Kaz, we are so far apart in the very basics that we won’t gain by further discussion, I suspect.
I don’t believe in such a thing as a money shortage.
I don’t believe “hoarding” money has a bad effect.
I don’t believe that banks sitting on their pile of recently printed money because they can’t find anyone who can repay is the same as increased demand for money.
I don’t believe higher prices for energy is the same as increased demand for money; quite the opposite.
I don’t believe that the crisis of 2008 had anything to do with deflation, or with the Fed paying interest on excess reserves, or that deflation [= decrease in money supply] even existed then.
I don’t beleive oil was 700% of its natural price, or that it even has a natural price.
And I don’t believe you have explained “demand for money”, other than saying it is a complex subject.
Yes, I assume there’s a natural price, as does every Austrian economist. In fact, it’s a central theme that arises steadily in Austrian monetary theory.
As I noted, this is HOW the free market works. If you accept the subjective theory of value, where anything is worth whatever someone will trade for it, then that everything has a natural price becomes a truism.
Money’s use in an economy is as a tool for determining that natural value as efficiently as possible. If you want to trade chickens for wheat, you have to worry both about the value of chickens, AND the value of wheat, that can vacillate wildly even in a single day. For money to work well, it needs to be relatively stable in value, so that you’re really only worrying about the price of the wheat.
This lets the million demands that you weigh every day be measured against the supply of each, and against the demands of the other three hundred million people. There IS an objective balance of all of those demands and supplies…and money helps find out what it is.
This is a basic Misesian position, as well as that of most other free market economists. It was first identified, as far as I know, by Max Weber, but was made famous by Friedrich Hayek.
Even guys like Fisher, who claimed that we need prices to be “stable”, wasn’t denying the underlying premise that there is a distributed ratio of pricing that is “natural”, he just hoped that it could somehow be kept clear even while a central bank was forcing the raw pricing average to be static.
We’re not talking about them all rising exactly the same percentage in raw numbers, but that they all retain exactly the same ratio to each other, relative to their natural price. In other words, perhaps the need for oak is twice as great as the need for maple, relative to supply, so it costs twice as much per pound. This communicates to the economy that twice as much needs to be invested in oak. If deflation or inflation changes this ratio in favor of maple (maple’s price rises faster, or doesn’t fall as fast), without changing the actual supply and demand, then you end up with too much maple and not enough oak.
No. That’s not even close. Good gods, that’s in another universe from Mises, Hayek, even Rothbard’s dubious take.
Inflation causes a maldistributino of resources because it blurs the communication balance between supply and demand. People appear to need too much of various things…and worse, the exaggeration varies from one resource to another…so that too much of the wrong things are produced.
This is the most BASIC kind of price theory, universal to pretty much all market economics.
You’ve taken the normal Rothbardian obsession with the central bank’s inflation as the bogeyman that is the sole source of all ill right over a cliff.
Your own wording anticipates the answer to your question:
You are mis-using “interest rates” but in either useage, the obvious correlation is artificially high interest rates. Interest rates, for society to function healthily, need to be at their natural levels, not an artificial high OR low.
As with everything else, you could just as well apply that argument to inflation. You present a false dichotomy, where I either buy exactly as much, or nothing.
Again, if it were that simple, central planning would work.
When faced with deflation, fewer people will buy houses, because the money invested in the house is LOST, at its old number, while the house declines in dollar value every year. Had the home buyer simply rented, and kept his money in a mattress, his rent would have declined, but his house payment never does.
The harm of inflation is that you may as well buy that stereo today, instead of saving the money for a rational purchase, because tomorrow the stereo will cost more but you’ll not have more.
The harm of deflation is that you should avoid buying the stereo at all, even if it would otherwise be in your personal interest to do so, because it will be cheaper tomorrow, and the next day, et cetera.
Wrong, because that’s not deflation. Deflation is either an increase in demand for money over supply, or the resulting price pressure on the whole economy, driving prices downward.
When a price on a specific item declines because of an increase in efficiency, perceived desirability, or technology, that is not deflation. That is natural pricing.
I meant that you’re a fool to lend in a deflationary economy because your borrower will probably go bankrupt trying to pay you back.
