments that are already addressed in the links I provided.
Patterico (fecd9b) — 9/22/2015 @ 6:54 pmThe last wave of inflation was touched off by the cessatio of wage and price controls and the twin oil embargoes that book ended that era. We got some of this staple inflation under qe infinity.
narciso (ee1f88) — 9/22/2015 @ 6:59 pm74 I assume you are not suggesting a return to the days of the horse and buggy in order to provide comfort to horses and mules, but if you are not then I am not entirely clear on what your point is.
The issue I am raising is that when horses and mules stopped being an asset and started being a burden to society you could just send them off to the glue factory but if say 100 million Americans become an economic burden to society this is trickier to handle.
James B. Shearer (29df46) — 9/22/2015 @ 7:00 pm@Patterico:For others, I will simply note that the lion’s share of points Gabriel is raising are addressed in those links.
Video/audio links take a lot more time to go through than transcripts do. I’ll tell you what; since you won’t tell me what they have to say and won’t point me to a transcript, then I will take the time to sit through them.
And if I then see that these awesome arguments do not address time value of money or risk, they will be invalid regardless of how much time they spent thinking about them or how many letters they have after their names.
And I will be a little annoyed with you, because if you ever said to me, “I don’t get this about relativity or whatever, I would never tell you “go read Einstein” and neither would any other physicist, I would simply explain it to you.
it gives me the distinct impression that you don’t really care to learn the position of people who question what you say.
This is excessively hostile, considering that what you have posted is in the least convenient form for in-depth discussion. If their arguments have merit, I don’t need to see it coming out of their mouths on video to decide that. All the video/audio links do is make it more costly for me to look at it.
But I won’t have you say that my position is just totally destroyed by this video, without you telling me what it says. That is dirty pool.
Gabriel Hanna (2ca835) — 9/22/2015 @ 7:03 pm68 No, since they’re video/audio. If you have links to the transcripts I’d be delighted to look at them.
Let me note that I also have a preference for written sources.
James B. Shearer (29df46) — 9/22/2015 @ 7:03 pmGabriel,
While you were writing that comment, I was watching the top video again to isolate the response to the concern that people won’t be able to repay their debts. It starts around 7:34 and should be watched to 10:34. I do think the rest of the video is worth watching, but this three-minute portion addresses with several arguments (note: I don’t say “totally destroys” but “addresses”) an argument that you have spent many, many comments packed with equations to make. I’ve spent much more than three minutes reading your comments on that exact topic. You can spare me the three minutes to watch at least that part of the video — especially since I went and found the exact timestamps for you.
Patterico (fecd9b) — 9/22/2015 @ 7:11 pmSome prefer written, some prefer audio, some (like me) prefer different types of inputs at different times. I read a lot but I listen a lot too, since I am often driving or walking or otherwise exercising and find audio easier in those environments.
Patterico (fecd9b) — 9/22/2015 @ 7:13 pmOkay, I listened to the first video. In it Herbener concedes that severe deflation would cause problems but claims people could just switch to another currency. This seems like a lot of unnecessary trouble which is easily avoided with a fiat currency.
Note if severe deflation will cause enough problems to justify the vast transition costs involved in switching currencies it seems logical that milder deflation will also be costly just not costly enough to prompt people to switch currencies.
James B. Shearer (29df46) — 9/22/2015 @ 7:28 pmand
[This in response to my:}
Gabriel, I’m trying to address your issues seriously, and when I do, you accuse me of attributing “secret motivations” to your arguments.
In my previous posts I presented data that showed that I have never in my lifetime experienced a period of monetary deflation nor of price deflation. Unless you were born before 1940, or had the maturity of an adult while still a pre-teen, I expect you have never consciously experienced these conditions either. Nevertheless I attempted to address some substantive issues that arise from your assumptions about what might occur when an economy undergoes price deflation due to increased productivity based on what I’ve seen. My example of the typist may have occurred during a period of extreme inflation, but the point was that technology can revolutionize productivity. I have seen this in my own life time, and it isn’t the end of the world. In fact, those who take their work seriously improve their lives and move on.
I think the entirety of your arguments founders on your concern that “your productive value, measured in things that are not money, may not be increasing just because the money supply is not growing as fast as the rest of the economy.”
Yes, comrade, you chose wisely. Ethnic studies is the path to redemption for all the wrongs that have been inflicted on your tribe. Join with us in the revolution. The capitalists can never repay you for the gifts you bestow on this earth merely by breathing.
BobStewartathome (97a232) — 9/22/2015 @ 7:29 pmHere is a link to the Atkeson and Kehoe paper showing no link between depression and deflation, in a study of 17 countries over 100 years
Patterico (fecd9b) — 9/22/2015 @ 7:34 pmThat’s not the way I heard it. He says at 8:13: “If this became a problem then people would simply switch to a different monetary regime.” (See the word “if”?) But he also says: “By the way, this has not historically been the case.” (At 10:14.) He says that under the gold standard, deflation was very mild and accompanied periods of robust growth — consistent with the Atkeson and Kehoe study linked above.
Patterico (fecd9b) — 9/22/2015 @ 7:39 pm@Patterico: I have watched the video and made notes. I am not impressed by your characterization of what was in there. Everything I saw either supported the arguments I made, or were irrelevant to them.
The first thing they do is define away the scenario I outlined, saying that monetary deflation has not been seen in many years and so that is NOT what they are talking about when they say “falling prices”.
Then they do this sort of straw man, where everybody delays purchase so nobody produces anything and everyone starves and dies. They agree that this outcome is very unlikely.
They say that regardless of deflation people still have to consume, which I never disputed, you will remember, in the other thread or in this one.
Around 3:53 they say that the real worry is that input prices will drop more slowly than output prices. In my examples, I explicitly assumed that inputs and outputs would stay the same relative to each other, so this is irrelevant to anything I’ve said. They said that real wages would stay the same: which is exactly what I explicitly assumed in the examples I worked through.
Around 5:11 they say that if people don’t invest during deflation, they miss out on the real returns of investment, which they argue would be the same. They make no mention of risk. They do not address that investments would have to produce real returns higher than the deflation rate. So they do not address my arguments at all.
Around 5:30 they distinguish again between monetary inflation/deflation, and lower prices due to productivity.
At 6:20 they argue that no one has ever demonstrated a correlation between deflations and depressions, which wasn’t anything I was saying anyway.
At 7:30 they admit that if you are hugely leveraged monetary deflation is hard on you. Any middle class person who borrows to buy a house would, of course, be “hugely” leveraged, if they followed the typical standard of borrowing 3 times your income.
At 8:15 they say that if people are free to switch to cheaper money they will and they will avoid the consequences of the deflation that way. This is exactly what I demonstrated in the other thread. And of course this is monetary inflation when you switch to another cheaper money and start using that.
At 9:40 they again concede that deflation is hard on debtors because debt is borrowed in nominal currency, and this means people will switch to cheaper currency if free to do so. Which is exactly what I demonstrated in the previous thread and here.
At 10:21 they say monetary deflation has never been more than 1 – 2% historically. Which is fine, but the world economy has grown 70fold in that time and the world gold supply has not, and cannot, so they don’t address if that kind of growth could have been had on a gold standard.
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Gabriel Hanna (2ca835) — 9/22/2015 @ 7:40 pmIndeed. So if hyperinflation is bad, then we should be bothered by mild inflation.
I suspect you will not sign on to that extension of your logic, which I do not find logical at all.
Patterico (fecd9b) — 9/22/2015 @ 7:40 pm@BobStewartathome: You made no substantive response to my quantitative arguments–and what is this horseshit about “ethnic studies”?
Even Patterico’s video agrees with what I said so go call them commies.
Gabriel Hanna (2ca835) — 9/22/2015 @ 7:44 pmJames, all those horses and mules aren’t worth spit. The movie Lawrence of Arabia makes a big deal about Lawrence becoming “one” with the Arabs. In fact, if you bother to read Seven Pillars of Wisdom or War in the Desert, you will find that Lawrence was delighted when he received two Rolls Royce trucks, one of which carried spare parts, food, water, feed for a few camels, and fuel, and the other carried machine guns, explosives, ammunition and mortars. These two trucks, with drivers who were also mechanics, plus a hand full or Arabs on camels, allowed Lawrence to raid over a hundred miles into Ottoman territory. He’d pull up near a railway station or bridge, unload and set any needed explosives, place his mortars and machine guns in favored positions, and proceed to blow the hell out of some isolated post. And, with a quick flight by biplane, also not mentioned in the movie, he’d be back in Cairo in time to let Allensby know what he’d done.
I mention this because WWI was the introduction on a massive scale of the internal combustion engine to the world. My Dad used to tell me that the U. S. troops in Europe were much more effective because they were generally farm boys who had some knowledge of machinery. After the war, the government sold at surplus tens of thousands of gasoline engines and who know what else, and all this revolutionized American agriculture and fishing.
FDR did his best to thwart this progress with his slaughter of pigs, etc., but eventually the technological advances won through.
BobStewartathome (97a232) — 9/22/2015 @ 8:00 pmGabriel, all I’ve heard from you is some 8th grade math predicated on the idea that everything in an economy is being produced at a steadily increasing rate, and then you stipulate that the amount of money (gold) is fixed. You then proceed to draw conclusions that are consistent with your assumptions. My point is that no economy would ever produce everything at a steadily increasing rate (my broccoli example) and that opportunities would arise for entrepaneurs on every front to continue the expansion. If I was going to argue against my position, I would invoke the law of diminishing returns or something along those lines. But you simply say that I haven’t responded to you. Even your latest response is a dodge. Everything is right there, comrade.
BobStewartathome (97a232) — 9/22/2015 @ 8:09 pmThey are addressing a point that James B. Shearer made many times in previous threads and that deflation critics make all the time. It’s not a strawman if it is a very common argument, although they do treat it with a little lighthearted mockery at points.
