Does debt deflation plus monetary inflation equal goldilocks?

[grapejelly]

Re: Does debt deflation plus monetary inflation equal goldilocks?

i don't think I understand the whole anti-fiat currency concept. Didn't staying on the gold standard without a devaluation after 1929 lead to the depression being as big as it was?

No. The US left the gold standard very early in the depression. If suspending redemption of gold and devaluation had done any good, wouldn't they have had an effect sometime in the 1930s?

How would an economy adjust to changes in population and technology if it's money was inelastic? How would people borrow for r and d or capital improvements? I understand that money being too cheap is also a problem. But I think what really made this last bubble so bad wasn't the overly cheap dollars. The problem really got out of control with unregulated "near money." Banks were making fake assets for each other and leveraging those assets. Regulation would have tamped that bubble. The same thing goes for unregulated credit for consumers and in housing.

If they weren't printing away now we would be at the worst sudden stop imaginable. Thank god there is still some credibility with America to get away with it. I know the whole dollar bubble issue. We'll have to live with that problem soon enough but hopefully with a functioning dollar zone economy.

If you used gold for money, then the value of goods and services in gold terms would fluctuate, and so what? Today you might buy a barrel of oil with an ounce of gold, tomorrow two barrels.

The only people who need an elastic currency are the banks and financial companies looking to profit at the expense of savers, investors and wage earners.

If they weren't printing away right now, the insolvent banks would collapse and good riddance.

[LinusK]

Re: Does debt deflation plus monetary inflation equal goldilocks?

1. you lend the bank a dollar (make a deposit of a dollar to the bank)
2. bank lends me a dollar.
3. you have a piece of paper saying you have a dollar on deposit.

Agree with 1 and 2, but disagree with 3. Money that's deposited in checking accounts is money too.

4. i have a dollar in my checking account.
5. okay
6. now I spend the dollar in my checking account.

7. I bought a dollar worth of hashish in the local economy. That dollar is propagating in the economy.

8. I don't pay the bank back their dollar (I default, so typical, I might add )

See, the dollar is still in the economy? There has been no shrinkage in the money supply?

The hashish dollar is still in the economy. But the default forces the subtraction of one dollar from the economy, either from the bank's capital, or from me, if the bank closes.

And the bank can still pay you back -- they simply borrow another dollar into existence via the CB...using your deposit as collateral.

The Fed has the ability to intervene in the economy. Part of the reason for the Fed was to prevent bank runs in which lots of banks would close down simultaneously. The reason for TARP and all the other crap is to keep the banking sector from collapsing. What the Fed is doing is inflationary, but at the moment the financial sector is destroying at least as much as the Fed is creating, so the effect is canceled out.

Banks' ability to borrow from the Fed is limited. That's why all the new programs - to increase the amount banks can borrow, so the Fed can keep them afloat.

They can't, for example, use deposits as collateral. Deposits are a liability to banks, not an asset.

But, and this is key, even if the bank doesn't pay you back, there is STILL a dollar in the money supply. It hasn't disappeared, I paid it to the hashish dealer at the schoolyard, remember?

The bank's future ability to create new inflation is affected, as I agreed. The current money supply is not affected at all. It is disinflationary with respect to future money creation but not deflationary.

If I pay that dollar back, I suck a dollar out of the economy and give it to the bank, diminishing a dollar from the money supply. So only repayment is deflationary.

You're not subtracting out the dollar the bank loses when you don't pay back the loan. If defaults don't cost banks anything, why is Citibank in so much trouble?

Yes we can let the banking system fail. We should.

Even if you don't use checks, credit cards, or debit cards, and have no money in savings, checking or money market accounts, it would be bad for you if the banking system actually failed.

There is no excuse for it as it is fraudulent. Fractional reserve banking periodically results in suspending the right to get your money out of the bank. It has to.

Today we can efficiently allocate savings through pooled accounts like you would lend money on prosper.com.

What is the difference between prosper and a bank? Isn't it that a bank guarantees your money, but prosper does not?

Isn't prosper a kind of reserve banking, where the fraction reserved is 0?

There is no reason to have banks other than to create inflation in order to finance huge government deficits (so they can fight wars and get re-elected) and to unjustly enrich certain elites.

[LargoWinch]

Re: Does debt deflation plus monetary inflation equal goldilocks?

I don't get this . . . .

No money was borrowed into existence.
B already had the money in his possession, which he lent to A.

If A doesn't pay it back, the money still exists in A's possession, or if A spent it, somewhere in the economy.

Furthermore, when A pays the money back to B, the money is now in B's hands . . . nothing was extinguished.

