"Deficit Hawks are hypocrites"


By tovarichpeter   Follow   Mon, 12 Nov 2012, 11:56am   3,100 views   54 comments
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http://www.nytimes.com/2012/11/12/opinion/krugman-hawks-and-hypocrites.html?src=me&ref=general&gwh=689372ED0CDB7CD906D1A9B13AB33957

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  1. Bellingham Bill


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    15   9:20pm Mon 12 Nov 2012   Share   Quote   Permalink   Like   Dislike  

    well, my overall point is that cost inflation without wage inflation will result in reallocation.

    To some extent this means hot dogs instead of steak and a falling standard of living, but balancing that is the way we push up home prices and rents.

    Most renters can afford steak, so we maintain some spending reserve after we cover the rent.

    My thesis is that should cost of living continue to go up, renters theoretically can go on strike for lower rents.

    But this is difficult, since LLs hold the whip hand here. But balancing that is an empty apartment gathers no rent at all.

    http://research.stlouisfed.org/fred2/series/CUUR0000SEHA

    is a brutal chart

  2. marcus


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    16   6:21am Tue 13 Nov 2012   Share   Quote   Permalink   Like (1)   Dislike  

    mell says

    It's funny, as soon as you put a couple of layers of abstraction in between people totally lose the ability to reason whereas everybody would agree that taking your kids college fund money and spending it on a nice house or a couple of luxury vacations is pretty selfish and economically a very poor decision for their kids.

    I agree with all of this. But not that KEynesian is at fault or that republicans are the more fiscally prudent party.

    Paul Ryan voted for two unfunded wars (which Obama later put on the books), not to mention medicare pat D (more unpaid for spending) as well as tax cuts, that were the true cause of our sorry ass financial state.

    Keynesian economics says that when things are going well it is the time to worry about deficits, not to at that time spend money then on tax cuts (mostly for the wealthy) and to initiate wars that are off the books.

  3. marcus


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    17   6:24am Tue 13 Nov 2012   Share   Quote   Permalink   Like   Dislike  
  4. mell


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    18   7:04am Tue 13 Nov 2012   Share   Quote   Permalink   Like   Dislike  

    marcus says

    Paul Ryan voted for two unfunded wars (which Obama later put on the books), not to mention medicare pat D (more unpaid for spending) as well as tax cuts, that were the true cause of our sorry ass financial state.

    Agreed - and tax increases will likely be part of addressing the deficit as well as cutting costs. The republicans have done nothing to address this lately, if not they have been worse under Bush. But that doesn't mean that deficit hawks don't have a point. If they also happen to be republican and supporting the current clown-brigade, then they are also hypocritical. The Keynesian way - though it is flawed IMO - never intended to have uncontrolled deficit spending. It was about temporarily growing the deficit and building up resources to pay back or forward during the good economic times. We have left that path long ago by never demanding any payback or cuts from anybody, with both major political parties at fault.

  5. marcus


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    19   7:18am Tue 13 Nov 2012   Share   Quote   Permalink   Like   Dislike  

    mell says

    But that doesn't mean that deficit hawks don't have a point

    But, real deficit hawks would not have voted for the Bush tax cuts.

    And many of the people who act like deficit hawks, were not hawks when the problem was caused, but they are now because the deficit IS out of control, and they know that they can get traction through the conservative entertainment complex, blaming liberals and Obama. This is about the power struggle, not being a true deficit hawk.

    They know that there are millions of dimbulbs that won't get exposed to this info http://www.youtube.com/watch?feature=player_embedded&v=LcvLHHMC4iI

    Or that if they did see it, they wouldn't believe it or comprehend it.

    mell says

    It was about temporarily growing the deficit and building up resources to pay back or forward during the good economic times. We have left that path long ago by never demanding any payback or cuts from anybody, with both major political parties at fault.

    I agree with all of this.

    Among other things, I blame the dogma that lower taxes always lead to growth. Even Laffer never implied this. Only when taxes are too high is this true.

  6. uomo_senza_nome


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    20   7:51am Tue 13 Nov 2012   Share   Quote   Permalink   Like   Dislike  

    Melmakian says

    You don't need a wage-price spiral for inflation

    whatever inflation you see in prices of commodities is temporary. That's the point when we say that inflation cannot sustain itself.

    Inflation is increase in money supply in addition to the human behavior element of increase in velocity. Without velocity, you can grow the money supply 200% and there can be no inflation.

    http://bpp.mit.edu/usa/

    Monetary policy will always help the big banks, that's why the Fed exists. Protect the banking class is their mantra.

  7. Bellingham Bill


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    21   9:02am Tue 13 Nov 2012   Share   Quote   Permalink   Like   Dislike  

    mell says

    It was about temporarily growing the deficit and building up resources to pay back or forward during the good economic times

    there's NO reason we can't always have good economic times.

    The economy IS NOT that random -- each year we actually make more wealth than we consume.

    Whenever it goes crash-boom-bang, it has been due to mass fraud and bubbles.

    The key thing is everyone being able to pay for what they consume and not resorting to credit, since credit can be a lie.

