Posted on 12/04/2011 8:33:58 PM PST by Comparative Advantage
You have one example where improvements in technology have led to lower prices on older technology.
Government Motors is a bad example
Fine, start Gunslingr Motors.
Borrow a few billion to build a new factory. Now run your financial projections with your revenue declining 3% each year.
Say your profit is $3000 on each $20000 auto. Next year your cars sell for $19400. The next, $18818. Then $18253. Then $17706.
What's your profit margin per unit now?
But Ford is an example of a company that continued to make investments in raising productive capacity even as it brought down the price of cars to something nearly everyone could afford.
You're confusing price drops from increased productivity with price drops due to deflation. Did his sales increase during the Great Depression?
More, because more people can afford them when the price drops, same as with computers:
Same as with houses.
Besides, a nominal reduction in dividends or salaries doesn't matter if purchasing power of money is increasing.
The nominal reduction won't help you pay off your existing debt, will it? Try not to crush the existing debtors and kill their banks while you're encouraging savers. There appear to be more debtors and they seem to be involved in a lot of the production in the country.
A monetary environment that doesn't punish savings, that doesn't encourage debt for consumption, and that rewards savers with increased purchasing power leads to more capital accumulation, increased capital investment, and rising standards of living.
A monetary system that punishes investment in new production, hurts producers that use debt and encourages the hoarding of cash leads to rising unemployment and falling standards of living.
Actually, technology leads to lower prices in practically all goods as productivity increases. Prices only rise when the productivity increases are swamped by monetary inflation.
Borrow a few billion to build a new factory. Now run your financial projections with your revenue declining 3% each year. Say your profit is $3000 on each $20000 auto. Next year your cars sell for $19400. The next, $18818. Then $18253. Then $17706. What's your profit margin per unit now?
$2576 give or take the portion of costs derived specifically from carrying debt. If prices are declining across the board, so are the input costs in making more cars. When one makes a capital goods investment, you do so calculating the expected return on that investment. If the return is ultimately less than the cost it isn't a wise investment, and shouldn't be made (the market is demonstrating via the price signal that those resources are more highly desired elsewhere in the economy).
You're confusing price drops from increased productivity with price drops due to deflation. Did his sales increase during the Great Depression?
Here's the nub, price drops under a gold standard are due to increased productivity. As the pool of goods grows faster than the money supply prices drop. The money supply doesn't stop growing, it just grows slower than the production of other goods. The deflation scenario you reference (the Great Depression) was a collapse of credit consequent to the malinvestments set in motion under preceding boom (when the Federal Reserve set interest rates too low). Benjamin Strong's efforts to help the Bank of England fake the gold standard is entirely responsible for the profusion of credit that was ultimately unsustainable.
The nominal reduction won't help you pay off your existing debt, will it?
Exactly, so don't utilize debt for consumption, only utilize it for productive purposes where the return is higher than the interest borne.
Try not to crush the existing debtors and kill their banks while you're encouraging savers. There appear to be more debtors and they seem to be involved in a lot of the production in the country.
The profusion of debtors is this country's largest problem. We're devoting more and more of today's production to affording yesterday's consumption. Instead we need to be setting aside more of today's production to support tomorrow's production. One way is the path to eventual destitution as the debt burden requires lowering present standards of living (to pay for yesterday's indulgence), or repudiating the debt (robbing those who saved and loaned you money) [can you say: Greece?], the other promotes the accumulation of wealth, and enables higher living standards in the future.
"Another debt-by-the-decade study done by Ned Davis Research showed the amount of debt it took to generate the total GDP for the decade. It showed the total debt to generate the total GDP for the decade of 1949 -to- 1959 was $337.6 bn. to generate the $248 bn. of GDP or Debt/GDP of 1.36. (The ratio essentially shows how much debt it takes to generate $1 of GDP). The ratio from 1959 to 1969 was 1.53, the ratio from 1969 to 1979 was 1.68, 2.93 from 1979 to 1989, 3.12 from 1989 to 1999 and 6.02 from 1999 to 2009."
This is not a sustainable model, and you're witnessing its failure across the globe.
All input costs are dropping?
When one makes a capital goods investment, you do so calculating the expected return on that investment.
And usually you don't expect to be forced to drop your prices 3% each year, while your debt becomes harder and harder to repay.
If the return is ultimately less than the cost it isn't a wise investment, and shouldn't be made
And when housing drops year after year, it probably isn't a wise investment.