Or, are you talking about the lending of fractional reserve banking?

Hmm my wheels are turning and I am becoming more confused about this whole thing.

[Rajiv]

Re: Does debt deflation plus monetary inflation equal goldilocks?

The confusion comes from not differentiating between "person to person" lending, as opposed to "Commercial Bank to person lending" It is the banking system that "creates" the money that it lends

[Jay]

Re: Does debt deflation plus monetary inflation equal goldilocks?

the money destruction isn't...it is destruction of FUTURE credit.

When A borrows from B, and doesn't pay it back, the money A borrowed has been spent and propogated already in the economy.

If A borrows from B and pays B back, then the money that was borrowed into existence is extinguished.

As I have pointed out many times, borrowing and defaulting is NOT deflationary. It is disinflationary only...it stops future money creation.

So the replacement of defaulted credit with newly borrowed presto chango fiat currency is highly inflationary. It dilutes the existing money stock, penalizing savers and investors. And it rewards the big banks who wrongly took enormous risks and are getting bailed out.

The new money is real money. The old stuff is collapsing asset values. So this is the very worst thing you can do, pouring gasoline on a fire that should instead be allowed to burn itself out.

Thanks grape, I think I get this now. This example holds provided that when A borrows from B, B is a bank and is creating the money out of thin air, right? If you are borrowing from me with no intermediary, then no money is created or destroyed and that would be neither inflationary or deflationary, correct? (discounting interest) Also, it makes sense that the real inflation occurs when the banks are refinanced.

[Quincy K]

Re: Does debt deflation plus monetary inflation equal goldilocks?

one of the reasons that oil is not being considered as a form of money like gold is because the USG holds almost all the gold in Fort Knox. Possession s 9/10ths of the law. If OPEC held all the gold and the U.S. held all the oil, gold would possibly be viewed as a barbaric relic even with it's 5000 year connotation as real money.

For all practical reasons, oil is far more useful and valuable than gold.

[LinusK]

Re: Does debt deflation plus monetary inflation equal goldilocks?

Thanks grape, I think I get this now. This example holds provided that when A borrows from B, B is a bank and is creating the money out of thin air, right? If you are borrowing from me with no intermediary, then no money is created or destroyed and that would be neither inflationary or deflationary, correct? (discounting interest) Also, it makes sense that the real inflation occurs when the banks are refinanced.

Whether lending creates money doesn't depend on whether there's an intermediary, or whether there's a bank involved.

For example, when a central bank purchases government bonds, it creates money, even if no intermediary is involved.

If a business issues debt ("promissory notes"), and people begin to use the notes to purchase goods and services, then the business has created money.

Even a casino, to the extent that people use the chips to settle debts, or for other transactions, creates money. The chips become money to the extent that people treat them that way.

In theory, anybody who issues a promissory note can create money, so long as other people are willing to accept it as payment.

Dollars, for instance, are nothing more or less than the debt, or the promissory notes of, the Federal Reserve.

[Jay]

Re: Does debt deflation plus monetary inflation equal goldilocks?

Whether lending creates money doesn't depend on whether there's an intermediary, or whether there's a bank involved.

For example, when a central bank purchases government bonds, it creates money, even if no intermediary is involved.

If a business issues debt ("promissory notes"), and people begin to use the notes to purchase goods and services, then the business has created money.

Even a casino, to the extent that people use the chips to settle debts, or for other transactions, creates money. The chips become money to the extent that people treat them that way.

In theory, anybody who issues a promissory note can create money, so long as other people are willing to accept it as payment.

Dollars, for instance, are nothing more or less than the debt, or the promissory notes of, the Federal Reserve.

Sure, the point wan't about the intermediary, but I agree with what you say for the most part. But is it still inflationary for me to lend you 100k from my bank account? Or if I lend you 20 bucks from my wallet? After all, I have less in my account or wallet and we haven't created any more money.
Inflation comes from the original money creation via bank credit which is then never paid back when someone defaults.

[LargoWinch]

Re: Does debt deflation plus monetary inflation equal goldilocks?

For all practical reasons, oil is far more useful and valuable than gold.

Actually, water is.

The point of gold being money is precisely because it has no other uses (besides wearing it and very minor industry uses).

[LinusK]

Re: Does debt deflation plus monetary inflation equal goldilocks?

But is it still inflationary for me to lend you 100k from my bank account? Or if I lend you 20 bucks from my wallet?

No. It'd only be inflationary if I gave you an IOU and then you used that IOU to buy something else. People don't do that in the real world, but turning debt into money is what Wall St. is all about. It's what created all the liquidity that pushed asset prices to such unsustainable levels, which in turn created the current crisis.