  8. uomo_senza_nome


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    22   9:07am Tue 13 Nov 2012   Share   Quote   Permalink   Like   Dislike  

    Bellingham Bill says

    The key thing is everyone being able to pay for what they consume and not resorting to credit, since credit can be a lie.

    IMO -- this is where Krugman has made a significant intellectual blunder and he is still making it.

    This article by Keen gets to the heart of the argument.

    (may require registration to read it fully)

    http://krugman.blogs.nytimes.com/2012/03/27/minksy-and-methodology-wonkish/

    “If I decide to cut back on my spending and stash the funds in a bank, which lends them out to someone else, this doesn’t have to represent a net increase in demand.” - Krugman

    aggregate demand = change in income + change in debt

    That is Keen's thesis and I think that bodes well with reality. Especially during the housing bubble phase, which was purely driven by inorganic credit growth.

  9. justme


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    23   11:01am Tue 13 Nov 2012   Share   Quote   Permalink   Like   Dislike  

    uomo_senza_nome says

    whatever inflation you see in prices of commodities is temporary

    Price spikes (not exactly the same as "inflation") in commodities may be temporary, there is usually a lingering higher price level even after the spike subsides.

    "Inflation" (the annual or time-rate change in price) may be "temporary", then return to a low number, but the prices themselves will nevertheless stay at their higher levels. So the effect of inflation is a permanent price increase.

    The permanent higher prices do not go away unless there is deflation. And as we know, the Fed will fight ASSET deflation at any cost to the 99%.

    An additional observation that I think is very important:

    The Fed loves asset inflation
    The Fed hates asset deflation
    The Fed hates wage inflation
    The Fed cares about consumer inflation only if it drives wage inflation.

    That is the Fed in a nutshell.

  10. Vicente


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    24   11:06am Tue 13 Nov 2012   Share   Quote   Permalink   Like   Dislike  

    justme says

    The Fed hates wage inflation

    Why do you say this?

    The Federal Reserve doesn't see it as their concern. Unemployment is something they do worry about. They don't care if you have a McJob as long as it counts as employment. It's the CEO's and FIRE gods who don't want wage inflation, because they want your nuts in a vice so they can have more for themselves and less for everyone else.

  11. justme


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    25   11:13am Tue 13 Nov 2012   Share   Quote   Permalink   Like   Dislike  

    justme says

    The Fed hates wage inflation

    Vicente says

    Why do you say this?

    Because of the evidence.

    Vicente says

    It's the CEO's and FIRE gods who don't want wage inflation, because they want your nuts in a vice so they can have more for themselves and less for everyone else.

    Exactly. So whose bidding do you think the Fed does, the 1% CEO crowd or the 99% nuts-in-a-vice crowd?

    There's your answer.

    Justme's rule: The officially stated goal of any institution is rarely [edited] the real or true goal.

  12. uomo_senza_nome


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    26   11:28am Tue 13 Nov 2012   Share   Quote   Permalink   Like (1)   Dislike  

    Vicente says

    The Federal Reserve doesn't see it as their concern

    No. They do. But the way they see it, price inflation causes wage inflation and not the other way around. Here's a Cleveland Fed paper that argues on this point.

    I'm sure it's a complex feedback loop where both are true to some degree, but it's hard to see any evidence that the Fed is helping the stagnant wage problem. They are all about asset prices. Correction: They are all about bank balance sheets and asset prices are an important component of bank balance sheets. Mark to fantasy accounting is to help big banks hide losses.

    Protecting the banking class is the key to Fed's policy. Here is Bernanke's recent exchange with Reuters.

    To the extent that home prices begin to rise, consumers will feel wealthier, they'll feel more -- more disposed to spend. If house prices are rising, people may be more willing to buy homes because they think that they'll, you know, make a better return on that purchase. So house prices is one vehicle. - Bernanke

    To me that reads - home prices are one channel to blow a bubble. There are other channels too, stocks, commodities.

    This would be funny if the real world did not suffer. Bernanke's grand experiment is on people's lives.

  13. justme


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    27   11:49am Tue 13 Nov 2012   Share   Quote   Permalink   Like   Dislike  

    Senza,

    On the topic of how bad Bernanke is or is not:

    Let us not forget that Greenspan was the one that started the mania with his unbridled appetite for asset inflation.

    You may recall that as late as 2004 and 2005, Greenspan was very happy to force interest rates low and pump up any asset class that would respond, in this case mainly housing. A long as he did not see any wage inflation, he would keep the music playing, and he did, until the bubble burst.

    Bernanke is not nearly as bad as Greenspan. Bernanke got the cleanup duty after Greenspan wrecked everything. Bernanke is trying to create some housing inflation again, which is very bad, but I understand WHY he is trying. I don't agree with Bernanke, but I do understand why he does what he does.

    (what's the name of that song, Senza una Donna :))

  14. uomo_senza_nome


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    28   12:49pm Tue 13 Nov 2012   Share   Quote   Permalink   Like   Dislike  

    justme says

    Let us not forget that Greenspan was the one that started the mania with his unbridled appetite for asset inflation.

    Talking about Greenspan, here is a piece smacking with irony.

    Who needs Gold when we have Greenspan?

