Ok. Agreed. Payback is only faster in inflation scenario.
Also, poor FILC was cornered with the wrong argument when I said to him that lets say that deflation is 10% and nominal return is 9%. He should have said the real return is 19% so the project is good. My apologies to FILC.
But how about the following statement from another blogger friend (Scepticus) on UK Housing Crash website
"the paradox of thrift is real.
it arises because of wage and price rigidities in the economy. An economy has two sources of spending, consumption and investment.
When an economy having no rigidities suffers a shock which causes a fall in investment, there is little change in overall output because consumption increases to compensate. This occurs because prices of money/debt and goods and wages automatically adjust to the lowered level of investment. In this kind of economy interest rates would be negative.
However in the rigid economy, workers fight pay cuts, producers avoid dropping prices and debt holders won’t accept haircuts. This leads firms to lay off workers and reduce output to maintain profits, and it leads to deflation in which the real rate of interest is very strongly positive even when the nominal rates is at or near 0. This strong real rate coupled with falling investment is a positive feedback loop from which it is very difficult to escape."
I am learning about your principles more and I think you could have given the following answer consistent with your principles and I would have accepted it:
The whole point of Austrian economics is to setup a system where true consumer demand (wishes and desires) is transmitted via an un-manipulated price system (currency). If people want to help other people (monetarily and otherwise) this will happen in the Austrian world and more efficiently since it will be more people-to-people where the giving person will have more knowledge of the situation around him/her and will be able to even more maximize the utility of charity. Because instead of relying on a government bureacracy they will be relying on the personal knowledge of their local needs and make the decision accordingly.
Furthermore, this way of paying “tax” (voluntarily) is more satisfying for the giver since they do it out of choice and not because they have to.
Tax evasion is very high there. This information is not consistent with my experience. But I don’t know the real number so I will stop arguing about this point until I find out the real / better information.
Ok. I thought about this more. If we had commodity based currency hoarding would be much harder to too. Also, hoarding in a commodity based currency will cause the commodity manufacturers to product more and thus balancing the demand.
But there are many practical issues I have not resolved in my mind which a commodity based currency will have.
commodity must be stored somewhere
should it be central or local. Central gives rise to the possibility of massive fraud which could be extremely damaging to a society. local is in-efficient.
Agreed. It is the most vendable good (it is also other things as well but I can discuss this later). But today’s dollars are also the the most vendable good in USA. I agree, they have been corrupted (due to credit money creation). dollars may not satisfy the definition of sound money per Austrian principles but they are the most vendable good in the USA.
Ok. I will go a step further and state that a commodity currency has many practical problems.
storage: central or local?
central: will give rise to a massive fraud which will be extremely disruptive to a society.
local is in-efficient (need to house, secure, etc) but limits fraut damage, also, physical movement of the money may be required for intra-local exchanges. Again, more in-efficiency.
Ok. Got it. The credit money re-directs real resources of the economy’s output to mal-investments. But you assume that “credit money in most cases goes to mal-investments”. Bankers are credit analysts and experts at evaluating projects. If they a good job on average. Society should come out ahead.
Bread Maker = Capital Good = Capital (Not as vendable as pieces of gold but it is still capital)
Bread = Product = Capital (Not as vendable as pieces of gold but it is still capital)
Gold = Money = Capital (most vendable good, also other things but we can discuss later)
Baker’s Knowledge of Making good Bread = Capital (may be difficult to vend but it is still capital)
Baker’s Reputation of Making good Bread = Capital (may be difficult to vend but it is still capital)
Baker’s Good health = Capital (may be difficult to vend but it is still capital, also I assume that cost of keeping the baker in good health does not exceed the value created by his labor - value of bread)
Baker’s charity toward the local poor = Capital (raises the spirit of the baker and the community, you are smart enough to figure out why)
Protection of the the Bread Maker provided by the local police = Capital (I am assuming that taxes are not soo high that they outweigh the benefit that is received by lowering the risk of loss due to theft)
Local police’s ability to work with other police departments and state police to catch criminals who escape the reach of the local police = Capital (I am assuming that taxes are not soo high that they outweigh the benefit that is received by lowering the risk of loss due to theft)
FBI (or equivalent thereof) = Capital (catch sophisticated / well organized criminals and cheaters and thugs)
Military = Capital (Protection against international aggressors and thugs and enslavers and criminals who would screw the bakers in the land)
Good relations with other nations = Capital (Bakers output - loaves of bread can be traded for BMWs)
it is assumed because the direction of resources and capital is now driven by risky gamblers, and not by the investment and savings of the consumer. So what you have is a disconnect in the market, between what consumers want, and what specculators THINK consumers want.
I compounding issue is that these speculators who receive new credit get an increase in purchasing power to buy up raw resources, this bids up the cost of resources for everyone, against those firms who choose not to participate in the credit consumption.
