Jason's or the LP's stance on money creation

[Swammerdami]

Do I read this correctly that you say when facts and theory contradict each other we should ignore the facts? If not, what in the world are you trying to say?

No. It was pure sarcasm.

Yeah, I noticed. Though only AFTER doing a double-take and rereading your sentence.

I thought I indulged in excessive whooshing sarcasm, but there's 2 or 3 others here as bad as I.

 

[Swammerdami]

deflation helps the poor, inflation helps the rich.

That's counterintuitive. Can you explain how you conclude it? The normal expectation is that deflation helps creditors because loans are paid back with bigger dollars, while inflation helps debtors because loans are paid back with smaller dollars; and as a rule, although there are of course many individual exceptions, the rich are more frequently creditors and the poor are more frequently debtors.

Yes. One need look no further than W.J. Bryan and his "You shall not press down upon the brow of labor this crown of thorns, you shall not crucify mankind upon a cross of gold." Does Mr. Harvestdancer think Bryan represented wealthy financiers rather than struggling farmers and laborers?

Jason? William Jennings Bryan's goal was to replace deflation with inflation. Was he serving his constituents poorly?

 

[Swammerdami]

Except for the Great Depression and Japan's Great Malaise, there were no major deflations in the 20th century; and we can hardly expect it in future as central bankers have learned about the perils of deflation.

Of historic interest may be deflations in the 19th century. Bordo and Filardo are each VERY distinguished economists.

1873-96: a good deflation that turned somewhat bad

The 1873-96 episode is a clear example of a “good deflation” when prices fell in many countries by about 2% per year, accompanied by growth of about 2-3% per year (Bordo et al (2004)). Deflation in that era was driven by both a productivity boom (reflecting the “second industrial or mechanical revolution” and the proliferation of railroads across the world (Crafts (2000)), and by a number of major countries (Belgium, Germany, the Netherlands, and Scandinavia in the early 1870s and France later) joining the gold standard.

Although secular deflation was accompanied by positive growth, it was controversial because of its distributional consequences. Groups whose real incomes fell, such as debtors and farmers, or those whose real incomes were perceived to have fallen in an age before price indices, complained bitterly and engaged in often disruptive social and political agitation. In the United States, this was manifested in the free silver movement and the rise of organised labour. In Europe it appeared in the growth of both labour unions and labour political parties and in a demand for tariff protection by agricultural groups.

Although real output grew on average in the deflation episode of 1873-96 in most countries, growth was punctuated by several recessions (1873-75, 1884-85, 1890-96), the worst of which was the last which may even possibly be characterised as bad. It began with the Baring Crisis of 1890, when Argentina defaulted on its debt. This shock led to banking crises (and stock market crashes) in London, elsewhere on the European continent, the United States and parts of Latin America, especially Brazil (Bordo and Murshid (2003), Triner (2003)). Recession was further aggravated by a wave of banking panics which began in the United States in 1893 and spread to Europe (especially Italy) and Australia (Bordo and Eichengreen (1999)).

1837-43: bad deflation

An earlier 19th century episode of deflation from 1837-43, often viewed as bad, began with financial crises in London and the continental Europe (Kindleberger (2000)) and especially in the United States in 1837. Another wave of crises occurred in 1839. In the United States, debate still swirls over whether the crisis and deflation reflected the “Bank War”, the struggle between President Andrew Jackson and Nicholas Biddle, President of the Second Bank of the United States (an early central bank) (Rousseau (2003), Wallis (2003)), or events in Europe such as a series of bad harvest failures in England, which led to the importation of wheat from continental Europe and a drain on the Bank of England’s gold reserves leading it to raise its discount rate and precipitate capital flight from periphery countries, especially the United States (Temin (1969)). The annual data for this period may be subject to some questions about their accuracy. For example, although prices fell by 5.6% in the United States, 2.1% in the United Kingdom and 2.0% in France, narratives by contemporary observers viewed the episode as one of serious recession (Thorp (1926)). Available measures of real GDP show an increase in the United States of 3.9% and of 1.3% in France. The United Kingdom, in contrast, experienced a real GDP decline of 2.6%.

 

[Bomb#20]

Except for the Great Depression and Japan's Great Malaise, there were no major deflations in the 20th century; and we can hardly expect it in future as central bankers have learned about the perils of deflation.

Of historic interest may be deflations in the 19th century. Bordo and Filardo are each VERY distinguished economists.
...