The profusion of debtors is this country's largest problem. We're devoting more and more of today's production to affording yesterday's consumption. Instead we need to be setting aside more of today's production to support tomorrow's production.
And when deflation crushes the debtors and they default and their banks fail, does that increase savings?
Isn't that your contention, that prices will drop and that this is deleterious? You said the price of sold goods (someone sells all the goods that go into making a car) and salaries will decline.
And usually you don't expect to be forced to drop your prices 3% each year, while your debt becomes harder and harder to repay.
You do in a hard money environment when the government and the banks aren't inflating the money supply and destroying the value of same, no different really than how businesses have to try and factor for inflation now.
And when housing drops year after year, it probably isn't a wise investment.
You want to sleep under the bridge? I plan to sleep in my house. I'll have it long after I've paid it off, and even if I chose not to make higher payments I'd still have it to sleep in during the length of a the mortgage. You seem to ignore the utility of a house (the actual reason someone should buy one).
And when deflation crushes the debtors and they default and their banks fail, does that increase savings?
Are you unaware that the savings rate has increased since the recession began? Households are trying to repair their balance sheets and provide a more sustainable foundation for economic growth, meanwhile the government is borrowing even more, worsening the overall environment.
At least you're honest enough to admit this. Most deflation advocates think their buying power will increase because their salaries will remain unchanged.
When their salary drops, will the typical home owner still have to make the same mortgage payment? Same student loan payment? Will that reduce the amount available to spend on those cheaper goods out there?
no different really than how businesses have to try and factor for inflation now.
Totally different.
You want to sleep under the bridge? I plan to sleep in my house.
Where will the people who don't have a house yet sleep? Maybe they'll live in an apartment building? I'm sure there will be lots of them built, knowing their value will decline every year. No worries, the rent they can charge will decline as well. Maybe you should build a few?
Are you unaware that the savings rate has increased since the recession began?
When deflation and bank failures were occurring in the 1930s, did that help the savings rate? When your savings disappeared when your bank went under, could you buy more cheap goods, or less?
Households are trying to repair their balance sheets and provide a more sustainable foundation for economic growth
That is a great idea. It's easier when deflation isn't causing business failures and layoffs.
At least you're honest enough to admit this. Most deflation advocates think their buying power will increase because their salaries will remain unchanged.
Salaries will decline in nominal terms, but as the purchasing power of money increases, and productivity increases, the purchasing power of salaries will rise.
When their salary drops, will the typical home owner still have to make the same mortgage payment? Same student loan payment? Will that reduce the amount available to spend on those cheaper goods out there?
When the currency change comes anyone with contracts denominated in Federal Reserve notes is likely to seek an amended contract in the new dollar backed in gold. I would not expect the (nominal) terms to be the same. If they didn't, the borrower would simply be able to convert gold backed currency for the Federal Reserve's floating currency, and enjoy the same advantages of repaying a loan in a constantly inflated currency.
no different really than how businesses have to try and factor for inflation now.
Totally different.
No, not really. Anyone lending money on 30 years terms today has to factor for how inflation will effect the purchasing power of the repayment over time. Lending in an environment of nominally deflating prices will requires the same consideration to made about the purchasing power of the repayment over the course of the loan.
Where will the people who don't have a house yet sleep? Maybe they'll live in an apartment building? I'm sure there will be lots of them built, knowing their value will decline every year.
Again, in nominal terms, not purchasing power terms. We've found the crux of your confusion and angst in this matter. Maybe it would help to look at this from the other direction. In 1964, when a quarter still contained silver, a gallon of gas cost 30 cents. Did you know that silver quarter would buy you more than a gallon of gas today (it's worth ~$5.82 in Federal Reserve notes)? Productivity increases in oil extraction, refining, and transportation have lowered the price of gasoline in real terms, but that reality has been swamped by inflation of the fiat money supply.
No worries, the rent they can charge will decline as well. Maybe you should build a few?
You repeatedly conflate and confuse nominal price changes with purchasing power changes. Supply and demand will determine how many housing units to build, and what to charge for them. Owners will invest in them (production and maintenance) so long as the free market price signals a profit available in doing so.
When deflation and bank failures were occurring in the 1930s, did that help the savings rate?
Yes! The savings rate went up after the bank failures that heralded FDR's presidency. The bank failures were the recognition that savings had been squandered in the boom, and people had to increase savings rates to rebuild their savings.