[LargoWinch]

Re: Does debt deflation plus monetary inflation equal goldilocks?

No. It'd only be inflationary if I gave you an IOU and then you used that IOU to buy something else. People don't do that in the real world, but turning debt into money is what Wall St. is all about. It's what created all the liquidity that pushed asset prices to such unsustainable levels, which in turn created the current crisis.

LinusK, I really like the way you express your views. This debate can only help me truly understand "money" in the economy.

My guts however tell me that if your a bank (which pay yourself huge bonuses on the way up), you also deserve to burn and die if you miss bad.

[Ant]

Re: Does debt deflation plus monetary inflation equal goldilocks?

Government cant "create" jobs because it does not produuce anything

I'm not an economist, I'm an entrepreneur - - and I am as a big a supporter of the ideal of free enterprise as anyone you're likely to meet - - but your statement strikes me as absurd.

Bridges, dams, roads - these things were all produced under the auspices of the WPA, and are valuable and productive assets - some even still in use today.

As someone was saying upthread, it's important to remember that *people* build things, and the form of organization they happen to use to coordinate their efforts does not seem to me to be the determinant of whether or not real value is created in the process - - personally, I'd rather see 1 million people employed building the next generation infrastructure for our country (and making us wealthier as a result) than employed contriving and selling each other "financial innovations" of little real-world value.

[LargoWinch]

Re: Does debt deflation plus monetary inflation equal goldilocks?

I'm not an economist, I'm an entrepreneur - - and I am as a big a supporter of the ideal of free enterprise as anyone you're likely to meet - - but your statement strikes me as absurd.

Bridges, dams, roads - these things were all produced under the auspices of the WPA, and are valuable and productive assets - some even still in use today.

As someone was saying upthread, it's important to remember that *people* build things, and the form of organization they happen to use to coordinate their efforts does not seem to me to be the determinant of whether or not real value is created in the process - - personally, I'd rather see 1 million people employed building the next generation infrastructure for our country (and making us wealthier as a result) than employed contriving and selling each other "financial innovations" of little real-world value.

Ant, I think what tsetefly means, is that gov. has no real wealth.

Gov. can only spread it around, but not create it.

[Ant]

Re: Does debt deflation plus monetary inflation equal goldilocks?

Gov. can only spread it around, but not create it.

Depends on what you mean by "wealth," I suppose.

Because I'm not an economist, I use the highly simplified definition of "stuff people want" (I got this from an essay I read in an econ class some years back.)

Bridges, dams, and roads (to use my original examples) are all absolutely "stuff that people want" - - i.e. wealth.

Just because the effort was funded by tax dollars does not mean that no net wealth was created; that seems to be the tacit assumption of your comment.

Sorry for the strident tone - - I normally just lurk on these boards. It's just that I hear variants of the above a lot. In my opinion, the dogmatic insistence that *only* people organized as private companies can ever create wealth, and people organized as citizens and governments never can, is misguided - - and it's sloppy thinking like that which is at least partially responsible for the situation we find ourselves in today.

[grapejelly]

Re: Does debt deflation plus monetary inflation equal goldilocks?

Depends on what you mean by "wealth," I suppose.

Because I'm not an economist, I use the highly simplified definition of "stuff people want" (I got this from an essay I read in an econ class some years back.)

Bridges, dams, and roads (to use my original examples) are all absolutely "stuff that people want" - - i.e. wealth.

Just because the effort was funded by tax dollars does not mean that no net wealth was created; that seems to be the tacit assumption of your comment.

Sorry for the strident tone - - I normally just lurk on these boards. It's just that I hear variants of the above a lot. In my opinion, the dogmatic insistence that *only* people organized as private companies can ever create wealth, and people organized as citizens and governments never can, is misguided - - and it's sloppy thinking like that which is at least partially responsible for the situation we find ourselves in today.

No, government cannot create jobs. That is a true statement.

Government can organize efforts that result in useful assets being built. That is also a true statement.

The two statements are mutually consistent and compatible with each other.

First, why can't government create jobs? Because government must deprive private actors of their wealth in order to spend. These private actors are engaging in voluntary commerce. Now they have to give their money to government.

People using their own money to engage in commerce will always be more efficient because they are engaging in voluntary acts that make both parties, buyer and seller, better off.

Government taking that money and spending it is inefficient and makes only one party better off. Any jobs that government "creates" are at the expense of a greater number of private jobs that are invisibly lost when private actors were engaging in commerce.