question on deflation I've been thinking of - BART? Aaron? Sapiens?

[Spartacus]

I've been thinking of and trying to argue against something this guy wrote,

http://www.silveraxis.com/index.html

he claims when a debt is written off, that is INFLATIONARY

The CASH has gone out but now is not going to be paid off - as long as the bank does not go under, that's inflationary

Can anyone see how a single act of defaulting is NOT inflationary?

As I wrote above, I can't argue against that - the one event is inflationary, BUT of course, in response, the lenders tighten up lending standards - less money goes out, which is deflationary.

If the bank could only keep lending (and not tighten up lending standards) when lots of people default then in aggregate it would remain inflationary.

[GRG55]

Re: question on deflation I've been thinking of - BART? Aaron? Sapiens?

I've been thinking of and trying to argue against something this guy wrote,

http://www.silveraxis.com/index.html

he claims when a debt is written off, that is INFLATIONARY

The CASH has gone out but now is not going to be paid off - as long as the bank does not go under, that's inflationary

Can anyone see how a single act of defaulting is NOT inflationary?

As I wrote above, I can't argue against that - the one event is inflationary, BUT of course, in response, the lenders tighten up lending standards - less money goes out, which is deflationary.

If the bank could only keep lending (and not tighten up lending standards) when lots of people default then in aggregate it would remain inflationary.

Unless it's your father forgiving the money he lent you for college tuition, when a debt is "written off" that usually means the underlying collateral has gone to zero. That money has gone to money heaven. I don't see how that could possibly be considered inflationary.

[Guest]

Re: question on deflation I've been thinking of - BART? Aaron? Sapiens?

Spartacus -

I see Tom Szabo has got you thinking ... I recall your initial reaction was the guy was full of it? At very least we acknowledge he's not thinking on a shallow level.

Indeed, he's got some controversial ideas. I'm not versed enough in the topics he covers to really examine what he says critically, but I also would be very interested to hear other's stress test some of his notions. I have no idea whether this is original thinking or bunk. As Spartacus asks, someone else here needs to put it under the 'gimlet eye'.

Lukester

[Spartacus]

Re: question on deflation I've been thinking of - BART? Aaron? Sapiens?

the cash has been spent - the MONEY does not go to heaven

The debt (accounting entries) go to heaven

The collateral still exists (for example, the house)

net effect - cash in circulation that did not exist before, the Bank takes a hit to its profit

Unless it's your father forgiving the money he lent you for college tuition, when a debt is "written off" that usually means the underlying collateral has gone to zero. That money has gone to money heaven. I don't see how that could possibly be considered inflationary.

[Spartacus]

Re: question on deflation I've been thinking of - BART? Aaron? Sapiens?

I see Tom Szabo has got you thinking ... I recall your initial reaction was the guy was full of it? At very least we acknowledge he's not thinking on a shallow level.

Indeed, he's got some controversial ideas. I'm not versed enough in the topics he covers to really examine what he says critically, but I also would be very interested to hear other's stress test some of his notions. I have no idea whether this is original thinking or bunk. As Spartacus asks, someone else here needs to put it under the 'gimlet eye'.

he did get me thinking - he sometimes gets me thinking "jeeeeez ... how stupid can a human being be?" ;)

But no, I never wrote that all his stuff was crap (but a lot seems to be).

It was a couple of Fekete articles that I really objected to, and Szabo seems to be Prof. F.'s lapdog.

And even there, some of Fekete's older stuff is really, really good.