So too much credit expansion drives up the cost of goods used for production, not at the direction of consumers, but at the direction of speculators.
yes that is true, and what happenewd here was banks were attempting to be responsible and throttle the amount of credit introduced into the market. But due to various political reasons there was heavy pressure to lower the standards and criteria for borrowing. With an excess amount of credit on the market and bankers being forced to lend, they must go out of their way to find people to lend to. Since middle-income and the rich already have various lines of credit and were not necessarily interested in more lines, bankers are left with only one other option, lend to the poor or irresponsible(The very people who should have been saving). Their goal was to get credit out there in the market, but there were no takers even with low interest rates. So the only other alternative was to lower standards.
Not true, and it is this very important fact that the Austrian Business Cycle Theory rests on. I’m not an expert and I don’t pretend to be, but Austrian Economics is very common-sensical. Banks are getting more and more money, and the banks want to make a profit. Well, a lot of money sitting around isn’t making them profit… it is, in fact, costing them for storage and security. So the bank wants/needs to get rid of (by get rid of I mean invest) this money or else it will incur more costs. So, the bank has used up all “sound investments” (there are only so many sound investments, if you need proof of this I will provide) and it still has more money and more money coming in. How does it continue loaning funds? It lowers standards, because if it doesn’t another bank which lowered their standards faster will get the more-sound-but-lower-standard deal.
What are you saying? That its okay to steal from one person to feed another? Well where does this stop? Is it okay to steal from one person to buy someone else a couch? Is it okay to steal from someone to give someone a down payment on a house? Is it okay to steal from one person to subsidize another person’s drug habit? Drug addicts, in some cases, value drugs much higher than food so would:
desirability of drugs by a addict about to go through withdrawal = sufficient justification for the use of coercion?
One more thing about your solution/prevention method for deflation.
We all want to avoid another War like World War I, right (lets ignore WWII for now)? What was a BIG issue with World War I, the reason so many people got involved in what was basically nothing but a civil war? Entangling alliances. So you, Mansoor, say “Entangling alliances were a terrible terrible thing and people should not be allowed to make them.” Even though entangling alliances weren’t the only issue, you see it as the only one that matters so you want to prevent it at any cost. So, you, Mansoor, think of a method of forever preventing entangling alliances (even though they weren’t the only problem or the CAUSE of WWI)… you just constantly have countries fighting each other in small scale skirmishes. Since countries are always fighting, only in small contingents mind you, they won’t form alliances because there will be nationalism and hatred between countries. You see this as an easy solution, a little bit of fighting is better than a World War, or so your reasoning goes. But how much is a little? What if one guy escalates just a little bit? Then another guy escalates on that? This continues so on and so forth until you have another monster all together, that is a bunch of countries fighting a bunch of countries. ITs not the same as WWI but its still terrible!
The correlation to deflation vs inflation is that the end of the “little skirmishes” is hyperinflation.
Mansoor please stop the nonsense that Pakistan is what an Ancap society would look like, I think you have a completely different idea of what it means. I’m from Pakistan too. Its quite obvious the amount of problems pakistan has are due to the IMF, United States, and other influence from foreign countries not to mention some of the most corrupt leaders there have ever been. I think I responded to you a bit about this before but drive around a bit in any pakistani city- and police there WILL rob you.
You can park your car somewhere- and if cops don’t like the way you parked- they’ll tow the car. When you get back to where your car was- guess what its gone and you have no idea where it went. Did someone steal it? Who knows? You can go ask a police officer closeby “Hey man did you see a black car here?”- They’ll tell you “Hmm I think I saw them take it down that street…no…no…wait…maybe down the other street…since you’re here, give me 500 rupees.”. Their only protocol for letting you know where your car is leaving a note on the floor- a note the wind could easily hurl away never to be seen again. But even if you do manage to find out that it was towed and where they took it- getting it back is another story.
Pakistan is a bureauocratic nightmare- thank GOD the government there doesn’t meddle in everything or else no one would be able to earn a living. People aren’t poor there because government is not involved in certain areas- that’s the one saving grace. My grandfather early on worked very hard on his own- created a paper mill and became well off without government intervention in Pakistan and lived quite well enough to support many other families by himself(Islamabad has some very beautiful and large houses that are a gazillion times cheaper than anything in the US). But that was back then- its always gotten progressively worse and the foreign intervention has never stopped. Pakistan has a serious inflation problem, a serious electrical system problem in the cities where there are blackouts every single day- these problems stem from Pakistani gov’t. and certainly help to curtail any REAL foreign investment- so its no wonder the standard of living is so poor there for most of the populace. Pakistan has a relatively good growth rate- if it weren’t for stupid policies that keep being implemented and foreign policy problems they have to deal with- Pakistan could be a great place. Their level of urbanization is pretty damn good compared to other countries around them.