I can but it would also be unwise to put all of it in gold coins, as I would not be able to transact for other goods and services that I want, being that it would be illegal to do so with my gold coins. You see what this would do on a grand scale, especially over a long period of time?
Costs and profits are not calculated in nominal terms. Investment still occurs under deflation because investing will net a higher real return than just sitting on the money.
You are correct. Some resources were not allowed to re-allocate. Union wage levels, etc. But don’t look at that just in isolation. Notice that all industries were depressed. There was much excess labor available elsewhere even with the union wage stickiness going on. Consumer demand collapsed. That was the main problem.
I disagree. I have an MBA. I never heard of anyone doing NPV calculations of real return. All NPV calculations are done with nominal prices. Nominal prices drive investment decisions.
If resources, on a large scale, are unable to reallocate, what do you think will happen? If Industry A is unable to adjust properly to economic conditions, don’t you believe that it will still have an effect on other industries where there is excess labor? Employees from Industry A were probably paying for products and services that are being offered by other industries and if employees from Industry A are laid off, what do you think will happen? You can’t just say, well those employees can now go work for Industry B. There is a reason why there are X amount of employees working in Industry B, no more and no less. Forcing Industry B to take on new employees might cause that industry to drop its wages or simply go right out of business because it can’t handle the additional employment. Employment from one industry, which on face may look like it isn’t related or supporting another industry, actually is, in the effect that those who are employed may very well be taking advantage of the products and services being offered in those other industries.
In a sense yes. I am claiming that it has the potential to do just as or more damage to a civilization. Please read my replies to others for details.
If the average rate of price deflation is 5% (as in, prices fall by 5% every year), a given investment may have a -3% rate of nominal return, and thus be more profitable than just waiting. Prices don’t rise and fall at the same rate across all industries, and the difference will create new opportunities for entrepreneurs to generate a profit.
Let’s say you’re right, then what?
But if you just wait (hoard you money) you get a +5% rate of return because everthing will be 5% cheaper. Why bother taking a risk with -3% return?
Right. About what? Please be specific? About deflation as a big, big, big problem for a civilization?
Yeah, let’s say deflation is a big threat to “civilization”, what do you do?
No, if you just wait, you get a -5% nominal rate of return. As stated previously, not everything will be exactly 5% cheaper. If you take an investment opportunity and assume the risk, you can instead bump your rate of return up to -3%.
Entrepreneurs take risks. It’s what they do. In this case, the -3% return is only nominal—in fact, the real rate of return (i.e., the rate of return that successful entrepreneurs care about) is positive and higher than what would have been gained from just hoarding money.
Well. I discussed some of the remedies above in the essay:
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Increase investment activity. But this won’t occur unless #2 below occurs.
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Increase our consumption. Increase demand for goods and services.
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Decrease our average per person labor hours. Work less. This will cause unemployment rate to go down.
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Do projects which will “use up” excess production capacity (i.e., labor hours).
Mansoor
Is public investment the same as private investment?
Do you increase consumption by devaluing the currency to encourage spending now as opposed to spending later?
How do you decrease the per person labor hours?
Who decides which projects to embark on and how do they get their authority to make those decisions?
I still don’t get it. Entrepreneurs need nominal profits to stay in business!
Cash flow analysis has to be done in nominal prices or expected nominal prices in the future. Can you please give me a concrete example showing cash flow streams.
I still don’t get it. Entrepreneurs need nominal profits to stay in business!
Cash flow analysis has to be done in nominal prices or expected nominal prices in the future. Can you please give me a concrete example showing cash flow streams.
Practically decreasing average labor hours per person is hard to implement. Because people naturally want to work full time and be fully employed per their talents and capacities.
The most practical remedy is: Do projects and yes public projects since private industry is not doing enough of them. That is the point.
Who decides which public projects to do and how do you get the money for them?
So if state pay people to build roads to nowhere (like they did in Japan during the 90s) or to dig holes to just fill them, it will be good to economy? Too addicted to agregates, aren’t you?
I mean because I could take a billion dollars and pay people to dig holes in the ground with spoons.