  15. Dan8267


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    29   12:58pm Tue 13 Nov 2012   Share   Quote   Permalink   Like   Dislike  

    Bellingham Bill says

    no wage inflation, no inflation.

    Inflation is the increase in the money supply, not an increase in prices. Relative increases in prices are an effect of inflation, not inflation itself.

    Relative decreases in prices are an effect of decrease demand and unemployment.

    It's quite possible for prices to stay at a constant rate while both inflation and unemployment is high and demand is low. That's exactly the game the Federal Reserve has been playing the past few years while keeping the interest rates near zero. The Fed has been trying to offset unemployment and low demand with just enough inflation to keep prices a constant while shifting the burden of the bad debt from banker-gamblers to the general public.

    Unfortunately, such a system has the stability of a pencil being balanced on its tip. Eventually, it will all fall one way or the other.

  16. Dan8267


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    30   1:04pm Tue 13 Nov 2012   Share   Quote   Permalink   Like   Dislike  

    Contrary to the way it’s often portrayed, the looming prospect of spending cuts and tax increases isn’t a fiscal crisis. It is, instead, a political crisis brought on by the G.O.P.’s attempt to take the economy hostage.

    Exactly.

    And just to be clear, the danger for next year is not that the deficit will be too large but that it will be too small, and hence plunge America back into recession.

    Don't agree with that. Sounds like Krugman agrees with Cheney when the Sith Lord said, "Reagan proved deficits don't matter. Now let's throw these puppies into the river.", or something like that.

    Spending on the wrong things and spending more than one earns are both significant problems.

  17. tatupu70


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    31   2:00pm Tue 13 Nov 2012   Share   Quote   Permalink   Like   Dislike  

    Dan8267 says

    Inflation is the increase in the money supply, not an increase in prices. Relative increases in prices are an effect of inflation, not inflation itself.

    I don't want to get into another argument about the definition of inflation because it's useless at this point.

    But clearly, you can have price increases in commodities due to increased demand or decreased supply that have nothing to do with money supply. eg. dwindling oil reserves, population growth abroad, etc.. How would you characterize that phenomena?

  18. uomo_senza_nome


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    32   2:13pm Tue 13 Nov 2012   Share   Quote   Permalink   Like   Dislike  

    tatupu70 says

    How would you characterize that phenomena?

    Dan is not saying that all relative price increases are an effect of inflation. Of course other factors can cause price increases that has nothing to do with change in money supply and/or velocity.

  19. Dan8267


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    33   2:15pm Tue 13 Nov 2012   Share   Quote   Permalink   Like   Dislike  

    tatupu70 says

    I don't want to get into another argument about the definition of inflation

    True, diction (the mapping of words (character sequences) to definitions) is not important, unless the mapping is altered specifically with the intent of preventing discussions of certain topics, as in the case of the redefining of inflation and in the case of Newspeak from 1984. In such cases, clarifying and using the original meaning is important because

    1. Such topics are being suppressed.
    2. There is ample historical text using the original definition.
    3. There is no word with the same meaning as the original definition.
    4. The censors are attempting to remove the power of a concept by removing the power of a word. Allowing the censors to control conversation is always bad.

    tatupu70 says

    But clearly, you can have price increases in commodities due to increased demand or decreased supply that have nothing to do with money supply. eg. dwindling oil reserves, population growth abroad, etc..

    True.

    tatupu70 says

    . How would you characterize that phenomena?

    Reliance on unsustainable resources. Such resources will eventually run out and the greater the reliance on them the more severe the economic impact will be when those resources finally do run out. For this reason, the worst thing that can happen to the U.S. is for it to find new sources of oil and to become an oil-exporting nation again.

    Increase supply will lower prices and increase demand and consumption, which increases the sudden crash at the end of the fossil fuel area. I'd rather fall from one stories than two.

  20. uomo_senza_nome


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    34   2:16pm Tue 13 Nov 2012   Share   Quote   Permalink   Like   Dislike  

    Dan8267 says

    The Fed has been trying to offset unemployment and low demand with just enough inflation to keep prices a constant while shifting the burden of the bad debt from banker-gamblers to the general public.

    That statement seems to implicate that the borrower is not at fault and it's all the bankers' fault. That is not the case. Nobody forces you to borrow more than you can afford to pay back. Due diligence pays.

  21. Bellingham Bill


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    35   2:20pm Tue 13 Nov 2012   Share   Quote   Permalink   Like   Dislike  

    Dan8267 says

    inflation is the increase in the money supply

    not what I was talking about, I was talking about the cost of living, like all normal people would take it.

    and the relationship with money and "inflation" also requires velocity.

    http://research.stlouisfed.org/fred2/graph/?g=cNg

    shows your definition is non-descriptive.

    The Fed could double the money supply but if they gave all the new money to me there would be zero inflation as a result.

    I think the 1970s were inflationary since many new workers were entering the workforce and altering the structure of the economy. Both the 1970s and 1980s saw 20M new jobs -- each decade!

    The mid-2000s were inflationary as the suicide lending bubble was pushing tons of money into the economy again, which was quickly spent.