When your savings disappeared when your bank went under, could you buy more cheap goods, or less?
The bust under a fiat money, fractional reserve system is always going to bring pain to the future, when society is forced to bear the full price of the boom it previously enjoyed. You err in conflating the deflation (shrinking) of the money supply under a boom/bust fiat money, fractional reserve system with the shrinking of prices under a hard money regime that is merely consequent to increases in productivity (not central bank malfeasance with the interest rates in the credit market).
That is a great idea. It's easier when deflation isn't causing business failures and layoffs.
Deflation under a fiat money regime is the collapse of credit when the debt burden assumed under the easy money boom is recognized as unpayable. In such a situation there are indeed business failures and layoffs as the economy must be re-aligned to the underlying realities of supply and demand that easy money masked (temporarily). This boom/bust scenario is not analogous to the 'deflation' of prices that occurs under a hard money regime where the profusion of goods outpaces the growth of the monetary base and supply and demand reduces prices in nominal terms.
If the Federal Reserve doubled the money supply tomorrow and handed the cash out equally to the population, do you think this would constitute an increase in 'savings' (having changed the nominal amount of everyone's cash balances)? Would any more saved goods exist for future consumption that didn't the day before?
LOL!
Yeah, we're talking about deflation, not rewriting every contract in the country.
When your salary drops 3% every year and your mortgage payment remains the same, you're seeing a downside of deflation.
No, not really. Anyone lending money on 30 years terms today has to factor for how inflation will effect the purchasing power of the repayment over time.
Yes, if inflation is expected to be 2% a year, that can be added to the interest rate charged on the loan.
Lending in an environment of nominally deflating prices will requires the same consideration to made about the purchasing power of the repayment over the course of the loan.
Obviously lenders will gladly reduce the principal on your loan by the rate of deflation every year. LOL!
Again, in nominal terms, not purchasing power terms.
If I borrow $2,000,000 to build an apartment building, I'm hurt when I have to reduce rents every year because of deflation.
The savings rate went up after the bank failures that heralded FDR's presidency.
What happened to your savings when the bank you used failed and your savings were lost? Were your savings larger or smaller?
This boom/bust scenario is not analogous to the 'deflation' of prices that occurs under a hard money regime
Are you under the impression that there were no booms and busts under a gold standard? That there isn't fractional reserve banking under a gold standard?
We're talking about several things (including two forms of 'deflation'). Have you given much thought to how a new currency is introduced? Do you think after the establishment of the Euro people went on paying their mortgages in Deutschmarks or French francs? Do you think when the Euro finally blows up people won't seek to amend existing contracts denominated in it?
I'm fine with the concept of competing currencies, even floating currencies, so long as the U.S. Federal government is held to the gold standard and there are no legal tender laws compelling the acceptance of floating currencies.
When your salary drops 3% every year and your mortgage payment remains the same, you're seeing a downside of deflation.
That mortgage is a contract in Federal Reserve notes. If an individual is being paid in a gold backed currency (the assumption underlying you assertion their nominal pay will decrease) they would be able to exchange it to continue making the payments in Federal Reserve notes (if the parties didn't agree to a new contract, which I honestly find more likely). Do you think the inflation of the supply of Federal Reserve notes has been as low as 3% annually since 1971?
Obviously lenders will gladly reduce the principal on your loan by the rate of deflation every year
At a minimum the rate of expected deflation will be subtracted from the interest rate, and it is possible that on particularly long contract periods an individual would accept a nominally priced smaller repayment if it had a higher purchasing power, but the most likely outcome is reduced prices and loan periods.
You're very hung up on nominal numbers, and seem unable to grasp the concept of purchasing power. I noticed you glossed over the part I mentioned about the 1962 quarter.
If, in 1962, I asked to borrow (and guaranteed to repay in Federal Reserve notes) a silver quarter from you at 3% interest with a 50 year loan, I would owe you ~$1.05 in 2012. Meanwhile that silver quarter is worth $5.82 Federal Reserve notes. You would have need to charge over 6.6% interest just to maintain the purchasing power you loaned me, never mind any sort of compensation for forgoing the use of that money for 50 years. You would actually come out ahead (of your 3% interest on a Federal Reserve note) in purchasing power ($2.3228) if I repaid you in a silver dime 50 years later.
So while you scoff at the notion of being repaid less in nominal terms, your missing the real picture, which is purchasing power.