I think Herbener says he actually believes real wages might increase in a widespread deflation (see 4:27).
Elsewhere in the video Herbener makes the point I have made here many times: in growth deflation of the slow, steady sort that has accompanied economic growth with hard money, people adapt to their circumstances, just as they do with expected inflation. In any environment, you have expectations, and investment certainly must outstrip what you could get simply holding the money. Whether a higher level of debt such as we have nowadays is a feature or a bug, as opposed to capital growth coming out of real savings, is something we may not agree on. I happen to think the world is overleveraged. But in any environment you have an outlook shaped by your expectations and you make decisions based on those expectations.
Your arguments in the past have advocated that people will have absolutely no incentive to invest (“deflation causes contraction by making money-under-the-mattress saving more attractive than lending or investment”). Although you claimed in that comment that I agree, I do not. I maintain that, because the profitability of production remains (as Herbener notes), there is always going to have to be a spread between what people can get by holding their money and what they can get through investment. This is because production is profitable in a free market whether your environment is inflationary, deflationary, or neither.
I’m pretty sure you have repeatedly argued (see here for example) that “Deflation provokes economic contraction” which is not quite the same thing — but the Atkeson and Kehoe study they mention says: “A broad historical look finds
many more periods of deflation with reasonable growth than with depression and many more periods
of depression with inflation than with deflation.” That seems to provide empirical evidence from economic history that deflation can accompany growth in the economy, which seems inconsistent with your repeated assertion that deflation provokes economic contraction. That’s historically just not true.
You’re hearing this with the same ears James B. Shearer is hearing it with, hearing “concessions” that I don’t think are offered, at least as regards the average debtor. Herbener says you could have issues with debts, and if that became an issue, people could respond to that with a competing form of money. This is indeed one of the things you posited before, and is one of the reasons I wanted you to hear this, because there appears to be some level of agreement between you and Herbener here. Our difference of opinion, as I recall, was not so much whether this might happen as whether it would necessary be defined as “inflation.” You seem to assume that people will continue to use the old money and also use the new, therefore there will be inflation, but I assumed that they might simply use competing currencies, which would not ncessarily inflate the entire supply. However, to the extent that he suggests that this would be a cure for too much deflation, I concede that he is saying that the money supply, if not expanded, would at least be larger than it would be in the supposedly overly deflated environment.
I’ll grant you this: here, Herbener appears to contradict the Mises/Rothbard theorem that any supply of money will do. I have read Herbener say something similar in forums online before, and have been meaning to ask him about that, and I think I will. I’ll report back what he says; I am interested in the answer.
Is that in real terms, or measured by GDP taking into account fiat money spent by governments? This business of the “size” of the economy is something you have more confidence in humans’ ability to measure than I do.
Patterico (fecd9b) — 9/22/2015 @ 8:16 pmIn any event, I’m glad you listened to the video. I hope you’ll read the Atkeson/Kehoe study (it’s short) because its empiricism appears to contradict, fairly firmly, your belief that deflation must always result in a contraction.
Patterico (fecd9b) — 9/22/2015 @ 8:19 pmGold growth on a gold standard:
Gabriel, the current holdings of the top ten countries (if you believe them) total 23,410 metric tons. The U. S. for example, has (supposedly) 8,924 MT. China is said to have 1,156 MT. However, over 6,500 MT of gold have been delivered to China over the past few years, and speculation (Richards) is that they probably have 3,500 MT.
World gold production is currently about 3,000 MT annually.
So a gold based currency could (at current gold prices) increase by about 10% a year if all gold production was acquired by national treasuries.
BobStewartathome (97a232) — 9/22/2015 @ 8:29 pm@Patterico:that people will have absolutely no incentive to invest
No, what I said is that investment will have to offer higher returns than deflation, especially since risks must be taken into account. The sentence you quote is one snippet out of a much larger argument that worked through the math in detail. It is simply not a fair characterization of anything I’ve said to say that people will have no incentive to invest.
I maintain that, because the profitability of production remains (as Herbener notes), there is always going to have to be a spread between what people can get by holding their money and what they can get through investment.
But there doesn’t and I proved it. Once you take into account risk and time value of money, the real return on an investment has to be higher than the deflation rate.
The reason I insist on using math is because this is a quantitative argument.
Suppose someone says to you, we should adopt wind power because it has all these great benefits. But you point out, it also has costs. Neither of you is lying. How to settle the argument? You must quantitatively account for the costs and benefits to see which is greater–and if the benefit is higher than the cost, then you have to account for what else you could be doing with the investment to see if there wouldn’t be a better use for the money.
So you cannot hand-wave these things away by using just words. Math has to come in at some point.
repeated assertion that deflation provokes economic contraction. That’s historically just not true.
First, I didn’t say that it always and everywhere must do so. Again, it’s an “all else being equal” argument. There are I am sure other effects that could swamp the contractionary efforts of deflation. There were all kinds of things going on at the close of the 19th century. While deflation and growth did happen together, there is no way to know if there might have been more growth without it.
I also said that in lieu of contraction it could provoke inflation. This is what the Free Silver movement was about and one man at least was nominated for the Presidency on Free Silver. People wanted cheap money.
You’re hearing this with the same ears James B. Shearer is hearing it with, hearing “concessions” that I don’t think are offered, at least as regards the average debtor
Well, since they weren’t making quantitative arguments, now we’re reduced to arguing about what “highly leveraged” means and we don’t even have a transcript to point to.
its empiricism appears to contradict, fairly firmly, your belief that deflation must always result in a contraction.
I have no such belief. It can also provoke an inflation to counteract it. All else being held equal.
Gabriel Hanna (2ca835) — 9/22/2015 @ 8:41 pmMake that Rickards, not Richards.
BobStewartathome (97a232) — 9/22/2015 @ 8:41 pm@BobStewartathome:So a gold based currency could (at current gold prices) increase by about 10% a year if all gold production was acquired by national treasuries.
Most of the world’s gold has already been mined. 10% a year means the supply of gold has to double every 7 years. It can;t double even once.
Gabriel Hanna (2ca835) — 9/22/2015 @ 8:42 pmGabriel, the amount of gold that can be mined is determined more by the price of gold than by your wild assed guess. Pit mines are profitable at a fraction of a gram per ton of ore, and hard rock mines do well at 5 grams per ton.
It’s a matter of economics. Part of the reason for the current slump in the price of gold has been the response of the gold producers. Many are profitable at $600/Toz and newly produced gold is readily available on the market.
Oil is the same sort of thing. Heck, you could make it out of seaweed, Douglas fir, or corn if the price was right.
BobStewartathome (97a232) — 9/22/2015 @ 9:06 pm87 Indeed. So if hyperinflation is bad, then we should be bothered by mild inflation.
I suspect you will not sign on to that extension of your logic, which I do not find logical at all.
Why wouldn’t I sign onto it? I expect there is some optimum rate of inflation (the Fed thinks it’s 2%) which balances various costs and benefits. Small differences from the optimum won’t hurt much (this is typical behavior near an optimum) but larger differences will become harmful at an increasing rate. So 12% inflation will be more than twice as bad as 7% inflation and 8% deflation will be more than twice as bad as 3% deflation (this example assumes the optimum is at 2%).
James B. Shearer (29df46) — 9/22/2015 @ 9:23 pm@Patterico:It’s not the math that is at issue but the conclusions you draw from it, which from my perspective would be more effectively presented if stated in English rather than variables.
English is not quantitatively precise but I will do my best. If you still have any doubts I would encourage you to run what I am about to say here by Herbener and I have no doubt that he will agree that my analysis is correct.
Suppose you are a bank. You make many loans. Some pay off and some don’t. That’s okay as long as you play the odds correctly, just like it is okay for a casino that people occasionally win big there, they make it up from the ones that don’t.
An investor desires a loan, to be paid back in one year. There’s a chance between 0 and 100% that the investment will succeed and the investor will pay the loan plus a real rate of return. Otherwise you will not get your loan back. (But what if you can get some of it back? That complicates the analysis but does not affect the conclusion.)
Let’s say 95% just to have a number. What do you have to charge to get an expected real rate of return that you desire?
Suppose, just to have a number, we pick 5% real return. What do we charge for the loan? Since the chance of getting paid is 95% , we have to divide the real payment we desire (105%) by 95%. This gives us 111% payment at the end of the year, which is an 11% real return. We have to charge 6% more, real return not nominal, to make up for the 5% chance of losing the principal of the loan. The exact numbers don’t matter: we are always, in this procedure, taking a number and dividing by a number less than 100%, and this is mathematically guaranteed to increase that number, it can never decrease it.
Under deflation, we will not offer this loan unless the real expected return we desire is more than the deflation rate. Because deflation is riskless, this guarantees that the real rate of return we demand must be substantially higher than the deflation rate. So at the margin lending and investment are discouraged while deflation is on. The bar for an attractive investment is raised higher with higher deflation.
Under inflation, there is a guaranteed cost of holding money. We demand any positive real rate of return; of course we want the best ones we can get, but there is never a reason not to lend the money at all unless the investment does not have a real positive rate of return. Deflation does give a motive not to lend the money at all unless there are very attractive investments on offer. This may be a feature rather than a bug, but it is nonetheless true, all else being equal.
Now suppose there are multiple competing currencies. The same argument applies to the aggregate supply of these currencies–if the aggregate supply growth is not keeping up with the economy, you still have deflation, and it still has the same effects, but now in multiple currencies. If alternative currencies are pressed into service to ease the deflation, and they weren’t previously used as currency, then this IS inflation provoked by deflation.
It may be that under multiple competing currencies deflation is less likely, but probably not if they are all precious metals and the like since the supply of them cannot be increased at will.
Mind you I do not say that deflation is always and everywhere bad. I do not say that no investment should be discouraged. I do not say that other things in the world could not happen which would swamp the effects of deflation.