Well, prices fell about 15% after WW1. Does that count as major?

Jason? William Jennings Bryan's goal was to replace deflation with inflation. Was he serving his constituents poorly?

The specific question of deflation aside, almost certainly. Bryan was the original populist* politician, as distinguished an economist as he was a biologist.

(* He was literally the candidate of the Populist Party. )

 

[Swammerdami]

Except for the Great Depression and Japan's Great Malaise, there were no major deflations in the 20th century; and we can hardly expect it in future as central bankers have learned about the perils of deflation.

Of historic interest may be deflations in the 19th century. Bordo and Filardo are each VERY distinguished economists.
...

Well, prices fell about 15% after WW1. Does that count as major?

Prices rose sharply during WW I, then fell back in 1920 (see graph below) but, until the Great Depression, U.K. prices still remained higher than they'd been as recently as 1916.

But -- Victory for the Pedants! -- this sudden reversal of WW I price hikes does fit the definition of deflation.

Was this the most interesting or useful comment you had for us?

 

[laughing dog]

Except for the Great Depression and Japan's Great Malaise, there were no major deflations in the 20th century; and we can hardly expect it in future as central bankers have learned about the perils of deflation.

Of historic interest may be deflations in the 19th century. Bordo and Filardo are each VERY distinguished economists.

1873-96: a good deflation that turned somewhat bad

The 1873-96 episode is a clear example of a “good deflation” when prices fell in many countries by about 2% per year, accompanied by growth of about 2-3% per year (Bordo et al (2004)). Deflation in that era was driven by both a productivity boom (reflecting the “second industrial or mechanical revolution” and the proliferation of railroads across the world (Crafts (2000)), and by a number of major countries (Belgium, Germany, the Netherlands, and Scandinavia in the early 1870s and France later) joining the gold standard.

Although secular deflation was accompanied by positive growth, it was controversial because of its distributional consequences. Groups whose real incomes fell, such as debtors and farmers, or those whose real incomes were perceived to have fallen in an age before price indices, complained bitterly and engaged in often disruptive social and political agitation. In the United States, this was manifested in the free silver movement and the rise of organised labour. In Europe it appeared in the growth of both labour unions and labour political parties and in a demand for tariff protection by agricultural groups.

Although real output grew on average in the deflation episode of 1873-96 in most countries, growth was punctuated by several recessions (1873-75, 1884-85, 1890-96), the worst of which was the last which may even possibly be characterised as bad. It began with the Baring Crisis of 1890, when Argentina defaulted on its debt. This shock led to banking crises (and stock market crashes) in London, elsewhere on the European continent, the United States and parts of Latin America, especially Brazil (Bordo and Murshid (2003), Triner (2003)). Recession was further aggravated by a wave of banking panics which began in the United States in 1893 and spread to Europe (especially Italy) and Australia (Bordo and Eichengreen (1999)).

1837-43: bad deflation

An earlier 19th century episode of deflation from 1837-43, often viewed as bad, began with financial crises in London and the continental Europe (Kindleberger (2000)) and especially in the United States in 1837. Another wave of crises occurred in 1839. In the United States, debate still swirls over whether the crisis and deflation reflected the “Bank War”, the struggle between President Andrew Jackson and Nicholas Biddle, President of the Second Bank of the United States (an early central bank) (Rousseau (2003), Wallis (2003)), or events in Europe such as a series of bad harvest failures in England, which led to the importation of wheat from continental Europe and a drain on the Bank of England’s gold reserves leading it to raise its discount rate and precipitate capital flight from periphery countries, especially the United States (Temin (1969)). The annual data for this period may be subject to some questions about their accuracy. For example, although prices fell by 5.6% in the United States, 2.1% in the United Kingdom and 2.0% in France, narratives by contemporary observers viewed the episode as one of serious recession (Thorp (1926)). Available measures of real GDP show an increase in the United States of 3.9% and of 1.3% in France. The United Kingdom, in contrast, experienced a real GDP decline of 2.6%.

Bordo is a monetarist, so your citation rebuts the claim that " I was pointing out how monetarist and keynesian economists fear 0.1% deflation just as much as they fear 10% deflation, which is true. They mistakenly think any and all deflation is bad. " Furthermore, the generally regarded father of monetarism - Milton Friedman - advocated that the optimal monetary policy was generate deflation equal to the rate of real economic growth.