If I borrow $2,000,000 to build an apartment building, I'm hurt when I have to reduce rents every year because of deflation.
Only if you did so with an improper appreciation of the demand for apartments. You want borrowers to operate with the crutch of inflation to reduce repayments in real terms at the expense of savers. The reality may well be that they should only spend $1,000,000 on making the apartments.
What happened to your savings when the bank you used failed and your savings were lost? Were your savings larger or smaller?
Those savings were squandered in the preceding boom when the interest rate intervention spawned malinvestment of capital (your savings at the bank). They're already gone at the moment of recognition (when the bank fails). You avoided my question: If the Federal Reserve doubled the money supply tomorrow and handed the cash out equally to the population, do you think this would constitute an increase in 'savings' (having changed the nominal amount of everyone's cash balances)? Would any more saved goods exist for future consumption that didn't the day before?
Are you under the impression that there were no booms and busts under a gold standard? That there isn't fractional reserve banking under a gold standard?
Yes, there were booms and busts, and we can go over how the governments intervention in credit markets created them if you want to discuss specific episodes. The key is to understand that there can be excesses of fractional reserve credit under a gold standard, but the genuine limit of gold reserves allows the interest rate mechanism to serve as brake on their expansion, and encourage the accumulation of genuine savings to support continued economic expansion. Furthermore, look a the growth of government debt since we embarked on the Federal Reserve system that allows essentially unlimited borrowing by the Federal government without respect for genuine interest rates or the real pool of savings.
When your mortgage is in a gold backed currency and your salary in gold decreases 3% a year, does that reduce your spending power?
At a minimum the rate of expected deflation will be subtracted from the interest rate
How do you do that with mortgages already out there? And isn't the lender going to be concerned with the deflating value of your collateral?
You're very hung up on nominal numbers, and seem unable to grasp the concept of purchasing power.
You're unable to grasp the historical damage to debtors a grinding deflation can be.
I noticed you glossed over the part I mentioned about the 1962 quarter.
Since it had nothing to do with deflation, it was pointless.
Those savings were squandered in the preceding boom when the interest rate intervention spawned malinvestment of capital (your savings at the bank).
Even banks with no bad loans and sufficient capital failed during bank runs.
Yes, there were booms and busts, and we can go over how the governments intervention in credit markets created them if you want to discuss specific episodes.
Even under a gold standard? Shocking!
The key is to understand that there can be excesses of fractional reserve credit under a gold standard
What? Impossible! LOL!
Furthermore, look a the growth of government debt since we embarked on the Federal Reserve system
Look at the higher government debt under the gold standard.
Only by however much you agreed to reduce your spending power when you took out the contract to buy the house. You're getting a home in return for your payments. If I bought another car tomorrow I'd be reducing my spending power by whatever amount I agreed to devote to future car payments.
How do you do that with mortgages already out there? And isn't the lender going to be concerned with the deflating value of your collateral?
Existing contracts could continue to be paid in Federal Reserve notes if the parties didn't agree to new terms. New terms would be no more difficult to establish than any other re-financing. The draw down in principal owned would address the lenders concerns about the nominal value of the home. The word you're looking for is amortization.
You're unable to grasp the historical damage to debtors a grinding deflation can be.
The 'damage' borne by borrowers by lower prices (which is what you mean by 'deflation' in this context) is simply that by satisfying urgency they bear a higher cost than someone who first saved for something and then purchased it. If you 'can't wait' to have a new TV, then yes, you pay more than the person who waits, saves for it, and then purchases the TV. You prefer to punish those who would save with lower purchasing power and ameliorate the natural cost of time preference on those who would borrow by allowing them to repay in devalued currency.
Since it had nothing to do with deflation, it was pointless
You may as well scream in all caps that you don't get it as make a comment like that. I directly addressed your concerns about lower nominal repayment with an example of why purchasing power, not nominal valuation in floating currency, is what matters.
On the other hand you still ignore my question: If the Federal Reserve doubled the money supply tomorrow and handed the cash out equally to the population, do you think this would constitute an increase in 'savings' (having changed the nominal amount of everyone's cash balances)? Would any more saved goods exist for the future consumption that didn't the day before?
Even banks with no bad loans and sufficient capital failed during bank runs.
If the bank failed to be able to make good demand deposits they cannot be declared to have had sufficient capital.
Look at the higher government debt under the gold standard.