    When that was shut off, we've got disinflationary pressures -- most people are broke, employment is sketchy, gas is double what it was 10 years ago, etc.

  22. uomo_senza_nome


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    36   2:23pm Tue 13 Nov 2012   Share   Quote   Permalink   Like   Dislike  

    Bellingham Bill says

    When that was shut off, we've got disinflationary pressures -- most people are broke, employment is sketchy, gas is double what it was 10 years ago, etc

    Stagnation as far as the eye can see .

    The Fed stabilized the patient, but the patient remains in the ICU because the doctors cannot agree on the treatment. And of course, the medical directors are stealing the medicine and selling it on the black market. So we have quite the dilemma.

    The credibility trap is preventing genuine reform, and the financial system is continuing to distribute the bulk of all new income growth to the wealthiest few, which leaves the vast middle with little discretionary income to fuel demand and organic growth. It is a false equilibrium, but these can last for a decade or more.

  23. Dan8267


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    37   2:26pm Tue 13 Nov 2012   Share   Quote   Permalink   Like   Dislike  

    It is important to acknowledge this simple truth. No economic problem is caused by the lack of money as money is purely an arbitrary measuring stick. Blaming the lack of currency units for economic problems is like blaming the lack of inches on a foot-long ruler for the size of your penis. Your penis doesn't become longer simply because one redefines an inch from 1/12th of a foot to 1/24th of a foot. Inch mark inflation does not make your dick bigger.

    Economic problems are caused by

    1. The misallocation of economic resources including labor, materials, and production.

    2. The idling of resources, especially labor.

    3. The trading of long-term prosperity for short-term wealth.

    4. Bad or fraudulent accounting.

    5. Cost shifting - the transfer of costs from the producers of a good or service to other parties. Cost shifting causes misallocation of resources and inaccurate accounting.

    For example, all pollution and subsidies. Coal is "cheap" only because the true costs of coal are shifted from coal power plants to society as a large. If these costs were adsorbed by the coal power plants, than coal-generated electricity would be among the most expensive forms of electricity.

    6. The exploitation of resources that should not be exploited because doing so is too risky or too costly in the absence of cost shifting.

    For example, deep water drilling for oil. If oil companies had to insure for the worst possible disasters, deep water drilling would be prohibitively expensive. This is the free market stating unequivocally that such drilling is not economically prudent.

    Smart capitalism isn't about gobbling up all resources, but rather intelligently deciding which resources should be exploited and which should not.

    7. Wasteful spending including earmarks, defense, and war.

    8. Corruption due to high ranking politicians being bribed to pass legislation that goes against the efficiency and fairness of the market. Any legislation written by a corporation is almost guaranteed to be something designed to give that corporation an advantage by making the market less free. Corporations hate free markets.

    A free market is a market that operates free from control of any entity whether government or private business. A free market is not a market in which all players are free to do what they want. The word "free" in free market modifies the word "market" not the word "player".

  24. Dan8267


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    38   2:33pm Tue 13 Nov 2012   Share   Quote   Permalink   Like   Dislike  

    Bellingham Bill says

    Dan8267 says

    inflation is the increase in the money supply

    not what I was talking about, I was talking about the cost of living, like all normal people would take it.

    I'm not less "normal" for knowing the real, correct definition of inflation and refusing to be brainwashed by the Federal Reserve. I'm more "informed" for knowing the correct definition.

    There is already a standard English term for cost of living. It's "cost of living". What word or phrase in English refers to the increase of a money supply resulting in the shifting of purchasing power from those who hold currency units to those who create them other than "inflation"?

    Please use "cost of living" when you mean "cost of living" and "inflation" when you mean "inflation". Understanding the difference between the two and discussing both as separate phenomenons is important.

    The quality of your life can increase with the cost of living. Areas with higher costs of living are often better places to live. Areas with rising costs of living are areas in which wages are increasing and the quality of life is increasing.

    In contrast, inflation lowers your quality of life by stealing your purchasing power. Inflation is nothing more than the thinly masked theft of your money. It's no different than if the bankers physically stole the dollar bills out of your wallet or the money out of your checking/savings account.

    Inflation steals your money and gives it to bankers. And by stealing your money, the bankers are stealing that part of your life that you spent earning that money. Stealing life is murder, whether the part of life stolen is at the end or from the middle.

  25. Quigley


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    39   2:35pm Tue 13 Nov 2012   Share   Quote   Permalink   Like (1)   Dislike  

    A good example of commodity prices being unlinked to inflation is the price of heroin, which fell from the heights to the floor a few years after we invaded Afghanistan. Other commodities rose in price, most rose quite a bit including gasoline and oil. But heroin prices became so cheap that kids from the 2000s could afford raging addictions at McJob prices!
    So yes, inflation is hard to quantify based on commodity prices. Which is why the Fed does care about wage inflation, as it's a far more accurate predictor.

  26. Dan8267


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    40   2:39pm Tue 13 Nov 2012   Share   Quote   Permalink   Like   Dislike  

    Bellingham Bill says

    and the relationship with money and "inflation" also requires velocity.

    http://research.stlouisfed.org/fred2/graph/?g=cNg

    shows your definition is non-descriptive.