I say only, all else being equal, deflation at the margins discourages lending and investment compared to inflation. I think you will find that Herbener will agree with what I have written, though he may offer other considerations that would discount its relative importance.
Gabriel Hanna (2ca835) — 9/22/2015 @ 9:26 pm@bobathome:Gabriel, the amount of gold that can be mined is determined more by the price of gold
It’s determined by physics and chemistry. It doesn’t magically appear in mines when it gets expensive. There’s only 15,000 tons in seawater and I don’t imagine you can extract it less economically than that, though maybe one day with fusion we’ll be boiling seawater all the time and collect the gold as by product.
All the gold ever mined in the history of the world, 186,000 tons, would cost about $8.2 trillion at today’s prices. About equal to the economies of the top 10 US states. Half of that gold came from one area in South Africa. Most of the earth’s gold is in its core. Most of what we mine is leftover from meteorites. The quantities don’t exist that could keep up with economic growth.
Gabriel Hanna (2ca835) — 9/22/2015 @ 9:38 pmI did not mean to take you out of context. It is a comment from a larger discussion, but your entire comment was:
You didn’t say in that comment that money-under-the-mattress saving would be more attractive than it would be otherwise. You said it would be more attractive than lending or investment, which seemed like a blanket statement. And that’s not the only one. And in another comment you said:
The italics are yours. Re-reading the comment, I see that the word “high” was intended to be included. But I read the comment as saying (especially with the italics) that credit would be “unavailable” and that “no one” (not fewer people, but no one) wants to lend or invest it — perhaps missing the intended nuance I now see, because of the missing word.
At the very least, you have to admit that more than once you used language (perhaps hyperbolic) suggesting that credit would slow to a complete halt in deflation. I don’t think it’s twisting the words I have just quoted to say that you seemed to be suggesting people would have no incentive to invest (simply holding money is more attractive, no one wants to lend or invest, credit will be unavailable).
I think if I interpreted your words as suggesting people had no incentive to invest, it may be due to a lack of precision in your language.
I don’t mean this as an attack on you, but a defense of myself in response to the suggestion that I was not being fair to you.
Patterico (fecd9b) — 9/22/2015 @ 9:39 pm91 They are addressing a point that James B. Shearer made many times in previous threads and that deflation critics make all the time. It’s not a strawman if it is a very common argument, although they do treat it with a little lighthearted mockery at points.
I didn’t say nobody would buy anything. I said given deflation people will tend to delay purchases just as with inflation people will tend to accelerate them. The greater the inflation or deflation the more effort people will put into this. This can create a positive feedback loop which makes problems worse.
The general issue is stability. How stable are market economies? Can an unexpected event trigger a destructive feedback loop? Empirically it certainly appears as if there are certain inherent possible instabilities (bubbles and busts) which sometimes become quite destructive. And I don’t believe this is all because of bad government, I think market economies are not naturally extremely stable and can sometimes if the conditions are right become unstable.
James B. Shearer (29df46) — 9/22/2015 @ 9:44 pmOr perhaps it’s a slower rate of deflation provoked by a faster rate of deflation.
Keep in mind that when currencies compete, some are used more but also others are used less. It’s not as though you just take the original stock at 100% and add in the competing currency on top of it. That’s like saying that when people eat an apple a day because only apples are available, and then oranges are offered at the market, we necessarily see more fruit being sold. Not necessarily so; perhaps people eat more oranges than before but fewer apples. The total amount of fruit sold may go up, down, or remain constant.
If people do indeed switch to a competing currency because the rate of deflation is too high, one imagines they are doing this to slow the rate of deflation. That doesn’t necessarily mean you’ll see inflation, just that you probably would see less deflation than you would absent the switch to the competing currency.
Patterico (fecd9b) — 9/22/2015 @ 9:45 pmRight, and as I have argued before, Woods and Herbener make the point that people still buy laptops even when the price consistently goes down, and nobody waits until tomorrow to get their cup of coffee because they expect it will be 5 cents cheaper. There are potential feedback loops that can happen in inflation or deflation. If either is steady and low, it tends not to disrupt the economy too much. As you acknowledge, any story you tell about deflation I could flip on its head and tell about inflation. So why the horror about a slow, steady rate of deflation resulting from growth, but we actually have people saying the Fed should try to create inflation??
Patterico (fecd9b) — 9/22/2015 @ 9:49 pm@Patterico:any story you tell about deflation I could flip on its head and tell about inflation.
Not as far as lending and investment are concerned. Ask Herbener about what I wrote in #99.
Gabriel Hanna (2ca835) — 9/22/2015 @ 9:57 pmI would like to run it by him, but I’d like to make the question as concise and focused as possible, and isolate our areas of disagreement.
Let me make my assertion and see if you agree or disagree with this:
My understanding of the Austrian view is that time preference alone determines the rate of interest and thus people’s willingness to save and invest, as opposed to consume. If people more intensely desire present consumption as opposed to future consumption, then interest rates will be higher, present consumption will be higher, and savings and investment will be lower. The converse is true: a lower time preference leads to lower interest rates, more savings and investment, and less present consumption.
A slow, steady rate of deflation or inflation should not affect this, because if people accurately anticipate it, they can adapt their contracts to provide a real rate of interest that is in line with their time preferences. Thus, the slow steady rate of deflation that was historically associated with growth under a gold standard did not mean that investment slowed or that contraction was a necessary result.
If you disagree with that, perhaps you could write a concise 2-3 paragraph competing view, and I could submit both to him for his thoughts.
Patterico (fecd9b) — 9/22/2015 @ 10:02 pm@Patterico:That’s like saying that when people eat an apple a day because only apples are available, and then oranges are offered at the market, we necessarily see more fruit being sold.
You’re right, we might not, we’d have to use numbers to analyze the situation to see what comes out of the aggregates. But think of the population this way:
People who don’t eat apples and don’t eat
People who eat apples but not oranges
People who eat oranges but not apples
People who eat both oranges and apples
Without knowing the percentages of the population it is not possible to say if the total amount of fruit will increase or not.
If people do indeed switch to a competing currency because the rate of deflation is too high, one imagines they are doing this to slow the rate of deflation.
Another way to say this is that if the money supply is 5% short, increasing it 4% would ease the situation but it would still be a negative inflation rate. Perfectly compatible with what I have said, since inflation is negative deflation and vice versa. The question is what is the direction of the change? Adding a new currency is inflationary, but it may not bring the rate up above zero, true.
Gabriel Hanna (2ca835) — 9/22/2015 @ 10:09 pm104 … So why the horror about a slow, steady rate of deflation resulting from growth, but we actually have people saying the Fed should try to create inflation??
Moving from the current 2% to 5% inflation would create winners and losers. Moving from 2% to -1% would create a difference set of winners and losers. Naturally people will advocate for the policy under which they win, just as they lobby for cutting their taxes and raising other people’s taxes.
James B. Shearer (29df46) — 9/22/2015 @ 10:10 pmAdding a new currency and keeping the old is inflationary.
Adding a new currency to compete with the old may be inflationary, deflationary, or neither.
Adding a new currency to compete with the old because the old is too strongly deflationary logically suggests that the addition of the new currency should reduce the rate of deflation, because otherwise why would people bother?
So are we saying the same thing?
Patterico (fecd9b) — 9/22/2015 @ 10:11 pmThat may explain why others have this attitude, but I was asking about the views of commenters here.
Patterico (fecd9b) — 9/22/2015 @ 10:13 pm@Patterico:that time preference alone determines the rate of interest and thus people’s willingness to save and invest, as opposed to consume.
Do you mean the market rate of interest? If so I could accept that, but any interest actually offered will depend on the risk involved.
A slow, steady rate of deflation or inflation should not affect this, because if people accurately anticipate it, they can adapt their contracts to provide a real rate of interest that is in line with their time preferences.
No, the symmetry is broken. People desire positive real returns. Under inflation they cannot get that by doing nothing, so they want to lend and invest under most circumstances. Under deflation, they will in general not lend and invest unless the expected rate of return, accounting for risk, is higher than the deflation rate.
If you disagree with that, perhaps you could write a concise 2-3 paragraph competing view, and I could submit both to him for his thoughts.
What’s wrong with #99?
Gabriel Hanna (2ca835) — 9/22/2015 @ 10:15 pm@Patterico 109: Yes, we are saying the same thing. If you start with -2% and you add %1 to get -1%, you made an inflationary change, just like if you started with 2% and added 1% to 3%. But in the first case you are always in deflation, and the second case you were always in inflation. In both cases you made an inflationary change.
Gabriel Hanna (2ca835) — 9/22/2015 @ 10:18 pm#99 is too long, I don’t want to impose on him with something that long.
I already want to ask him about the seeming conflict between the Mises/Rothbard “any amount of money will do” theorem and Herbener’s statement that strong deflation could cause a move to an alternate currency. So now this is a second question and I want to keep it concise. So I want to isolate the point of disagreement and then write two focused different positions.
Patterico (fecd9b) — 9/22/2015 @ 10:20 pm@Patterico:Okay suppose we trim down #99 to this:
“Under deflation, we will not offer a loan unless the real expected return we desire, accounting for risk, is more than the deflation rate. Because deflation is riskless, this guarantees that the real rate of return we demand must be substantially higher than the deflation rate. So at the margin lending and investment are discouraged while deflation is on. The bar for an attractive investment is raised higher with higher deflation.
Under inflation, there is a guaranteed cost of holding money. We demand any positive real rate of return; of course we want the best one we can get, but there is never a reason not to lend the money at all unless the investment does not have an expected positive real rate of return, accounting for risk. Deflation does give a motive not to lend the money at all unless there are very attractive investments on offer. This may be a feature rather than a bug, but it is nonetheless true, all else being equal.
Now suppose there are multiple competing currencies. The same argument applies to the aggregate supply of these currencies–if the aggregate currency supply growth is not keeping up with the economy, you still have deflation, and it still has the same effects, but now in multiple currencies. If alternative currencies are pressed into service to ease the deflation, and they weren’t previously used as currency, then this IS an inflationary change in the money supply provoked by deflation.”