[jk]

Re: question on deflation I've been thinking of - BART? Aaron? Sapiens?

the cash has been spent - the MONEY does not go to heaven

The debt (accounting entries) go to heaven

The collateral still exists (for example, the house)

net effect - cash in circulation that did not exist before, the Bank takes a hit to its profit

let's look at all the parties and see how it looks to each. the borrower spends the money by buying something. the recipient of that cash no longer possesses the object or asset but now possesses cash. let's use your example of a home purchase. the home seller now holds cash. the home buyer owns an asset for the moment, the house, and owes a debt. the debt is carried on the bank's books as an asset. the buyer now defaults. he no longer holds the house and let us say the debt is written off. the bank no longer carries the debt as an asset, it carries the house as an asset. the bank then sells the house. let us suppose that the value of the house has gone down, so it sells the house for less than the loan it originally issued. the money used to purchase the house from the bank now disappears into the bank vault, and the bank records a loss on its books. so, phew, the original seller has the original cash, the bank has a loss equal to the amount of the original loan minus the value recouped by the foreclosure sale, and the second home buyer owns the house but is out the cash he used to buy it. the cash used to buy the foreclosed house, which has been put in the vault, plus the loss recorded equals the amount that the original seller pocketed. net change, zero.

[Guest]

Re: question on deflation I've been thinking of - BART? Aaron? Sapiens?

Has anyone around here ever wondered how much employee productivity Eric Janszen is costing to the hapless employers of all of the obsessively engrossed iTulip readers?

With all the time we spend (all of us, from the roustabouts to the captains of industry), are spending tunneling and boring through all the topics discussed on this website, it's a wonder any of our employer's get some work out of us. :eek:

[EJ]

Re: question on deflation I've been thinking of - BART? Aaron? Sapiens?

he did get me thinking - he sometimes gets me thinking "jeeeeez ... how stupid can a human being be?" ;)

But no, I never wrote that all his stuff was crap (but a lot seems to be).

It was a couple of Fekete articles that I really objected to, and Szabo seems to be Prof. F.'s lapdog.

And even there, some of Fekete's older stuff is really, really good.

Quick KaPoom refresher.

There are two kinds of money transactions: cash and credit.

Joe spends cash and the total available cash in the Joe's account declines by the amount spent.

Joe spends credit and the total available amount in the Joe's credit account with the lender declines by the amount he spent.

Joe's spending credit results in a debt, a liability to him and an asset to the lender.

In the case of unsecured debt (e.g., credit card), default on a debt by the Joe means that Joe still has the cash/goods/property/etc. that was purchased on credit. However, his credit account with the lender is now out more than the amount of the debt. He now has no credit with the lender. The lender has lost the asset. In the case of secured debt (e.g., mortgage) Joe looses the collateral. It is transferred onto the lender's books at a discount on the original loan (asset).

Both processes destroy money and are thus debt deflationary.

So far so good for most commentators. It's what happens in a floating exchange rate, fiat money world with millions of such defaults in aggregate that gets everyone wrapped around the axle.

The so-called "deflationists" forget that the days of runaway price deflation as happened in the 1930s mostly ended when nations went off the gold standard, and that once the international gold standard was dumped by Nixon in 1971, the interaction of currencies, money and credit among nations has been inflation-prone ever since. Japan suffered a mild deflation versus a run-away deflation for complex reasons that I won't get into here having to do with their net external creditor position. Their deflation has never been more that a couple of percent per year, and has hardly been as debilitating as the price deflation experienced by the US during The Great Depression. (As a matter of fact, Japan experienced that period as a hyperinflation, which is a form of debt deflation.) While Japan suffer "deflation" over the past 15 years, Toyota has been able to overtake General Motors. Suffice it to say that the US, with its massive net external debtor position, is not subject to that risk.

As we can see by looking out the window, during a debt deflation a net external debtor such as the US can experience commodity price inflation with respect to traded goods in negative external trade balance (e.g., oil and gold) coincident with price deflation in financial assets, such as stocks, mortgage bonds, and asset backed securities. What links the falling asset prices and the rising goods prices is shrinkage in the unit of measure used for credit and cash transactions, the dollar. This is a classic hyperinflation process, although it has not reached anywhere near a degree of severity yet.

Credit is declining along with the purchasing power of money. Taken to its logical conclusion, in an economy suffering an extreme inflation there is little credit available from the banking system, most transactions are cash, and cash is losing purchasing power.

[EJ]

Re: question on deflation I've been thinking of - BART? Aaron? Sapiens?