    The Fed could double the money supply but if they gave all the new money to me there would be zero inflation as a result.

    Note even close. As soon as you spent the money it would enter the system. And the purchases you make would come from the purchasing power of everyone else. It is mathematically set to be a zero-sum game.

    Arguing that money added to the system but isolated in some subsystem has no effect is essentially playing a semantic game. The subsystem is better thought of as a separate system until the money flows into the original system. At that point, the inflation is real and precisely measurable.

    Here's an engineering principle: Keep it Simple! This principle should be applied to accounting and monetary policies as well.

    The only purpose in inflation is to steal wealth from the population at large, particularly savers, and to give it so some other group who probably are bastards who don't deserve it and are responsible for wrecking the economy in the first place.

    Inflation is a tax on savings, paid for by the financially responsible, and given to bankers. If I'm going to pay a tax, it should be to government for the purpose of running government, protecting the people, and providing government services. I should not be paying taxes to rich, greedy bankers who are responsible for most of the economic problems in our society. Bankers are worse than pedophiles. Would you want your tax dollars going to pedophiles?

  27. uomo_senza_nome


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    41   2:44pm Tue 13 Nov 2012   Share   Quote   Permalink   Like   Dislike  

    Dan -

    I can agree with your argument that money supply doesn't matter, but money velocity totally matters. Consider the problem of hoarding gold during the Great Depression. Hoarding of gold actually caused the idling of resources that you are talking about.

    http://jessescrossroadscafe.blogspot.com/2012/10/the-great-depression-in-ten-pictures.html

    According to you, FDR is a thief. There are many in the far right (Lew Rockwell and his associated Austrian friends) who claim the exact same thing even today. But there is another view. FDR simply did what he could to revive the economy, given the situation he had been presented.

  28. Dan8267


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    42   2:46pm Tue 13 Nov 2012   Share   Quote   Permalink   Like   Dislike  

    uomo_senza_nome says

    Dan8267 says

    The Fed has been trying to offset unemployment and low demand with just enough inflation to keep prices a constant while shifting the burden of the bad debt from banker-gamblers to the general public.

    That statement seems to implicate that the borrower is not at fault and it's all the bankers' fault. That is not the case. Nobody forces you to borrow more than you can afford to pay back. Due diligence pays.

    I don't see how my statement in any way implies what you say it does. Nor do I believe that the borrower isn't at fault or didn't knowingly take part in fraudulent loans. Not sure how you are connecting the two.

  29. uomo_senza_nome


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    43   2:47pm Tue 13 Nov 2012   Share   Quote   Permalink   Like   Dislike  

    Dan8267 says

    The only purpose in inflation is to steal wealth from the population at large, particularly savers, and to give it so some other group who probably are bastards who don't deserve it and are responsible for wrecking the economy in the first place.

    Do you realize that there are a lot of "corrupt" or "irresponsible" savers? Example: politicians, rich bankers - the very people you demonize. May be inflation is not a bad thing after all, screw the corrupt politicians and the bankers who are sitting on a pile of Treasury bonds.

  30. Dan8267


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    44   2:48pm Tue 13 Nov 2012   Share   Quote   Permalink   Like   Dislike  

    uomo_senza_nome says

    Dan is not saying that all relative price increases are an effect of inflation. Of course other factors can cause price increases that has nothing to do with change in money supply and/or velocity.

    I thought that was obvious. There are many factors in the rise and fall of prices. Inflation is just one. However, the relationship between inflation and price changes is always described by the same equation. The nominal price is simply adjusted to keep the real price unaffected by the inflation. The unfortunate side-effect, or really the intended effect, is a shift in wealth from some people to others.

  31. Dan8267


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    45   3:04pm Tue 13 Nov 2012   Share   Quote   Permalink   Like   Dislike  

    uomo_senza_nome says

    I can agree with your argument that money supply doesn't matter, but money velocity totally matters.

    uomo_senza_nome says

    Do you realize that there are a lot of "corrupt" or "irresponsible" savers? Example: politicians, rich bankers - the very people you demonize. May be inflation is not a bad thing after all, screw the corrupt politicians and the bankers who are sitting on a pile of Treasury bonds.

    Ok, if I'm reading you correctly, you are arguing that inflation can be a good thing because it punishes savers, a.k.a. hoarders. Basically, saving is a virtual for the individual but a vice for society. The Paradox of Thrift.

    Yes, I agree that the Paradox of Thrift is a real problem and that velocity of money matters. However, I do not buy the argument that inflation is the correct solution to that problem or that inflation is even an effective solution to that problem.

    The parasites you mentioned can avoid inflation, especially if they are cronies of Federal Reserve managers, through various means like preferred stocks, gold, paintings, high-priced real estate. The common man does not have the ability to protect himself from inflation without taking considerable risks as he's not privy to the information that the parasites have.

    A better way to avoid the Paradox of Thrift, which would be better named the "Dilemma of Thrift", would be to simply run non-corrupt, effective, and transparent banking system.