When, and by what metric?
Your income is going to drop 3% a year, every year, after you bought the house while your mortgage payment remains steady. Sounds like a bigger reduction than you anticipated.
The draw down in principal owned would address the lenders concerns about the nominal value of the home.
Really? Your 20% down-payment is almost erased after the first 7 years. Now you've only got about 12% equity. After 7 more years, you're at about 13.5%.
Assuming you're able to keep making the payments , which are now about 50% higher than when you started, in real terms.
The 'damage' borne by borrowers by lower prices (which is what you mean by 'deflation' in this context) is simply that by satisfying urgency they bear a higher cost than someone who first saved for something and then purchased it.
I'm thinking about farmers who borrow to run their farm and sell for less every year. Manufacturers who borrow to build a plant and then have to sell for less and less, year after year.
If the Federal Reserve doubled the money supply tomorrow and handed the cash out equally to the population, do you think this would constitute an increase in 'savings'
No. And if the Fed cut the money supply by 50% tomorrow, savers wouldn't benefit, because the economy would be crushed.
If the bank failed to be able to make good demand deposits they cannot be declared to have had sufficient capital.
Just how much capital do you think is sufficient?
When, and by what metric?
1945 as a percentage of GDP.
Why? Do you not take inflation into account when looking at the total repayment cost on a 30 year mortgage? The same calculation would be required of both the borrower and the lender in an environment were productivity increases raised the purchasing power of money. The result would be lower prices and shorter terms.
Really? Your 20% down-payment is almost erased after the first 7 years. Now you've only got about 12% equity. After 7 more years, you're at about 13.5%.
In 7 years my house is paid for. I'll have 100% equity and a roof over my head until I sell it. It's a little thing I like to call, 'buying what you can afford'. 30 year mortgages are a product of our inflationary environment, and not even common outside the U.S.
I'm thinking about farmers who borrow to run their farm and sell for less every year. Manufacturers who borrow to build a plant and then have to sell for less and less, year after year.
They'll simply do so to the extent profitable without being able to fob off their costs on savers who don't enjoy their profits anyway.
No. And if the Fed cut the money supply by 50% tomorrow, savers wouldn't benefit, because the economy would be crushed
Actually, savers would benefit because the purchasing power of their savings would rise considerably. But no one is talking about shrinking the money supply. 'Deflation' of prices subsequent to productivity increases that allow the pool of goods and services to expand faster than the money supply increases standards of living by making goods available to a larger segment of society. We went over this already with the improvements in computers that have brought down price, increased sales, and led to even higher levels of investment (something you insisted wouldn't happen, but is right now happening).
Just how much capital do you think is sufficient?
Enough to pay demand deposits. If you 'pull a Corzine' and start loaning out money your clients expect to be able to withdraw at a moments notice, you're asking to be liquidated, and the market will oblige.
Look at the higher government debt under the gold standard.
When, and by what metric?
1945 as a percentage of GDP.
Sorry, FDR ended the gold standard in 1933 when he confiscated privately held gold, suspended specie redemption, whilst simultaneously claiming that an ounce of gold was no longer worth $20.67, but instead $35 (not that you were allowed to trade in $35 Federal Reserve notes for an oz). When specie redemption is forbidden by law you no longer have a gold standard.
As an aside, do you look favorably on FDR's gold confiscation and inflation measures as effective depression fighting tools?
Why?
Because your money is worth 3% more each year yet your mortgage payment remains the same.
In 7 years my house is paid for.
That's excellent! What about the other 10s of millions of home owners where that is not the case?
They'll simply do so to the extent profitable without being able to fob off their costs on savers who don't enjoy their profits anyway.
You're funny.
Actually, savers would benefit because the purchasing power of their savings would rise considerably.
Just like all the savers did during the Great Depression. When unemployment jumped to what, 25%?
'Deflation' of prices subsequent to productivity increases
Except we aren't discussing those types of price drops, just the deflationary ones.
1945 as a percentage of GDP.
Sorry, FDR ended the gold standard in 1933
Sorry, the gold standard lasted until Nixon.
When specie redemption is forbidden by law you no longer have a gold standard.
And we'll never have one again.
As an aside, do you look favorably on FDR's gold confiscation and inflation measures as effective depression fighting tools?
I don't like confiscation and they didn't do enough to fight deflation, obviously.
Why?
Because your money is worth 3% more each year yet your mortgage payment remains the same.