 

[ZiprHead]

Furthermore, the generally regarded father of monetarism - Milton Friedman - advocated that the optimal monetary policy was generate deflation equal to the rate of real economic growth.

How is that even possible?

 

[laughing dog]

Furthermore, the generally regarded father of monetarism - Milton Friedman - advocated that the optimal monetary policy was generate deflation equal to the rate of real economic growth.

How is that even possible?

Under monetarist thought, inflation and deflation are strictly monetary phenomenon. So if real economic growth is say 3%, then a 3% deflation keeps nominal GDP constant and real incomes grow by 3%. And theoretically, if the real economic growth is stable over time and if everyone knows this is the monetary policy, then deflation is expected to be 3%. Those expectations are baked into every conceivable dynamic contract (i.e. any agreement that spans a time period more than a day or two), so no one is ever made better or worse off. In fact, anyone who holds cash money sees an increase in their wealth!!!!

You'll notice the big caveats there. Practical monetarists understand that the theoretical model is an approximation of the real world, but they tend to think it is close enough to act as a good policy guide over long periods of time.

 

[ZiprHead]

Furthermore, the generally regarded father of monetarism - Milton Friedman - advocated that the optimal monetary policy was generate deflation equal to the rate of real economic growth.

How is that even possible?

Under monetarist thought, inflation and deflation are strictly monetary phenomenon. So if real economic growth is say 3%, then a 3% deflation keeps nominal GDP constant and real incomes grow by 3%. And theoretically, if the real economic growth is stable over time and if everyone knows this is the monetary policy, then deflation is expected to be 3%. Those expectations are baked into every conceivable dynamic contract (i.e. any agreement that spans a time period more than a day or two), so no one is ever made better or worse off. In fact, anyone who holds cash money sees an increase in their wealth!!!!

You'll notice the big caveats there. Practical monetarists understand that the theoretical model is an approximation of the real world, but they tend to think it is close enough to act as a good policy guide over long periods of time.

Thanks for the explanation. I still don't see how it could be made to work in the real world.

 

[Loren Pechtel]

3) You just threw out the primary means the government uses to keep the economy on approximately an even keel. Look at inflation before and after the Fed. The swings were much wider in the past--and those swings cause harm, especially when they swing negative.

The other two points are not particularly relevant but this one ... it needs a response.

While there were swings of both inflation and deflation before the Federal Reserve, they averaged out to a very mild deflation. After the Federal Reserve we've had constant inflation without any averaging out. The swings are no longer inflation - deflation but mild inflation - high inflation.

The swings are generally between zero and moderate. Although what constitutes moderate is subjective. We did swing high at one point when they tried to use it to create economic growth and learned the hard way that doesn't work.

No. Since the founding of the Federal Reserve we have not had zero inflation except when the Federal Reserve was unable to stop it. Inflation has always been the tool of the Fed.

You're not rebutting me. The Fed's objective is to keep the inflation rate as constant as possible and as low as possible consistent with not allowing it to swing into deflation.

Your statement also relies on the Keynesian fallacy that deflation is bad in and of itself, without exception. He believed that if we had deflation, basically all economic activity would stop because everyone would hold on to their money until prices fell even further, causing prices to fall even further, causing people to hold on to their money even more until prices fell even further, etc. It is an absurd way of thinking about deflation that no reasonable person can agree with.

It depends on the amount of deflation. He's completely correct for large deflation--when you can make more sticking your money under your mattress than putting it to constructive ends you will totally crater your economy. Mild deflation just suffers from a loss of control authority--harmful only if it happens to go towards more deflation because you're helpless to stop it.

In that case severe inflation is also bad, but you don't hear the horror stories about it from monetarist or keynesian economists the way you hear about the dreaded deflation. The problem is, the economists of the schools that favor the Federal Reserve are just as afraid of a little inflation as they are a lot of inflation. They see that they cannot control it at all except by reversing it, so in their minds a little does lead to a lot does lead to collapse. They're completely wrong, but that is their view.

Nobody disagrees with severe inflation being bad, thus it's not discussed much.

Here's the key point that Keynes was trying to cover up with his made up horror stories about deflation: deflation helps the poor, inflation helps the rich.

And the key point is that you are utterly wrong about this.