    If inflation is set to zero, which can be done entirely by fiat, than a checking, savings, or money-market account could offer 0% interest and the account holders would not lose money. As a saver, I'm still going to keep my money in a bank for safety, and that money will still be loaned out to others are the interest rate I get + the interest rate the bank takes, which could be as little as (0% + 1%).

    I don't mind my money being lent out as it costs me nothing and I still get safety and online banking / accounting. If I get even a measly 0.25% interest, that's icing on the cake.

    With deposit insurance, there aren't going to be any runs on the bank. So the only time I'm going to take my money out of the bank is when I'm going to spend it. Hence, the velocity of the dollar will not be lowered by my saving. My cash isn't sitting idled, it is being used to provide your child with a college education, a factory with new capital goods, a small business with a startup loan, etc.

    My savings does not drag on the economy. I'm simply shifting my wealth from one-time consumption to investment. I.e., my cash is going to build robots rather than pizzas. I would argue this is good for the economy.

    If my scenario doesn't reflect the status quo, it is only because the banking system is being ran incorrectly. The solution is to fix the banking system, not to punish savers.

    Punishing savers has profound negative impacts on the economy. If a person cannot save up for a large purchase like a car or a house, then that person must either not make the purchase, or even worse, take on debt to make the purchase. Buying goods and services on debts make all those goods and services more expensive, which means you buy less of them or other goods and services. This lowers the velocity of money.

    In effect, using debt rather than savings to purchase goods and services, lowers the velocity of money by transferring some purchasing power from producers/consumers (who are the same people) to bankers. It's in effect a sales tax, and sales taxes are always a drag on the economy and they always lower monetary velocity.

  32. Dan8267


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    46   9:01pm Tue 13 Nov 2012   Share   Quote   Permalink   Like   Dislike  

    no response to the last post?

  33. uomo_senza_nome


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    47   7:59am Wed 14 Nov 2012   Share   Quote   Permalink   Like   Dislike  

    Oui, I am talking about the Thrift paradox.

    Dan8267 says

    Hence, the velocity of the dollar will not be lowered by my saving. My cash isn't sitting idled, it is being used to provide your child with a college education, a factory with new capital goods, a small business with a startup loan, etc.

    There are two problems:

    a) tension between saver and borrower using the same medium
    b) duration mismatch

    (a) is a saver problem, the saver chooses the same medium that the borrower wishes to borrow. Inherent conflict of interest between the two parties.

    (b) is certainly a banking problem. But without the saver enabling the duration mismatch by choosing to save in the borrowing medium, the situation cannot arise.

    For more on these problems, see here

    There is also a third problem, in the modern banking system which is that they can create loans out of thin air. They don't need saver deposits to give out loans. Loans come first, reserves later. This should never be the case for sound banking -- because the limit of credit is now imposed by the banker's quality (which is dubious at present).

    Note: I am distiniguishing clearly between the two tasks - saving and investing; they are not the same thing, however much we've been brainwashed to think they are. Saving is simply preserving purchasing power to use in a future date. Investing is taking risk for a higher real return.

  34. Dan8267


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    48   9:32pm Wed 14 Nov 2012   Share   Quote   Permalink   Like   Dislike  

    Comment length is limited to 8000 characters but you entered 11840 characters.

    Well, at least now this is only going to be a two-post reply.

  35. Dan8267


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    49   9:33pm Wed 14 Nov 2012   Share   Quote   Permalink   Like   Dislike  

    Good points, but they are all addressable without resorting to inflation.

    Case 1: Saving without investing

    First, let's consider saving without investing. In an inflation-free monetary system saving $X simply causes the available money supply to temporarily decrease by $X. This causes the purchasing power of those spending to increase proportionally to X. A lot of saving will cause prices to decline.

    Now declining prices will reduced demand, but declined prices will not. This is very important to understand. It is solely the expectation that future prices will be lower that causes consumers to delay purchases. As such, slow and long declines are bad for the economy if the economic system reduces production as a result of decrease demand like our economy does. However, a different economic system that maintains production during decreased demand and simply lower prices will behave differently. Let's look at both subcases of the case of "saving without investment".

    Case 1.1.1: Saving without investing, economy lowers production, prices decline slowly

    1. People start saving for whatever reason.
    2. This removes money from circulation.
    3. Thus purchasing power for those who spend increases. This is a negative feedback that encourages more spending and less saving.
    4. However, the prices are slowly declining, so people expect future prices to be lower. This is a positive feedback that encourages less spending and more saving.
    5. The feedback in #4 must be slightly greater than the feedback in #3. If #3 is greater, saving will stabilize at a limit and buying, demand, and production will go back to normal. If #4 is much greater than #3, then we actually have case 1.1.2 (see below) as prices will decline rapidly.
    6. Unemployment increases.
    7. The lack of employment forces people to cut back in spending further but also to spend their savings.
    8. Savings decrease and money returns to circulation.
    9. The increase in money circulating raises prices, but not necessarily enough to counter the drop in prices do to lower demand.

    This is the scenario that describes the First Great Depression. It's solution is simply to prevent step 6 by having the government hire people to do useful work. The key being useful. There's an infinite number of useful things to be done. Paying a man to dig a hole and then fill it makes no sense when we could pay the man to learn new skills. Going to war makes no sense, since a country would be far better off spending that money achieving energy independence.