So you have a mortgage payment that is 100% of your income? I think I found your problem, like too many Americans, you're over leveraged and want Bernanke to bail you out with his printing press.
That's excellent! What about the other 10s of millions of home owners where that is not the case?
For the over leveraged there is a process we call bankruptcy.
Just like all the savers did during the Great Depression. When unemployment jumped to what, 25%?
The Great Depression was a confluence of several factors. The implosion of the credit bubble fostered by the Federal Reserve's credit distortions (themselves an effort to help the Bank of England fake a return to the gold standard after using inflation to pay for WWI), Hoover's tax increases (tariffs and income taxes), as well as his assault on profits. FDR's continuation and exacerbation of these policies, including trying to arrange prices throughout the economy and cartelization of business.
At any rate, the increase in savings was the foundation of emerging from depression, and followed, not preceded, it. Hence, not causative.
Except we aren't discussing those types of price drops, just the deflationary ones.
But that is precisely the kind of deflation that exists in under a gold standard. As productivity increases the supply of goods grow faster than the stock of gold, prices relative to gold will decrease.
Sorry, the gold standard lasted until Nixon.
No, the gold standard ended with FDR outlawing the private holding of gold. No longer could the market act as a restraint on the creation of money, it was entirely in the hands of politicians. FDR, and the Bretton Woods agreement, left one 'loophole'. Foreigners could exchange their USD for gold. When the inflation of dollars to pay for the Vietnam war and the Great Society became obvious to the rest of the world this 'loophole' was closed, before the game could be exposed. We entered an era (post-Bretton Woods) of competing fiat currencies.
When specie redemption is forbidden by law you no longer have a gold standard.
And we'll never have one again.
You should study history. Princes have tried the paper money trick repeatedly through the centuries. It has always ended in tears for the public, and an eventual return to sound money until the harsh lessons are forgotten.
The Founders actually forbid the States from printing money precisely because they had experienced the deleterious effects of paper currency. Madison even specifically cited it in Federalist #10, "A rage for paper money, for an abolition of debts, for an equal division of property, or for any other improper or wicked project, will be less apt to pervade the whole body of the Union than a particular member of it..."
I don't like confiscation and they didn't do enough to fight deflation, obviously.
Printing money isn't a solution to the misallocation of resources. It only serves to enrich those who first get their hands on it, and distorts prices, masking genuine profit and loss and thereby thwarting and delaying the reallocation of resources to productive (profitable) ends.
I encourage you to read about the money printing engaged in by the colonies. Or by the French under the guidance of John Law. The consequences read like the headlines of the last few years, property bubbles and all...
So you have a mortgage payment that is 100% of your income?
No. And yet, the mortgage remains unchanged while my income drops.
I think I found your problem, like too many Americans, you're over leveraged and want Bernanke to bail you out with his printing press.
No, the problem is the mortgage remains unchanged while my income drops.
For the over leveraged there is a process we call bankruptcy.
No negative effects when deflation causes additional bankruptcies?
But that is precisely the kind of deflation that exists in under a gold standard. As productivity increases the supply of goods grow faster than the stock of gold, prices relative to gold will decrease.
Prices will drop for all goods, even those without increasing productivity. Is that a problem?
Printing money isn't a solution to the misallocation of resources.
No, but it is a solution to deflation.
It only serves to enrich those who first get their hands on it,
Really? Say the Fed buys $1 billion of 10 year Treasuries, yielding 1.87%, from JP Morgan. JP Morgan now has cash yielding 0%. How does this enrich them?
Ok, let's try to put this another way. Inflation reduces your retirement savings every year, for the rest of your life. Why do you prefer that to relative increase of the cost of your mortgage for the limited time you hold a mortgage? Which would you expect, over the course of your life, to actually 'cost' you more?
No negative effects when deflation causes additional bankruptcies?
Do you think there are no negative effects when inflation results in malinvestment of scarce resources and the boom/bust cycle? There is virtue in limiting borrowing for consumption, as it preserves capital for increasing productivity.
Prices will drop for all goods, even those without increasing productivity. Is that a problem?
Certainly not! The increasing purchasing power of money will mean that more people than ever will be able to afford goods and services. Have you ever gone to the store and said, 'Damn! These prices are lower! Now I can buy more, or have money left over after buying the same amount.'? Do you actually see that as a problem?!?