On the secured loan issue I'm still confused - the money still exists, and the asset still exists (although it's changed ownership and its "value" may be impaired a little). This transaction looks inflationary to me - the subsequent knock-on effects of less future credit may destroy money, but this transaction doesn't destroy money in the present.

Remember, in a credit transaction money is created the moment the money is borrowed. Every time you use your credit card you are creating "money" that exists as a liability to the borrower and an asset to the lender. Every time a debt is defaulted on the money that was previously created returns from whence it came. For a collateralized debt, the money previously created is also destroyed in a default. However, the bank winds up with an asset against which new debt can be issued.

This seems to be independent of money printing, so

By "inflation" here you mean "prices rising" because the external suppliers are demanding more money for their tradeable goods - in this situation you don't necessarily mean more circulating money (although more money may be printed, and this will have its own effects, which look the same (prices rising, dollar falling)).

Per KaPoom Theory, the money was created long ago. Trillions in new money was created when bonds were sold to central banks and pension funds in Asia, Europe, oil producing countries where they are assets. If the US defaulted, the money would go whence it came. But, as expected, the US is not defaulting, not that way.

When we first posted this in April 2001, we got a lot of angry email.

[Spartacus]

Re: question on deflation I've been thinking of - BART? Aaron? Sapiens?

OK, so the "money printing" inflation already happened

BUT the "prices rising in general" part was
1. delayed by derivatives (which also "printed money")
2. prevented by lopsided economics (FIRE appreciation)
3. prevented by the inventories being worked off from the last commodity boom
4. prevented/delayed by the bond market's captive bidding (foreign CB and Social Security)

Remember, in a credit transaction money is created the moment the money is borrowed. Every time you use your credit card you are creating "money" that exists as a liability to the borrower and an asset to the lender. Every time a debt is defaulted on the money that was previously created returns from whence it came. For a collateralized debt, the money previously created is also destroyed in a default. However, the bank winds up with an asset against which new debt can be issued.

Per KaPoom Theory, the money was created long ago. Trillions in new money was created when bonds were sold to central banks and pension funds in Asia, Europe, oil producing countries where they are assets. If the US defaulted, the money would go whence it came. But, as expected, the US is not defaulting, not that way.

When we first posted this in April 2001, we got a lot of angry email.

[jimmygu3]

Re: question on deflation I've been thinking of - BART? Aaron? Sapiens?

I've been thinking of and trying to argue against something this guy wrote,

http://www.silveraxis.com/index.html

he claims when a debt is written off, that is INFLATIONARY

The CASH has gone out but now is not going to be paid off - as long as the bank does not go under, that's inflationary

Can anyone see how a single act of defaulting is NOT inflationary?

As I wrote above, I can't argue against that - the one event is inflationary, BUT of course, in response, the lenders tighten up lending standards - less money goes out, which is deflationary.

If the bank could only keep lending (and not tighten up lending standards) when lots of people default then in aggregate it would remain inflationary.

I would argue that it is only inflationary if the Fed forgives the bank's debt. When a bank writes off a bad debt, interest inflows are reduced, but demand for interest payments to depositors and the central bank are NOT. Fewer new loans can be initiated without additional deposits or investment. This balances out any inflationary impact that the loan write-off had.

If, on the other hand, the Fed bails out the bank and forgives the loans from the Mother Ship, that is inflationary.

[Andreuccio]

Re: question on deflation I've been thinking of - BART? Aaron? Sapiens?

Has anyone around here ever wondered how much employee productivity Eric Janszen is costing to the hapless employers of all of the obsessively engrossed iTulip readers?