Gabriel Hanna (2ca835) — 9/22/2015 @ 10:25 pm@Patterico 113:I already want to ask him about the seeming conflict between the Mises/Rothbard “any amount of money will do” theorem and Herbener’s statement that strong deflation could cause a move to an alternate currency.
It’s perhaps not authoritative coming from me, but here is what I think he will answer:
There is not a contradiction. Any amount of money will do for a static economy. An economy that is growing will provoke demand for more money, and if one kind cannot grow to meet demand, alternatives will be sought that can.
David Hume gave an example: what if all the money were changed, overnight, from gold to silver? Nothing would change except the color of the metal, because there’s been no other change in the economy. In that sense “any amount” will do, if the economy is held constant. If it grows or shrinks, people will demand more or less money.
Gabriel Hanna (2ca835) — 9/22/2015 @ 10:29 pm@Patterico 113: An analogy:
Mises: Clothes can be made of any size, to accommodate any size person.
Herbenen: If people grow bigger they need to get different clothes.
Like I said I don’t think there is a contradiction and I bet that’s what he says.
Gabriel Hanna (2ca835) — 9/22/2015 @ 10:33 pm106 My understanding of the Austrian view is that time preference alone determines the rate of interest and thus people’s willingness to save and invest, as opposed to consume. …
This doesn’t seem right to me, it will also depend on the economic growth rate. Because if people expect their income to be higher in the future they are more willing to borrow money for present consumption since their higher future income will make repaying loans less burdensome.
James B. Shearer (29df46) — 9/22/2015 @ 10:41 pm@Shearer:This doesn’t seem right to me
It does to me. I borrowed to buy a house because I wanted the house now. If I had saved the money and got the same rate of interest for it my bank is charging me, I could have bought the house later.
But even retired people buy houses and RVs and such–they’re not expecting to make more money in the future.
Gabriel Hanna (2ca835) — 9/22/2015 @ 10:45 pm110 That may explain why others have this attitude, but I was asking about the views of commenters here.
I am okay with the current 2% or so inflation rate and don’t see any compelling reason to try to move it up or down.
James B. Shearer (29df46) — 9/22/2015 @ 10:47 pm118 It does to me. I borrowed to buy a house because I wanted the house now …
I think people in general will borrow more and buy a better house if they expect their income to rise than if they expect their income to fall.
James B. Shearer (29df46) — 9/22/2015 @ 10:51 pmGabriel,
I think I have crystallized the issue. See if this sounds like a reasonable way to ask the question. It’s long but takes account of both of our positions — indeed I am agreeing with your point as facially reasonable. I have not sent it, so if you have an issue with it, let me know:
Prof. Herbener,
A friend of mine contends that even growth deflation can be undesirable in that it can discourage lending and investment.
My understanding of the Austrian view is that time preference alone determines the rate of interest and thus people’s willingness to save and invest, as opposed to consume. I believe you have said that an expected and steady rate of inflation or deflation should not affect the interest rate. It is determined solely by time preference.
I understand how an expected rate of inflation or deflation would not affect the interest rate in that portion of the time market that consists of (to borrow Rothbard’s phrase) “purchase of producers’ goods and services, which are transformed over a period of time, finally to emerge as consumers’ goods.” As you have explained elsewhere, if prices of outputs are expected to change due to expected inflation or deflation, prices of inputs can adjust accordingly to maintain the spread.
But the situation seems different, my friend says, for the time market involving (again quoting Rothbard) a “written claim to a certain amount of money at a future date.” In other words, the credit market or loan market. When we say time preference alone determines the rate of interest, I assume that means the real rate of interest and not the nominal rate. Thus, I assume that In an inflationary environment, in the loan market, one can ensure that the real rate of interest remains constant (and address the risk of default) by adjusting the nominal rate of interest upward. For example, if the rate of inflation is 3%, and the real equiibrium interest rate determined by time preference is 1%, one could set the interest rate at 4% to keep the real interest rate at the equilibrium. (My friend notes that it would be even higher to adjust for risk of default, which becomes relevant in a moment.) The spread between the nominal interest rate (4%) and the rate of inflation (3%) is 1%: the real equilibrium rate of interest.
My friend argues that the adjustment cannot happen properly in a deflationary environment — because what if the real rate of interest determined by time preference is less than the rate of deflation? To put the problem in a concrete example, assume that the equilibrium rate of interest determined by time preference is 1%, but we are in an environment where deflation has been, and is expected to remain at, 3%. The nominal interest rate must necessarily remain positive, or else people would simply hold their money. But even at zero, the spread between the nominal interest rate (0%) and the rate of inflation (-3%, because we are in 3% deflation) is 3%, which is far greater than 1%: the real equilibrium rate of interest. When you factor in the need to raise the nominal interest rate to account for risk, the spread becomes even greater.
If the difference between the nominal rate of interest and the rate of inflation (or deflation) becomes greater than the equilibrium interest rate, that would seem to artificially contract credit, causing producers to invest in lines of production calling for present consumption rather than higher-order lines of production — a sort of mirror image of what causes the boom in Austrian business cycle theory.
My friend seems facially to have a point here. Is he going wrong, and if so, where?
Patterico (fecd9b) — 9/23/2015 @ 7:52 am@Patterico: The only thing I want to change is that I am not talking about nominal rates of interest/return on the loan. The loan has to have a real rate of return higher than deflation, because deflation is riskless. Not just the nominal rate but the real rate has to increase to account for risk. The nominal rate can be neglected entirely from the calculation. I mean it’s important for calculating the monthly payment, but not for figuring out what real rate of return needs to be.
Gabriel Hanna (64d4e1) — 9/23/2015 @ 9:08 am#100: Gabriel:
Since 1903, 148,900 M-tons of gold have been produced world wide. More than half of this total has been produced since 1980 (76,200 M-tons). Production is dependent upon the market price. In the last 30 years we have seen about 2000 M-tons produced annually when prices are in the range of $100 to $900 per T-oz. Prices in the range $900 to $1400 resulted in production of 2500 M-tons annually, and prices above $1400 resulted in annual production that averaged 2700 M-tons. Production is sill high since the marginal cost of producing gold in many of the new mines is still much less than the market price.
If Reagan had gone back to the gold standard in 1985, the existing holdings of the U. S. Treasury could have backed the M1 money supply (then about $500B) at a redemption value of about $1750/T-oz. Currently M1 is running at about $3T. The CPI has increased by 250% since 1985, and so this $3T is about $1.2T in 1985 dollars. The U. S. has produced 8,366 M-tons of gold in the interim, and this amount is enough to almost double U. S. holdings, meaning that the increase needed to back all these new M1 dollars could be purchased almost entirely from U. S. producers. No need for South Africa at all.
Your idea for extracting gold from seawater is nothing new. And who knows, when California gets around to desalinating its potable water, the gold might be useful by product. But I doubt it.
Markets work.
BobStewartathome (97a232) — 9/23/2015 @ 12:08 pm#123 Addendum:
My references for the excel “database” I built to produce this answer are as follows:
M1
http://www.tradingeconomics.com/united-states/money-supply-m1
CPI
http://www.tradingeconomics.com/united-states/consumer-price-index-cpi
Prod. History
Main body, 1900-2002
http://www.nma.org/pdf/gold/his_gold_prices.pdf
http://www.westernmininghistory.com/articles/4/page1
Post 2002
http://minerals.usgs.gov/minerals/pubs/commodity/gold/myb1-2007-gold.pdf
http://minerals.usgs.gov/minerals/pubs/commodity/gold/myb1-2012-gold.pdf
http://minerals.usgs.gov/minerals/pubs/commodity/gold/mcs-2015-gold.pdf
Detailed Americas prod.
BobStewartathome (97a232) — 9/23/2015 @ 12:43 pmhttp://minerals.usgs.gov/minerals/pubs/country/2012/myb3-sum-2012-latin-canada.pdf
and so on for other years.
@bobathome:Markets work.
Within the limits of physical law. They can’t summon new gold into existence by mere demand. That’s like saying the Earth will raise new continents when the price of real estate gets high enough.
Doubling every 7 years can’t be done indefinitely, because the entire supply of mined + unmined gold is fixed. However many tons you think are out there waiting to be mined or harvested from seawater, you have to double every 7 years at 10% growth. At three percent growth you have to double every 20 years. We’ve doubled 3-4 times since 1900. The total supply of mined gold has doubled once.
Gabriel Hanna (64d4e1) — 9/23/2015 @ 1:16 pmDeLong, in a 1998 web article, estimated that the World GDP doubled between 1900 and 1940, then doubled again by 1965, and again by 1995 (his “Preferred” analysis.) The doubling times are thus 40, 35, and 30. So this is an annual growth rate of less than 2.5%. Another analysis, using an “ex-Nordhaus” methodology, estimated the doublings in the 20th Century as 1900 to 1955, and 1955 to 1990. Or 55 years and 35 years, for an annual growth rate of about 2%.
I can’t vouch for DeLong, but he does explain his methodology, sort of. It’s not clear to me that you have provided a similar degree of transparency for your 10% growth rate. China’s built a lot infrastructure, but there is a good chance that most of it will eventually be consider a poor investment. Just as California’s choo-choo train to nowhere is likely to be nothing more than a steel-reinforced obstacle that will be difficult to remove when someone comes up with an efficient use of the land for the people who live there.
BobStewartathome (97a232) — 9/23/2015 @ 2:16 pm@BobStewartathome:It’s not clear to me that you have provided a similar degree of transparency for your 10% growth rate.
It was your figure from your post 93. I used 3-4% every other time I’ve commented on it.
Doesn’t matter. The gold supply can’t double indefinitely. It can’t even double once.