Really? Say the Fed buys $1 billion of 10 year Treasuries, yielding 1.87%, from JP Morgan. JP Morgan now has cash yielding 0%. How does this enrich them?
They deposit that money at Chase Manhattan, who can then deposit that money with the Fed and make loans on those reserves, while JPM still has access to spend $1 billion. Are you familiar with deposit multiplication? This is the process by which the money supply is inflated. Do you think Chase and the others are making consumer loans at <1.87%?
Only if my savings are held as cash.
Why do you prefer that to relative increase of the cost of your mortgage for the limited time you hold a mortgage?
Increased cost of mortgage in addition to decreased value of the house when I sell it.
Do you think there are no negative effects when inflation results in malinvestment of scarce resources and the boom/bust cycle?
Why would I think that? Do you think that?
Prices will drop for all goods, even those without increasing productivity. Is that a problem?
Certainly not!
So if Boeing doesn't increase productivity and has to reduce prices every year by 3%, that doesn't cost Boeing employees some jobs?
If Boeing defaults on their debts, that doesn't harm their lenders? Those lenders don't reduce their outstanding loans?
The increasing purchasing power of money will mean that more people than ever will be able to afford goods and services.
Absolutely! Except for those people who lost their jobs, or can't get a loan to keep their business going (and their employees) and anyone who supplies those businesses or those unemployed workers.
They deposit that money at Chase Manhattan
JP Morgan deposits the cash at Chase? Okay.
who can then deposit that money with the Fed and make loans on those reserves
Why wouldn't JP Morgan do that, instead of depositing the money at Chase?
Are you familiar with deposit multiplication?
I am aware of the money multiplier. That doesn't make 0% cash more profitable than a 1.87% bond, does it?
Do you think Chase and the others are making consumer loans at <1.87%?
Of course not. What does that have to do with your claim that the first recipients of the new money profit.
I've shown that they don't. Still waiting for your proof that they do.
Or an annuity. But you've dodged the question. Why do you worry about the relative increased cost of a short term loan over the continuous purchasing power erosion of a lifetime of savings?
Increased cost of mortgage in addition to decreased value of the house when I sell it
But the money has increased in purchasing power, all houses are now 'cheaper' when you sell, and the money you get for selling it goes farther. If you sell your house, where are you going to live anyway? Under a bridge? Or would you buy another house, that also is cheaper in nominal terms than when you bought your first?
Do you think there are no negative effects when inflation results in malinvestment of scarce resources and the boom/bust cycle?
Why would I think that? Do you think that?
Because you whine that increasing the purchasing power of money makes loans more expensive than under an inflationary environment, and ignore the much more deleterious effects of inflation in distorting economic activity, reducing the value of savings, creating ephemeral profits, and squandering resources.
I would rather the cost of borrowing be born by the borrower, instead of partially fobbed off on the pensioner, the saver, and anyone else subjected to higher prices, but not a recipient of the newly created money that causes it.
So if Boeing doesn't increase productivity and has to reduce prices every year by 3%, that doesn't cost Boeing employees some jobs?
Yes, just as if Dell doesn't increase productivity now they find themselves removed from the marketplace by their competitors who do. Computers, phones, pencils, or airplanes, the principal of capitalism is the same: Increase productivity to increase profits, reduce prices, and increase marketshare, or be replaced by those who do. Do you abhor competition as 'destructive'?
If Boeing defaults on their debts, that doesn't harm their lenders? Those lenders don't reduce their outstanding loans?
Do you want bailouts for all bad business investments? Inflation is a form of bailout, extracted by the borrower from all the other users of that specific fiat currency to reduce their relative debt burden. I want NO bailouts. Where do you stand on the subject?
Absolutely! Except for those people who lost their jobs, or can't get a loan to keep their business going (and their employees) and anyone who supplies those businesses or those unemployed workers.
If your business needs loans to survive and mine doesn't, why should you get bailed out at my expense, and the expense of everyone else who has or earns a dollar?
Do the suppliers of computer memory care if Apple purchases their product, or Dell? They'll happily sell to whichever one the marketplace sees fit to allocate the resources to buy their product.
I am aware of the money multiplier. That doesn't make 0% cash more profitable than a 1.87% bond, does it?
