The Gotterdammerung of Central Banking

Prudent Bear ^ | 9/24/2007 | Martin Hutchinson

[hubbubhubbub]

“right wing form of Marxist historicism “

Don’t babble out loud. It reveals to all your IQ.

[hubbubhubbub]

Deflation is good for citizens, Inflation is good for Government.

[Toddsterpatriot]

Deflation is good for citizens,

Exactly. Just look what deflation did for American workers in the 1930s.

[redgolum]

For later read

[hubbubhubbub]

Savers made out like bandits, debtors is another story.
Are you are saver or debtor?

[Toddsterpatriot]

Savers made out like bandits,

And the 25% unemployment rate was an added bonus.

Are you are saver or debtor?

I'm a saver.

[cinives]

Sure you are. You don’t see that technology in other industries has advanced as well ?

Additionally, the computer industry has successively lowered prices on all its products for 2 reasons: 1) supply and demand and 2) competition. As the technology has moved along, costs have not decreased; rather, supply for the “older” product has increased, and the prices now reflect that.

If there wasn’t Intel and AMD and Motorola, we’d be paying a lot more per CPU.

[Toddsterpatriot]

You don’t see that technology in other industries has advanced as well ?

Please explain why lower prices in technology are similar in any way to the lower prices consumers "enjoyed" during the Great Depression.

[Hydroshock]

Saver.

[cinives]

In the 20s the money supply grew a small bit less than productivity, so the 20s was a slightly deflationary period. I don’t think anyone is blaming that for the stock market crash and subsequent bank failures. It was the 1/3rd contraction in the money supply between ‘29 and ‘32 that was the biggest problem, along with the bank failures and unemployment.

http://www.shambhala.org/business/goldocean/depsupply.gif

No one here is arguing that a major contraction in the money supply, like during the depression, is a good thing.

[Toddsterpatriot]

No one here is arguing that a major contraction in the money supply, like during the depression, is a good thing.

Oblomov thinks that persistent deflation, "small amounts of deflation (<3% per annum)" would be a good thing.

[oblomov]

Yes, it would be a good think. Deflation was the norm during the 19th Century. On the other hand, There was 20%+ deflation in 1932, which is a major contraction in the money supply. This is not what I advocate. Instead, a modest amount of deflation (we can debate the amount) would be good for savers, it would encourage our economy to migrate toward production instead of consumption, and it would prevent the growth of government.

Massive deflation, like any form of economic instability, would cause the economy to seize up. The same is true of massive amounts of inflation. By your logic, even small amounts of inflation are bad since the collapse of Wei But it’s disingenouous to treart all deflation as equivalent with the Great Depression, while ignoring the time period when we did have modest amounts of deflation, such as the early 1950s and the latter part of the 19th Century. These periods were robust economically.

[oblomov]

CORRECTED POST:

Yes, it would be a good think. Deflation was the norm during the 19th Century. On the other hand, There was 20%+ deflation in 1932, which is a major contraction in the money supply. This is not what I advocate. Instead, a modest amount of deflation (we can debate the amount) would be good for savers, it would encourage our economy to migrate toward production instead of consumption, and it would prevent the growth of government.

Massive deflation, like any form of economic instability, would cause the economy to seize up. The same is true of massive amounts of inflation. By your logic, even small amounts of inflation are bad since the collapse of Weimar Germany was inflationary. Similarly, it’s disingenouous to treat all deflation as equivalent with the Great Depression, while ignoring the time period when we did have modest amounts of deflation, such as the early 1950s and the latter part of the 19th Century. These periods were robust economically.

[Toddsterpatriot]

Deflation was the norm during the 19th Century.

Do you miss the Panics and Depressions that were also the norm?

There was 20%+ deflation in 1932, which is a major contraction in the money supply. This is not what I advocate.

At 2.5% a year, it would only take 8 years to deflate 20%. Do you think home ownership might be damaged by long term deflation at 2.5% a year? Why do you think the same house should be worth 2.5% less each year? How would that be good for savers who already own a home?

Would you recommend that salaries be reduced by 2.5% a year, to stay in line with the decline in prices?

it would encourage our economy to migrate toward production instead of consumption, and it would prevent the growth of government.

How would production be encouraged? If GM had to cut prices by 2.5% a year, they would rapidly go out of business. How does that encourage production?