Gabriel Hanna (64d4e1) — 9/23/2015 @ 2:30 pmFoolish people have been proclaiming the end of mining opportunities for a long time. It is true that big gold finds are hard to come by with today’s technology, but most of the mines that have been recently developed couldn’t have been discovered with the technology that existed 100 years ago. And any number of currently profitable mines would be closed if the price of gold was set at $40/T-oz. But higher prices bring renewed interest and innovation. The future holds many promises that could change what we now regard as a futile effort. A hundred years from now we may be mining asteroids, or we may develop more powerful remote monitoring and scanning systems. These prospects are much more realistic than the elimination of the income- or wealth gap via redistribution, a goal that consumes the vile little hearts of Progressives.
I don’t dispute your contention that there is a finite amount of gold (and every other element) to be found on earth. But I question your assertion that we’ve found almost all of it. That is an absurd speculation.
And disparaging our current increases in the world’s holdings of gold by saying that the rate of increase isn’t sufficient to keep up with a 10% growth rate is the rankest sort of red herring. Our holding of gold is increasing at a rate of just under 2% every year, and higher gold prices will yield more discoveries as well as production from known deposits that aren’t profitable at current prices.
BobStewartathome (97a232) — 9/23/2015 @ 2:35 pmGabriel, the 10% value was the potential annual increase in the existing holdings of national treasuries, which amount to somewhere between 20,000 and 30,000 M-tons, depending on what you think China might have. This is the roughly 3,000 M-tons produced annually divided by 30,000. Just to be clear.
BobStewartathome (97a232) — 9/23/2015 @ 2:40 pm@Bobathome:But I question your assertion that we’ve found almost all of it. That is an absurd speculation.
Take it up with the geologists.
Our holding of gold is increasing at a rate of just under 2% every year, and higher gold prices will yield more discoveries as well as production from known deposits that aren’t profitable at current prices.
Doesn’t matter. Can’t double indefinitely. Demand does not change the number of protons in a nucleus. Maybe it works for ten years or maybe it works for a hundred, but after that the gold is all being used and there isn’t any more in the earth’s crust.
Gabriel Hanna (64d4e1) — 9/23/2015 @ 2:45 pm@bobathome: A hundred years from now we may be mining asteroids
I’ve done a lot of orbital mechanics. If the price of gold is high enough to justify that, it is too expensive to use as money. Why not use paper currency backed to property rights in gold bearing asteroids? No dumber than the rocks used by the Yap as currency.
Gabriel Hanna (64d4e1) — 9/23/2015 @ 2:48 pmYou’ve lost me there. I thought the definition of a “real rate of return” was one that had already been adjusted for inflation or deflation. What definition are you using?
Patterico (fecd9b) — 9/23/2015 @ 5:29 pm#131: Again you speculate on the future and your certainty undermines your credibility. However, I like your idea. As long as people believed their property rights would be honored, it might work!
And regarding the economic impossibility of landing a ton of gold safely on earth (no KEWs allowed) from orbit, you probably haven’t considered all the alternatives. At the rate we’re going, a ton of gold could be worth upwards of $100M to $1B. This is a prize that would get your generation’s Paul Macready (whom I worked for a long time ago during summers in Altadena, bless his heart,) off his butt and Shazam!!! “where do you want it sir?”
BobStewartathome (97a232) — 9/23/2015 @ 5:42 pmI thought the definition of a “real rate of return” was one that had already been adjusted for inflation or deflation.
Yes, you are right. That is the definition I am using. The real return has to be higher than deflation, after you account for deflation.
At the end of the investment, your real value has to have increased by at least the same rate that deflation did or you lost money by investing as opposed to not investing.
If you convert everything to nominal values you get the same answer but you add extra steps to the calculation.
Gabriel Hanna (2ca835) — 9/23/2015 @ 6:23 pm@BobStewartathome:Again you speculate on the future and your certainty undermines your credibility.
Yeah, what would a physics Ph.D. know about orbital mechanics?
At the rate we’re going, a ton of gold could be worth upwards of $100M to $1B.
The standard would have been abandoned long before then, ask Herbenen he’ll tell you the same.
Gabriel Hanna (2ca835) — 9/23/2015 @ 6:26 pm@Patterico: For example, if an investment has a real return of 2%, and the deflation rate is 2%, then the nominal rate was 0%. So someone who held your gold pieces for you in a vault and returned the same number would be paying you a 2% real return (as measured by things that are not gold)–but of course you could do that yourself. So an investment would have to offer more than 2% real return, but we knew that already since we knew deflation was 2%. So why go to the trouble of bringing in the nominal rate, which only adds an extra step and doesn’t change the conclusion?
Gabriel Hanna (2ca835) — 9/23/2015 @ 6:35 pm@Gabriel Hanna: Yeah, what would a physics Ph.D. know about orbital mechanics?
What would and engineering Ph. D. know about the limitations of a physics Ph.D.?
BobStewartathome (97a232) — 9/23/2015 @ 7:00 pm@BobStewart@home:What would and engineering Ph. D. know about the limitations of a physics Ph.D.?
No more than he’d know about yours. I myself wouldn’t presume to tell you that you don’t understand what you do as well as I do, whether you are an engineering Ph. D.or whether you clean the toilet for one.
I come from a family of engineers and admire and respect them for what they know; and once in a while I wish they’d listen to what I know. But you know what they say–you can always tell an engineer, but you can’t tell them much. If they don’t know it, it must not be worth knowing.
Gabriel Hanna (2ca835) — 9/23/2015 @ 7:07 pmI agree with what you’re saying in logical terms, but talking about the nominal rate as well as the real rate may help people to reason it through and understand why the real rate must exceed the rate of deflation. Let me explain.
I think what you’re saying is that, to be spurred to invest, your real rate of return must not only be positive, but must also exceed the rate of deflation. Because otherwise you can earn the same real rate by holding the money.
But another way of saying that same thing is that not only must your real rate of return be positive, but your nominal rate must also be positive. Because in a deflationary environment, you can have a positive real rate of return even with a theoretical negative nominal rate. So people need to recognize that nobody would settle for a negative nominal rate even if they could get a positive real rate, as long as they could achieve the same real rate or better by holding the money. One way of getting that concept across is to say that the nominal rate must be positive, as well as the real rate.
What I am saying is that we are saying the same thing in different words — and while your way of saying it does cut out an irrelevant variable in one sense, inserting the irrelevant variable can help people understand why it is irrelevant.
Put another way, your statement “but of course you could do that yourself” is shorthand for “you could earn that rate by holding onto the money and not investing it” — which is another way of saying that it is not enough for your real rate to be positive, your nominal rate must also be positive.
Does that make sense?
The way I chose to express this concept in my proposed missive to Herbener is: “The nominal interest rate must necessarily remain positive, or else people would simply hold their money.” I think that way of saying it makes it clear, at least to some, why people would reject a deal that got them a positive real rate of return, but one lower than deflation.
My way of phrasing it may be more attractive to someone who has a hard time doing the shortcuts or recognizing the assumptions in their head.
Patterico (fecd9b) — 9/23/2015 @ 7:34 pmIn my example, the need for the nominal rate to be positive is what necessarily pushes the real rate above what would ordinarily be the real equiibrium rate of interest. In my example, the equilibrium rate of interest (determined by time preference) is 1% in a non-inflationary and non-deflationary environment. But deflation of 3% means that the real rate must exceed 3% because the nominal rate must be positive. Once you have a real rate that is necessarily higher than what the equilibrium rate would be absent deflation, there should be distortions in the market.
This is getting ahead of myself, because I have not yet discussed the Austrian theory of the business cycle, but the theoretical problem (as I think it through) would not be “not enough lending” but rather malinvestment in the wrong sort of production process. As I said in the proposed missive to Herbener, it’s kind of the inverse of the classic Austrian business cycle theory, in which an artificially low interest rate misleads entrepreneurs into believing consumers have a low time preference, which causes them to invest less in current consumption and more in higher-order stages of production. In the scenario we have posited, we have the opposite problem. Deflation causes the interest rate to be set above the equilibrium limit, which would cause malinvestment in immediate consumption when consumers are not currently as interested in consumption as the interest rate would lead entrepreneurs to believe.
This discussion is fascinating and is crystallizing my thinking as to the possible dangers of deflation, as the mirror image of the dangers of inflation. I’m not sure if you followed the last paragraph, but if you read up on the Austrian theory of the business cycle (I have a short primer here) it will make more sense.
Patterico (fecd9b) — 9/23/2015 @ 7:47 pmI have to say, I learn as much or more in these discussions as I do being a passive receptacle for information while reading a book or listening to a podcast. The reason is that being challenged by smart and interested readers forces me to recognize where my knowledge is shaky and to shore up my knowledge, which opens up new questions as I learn more. Which is another way of saying: thank you for participating in this discussion with me.
Patterico (fecd9b) — 9/23/2015 @ 7:50 pm@Patterico: I have learned much from these discussions too.
The need for the nominal rate to be positive is what necessarily pushes the real rate above what would ordinarily be the real equilibrium rate of interest.
It’s two ways of saying the same thing. The real rate of your return is (100% + nominal) / (100% + inflation). If you make inflation less than zero (deflation), then you are getting your real rate by dividing the nominal by a number smaller than one, which makes it bigger. If your nominal rate is zero, then your real rate is equal to 100% / (100% + inflation), which is almost equal to the deflation rate (if the rate is small, like say 5%). 100% / (100% – 5%) = 105.3% ~ 105%.
I am this moment, in fact, trying to build a computer simulated market using only actors who have ordinal preferences and showing that numerical prices will emerge and actors will respond to them without anyone having to calculate the marginal value of anything. I’ve figured out the rules of the simulation and even a single actor will produce to meet its needs using extremely simple and deterministic rules.
This will result in quantitative results and it will be easy to do things like add a currency, create deflation, etc. and see what results emerge.