    A second way to prevent this scenario is to provide mechanism for the rapid decrease in prices rather than a slow decrease in prices. This shifts this scenario to case 1.1.2.

    Case 1.1.2: Saving without investing, economy lowers production, prices decline rapidly

    1. People start saving for whatever reason.
    2. This removes money from circulation.
    3. Thus purchasing power for those who spend increases. This is a negative feedback that encourages more spending and less saving.
    4. Prices drop rapidly and quickly hit a bottom.
    5. People have no anticipation of prices getting lower since they are already at historic lows and are no longer dropping and it is clear that the prices cannot get lower. For example, the interest rates set by the Fed can't go lower than they are now.
    6. People rush to buy what they can before prices rise. It's a land grab and if you don't buy now, you'll miss out. Think of those Black Friday deals that make the unwashed peasants trample each other to death.
    7. #6 is a negative feedback that causes savings to drop, money in circulation to increase, and rising prices.
    8. Some unemployment may be generated from step 4, but it is quickly reversed by the increase in demand. If the price drop is rapid enough, production won't be affected and unemployment won't occur.
    9. Prices return to normal. This could happen gradually or rapidly, but either way the economy keeps ticking because demand and production remain high.

    In this scenario the negative feedback prevents a depression. Some corporations will lose profits, but their losses are gains to the customers who get more bang for their buck. Ultimately though, the negative feedback provides stability.

    This is the scenario we could have been in had our government not propped up housing prices during the housing bubble burst, which is still going on as a result. This scenario is far better than 1.1.1 and is arguably not a bad thing.

    Case 1.2.1: Saving without investing, economy maintains production, prices decline slowly

    In this scenario, I'm going to describe an economy that has not been created yet. Of course, it could be created; there's no law of mathematics, logic, or physics that prevents such an economy. It's just that the stupid hairless apes of this sphere haven't built such an economic system, yet.

    1. People start saving for whatever reason.
    2. This removes money from circulation.
    3. Thus purchasing power for those who spend increases. This is a negative feedback that encourages more spending and less saving.
    4. However, the prices are slowly declining, so people expect future prices to be lower. This is a positive feedback that encourages less spending and more saving.
    5. The feedback in #4 must be slightly greater than the feedback in #3. If #3 is greater, saving will stabilize at a limit and buying, demand, and production will go back to normal. If #4 is much greater than #3, then we actually have case 1.2.2 (see below) as prices will decline rapidly.
    6. Production remains constant by design of the economic system.
    7. With constant production but lower prices, unemployment remains constant but wages decrease. This is a positive feedback that encourages saving and discourages purchasing. However, the decrease in wages is also a negative feedback that results in less saving.
    8. As both wages and prices decrease, the overall purchasing power remains constant by mathematical necessity. The production is the same, so any decrease in wages or circulating money results in a proportional decrease in prices. Yes, purchasing power can still shift from one group of persons to another, but the system as a whole has the same purchasing power, which is the ability to purchase all the goods and services produced, which is a constant in this scenario.
    9. The end result is lower prices and lower wages, but constant purchasing power. Savers are rewarded by having more "future" purchasing power at the expense of the future purchasing power of non-savers, but the present purchasing power of people in general is no different than before step 1.
    10. Eventually, for whatever reason, savers start spending. This simply does in reverse steps 1 to 9. Savers get a temporary reward of boosted purchasing powers during the beginning of this step. That is, the savers who spend first, get the most boost in purchasing power. This encourages step 10 to happen sooner rather than later.

    This scenario describes a self-correcting economic system that avoids depression. There is a temporary shift in purchasing power from non-savers to savers, but in the long run there is no fluctuation of purchasing power in contrast to our system in which a great deal of purchasing power is constantly shifted from the masses to bankers.

    Case 1.2.2: Saving without investing, economy maintains production, prices decline rapidly

    Same as case 1.1.2 except that unemployment never occurs. Instead there may be a short-term drop in wages follow by a wage recovery.

  36. Dan8267


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    50   9:33pm Wed 14 Nov 2012   Share   Quote   Permalink   Like   Dislike  

    Case 2

    Now let's consider the scenarios where savings are used for investments. In this case, we'll eliminate fractional reserve banking and long-term inflation all together. To deal with the "duration mismatch" between savers and borrowers, we'll use temporary inflation as described in this example. (I find that people follow systems better if you give them examples rather than the algorithms.)

    A bank has $100,000 in deposits. It loans out $90,000 to various borrowers. The depositors (savers) withdraw $50,000. Since the bank only has $10,000, the government central bank temporarily creates $40,000 and loans it to the bank at say 0% interest. The bank is now flagged as "critical" meaning it cannot issue new loans. Yes, in this system borrowing can only happen if there are savers and savers perform a valuable service to the economy.

    The bank still receives interest payments on its existing loans but cannot increase its revenue streams by issuing new loans until it is no longer critical, a.k.a. "solvent". The bank becomes solvent again by paying back the government central bank the entire loan it took out ($40,000) plus any interest on it. (The interest can be used to pay for loan losses for defaults, depositor insurance, and running the central bank.)