With all the time we spend (all of us, from the roustabouts to the captains of industry), are spending tunneling and boring through all the topics discussed on this website, it's a wonder any of our employer's get some work out of us. :eek:

With apologies to JK:

let's look at all the parties and see how it looks to each. the employer spends the money by buying your time. you, the recipient of that cash no longer possesses the time but now possess cash. let's use your example of iTulip readers. you, the employee, now hold cash. iTulip owns an asset for the moment, your time, and owes a debt. the debt is carried on iTulip's books as an asset, your posts. you now default. the employer no longer holds your time and let us say you are fired. your employer no longer carries you as dead weight, it carries a new employee. iTulip then sells subscriptions. let us suppose that the value of your time has gone down, so you get a job much less than you were originally paid. the money used to purchase your time from you now disappears into iTulip's vault, and your employer records a loss on its books. so, phew, you have the original cash, but a minimum wage job, your employer has a loss equal to the amount of your original pay minus the value recouped by firing your lazy ass, and some new employee has a great new job. the cash used to buy your time, which has been spent mostly on beer, plus the loss recorded equals the amount that you originally pocketed. net change, zero.

[rabot10]

Re: question on deflation I've been thinking of - BART? Aaron? Sapiens?

Quick KaPoom refresher.

There are two kinds of money transactions: cash and credit.

Joe spends cash and the total available cash in the Joe's account declines by the amount spent.

Joe spends credit and the total available amount in the Joe's credit account with the lender declines by the amount he spent.

Joe's spending credit results in a debt, a liability to him and an asset to the lender.

In the case of unsecured debt (e.g., credit card), default on a debt by the Joe means that Joe still has the cash/goods/property/etc. that was purchased on credit. However, his credit account with the lender is now out more than the amount of the debt. He now has no credit with the lender. The lender has lost the asset. In the case of secured debt (e.g., mortgage) Joe looses the collateral. It is transferred onto the lender's books at a discount on the original loan (asset).

Both processes destroy money and are thus debt deflationary.

So far so good for most commentators. It's what happens in a floating exchange rate, fiat money world with millions of such defaults in aggregate that gets everyone wrapped around the axle.

The so-called "deflationists" forget that the days of runaway price deflation as happened in the 1930s mostly ended when nations went off the gold standard, and that once the international gold standard was dumped by Nixon in 1971, the interaction of currencies, money and credit among nations has been inflation-prone ever since. Japan suffered a mild deflation versus a run-away deflation for complex reasons that I won't get into here having to do with their net external creditor position. Their deflation has never been more that a couple of percent per year, and has hardly been as debilitating as the price deflation experienced by the US during The Great Depression. (As a matter of fact, Japan experienced that period as a hyperinflation, which is a form of debt deflation.) While Japan suffer "deflation" over the past 15 years, Toyota has been able to overtake General Motors. Suffice it to say that the US, with its massive net external debtor position, is not subject to that risk.

As we can see by looking out the window, during a debt deflation a net external debtor such as the US can experience commodity price inflation with respect to traded goods in negative external trade balance (e.g., oil and gold) coincident with price deflation in financial assets, such as stocks, mortgage bonds, and asset backed securities. What links the falling asset prices and the rising goods prices is shrinkage in the unit of measure used for credit and cash transactions, the dollar. This is a classic hyperinflation process, although it has not reached anywhere near a degree of severity yet.

Credit is declining along with the purchasing power of money. Taken to its logical conclusion, in an economy suffering an extreme inflation there is little credit available from the banking system, most transactions are cash, and cash is losing purchasing power.

Hey EJ I want to know does Joes wife have an Amex and would that make a difference?

[rabot10]

Re: question on deflation I've been thinking of - BART? Aaron? Sapiens?

Hey EJ I want to know does Joes wife have an Amex and would that make a difference?

Sorry for beiing flippant about a subject that needs MUCH more insight. It's just the whole idea of how money is created that is UN real to me and not KNOWN to the masses

Hey but let's talk about my wifes Amex bill someone has to stop it

[Spartacus]

Re: question on deflation I've been thinking of - BART? Aaron? Sapiens?

Hey but let's talk about my wifes Amex bill someone has to stop it

I suggest a "lawn mower accident"

and the next time

a "blender accident"

and the next time a "hedge trimmer accident"

and the next time "what? no, nothing in the mail, really ... " (if you are a good liar)