Gabriel Hanna (2ca835) — 9/23/2015 @ 8:32 pmGabriel, true enough. But I think if I was trying to get back to earth from orbit in a low cost, safe, way, I’d hire an engineer with a fluid dynamics background and an agile brain, and, of course, with trans-sonic expertise. One thought, place a space shuttles in orbit, have it jettison its engine, and replace it with the gold asteroids, in the right amount and in the right place of course, and then put out the welcome mat at Edwards. The engine could be dropped (accidentally) on a nuclear weapons facility in Iran.
Or if that looks difficult, give Branson a call at Virgin Air. He’d rise to the challenge and maybe figure out a way to make the operation pay for itself leaving the gold as the profit.
BobStewartathome (97a232) — 9/23/2015 @ 8:39 pm@BobStewartathome But I think if I was trying to get back to earth from orbit in a low cost, safe, way
It’s getting it from the asteroid belt to earth orbit that’s going to cost you, in time, energy and life support. You’ve worked out how to get the jewels from the docks to Queen Isabel’s court and sort of assumed the two transatlantic crossings.
Space travel is very expensive. Cheaper with fusion, but what isn’t?
Gabriel Hanna (2ca835) — 9/23/2015 @ 8:45 pmOne further complication — and I am thinking out loud here, so if I lose you, I apologize.
My understanding is that the Austrians believe that the unsustainable boom in classic Austrian business cycle theory is caused by artificial credit expansion resulting from a central bank increasing bank reserves. This artificial expansion of the monetary base allows banks to issue fiduciary media, which causes artificially low interest rates that are driven below the market rate set by time preference. This sends a false signal to entrepreneurs, who see the low nominal interest rates as a signal that consumers have lowered their time preference, and have chosen to reduce consumption and increase saving, demonstrating their increased demand for future goods and decreased demand for present goods. Entrepreneurs then invest in higher-order production processes that will prove unsustainable. Eventually the bad investments will fail to pay off, and businesses will go under, resulting in the bust.
By contrast, as we have seen, Austrians (according to Herbener) also seem to believe that expected price inflation (as opposed to inflation of the monetary base) does not necessarily affect the real rate of interest, as reflected in the “purchase of producers’ goods and services, which are transformed over a period of time, finally to emerge as consumers’ goods.” This is because the cost of inputs will rise when producers expect higher output prices, meaning the spread between inputs and outputs remains constant. In the loan market, Austrians also appear to believe that expected inflation does not necessarily affect the real rate of interest, since the nominal rate can be raised to compensate for inflation while maintaining the pure (real) rate of interest determined by time preferences.
Herbener has also said, I believe, that expected price deflation can be similarly anticipated and adjusted for, so that the capitalist in the production process can perform the capital-advancing function within the production process, and still maintain his real rate of interest despite falling prices, by the downward adjustment of the prices of inputs, In this way, businesses can still make money even when output prices are lowering.
But Gabriel, I think you have made a facially sound case that the same is not true in the credit market. While nominal interest rates can be adjusted upwards to make the real rate of return equivalent to the equilibrium rate of interest. But in a deflationary environment, as we have seen, this adjustment process cannot take place as easily — because the nominal rate must always remain positive, just as the real rate must remain positive. Because (as you have observed) this means that the real rate must exceed the rate of deflation, we can easily imagine an environment in which the real rate necessarily exceeds the equilibrium rate. (I think this may be a function of time preference itself; because we generally prefer present goods to future goods, we demand more future goods in return for giving up present goods.)
It is my suggestion that this scenario throws us into the converse of the boom period of the classic Austrian business cycle theory. Instead of artificially low interest rates, we now have artificially high real interest rates, set above the real equilibrium interest rate. In short, the need for the nominal interest rate to remain positive necessarily creates a real rate of return that is higher than the equilibrium rate that would normally obtain in a non-deflationary environment.
This, I submit, could cause the opposite effect of what is normally described by Austrian business cycle theory. We would see entrepreneurs misled by the artificially high interest rate into believing that people’s time preference is high, and that they prefer immediate consumption. Entrepreneurs would engage in malinvestment in lines of production geared towards immediate consumption, when consumers would actually have a lower time preference and would prefer investment in higher-order stages of production.
Which is a long way of saying that the principles of Austrian business cycle theory, applied to deflation rather than credit expansion, ought to result in exactly the sort of drag on the economy that you described: an artificial suppression of investment in long-term capital goods.
If you are in agreement with this theory, Gabriel, I think I will submit a version of it to Herbener. I have never seen this expressed anywhere in quite this way, but the logic makes sense to me.
Patterico (fecd9b) — 9/23/2015 @ 8:49 pmYes, that is what I am saying. Each way has its value, in that one way of expressing it may make more sense to person A, while another way of saying it might be more intuitive to person B.
Please take the time to slog through my lengthy recent comment, because I think that, while perhaps simply restating your argument in different words, I have done so in a way that ought to make sense to people who accept Austrian business cycle theory. I will be fascinated to see how Herbener reacts to it. If you can figure out a way to tighten up the question, I would appreciate that too.
Patterico (fecd9b) — 9/23/2015 @ 8:52 pm@BobStewart@home:place a space shuttles in orbit, have it jettison its engine, and replace it with the gold asteroids
Leaving them in orbit of course is much cheaper than getting them down–done safely or not. If we take the Yap Islander approach we can just sell the property rights in the orbiting gold–but if we’re going to be that sensible may as well leave them in the Belt where we got them.
You may have heard Heinlein’s quote, “Get to low-Earth orbit and you’re halfway to anywhere in the solar system.” You may be aware that this is literally true: an orbit that skims the daisies on Earth requires exactly 1/2 the energy required to reach Earth’s escape velocity–everything cancels out but the 1/2.
Not a lot of help with moving the asteroids though, you’re transferring between Earth-Sun orbit and Belt-sun orbit and back, so you’re not done with all your velocity changes.
Gabriel Hanna (2ca835) — 9/23/2015 @ 8:56 pm@Patterico:lengthy slog
I think I follow you well enough. So the cure for what plagues deflation, for commodity money, is not going to be something like gold. It would be something like the commodity index funds I was talking about, something that is a large collection of varied items that can be more or less counted on to grow and shrink along with the economy.
But this index fund would be so abstract, and complicated to calculate, that it might as well be fiat currency, except that you might be able to keep governments out of it.
Bitcoin is an example, if enough people continue to take it seriously. It has no intrinsic value, and it could be set up so that it is created or destroyed at roughly the level at which the economy grows.
Gabriel Hanna (2ca835) — 9/23/2015 @ 9:03 pmYeah, my English-major way of approaching all this may be imprecisely stating how one must compensate for inflation or deflation.
It reminds me of another issue that I think will amuse you, as a math guy. In criminal law in California, certain violent crimes allow prisoners to receive only 15% credit for the time they have served. Thus, when you serve 100 days, for example, you get credit for your time actually served (100 days) plus 15% of that (15 days). So in a 115-day sentence, you would serve 100 days. Here’s the funny part that I think is analogous to our discussions here: folks in the criminal justice system often refer to this as “85% time” and seem to believe that when you get 15% (really 115%) credit, you serve 85% of your time — because, you know, 100 minus 15 is 85. As a math guy I’m sure you see the fallacy instantly — but it took me years to realize and still baffles some people when I try to explain it to them, Namely, “85% time” is actually more like 87%, because when you take a sentence (nominal time) and figure out what a person has to actually serve (real time), the issue is, how much time do they have to serve such that x (the amount of real time) plus 15% of x (the credits) equals 100%? So the equation (I hope I am doing this right) is x plus .15(x) = 100, meaning 1.15x = 100, or x = 100 divided by 1.15, or about 87%. Meaning “85% time” is really more like “87% time.”
I think that’s what you were trying to gently tell me with the equations above. Remember, I double-majored in English and music, and though I did well in logic in college, pure math is not my strong suit. (But I can puzzle through it if I do it slowly.)
Patterico (fecd9b) — 9/23/2015 @ 9:04 pm@Patterico:lengthy slog
Perhaps this paraphrase will show if I understand: deflation’s interest rates are telling markets that everyone really wants to consume right now, and so they want money. But it’s the money that is in high demand, so the reason money is expensive to rent is because people want to do nothing with it right now. Money is valuable in itself and not as a medium of exchange. What the producers should be doing is producing money, not stuff, producing more stuff will just make the money more expensive, and more valuable and more worth hoarding.
Obviously it doesn’t go on forever in one direction, something breaks, and that may be fortunes of the shareholders of the investments bought with expensive money.
Fiat currency is harder to do this with. It’s never valuable in itself, and the supply is easily changed.
Some compromise like Bitcoin–intrinsically worthless, not under control of government–might preserve the best features of both–or the worst features of both.
Gabriel Hanna (2ca835) — 9/23/2015 @ 9:10 pm@Patterico: Well, I work for an insurance company and I am always amazed by the number of people who are more confused about math than you are. I am not confused that the people with business degrees don’t know math, because I have friends who teach business math.
The most frequent thing I have to explain is why you can’t average percentages or add up averages. What’s complicated in insurance is that most of the numbers we are interested in are weighted averages but they are well disguised. I spent a lot of time working through them and I have to explain it all about once a week.
I once had an elementary ed major tell me that math can’t be right because of the story of the three-men-who-split-a-$25-bill-and-paid-with-three-tens. She’s out there now, educating the new generation.
Gabriel Hanna (2ca835) — 9/23/2015 @ 9:16 pmWell, I think that’s a separate issue. The cure, I think, is a free market in money, so people can choose what works for them. If gold does not work, maybe people will choose something else.
I know that seems unthinkable to people wedded to the status quo, but consider this: I think I told Kevin M above (who has disappeared from the thread) that I am in the middle of Capitalism and Freedom by Milton Friedman. Now, one of the things that is amusing about it is that he proposes a free-floating currency exchange as a solution for trade problems caused by pegged exchange rates. It was a bit jarring to realize that I was reading a book written in 1962, before Nixon took us off the gold standard, and before we had a world economy that follows exactly what he proposed. I am sure that in 1962 there were people who thought that his proposal was insane and dangerous, yet we now take it for granted.