Why bother lending, when you can just hold onto your money and it becomes worth more?
How is the guy taking a 30 year home loan going to pay make his payments a few years from now, when his income has fallen because of deflation, but the payment is just as big as ever? How is he going to sell the house to pay you back, when the price of the house has fallen faster than he’s paid it off?
Right now, we are seeing a massive price decline in housing. This makes lending OR borrowing for, or OWNING a house a really bad deal.
If the government forces us to exclusively use their money, and then contracts the money supply, it is going to create the opposite of a bubble that’s caused by an inflated money supply. Right? Everyone reduces spending while trying to sell off assets, banks don’t lend, nobody hires, everyone sits on their money instead of spending and the economy grinds to a halt.
So money has a magical condition that is completely removed not only from all the rest of market economics, but from physics? There is a supply/demand curve for money, just like anything else. If there is not as much corn as people need, it’s a shortage. If there’s not as much money as people need, there’s a shortage. This is economics 101.
Fortunately, every Austrian economist disagreed with you.
If, tomorrow, there were suddenly only one dollar, we’d all be fine? Note that the supply of money did not shrink evenly, but the dollar is suddenly all that’s left, wherever it is.
Fortunately, every Austrian economist disagreed with you.
If money is simply removed from the economy, it’s as bad as if corn, or anything else, is removed from the economy. It drives up demand.
Except that it’s not just printed money. The interest payment the Fed is making is identical to the interest it charges on its created money, so they wouldn’t bother just borrowing it in the same amounts they are. But money velocity has fallen, because the banks stopped lending or otherwise investing out even existing money, even money they would normally have invested.
What are people going to buy the energy WITH? If it costs twice as much, but we have the same dollars, how EXACTLY is the same amount of energy going to be purchases? And, since almost everything else you buy requires energy, this shortage expands to fill the entire economy.
What you “believe” is dogma that would horrify even Rothbard.
Deflation isn’t a change in raw quantity of money. Again, no Austrian economist thought that. Deflation is a shortage in supply of money VERSUS DEMAND. Mises said this, Hayek said this…I don’t know of any actual Austrian, or other real free market monetary expert, who disagreed with that.
Then it’s you against every real economist out there.
Of course not. If we could explain it, then central planning would work. Explain it, then set up a central bank.
I can’t explain the demand for corn, either. Proof of this comes in the form of the massive damage done when the socialists tried to push biodiesel, not realizing they would cause famine in the third world because of rising corn prices. And if we try to compensate for THAT with a different coercion, we’ll cause an imbalance somewhere else.
That there is a demand for corn, and money, is a truism. That there must be a supply to match the demand is an automatic extension of that. That the supply can be too low or high is inseparable from these obvservations.
Wow, keep yourself insulated from any conflicting information, or else who knows what’ll happen.
Which dogma are you adhering to so cultishly that you can’t even expose your confirmation biases to examination? You’re certainly not a Rothbardian…Objectivist, maybe?
If it did, that would be less damaging than what does happen, where the shrinkage is uneven around the economy, hitting some resources differently than others, causing a blurring of the communication of needs through pricing.
What is good is if everyone borrows the amount of money (much, some, or none) that they would be led to do without any outside interference, whether inflation or deflation or fannie mae or the Community Reinvestment Act.
DISCOURAGING borrowing is as harmful as encouraging. The attitude that you know what is good for people better than they, as individuals, do is socialist.
Except it doesn’t happen magically like that. POOF, the government has less money, yet we have just as much. No, in fact the government uses its coercive power to shelter itself, while WE end up with less money, even faster than prices fall. Meanwhile, everyone who already owns a house is stuck with a failing investment, everyone who owns a farm cannot afford to expend assets all year in anticipation of the crop at the end of the year, with crop prices falling, et cetera.
First, the money doesn’t magically burn. The banks, in fact, hold onto much of it instead. The Fed is paying them interest to hold it, and they find that to be BETTER than lending it.
Right now, we are suffering deflation unevenly (as I pointed out it must be), and one of the most amplified sectors is housing. The banks don’t want to lend ANYONE money for a house, because the house will soon be worth less than the loan. Almost nothing fixes that.