Inflation/deflation does not favor one over the other so long as it isn't too big. An increase in the inflation rate helps the borrower, a decrease in the inflation rate helps the lender. Perhaps you are looking at deflation as being a stealth pay increase for the poor--but in time the jobs will go away instead.

It is true that you can look at it as a lender/lendee relationship. You can also look at it from the point of view of those who hold most of their weath in cash (generally the poor) and those who hold most of their wealth in assets (generally the rich).

But since you insist on looking at it from a lender/lendee point of view, who is the biggest debtor in the country? Whose debt alone exceeds the collective debts of the poor?

Note that it's only a change that causes effects. And the Fed's goal is to keep it flat.

Of course, most of the swings of inflation and deflation were caused by the previous attempts by the government. Sometimes it was by the previous attempts to institute a central bank. Sometimes it was the emergency measure of unbacked government currency as in "not worth a continental". Pointing out every time the government makes a mess as a reason to have government intervention is an odd way of arguing in favor of government intervention.

And why do you blame the government for the swings that predate the government trying anything?

Are you actually arguing that before the founding of the Federal Reserve the government didn't interfere with the economy? Are you not familiar with the First Bank of the US or the Second Bank of the US? Or issuing paper currency to pay for wars?

They didn't try to keep it on an even keel. Effects, but not planned control.

deflation helps the poor, inflation helps the rich.

That's counterintuitive. Can you explain how you conclude it? The normal expectation is that deflation helps creditors because loans are paid back with bigger dollars, while inflation helps debtors because loans are paid back with smaller dollars; and as a rule, although there are of course many individual exceptions, the rich are more frequently creditors and the poor are more frequently debtors.

When most of your wealth is in cash, lower prices on items are good. When most of your wealth is in commodities, lowering prices lowers net worth. There are people on this forum who think rich people are sitting on large piles of cash, but generally that isn't true and their net worth is an estimate based on the value of their holdings.

If prices go down and net worth goes down the same amount they won't care.

Do I read this correctly that you say when facts and theory contradict each other we should ignore the facts? If not, what in the world are you trying to say?

That is LD's position.

No, he said it was sarcasm.

 

[Loren Pechtel]

I messed up. In my previous post where I wrote " The problem is, the economists of the schools that favor the Federal Reserve are just as afraid of a little inflation as they are a lot of inflation." I meant " The problem is, the economists of the schools that favor the Federal Reserve are just as afraid of a little deflation as they are a lot of deflation."

I hope that those who respond to me notice this correction.

What you don't understand is that when there is deflation there is no control. A little deflation doesn't cause a problem--but neither does driving on black ice.

 

[Bomb#20]

deflation helps the poor, inflation helps the rich.

That's counterintuitive. Can you explain how you conclude it? The normal expectation is that deflation helps creditors because loans are paid back with bigger dollars, while inflation helps debtors because loans are paid back with smaller dollars; and as a rule, although there are of course many individual exceptions, the rich are more frequently creditors and the poor are more frequently debtors.

When most of your wealth is in cash, lower prices on items are good.

Ah, I see what you're getting at. That's a fair point; but you appear to be focusing on a subset of poor people, the ones who are struggling but keeping their heads above water, and who have low but uniform incomes. The working poor, those on disability, the elderly on fixed pensions/annuities, etc. There are other subsets it wouldn't apply to: farmers who have to go into debt every year because they only get paid at harvest time, people with negative net worth paying off their cars in installments, and so forth. And then there's the whole issue of the effect of deflation on wages: bigger dollars means fewer dollars going to workers, but there will be a tendency for employers to adjust for it with layoffs rather than across-the-board wage cuts. That makes deflation good for the workers who keep their jobs and very bad for the ones who lose theirs. So I think maybe generalizations about whether deflation and inflation help or hurt the poor are too coarse-grained a way to look at it.

When most of your wealth is in commodities, lowering prices lowers net worth.

Well, sure, but only in nominal terms. In purchasing power it's a wash, so I don't think that really qualifies as getting hurt by deflation.

There are people on this forum who think rich people are sitting on large piles of cash, but generally that isn't true and their net worth is an estimate based on the value of their holdings.

It depends on what they're invested in. Rich people who put their money in bonds are hurt by inflation when the loans are paid back in smaller dollars; those who invest in stock or real estate are hurt by inflation when they sell and get taxed on fictitious capital gains. The only ones I see who'd gain from inflation are the highly leveraged ones, buying on margin or playing the options and derivatives markets.