    In such cases, runs on banks have no negative effects other than a temporary slight increase in the money supply (inflation) that is completely undone as the banks pay back their loans. The government can even discourage risky lending and going critical by setting the interest rates for any bank going critical to a value greater than what it charges its customers. A bank might choose to take a loan from another bank, but doing so strengthens its competitor and its competitor also has a vested interest in not making the loan if its risky.

    Case 2: Saving with investing, no long-term inflation

    1. People start saving for whatever reason.
    2. No money is removed from circulation. It merely shifts from funding pizzas to funding robots. I.e., from consumer goods to capital goods and infrastructure.
    3. Purchasing power remains constant. Consumer prices decrease and capital goods prices increase as demand shifts from one to the other.
    4. Employment patterns may shift as production shifts focus, but net employment and productivity remains constant.
    5. People stop saving for whatever reason. They withdraw money to make purchases.
    6. Some banks go critical. In the worst-case scenario, all banks go critical. Let's continue with this case.
    7. The money lent out by the banks, largely competing for capital goods, is no longer augmented so capital goods prices lower. In effect, for those businesses with cash the purchasing power of that cash for capital goods increases.
    8. Meanwhile, the money withdrawn from banks, which partially comes from inflation, is used to buy consumer goods. The prices of consumer goods go up as a result of both increase demand and the inflation needed to deal with critical banks. So the purchasing power of the savers is diminished if they all decide to buy at the same time. This is a healthy negative feedback which keeps the economy stable.
    9. As the banks pay back the loans from government, banks move from being critical to solvent and the government destroys the excess money. The inflation was temporary and those who chose not to spend during the period of buying did not lose any purchasing power. This encourages people not to withdraw all at the same time, another negative feedback.
    10. The allocation of resources shifts back from capital goods towards consumer goods. Employment patterns follow.

    Summary

    Naturally running simulations based on the above models would be prudent. And, of course, there are always details to work out. However, the basic principles are sound. Inflation is neither necessary nor desirable for avoiding the Dilemma of Thrift.

    I am absolutely confident that given funding and fiat, I could design an economic system free from long-term inflation and fractional reserve banking that would be depression proof. It would hardly be the most difficult problem I've tackled.

  37. marcus


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    51   7:28pm Thu 15 Nov 2012   Share   Quote   Permalink   Like   Dislike  

    It's impossible to boil US economics and monetary policy down to simple cause and effect. OR to claim that there are simple solutions to our monetary system. It's also overly simplified to put the entire problem at the feet of bankers.

    The reason ?

    Because we are already involved in convoluted international dealings, and our currency is still the worlds reserve currency. The complexity, the unknowns, and the degree to which we are deeply invested in the current system, mean that changing it is nearly impossible, except maybe after an apocalyptic change, or after a very long transition.

    Anyone who thinks or suggests that solving our current debt and trade imbalance and monetary problems is easy or that they can wrap their mind around a "solution" is a fool, and doesn't even BEGIN to understand how much they don't know about what is involved.

  38. Dan8267


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    52   8:16pm Thu 15 Nov 2012   Share   Quote   Permalink   Like (1)   Dislike  

    marcus says

    It's impossible to boil US economics and monetary policy down to simple cause and effect.

    If complex systems like the weather can be accurately modeled, then so too can economies. A real math teacher would understand that.

  39. marcus


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    53   10:44pm Thu 15 Nov 2012   Share   Quote   Permalink   Like   Dislike  

    Relevant to the conversation:

    http://www.investopedia.com/financial-edge/1011/how-the-triffin-dilemma-affects-currencies.aspx#axzz2CMdakykb

    Where we are in history, that is specifically with respect to current levels of wages in places like China, India and Mexico is an important international factor, like the Triffin dilemna, that renders other analysis of inflationary impact almost useless.

    Inflation that includes wage inflation that is commensurate with price increases in food and rents, probably hurts the wealthy and the poor more than it does the middle class.

    But under current circumstances, with international labor rates competing with ours, I believe that inflation will be a transfer of wealth out of the country, and ultimately to the developing world. This has occurred to some extent already with globalization, as labor in China gets more (on average) intrinsic value in return for their work and we get somewhat less.

    This could be framed as a phenomenon that is somewhat independent of inflation, but it is through inflation that it occurs, when wage inflation does not match price increases in food, rents etc. This is simultaneous to a perceived benefit we receive of being able to consume products more cheaply than if they were made here.

    I think B Bill is right that when we do get inflation without corresponding wage inflation it ultimately can put downward pressure on rents, but first the pressure hits us all with higher real cost of living, less ability to save and so on.

  40. marcus


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    54   7:05am Fri 16 Nov 2012   Share   Quote   Permalink   Like   Dislike  

    OF course the 1% are affected the least by whether wage inflation keeps up with other inflation, because their "wages" are in the form of investment returns, from investments that are international. Ultimately they are affected in ways they might not yet understand, because when the middle class takes a hit, our entire economy and our aggregate wealth is going to be impacted.

    Maybe the argument for progressive taxes needs to come down to higher income folks having skin in the game, as they say.

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