Increasingly I think that the more things we can entrust to the distributed intelligence of the market, and take out of centralized command control, the better off we will be. Money is one area that I suspect would improve vastly in a free market. And we would be a freer people, by far, if we could get government out of money to the extent possible (while retaining the rule of law and the power to enforce contracts, which as you have observed necessarily means that it retains a limited role in the definition of money).
Whether Bitcoin can work gets us into problems I mentioned in an earlier post about the regression theorem, and whether it is possible to create a currency out of thin air and determine its value. Mises said that was impossible and I know of no fiat money in history that did not originate with hard money. The wild fluctuations in the price of Bitcoin seem to bear out this concern, and raise genuine questions about whether a consensus as to its “true value” as a medium of exchange can ever be ascertained with enough certainty to make it truly workable.
Patterico (fecd9b) — 9/23/2015 @ 9:16 pmMmm, none of that is the way I would put it, and I’m not sure Austrians would find it accurate. Let me restate it in terms I am comfortable with. Yes, deflation’s interest rates are artificially high, which is telling entrepreneurs that people want to consume right now — and that price signal is inaccurate, because in truth people are saving more (is this what you mean by “they want money”?) and are less interested in immediate consumption than the rate of interest seems to indicate. The reason money is expensive to rent, according to the logic of my lengthy slog (which Herbener may find fault with) is because its value increases simply by holding it, meaning that in order to obtain both a positive real and positive nominal rate of return, the real interest rate is pushed above the equilibrium rate that one might find in a non-deflationary environment. What the producers should be doing is to engage in more investment in higher-order stages of production — i.e. long-term capital investments, which will pay dividends in the long run. This will result in an allocation of resources that is efficient because it is in line with people’s real time preferences, and not the time preferences that the artificially high interest rates appear to signal.
Patterico (fecd9b) — 9/23/2015 @ 9:26 pm@Patterico:What the producers should be doing is to engage in more investment in higher-order stages of production — i.e. long-term capital investments, which will pay dividends in the long run.
Okay then. So the challenge is that it is harder to decide what to do. Price signals are easy–sell for more than you bought if you can, make more of things that are going up and less of things that are going down. Interest rates could have different reasons for being where they are.
The cure, I think, is a free market in money, so people can choose what works for them. If gold does not work, maybe people will choose something else.
Sure but they will occasionally choose stupid things, and those choices will have bad effects on other people who weren’t stupid. There will be “junk currencies” and currencies that look good while not examined closely (what’s that, you there in the back, are you saying “That’s what we have now”?). There will be butthurt. Ben Franklin said, a republic if you can keep it. Free markets are the same. Everyone likes the free market until they lose and demand that the government fix the “market failure”… Everyone wants cheap money while it’s worth something, and then complains when they’re left with a cellar full of tulips or South Sea stock.
Hence the challenges. Free markets may not temperamentally suited to plains apes. Maybe try with cats.
Gabriel Hanna (2ca835) — 9/23/2015 @ 9:34 pmAll I know is that $17 trillion equals a whole lot of productive labor for a country of 300 million people with 90 million permanently out of work, an unemployment rate of young people of over 20 percent, a do-nothing Congress and a President who thinks everything will be better because he watched too many episodes of Star Trek: TNG with Patrick Stewart saying “Make it so, Number 1.”
Ag80 (eb6ffa) — 9/23/2015 @ 9:48 pmwe’re still on the holodeck, Ag, only reasonable explanation,
narciso (ee1f88) — 9/23/2015 @ 9:53 pmYeah, but it’s not $17 trillion of productive labor, unfortunately. Because it includes government expenditures, which are in recent times as much as 40% of GDP or more. Because those expenditures are disconnected from preferences and not a result of voluntary transactions, we can’t know how productive those dollars are.
Patterico (fecd9b) — 9/23/2015 @ 10:01 pm144 … just as the real rate must remain positive. …
I don’t accept that the real rate must remain positive. This seems to depend on all people all the time preferring to spend all their money immediately rather than accept a small loss in real value over time. Which is not the case.
James B. Shearer (29df46) — 9/23/2015 @ 10:53 pm151
I know that seems unthinkable to people wedded to the status quo, but consider this: I think I told Kevin M above (who has disappeared from the thread) that I am in the middle of Capitalism and Freedom by Milton Friedman. Now, one of the things that is amusing about it is that he proposes a free-floating currency exchange as a solution for trade problems caused by pegged exchange rates. It was a bit jarring to realize that I was reading a book written in 1962, before Nixon took us off the gold standard, and before we had a world economy that follows exactly what he proposed. I am sure that in 1962 there were people who thought that his proposal was insane and dangerous, yet we now take it for granted.
Well if everyone went back on the gold standard this would imply fixed exchange rates. Isn’t that what you want?
Classical economics has the concept of an optimal monetary union, the ideal size of a region in which everyone uses the same money. Bigger is better from the point of view of facilitating travel and trade but (in the classical view) starts to do more harm than good when you try and tie two regions that are too different together. So there is an optimal size, not too big and not too small. Many economists thought the Euro was a bad idea because countries like Germany and Greece are too different. But the politicians ignored them and went ahead with the Euro anyway. What is the Austrian view of this?
James B. Shearer (29df46) — 9/24/2015 @ 5:47 am“Well if everyone went back on the gold standard this would imply fixed exchange rates. Isn’t that what you want?”
It’s a complex issue and I encourage you to read Friedman on the subject, but it’s not as simple as saying one prefers a pegged exchange rate or a free floating exchange rate. The problem revolves around how to address an imbalance between countries in the balance of payments. Under a pure gold standard this is all self-correcting, under a mechanism that I do not have to ime to explain but which was known even in the time of David Hume. The problem that Friedmans had with that scenario was that central bank control over the money supply interferes with the natural mechanism. So you’re left with a system in 1962 in which Americans could not own gold but foreigners were allowed to exchange it for a fixed rate, and government could either set the price of gold or allow the relative price of different currencies to be determined on the market. Friedman decided, and I agree, that a free floating exchange rate system eliminates government control as much as possible in this scenario. But that does not mean that a gold standard would not handle it better, in theory, as long as there were no central bank control over the money supply.
Friedman says a good standard would be ideal if it were widely accepted by the public, because it would accomplish the goal of getting government out of our money. The only problem he would have with it at that point is that it requires real resources to get the money. Historically this has created incentives to rely on fiduciary money, and once you do that, government is inevitably tempted to issue its own fiduciary money, and next thing you know government is in control, which Friedman thinks is really bad. (Mises (summarized by Murphy in a part that I skipped summarizing) says the trade-off is more than worth it; that the notion that we must expend real resources to expend money is a small price to pay for escaping government control of the money supply.)
Patterico (fecd9b) — 9/24/2015 @ 7:14 amGiven that we have nearly instantaneous access to our demand deposits via debit cards, what would the Treasury use as the required amount of gold (if that was the choice) to hold for redemption? It would seem to be a bit inadequate to just back coins and notes. Presently, currency (M0) is running around $400B, while the M1 aggregate is around $3050B. Or would demand deposits disappear?
To put some numbers behind this question, Wiki has this summary of U. S. gold holdings:
This morning, gold is quoted at $1155, so today’s market value is $298.7B, which would imply that covering M0 would require an increase in U. S. holdings of 2,861 M-ton, to 10,906 M-ton, which would cost about $106B.
Covering M1 ($3050B) would require a ten-fold our current holdings, or about $950B.
Just to be clear:
http://www.investopedia.com/terms/m/m1.asp#ixzz3mfR2wEhc
BobStewartathome (97a232) — 9/24/2015 @ 8:34 amCovering M1 ($3050B) would require a ten-fold increase of
toour current holdings, or an addition of about $950B worth of gold at today’s prices.FTFM
One salutary property of a market price is that if the Government announced that it was buying gold to cover some measure of our currency, then the price of gold would increase significantly, which would lessen the amount of gold needed. For example, M0 ($405B) would be covered by our present holdings at a price of about $1600/T-oz. M2 would be covered at a price of about $10,000/T-oz.
BobStewartathome (97a232) — 9/24/2015 @ 10:17 amARrrrgghh!!! Make that M1 ($3,050B) would be covered at a price of about $10,000/T-oz.
BobStewartathome (97a232) — 9/24/2015 @ 11:36 am#96: Gabriel, I think I understand the confusion about the 10%. I was speaking of the increase in the gold holdings of governments, which is a small fraction of the gold that is held world-wide. As I mentioned in a previous post, about 150,000 M-tons have been mined since 1900, and governments currently hold around 25,000 M-tons. With current production being in the range of 3,000 M-tons annually, governments could increase their holdings by 10% a year by buying just current production. Whether this would be sufficient to implement a gold standard for currency is another question. As I mentioned above, the U. S. could easily cover their coins and notes with a 33% addition to its holdings at a gold price of $1155, and at a price of about $1600/T-oz the value of their gold holdings would equal M0.
BobStewartathome (97a232) — 9/24/2015 @ 1:14 pm@BobStewartathome:As I mentioned above, the U. S. could easily cover their coins and notes with a 33% addition to its holdings at a gold price of $1155, and at a price of about $1600/T-oz the value of their gold holdings would equal M0.
Right, but none of that answers my objection. The growth in the supply of gold, even if governments hog all of it and conscript all of us to work every mine, can’t possibly keep up with today’s economic growth for more than a decade or two.
It’s not the amount of gold that’s at issue, it’s the growth rate in it. Make the dollar a nanogram of gold if you want. Or use all the gold in the world to represent the world economy today. Doesn’t matter. The total gold supply has to double every 10 – 20 years to grow with the world economy and it can’t.
Yes, we can convert any amount of money into any amount of gold that is physically present, no one disputed that.