Who is loaning cash at 0%? J.P. Morgan Securities LLC is a primary dealer. JPMorgan Chase & Co. is the parent company. I don't think primary dealers make direct loans, but I could be wrong since the rules were changed after the 2008 debacle. JPM Sec. LLC deposits their check at the other subsidiary, JPMorgan Chase Bank, N.A. Now JPM Sec. can still spend the money they have received from the Fed, while the Chase subsidiary makes more money loaning those deposits. But there wouldn't be any new deposits to loan, if the Fed hadn't printed up more money from thin air to buy the Treasuries in the first place. Hence, JPM makes money off the Feds printing. If you want to split hairs about the subsidiaries, you're only fooling yourself.
Short term loan? 30 years is short term?
And 30 years of deflation of the value of the home.
But the money has increased in purchasing power, all houses are now 'cheaper' when you sell, and the money you get for selling it goes farther.
That is awesome. The home you paid $100,000 for, plus 30 years of interest, is now worth about $40,000. You might have been better off not spending the $100,000, plus 30 years worth of interest. I'll bet that money would be worth more than the $40,000 asset you own now.
Because you whine that increasing the purchasing power of money makes loans more expensive
Yes, deflation makes loans more expensive. First time you're hearing that?
I would rather the cost of borrowing be born by the borrower
And when the borrower defaults, borne by the bank. And the economy as a whole.
The "short term" loan on the house ends up costing 2.5 times as much in the last year of the mortgage, compared to the first year.
Is that a problem for you, or only for people who understand compound interest?
Do you want bailouts for all bad business investments?
No. And I don't want deflation to destroy good investments.
If your business needs loans to survive and mine doesn't, why should you get bailed out at my expense, and the expense of everyone else who has or earns a dollar?
Yes! We need deflation, to kill all businesses that borrow money! Now you get it. LOL!
I am aware of the money multiplier. That doesn't make 0% cash more profitable than a 1.87% bond, does it?
Who is loaning cash at 0%?
Nobody, but when the Fed gives JP Morgan cash, in exchange for their bond, they stop earning interest on the bond (the Fed owns it now) and don't earn any money on the cash (now owned by JP Morgan).
Now JPM Sec. can still spend the money they have received from the Fed,
Great, show me how they spend it that gives them the benefit of getting the money first.
while the Chase subsidiary makes more money loaning those deposits.
If they wanted to loan more money, they could have sold the bond, without Fed involvement.
But there wouldn't be any new deposits to loan, if the Fed hadn't printed up more money from thin air
As I said, they could sell the bond.
If you want to split hairs about the subsidiaries, you're only fooling yourself.
My comments had nothing to do with subsidiaries, only the claim that the primary dealer profits from having cash instead of a bond.
I've endeavored to address all of your questions. If we're to have this discussion I can only ask the same.
Why do you worry about the relative increased cost of a short term loan over the continuous purchasing power erosion of a lifetime of savings?
Computers, phones, pencils, or airplanes, the principal of capitalism is the same: Increase productivity to increase profits, reduce prices, and increase marketshare, or be replaced by those who do. Do you abhor competition as 'destructive'?
If your business needs loans to survive and mine doesn't, why should you get bailed out at my expense, and the expense of everyone else who has or earns a dollar?
Yes! We need deflation, to kill all businesses that borrow money! Now you get it. LOL!
That isn't an answer to the question. How do computer companies profit in an environment where they borrow to invest, and yet the price of the product they sell goes down at a higher than 3% annual rate? The answer is by being more productive, and hence more profitable, than their peers. The reality of the computer marketplace completely contravenes your expectations. Prices go down, consumers buy more every year than the last, and profits continue to be found.
And 30 years of deflation of the value of the home.
Again you confuse nominal price with value (purchasing power). Do you think a home purchased for $100k today is worth twice as much when it sells for $200k after 30 years of 3% inflation?
If they wanted to loan more money, they could have sold the bond, without Fed involvement.
You think they could obtain the same price, absent the Fed printing the money (thereby inflating the money supply) to meet their price?!
My comments had nothing to do with subsidiaries, only the claim that the primary dealer profits from having cash instead of a bond.
I explained to you how JPM uses subsidiaries to acquire and profit from the Fed's monetary creation. You asked how JPM profits, not how a particular subsidiary of JPM profits. This hair splitting only serves your point if you ignore that JPM owns the bank loaning the deposit, and the securities firm that counts the deposit as an asset.
Say the Fed buys $1 billion of 10 year Treasuries, yielding 1.87%, from JP Morgan. JP Morgan now has cash yielding 0%. How does this enrich them?
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