And I addressed your reply…but you’ve fallen into a cultish, confirmation bias sort of behavior of refusing to talk about it any more.
My rebuttal stands. The rational people will read it, and since you are not refuting it, the conclusion is mine.
It boggles my mind that people who claim to know something about economics don’t know about the massive history of economic downturns in the 1800s.
The deflation set off by the imposition of the gold standard for the first time in the US, in 1873, initiated waves of deflation resulting in economic depressions that dwarf any recession of the Fed’s era of blundering mismanagement.
Deflation is a potential consequence of multiple causes. What deflation causes usually depends on what caused a deflation in the first place, and so talk of what deflation causes often creates more confusion than elucidation.
Centaris paribus, when the economy grows, the supply of goods tends to increase and the general level of prices falls. The purchasing power of each monetary unit increases; debtors will repay lenders with money worth more in real terms. However, the burden of debt does not necessarily increase. Economic growth enables the debtor to produce more with less, and so debtors have no more difficulty maintaining nominal income.
On the other hand, an excess demand for money really does cause all those problems you describe. The money supply (real or nominal) must rise to bring supply and demand back into equilibrium. This is not optional. When there is an excess demand for money, the money supply will increase one way or another and “stimulate” total spending, employment, demand, etc. The only question is whether it will occur through an increase in the nominal or real money supply.
Your house payment is $900, safely within your means to pay.
Each year, your house declines in raw dollar value, due to deflation.
Each year, your income declines in raw dollar value, due to deflation.
Soon, your house is worth $50K, but you still owe $75K on it.
Soon, $900 per month is more than your entire income.
See, your original loan remains in the original units, that are getting more valuable every day.
Even if you paid cash, you’d be throwing away your money, as your house would decline in value every year,
You should have kept the cash, and rented for the rest of your life…but I can’t imagine where you’ll find someone willing to own the house and be your landlord, since the price he pays for the rental property is money he should have just held onto, the way you are.
If the money supply is static, your above scenario LEADS to an excess demand for money.
The money supply, like the shoe supply and the carrot supply, needs to be responsive to changes in demand…including the very growth of the economy, itself. That growth produces a demand for more money.
Kaz, by “natural price”, do you mean “current market-clearing price”? If so, I’m not sure how Smiling Dave could disagree with that, and it’s therefore probably just a semantic mismatch between you two.
If thats what it means, then how could oil be 700% higher than the current market clearing price in 2008?
And how could inflation distort the current market clearing price? The price is what it is, whether influenced by inflation or not. Of course inflation may change the price, but thats not the same as distorti8ng it
By “natural price” I generally mean the price it would have in a free market, meaning outside of government coercion.
In the case of oil I was being lazy and thinking of a subset of that: The price of oil, before seven years of foreign policy insanity drove it up on the government-imposed commodities/futures market, almost purely through speculation, into a massive price bubble.
In 2000, oil was around $20/barrel.
In 2008, it was around $140/barrel.
This was not due to 700% inflation, or else we’d have $14 bread and $140,000 Toyota Celicas.
It’s due to our wars in two oil-important regions, our government’s efforts to start a war with a third, its belligerence to a fourth, et cetera.
The foreign exchange “weakness” of the dollar (a good thing for the US, overall) is only a small part of that…it would explain oil in the mid to high thirties, at worst.
I’m saying that, even if we accept the government’s normal meddling with oil, if you simply got rid of the neocon foreign policy oil would still be under $30/barrel, after inflation and everything.
The real Austrian economists were not so dogmatic as to refuse to ever examine conditions and guess as to what should have happened.
Only Rothbard was, and only when it suited his agenda.
I cannot know it, in the sense that Mises, Einstein, and Popper believed in Fallibilism…and so do I.
But I can see the effects and offer a strong guess. We can’t KNOW that a free market would work better than socialism, by the same fallibilist measure. But we can look at the evidence and say “it sure seems likely”.
Oh, and thanks for the welcome. I have posted on occasion, probably for years, but got carried away today.
Oh, I replied to the second oldest thread on the board just because you had commented about “what’s with you guys doing that” and that inspired me, so that one doesn’t count.
The others were all on the topmost page, sorted by recent replies.
Either way, if the reply is cogent, how does it matter when it’s from?