Gabriel Hanna (64d4e1) — 9/24/2015 @ 2:45 pmGabriel, I’d be very happy with as few as two generations [of our faster breeding cohort … say 30 years of fatherless families supported by Federal “compassion”] of economic sanity, to replace 80 years of folly. If things get out of balance with gold [not likely unless we actually see 10% annual growth in global productivity,] switch to Pt for a generation, and then back to gold. Utopia doesn’t interest me. Avoiding demagogues who promise a War on Poverty with other people’s money, or social justice with our policemen’s lives, or the emasculation of our armed forces (literally) would be sufficient to make me rest easier about the future that will confront my grand children in a decade or two. It’s really about Sowell’s Conflict of Visions.
Regarding harvesting asteroids made of gold: No need to send people out there, a robot with sensors capable of detecting very heavy rocks, plus a navigational system that can compute a suitable course through the universe, maybe including sling-shots around Venus or Mercury to kill off excess velocity relative to Earth, plus solar panels that could provide sufficient power to drive a fairly low thrust drive, maybe by accelerating minute quantities of material from the rock to relativistic velocities, and a couple of decades before the conveyor belt of harvested rocks arrives in an earth orbit would suit me. The generation that fought WWII was full of people who would jump to such challenges. Now we “know” its impossible. Just like we “know” that the majority of all the gold that’s going to be found has been found.
PS: Patterico, I’m assuming the Sowell link will benefit you. There is an id parameter in the URL, and I’d appreciate a confirmation that all is as intended.
BobStewartathome (97a232) — 9/24/2015 @ 5:19 pm165 … Avoiding demagogues who promise a War on Poverty with other people’s money, or social justice with our policemen’s lives, or the emasculation of our armed forces (literally) would be sufficient to make me rest easier about the future that will confront my grand children in a decade or two. …
What does any of this have to do with the gold standard?
James B. Shearer (29df46) — 9/24/2015 @ 6:26 pmJames, “with other peoples money” is a clue. The massive increase in government spending has given our feckless administration the confidence that comes with massive power. They think they came ram anything they want down our throats because they have a finger in almost every pot in bizarre.
Spending without consequence is what we have. A gold standard would act like a thermometer for the average guy who doesn’t pay much attention to things that seem to exist in another universe. When the administration decides to spend $9T, $4T of which the Federal Reserve has agreed to create out of thin air, the perturbations to the M1 and M2 money supply would require purchases of gold by the administration to support the new currency. This would result in startling increases in the price of gold. The average guy would suddenly realize that trains to nowhere in California, or increased benefits for children bearing children, or steadily increased pay for government “workers”, all relate to his well being in a very real way.
As thing stand, even “conservative” politicians regard deficit spending as a free lunch.
BobStewartathome (97a232) — 9/24/2015 @ 7:02 pm@BobStewartathome: No need to send people out there, a robot with sensors capable of detecting very heavy rocks, plus a navigational system that can compute a suitable course through the universe, maybe including sling-shots around Venus or Mercury to kill off excess velocity relative to Earth, plus solar panels that could provide sufficient power to drive a fairly low thrust drive, maybe by accelerating minute quantities of material from the rock to relativistic velocities, and a couple of decades before the conveyor belt of harvested rocks arrives in an earth orbit would suit me…
Oh, is that all? Would you also like an unlimited supply of chocolate-covered redheads, a genetically engineered flying unicorn, and a 60″ 3D flat screen TV that fits in your pocket and costs a nickel and runs on AAs?
Now we “know” its impossible.
Who said that? No one. This is exactly what I said:
If the price of gold is high enough to justify that, it is too expensive to use as money.
Every statement I made in justification of what I said explicitly assumed that is was in fact possible to go to the asteroids and get gold. Not only that, I proposed much, much cheaper and far more realistic alternatives to achieve the same result that you desired. But it will never make sense. We could invent fusion and transmute gold cheaper than develop and implement all the technology to do that–and even then we still have to pay the delta v some way. Long before gold got that expensive, sensible people would have stopped using it and used something else.
You’re not talking about going to India by sailing west and coming back with exotic spices and strange people from another world, and I’m telling you it’s stupid and we’ll just see what history says. You’re talking about going to India by sailing west, taking Spanish wine grapes with you, teaching the natives to cultivate wine grapes and produce wine, and after years of effort struggling with the wrong environment and people who don’t follow your customs and speak your language, triumphantly return to Spain with a cargo of wine, and I’m telling you it’s stupid. Not impossible, stupid.
You are not stupid, but the scenario you outlined is because you’ve never bothered to think very hard about it.
If this sort of handwaving, without a single calculation, to assert that one day no doubt it will be perfectly simple and cheap, is what you do in your day job, I hope I don’t hear of your work one day on “Engineering Disasters”.
I like your comments when you think about what people actually said and engage that thing, but the other stuff you say is practically trolling.
I am far more enthusiastic about the possibilities of the Solar System than you could ever possibly be, because my enthusiasm is based on reality and not fantasy. With the capabilities you blithely assumed, we could accomplish far more as a civilization than bringing back a particular metal without anywhere near as much effort. Gold would literally not be worth anything to a civilization with that kind of command over matter and energy. It would be like God using his powers to cheat at Monopoly.
Gabriel Hanna (2ca835) — 9/24/2015 @ 9:06 pmGabriel, when I troll my goal is a nice King salmon. If you’re going to sail to India three centuries ago, I think you’d do better taking some Anglo-Saxon ideas about governance, artillery with ammunition, and as much fresh water, lime juice, salted beef, biscuits, and IPA as you can fit in your sailboat, which should be built on a scale and using principles that will amaze the natives. Sort of like Clive. But even then the mortality rate was appalling. But that was easy, right. Not like exploring space which is really hard, not to say impossible.
BobStewartathome (97a232) — 9/25/2015 @ 7:54 amAt various points I’ve suggested that the hypothetical construct that underlies Gabriel’s math is not realistic. Not everything can be supplied at a uniformly increasing rate. There’s only so much water front property for example. And it is unlikely that the labor force can grow by that same rate in such a world since it is unlikely that anyone would be unemployed (an assumption Gabriel made in a previous post.)
These issues aside, I think there is a bigger one. In a world with a currency based on a commodity that doesn’t grow as fast as the economy, but has as steadily increasing amount of wealth generated by the economy, it is entirely possible that consumers would forego borrowing entirely. Presently, we have young professionals leasing $50K prestige autos, with no thought of saving money. They do this with the expectation that they will be making more money (inflated money) in the future, and their lease payments will fall as a percent of their income. Ditto for college degrees. Kids incur six figure debts for degrees, with the expectation that they will land high paying jobs, and their payments will be a trivial portion of their income. Everything is future oriented, and the underlying premise is that the payback will be in phony dollars. But the future really doesn’t have to depend upon borrowing. More importantly, the future should not depend on borrowing that is undertaken with the expectation of inflation, because with this expectation the borrower will not evaluate the payoff as carefully as he might if he thought he’d have to pay it off in real dollars.
In the hypothetical world that supports Gabriel’s math, most people would save money, and when the old clunker finally gulped its last gallon of gas, they would use some of those savings to buy a new car, no loan needed. What we have now is an economy that relies on foolish “investments” that seem acceptable to the borrower because they really don’t intend to pay back the loan in real dollars. Worse, we have kids who are hopelessly in debt to the government for their education, and half of them either are unable to find any employment, or they find a job that doesn’t require a college degree. And I’ll bet a lot of them enjoy that job a lot more than their transgender studies major.
I’ve never objected to Gabriel’s math. He goes wrong with his assumption about what it takes to make an economy work. Borrowing, particular foolish borrowing, is not a key to a prosperous future.
BobStewartathome (a52abe) — 9/28/2015 @ 4:14 pm171 I’ve never objected to Gabriel’s math. He goes wrong with his assumption about what it takes to make an economy work. Borrowing, particular foolish borrowing, is not a key to a prosperous future.
Borrowing is just the flip side of saving. If you want to defer some of your consumption to the future someone in the future must forego some of their consumption.
James B. Shearer (29df46) — 9/28/2015 @ 4:50 pmJames, if you save, then the money is yours. If you borrow, you are casting your fate to the winds, especially if you have no way to pay it back … other than voting for Keynesians.
BobStewartathome (a52abe) — 9/28/2015 @ 5:34 pmOff Topic: Mark Steyn’s comments in Copenhagen are here. Well worth the time!
Thatcher & Regan beget McCain & Hastert beget Boehner, Cameron & McConnell. Fine.
It’s an old story, told many times.
BobStewartathome (a52abe) — 9/28/2015 @ 6:26 pm173 173.James, if you save, then the money is yours. If you borrow, you are casting your fate to the winds, especially if you have no way to pay it back … other than voting for Keynesians.
If I save I am lending to society. Giving up present consumption for a promise of future consumption. If society is unable to pay me back when the time comes then I was unwise to lend to them.
Who is the greater fool, the man who borrows money he has no way to repay or the man who lends it to him?
James B. Shearer (29df46) — 9/28/2015 @ 8:44 pmJames, our children and grand children are currently “lending” to us. They, indeed, are the greater fools. But in their defense, no one has ever explained the terms of the loan to them. And few are aware of the issue until they begin to earn enough money to be targeted by the social justice corps. Our politicians are their investment advisors.
And investing money you have saved is likely to be done in a more prudent fashion than spending money you have borrowed. In the latter case, the lender judges the “investment”, which for most consumer purchases is nothing more than the nature of the collateral offered (the repo man has a set of keys) and the credit score of the borrower. Which is fine in general, but as we can see in the student loan case, young people do not always choose wisely. Money spent on transgender studies and the deconstruction of American history is simply a transfer of wealth from poor students to parasitical professors and the university apparatus that lends its authority to the charade.
BobStewartathome (a52abe) — 9/29/2015 @ 7:40 am