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.