Consumption would certainly be curtailed. Do you think that the loss of production and the reduction of consumption might have a negative impact on the economy? How would the increased unemployment that would occur prevent the growth of government? The last time we suffered from deflation, we got massive growth in government.

By your logic, even small amounts of inflation are bad since the collapse of Weimar Germany was inflationary.

You're confused, where did you see that point in "my logic"?

Similarly, it’s disingenouous to treat all deflation as equivalent with the Great Depression, while ignoring the time period when we did have modest amounts of deflation, such as the early 1950s

When did we have deflation in the 1950s? Any stats?

[oblomov]

Would you recommend that salaries be reduced by 2.5% a year, to stay in line with the decline in prices?

Not if productivity is going up by more than 2.5% per year.

That is my point: that deflation encourages productivity and inflation encourages waste. As a result, in terms of cultural and economic impact, severe deflation is worse than severe inflation, but modest inflation is worse than modest deflation.

If GM had to cut prices by 2.5% a year, they would rapidly go out of business. How does that encourage production?

GM would not necessary need to cut prices by 2.5% per year, if they could demonstrate the value of their goods. No matter the economic conditions, all prices do not move in lockstep with the general price level, just the average of prices. Technology and clothing have had massive price deflation over the past 20 years, and yet more technology goods and clothing are produced each year at ever greater levels of productivity.

The last time we suffered from deflation, we got massive growth in government.

Again, your comparison is to a period where we had severe deflation, bank failures, a collapse in the equity and commodity markets. This would not need to happen under my preferred scenario, which is deflation on the order of 1% per year.

>>By your logic, even small amounts of inflation are bad >>since the collapse of Weimar Germany was inflationary.

You're confused, where did you see that point in "my logic"?

Associating modest deflation with the great depression is equivalent to associating modest inflation with hyperinflation. Sauce for the goose...

When did we have deflation in the 1950s? Any stats?

I was thinking of 1949 and 1954.

[Toddsterpatriot]

Not if productivity is going up by more than 2.5% per year.

Just because prices are declining doesn't mean that productivity is increasing. You think GM could increase productivity by 2.5% a year?

That is my point: that deflation encourages productivity

I guess if you destroy the bottom 20% of the nation's producers, you'd increase average productivity. Too bad that unemployment would rise 20%. Not going to encourage a lot of savings with 25% unemployment, are you?

but modest inflation is worse than modest deflation.

We've had modest inflation since 1982 and our economy has been great. Japan had modest deflation since 1989 and their economy sucked.

GM would not necessary need to cut prices by 2.5% per year, if they could demonstrate the value of their goods.

Great, how long will they last when they have to cut prices by 5% a year?

Associating modest deflation with the great depression

I'm perfectly happy to associate modest deflation with Japan's lost decade.

I was thinking of 1949 and 1954.

That's weird. It almost looks like that coincides with two periods of recession.

I wonder if deflation might be worse for the economy than you think?

[cinives]

Why do you think the same house should be worth 2.5% less each year?

Actually yes, since a house or other structure is a depreciating asset. Even the IRS gets that.

Why should a building that requires maintenance and upkeep costs continue appreciating year over year, just because ... ?

If you save an amount every year to replace the amount of depreciation of the roof, gutters, siding, windows, floors, paint etc etc you would see that houses appreciating every year is a matter primarily of inflation and location.

Home ownership is not always a good idea financially. Since many people are undisciplined, they use home ownership as forced savings, which is a pretty stupid idea when you consider all of the costs.

[Toddsterpatriot]

Why do you think the same house should be worth 2.5% less each year?

Actually yes, since a house or other structure is a depreciating asset. Even the IRS gets that.

You misunderstand. Not only would existing houses drop by 2.5%, but also new houses.

Why should a building that requires maintenance and upkeep costs continue appreciating year over year, just because ... ?

Why should the same home that was built and sold for $200,000 last year be built and sold for $195,000 this year just because.....?

Home ownership is not always a good idea financially.

I agree.

Since many people are undisciplined, they use home ownership as forced savings, which is a pretty stupid idea when you consider all of the costs.

Imagine how stupid it would be if all hard assets dropped 2.5% in value every year. Year after year. Instead of forced savings, you've have forced losses. Sounds like a great idea, right?

[Toddsterpatriot]

Hub, where'd you go?

To that big gold standard in the sky?

[Fan of Fiat]

To the pearly golden gates of heaven?