flation, de or in?

Conversable Economist Timothy Taylor discusses the effects of various types of deflation on economic growth. Deflations were frequent until the Great Depression. Since then we have fought deflation through continual monetary expansion thinking that would ensure growth at the acceptable cost of inflation. Evidence is mounting that this assumption is not grounded in fact and that there can be real economic growth during a period of price deflation as was true during the end of the 19th century.

There is a moral dimension in addition to the economic. Policy choices invariably create winners and losers. Choosing an inflationary monetary policy rewards debtors and penalizes savers. By pursuing a constantly inflationary monetary policy we have become a nation of debtors and a debtor nation. Is this really the appropriate choice for the richest nation in the world? What are the implications of pushing individuals toward borrowing instead of saving? Does a debtor look forward to the future with the same confidence as a saver? Or is the debtor’s attention focused on current consumption, with the future being another day?

We need a return to hard money not more easy money.

16 thoughts on “flation, de or in?”

  1. I doubt that a welfare state with a universal franchise is going to be compatible with sustained deflation. But then I’d have said that that a welfare state with a universal franchise isn’t compatible with mass immigration, and it has been so far. So far.

  2. east pittsburgh is over the hill from me and edgar thompson is down the road about 3 miles. never heard squat about what they did growing up in the ’70’s here in my public school “education”.

  3. Japan has gone through serious deflation for the past 25 years and counting. They haven’t exactly thrived but are still standing. Toyota, Sony, et al are still around.

    The central bankers fight deflation so vigorously because debt becomes prohibitively expensive when prices are falling. Debtors would be paying back money that is worth more than what they borrowed. Bankers can’t make any money in that environment because fewer want to borrow under those terms. Strategies of borrowing cheap and buying long term investments such as what Berkshire Hathaway does would cease to work.

  4. It is all about the Federal Government’s insatiable appetite for resources. Inflation benefits debtors. Who is the greatest debtor of them all? Inflation is a tax on savings. It is levied by the Federal Reserve, not by Congress. It is unconstitutional. But, nobody cares, except for the poor schmucks who are getting screwed.

  5. Grurray – It is not the job of central banks to make bankers money. If banking becomes a service business to hold money, transform money, and transfer money with less extensive profits, I won’t shed many tears, ditto for Berkshire Hathaway.

    More generally, I think that it’s likely that we’re on the verge of a future where people will create, and use, deflationary currencies for their savings while taking on debt in inflationary currency. There is a real demand to be able to save in a currency that won’t be devalued away. Whether this will be bitcoin or some successor currency is not clear at the moment. What is more likely is that this will not be a currency controlled by a government or a central bank.

  6. Bankers can’t make any money in that environment because fewer want to borrow under those terms.

    Tell that to JP Morgan.

  7. Inflation is too much money chasing too few goods. Deflation is too many goods chasing too little goods. When gold and silver were used in the US for money, the money supply changed very little except during the California gold rush. In those days the price of a steak was highest in the gold camp itself and got lower further away.

    Yellen fears deflation because when a bank loans money to buy a house, it does not hand the borrower a sack of gold coins. Instead it hands the borrower several pieces of freshly printed paper which are called ‘money’. The borrower uses the bag of freshly printer pieces of paper to buy the house. Strangely enough, sellers accept the bag of freshly printed paper as payment for the house.

    If deflation strikes and the price of the house collapses, the buyer still owes the bank a bag of freshly printed paper but has no way to get it. So he gives the bank the worthless house. This is bad for banks. Bankers got out of business if they make loans in deflationary times.

    Times are better during inflation because prices constantly go up. Sadly prices of food and toilet paper go up faster than other prices. During the Venezulan hyper inflation people live in very expensive houses but can barely afford food and they can’t afford toilet paper.

    In Ukraine people pay for food using suitcases full of freshly printed pieces of paper. Bankers like inflation. It makes their bottom line look good and the price of their stock goes up.

  8. “It is not the job of central banks to make bankers money”

    “Tell that to JP Morgan.”

    Big banks made hundreds of billions of dollars off QE and other stabilization/stimulus programs while households lost hundreds of billions.

    It may not be the Fed’s official job, but it sure seems like that’s always the end result. The Fed’s job is to keep the banking system running and be the banker’s bank. Everything they do is to keep banks in business, period. Anything on top of that is gravy. If people don’t like it, it’s up to the government to address that part. Or obscure it, as seems to be the case these days.

  9. mr. foster:

    via insty

    > Throughout history, poverty is the normal condition of man. Advances which permit this norm to be exceeded — here and there, now and then — are the work of an extremely small minority, frequently despised, often condemned, and almost always opposed by all right-thinking people. Whenever this tiny minority is kept from creating, or (as sometimes happens) is driven out of a society, the people then slip back into abject poverty.

    This is known as “bad luck.”<

  10. In the early 17th Century the Netherlands discovered that the Bank of Amsterdam, the prototype of all central banks, increased its military power by enabling it to finance its fight for independence from Spain and survive the 30 years war. William III, the Stadtholder of the Netherlands, became William III of England in the Glorious Revolution, and England formed the bank of England. The BoE enabled England (later Great Britain) to raise the funds to make it the world’s preeminent military power by the end of the 18th Century. One of the main forces that triggered the french revolution was France’s inability to keep up with the UK financially, despite the fact that France was a much larger country.

    In the US, the early attempts at forming a central bank failed. But, the Civil War had to be financed, so the National Bank System was formed. In 1913, the Federal Reserve System to be a central bank capstone to the National Bank System. Just in time for WWI, WWII, and the Cold War.

    Central Banks and the banking systems primary function is to facilitate the ability of governments to engross and spend large fractions of their country’s domestic product — for the purpose of war but also so that the regimes can pass funds around to their supporters.

    Central banks and local banks do not exist in opposition to each other or in isolation. They are a system. Central Banks are responsible for the health of the system and each of its constituents. The system can be redesigned, but like any ecosystem, the parts must fit with the whole and operate in mutually supportive ways.

  11. “people will create, and use, deflationary currencies for their savings while taking on debt in inflationary currency.”

    How can you have a currency that people will save in, if borrowers won’t borrow in it?

    It is rather like the sound of one hand clapping.

  12. “Times are better during inflation because prices constantly go up. ” Sorry. Typing error, Should read
    “Times are better for banks during inflation because prices constantly go up.”

    During inflation. the value of collateral quickly exceeds value of the loan. Many borrowers refinance regularly to pay off old loan with a much larger new loan using the same old collateral. This generates lot of extra income for the bank, and increases both the amount of money in circulation as well as the velocity of money.

    Lord Keynes smiles.

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