“means less savings, which means less wealth to lend out” You just said the same thing I did using different words.
So yeah, they have it bass ackwards.
I think I get it! I just walked into the shower and it dawned on me. Any type of inflation, whether artificially low interest rates or handout checks, they’re going to cause the same problem. People will eventually have to save more because time preferences have not changed. So of course there will be a bust. Demand will not meet expectations because people will eventually want to save more. Hmm, that part makes perfect sense.
But then as I was getting out of the shower, I thought of possible responses. What if there were gradual increases. So say you started off handing everyone $1 a month, but with a lot of time you give everyone $1000 a month. Would spending be higher than normal? Would you be able to avoid that shock of savings that depletes demand (bust) with this method? I know, the solution isn’t to avoid savings, because that will be the way to get capital flowing again plus give people the security that they desire, but would this method avoid the bust while raising demand?
I believe people would adapt their time preferences to the new conditions.
For example, the state in which people are in when they’re receiving $1 a month, would be different then the state they would be in while receiving $1000.
From what I understand people would spend the extra money considering they already allocated their resources accordingly.
You’re right, they would adapt, but in a way that is different than you expect. People wouldn’t spend the extra money (at least not all of it). People want to have a savings that is relative to other goods. They want to be able to buy a certain value of goods with their savings. The dollar amount is irrelevant. People will want more money in their savings if inflation occurs. Inflation, whether it be by low interest rates or money payments, will cause a crash if it happens at once.
And I thought of a response to my other question about whether it is done gradually. I don’t think that this would change anything. For this you just have to use the Keynesian favorite red herring of sticky wages/prices. These prices won’t go up automatically, but when they do, it will cause people to save and will cause a shock that will set off a bust, no matter how gradually the inflation is introduced.
Seriously, this thread has been so informative for me. Thank you everyone!
So I just have to know: is there anything about my assessment that is wrong from what you can see? I think I summarized it pretty well in my last post. Is there anything wrong with what I’m saying?
I’m glad you asked. Yes, I think there are some problems. The bust is caused by the artificially lengthened time period of production. It’s not merely that artifiicially low interest rates are unsustainable. It’s that there simply are not enough real goods, real resources, available to support the lengthened, more round about, structure of production (sorry I keep repeating this, I don’t know how else to describe it). That is the cause of the bust. From your replies, I don’t see where you mention this. Your replies do seem to imply that increased savings somehow cause the bust. You point to price inflation causing people to want to save more, and the savings lead to the bust. This is where I disagree (I’m no expert, though).
The example is that of Crusoe attempting to build a boat instead of building sticks and nets to gather berries first. The boat will take six months; if he attempts to build a boat (lengthened, round about production structure) without savings (berries to eat), he will starve (bust).
In conventional central bank credit expansion, this has been described in detail. In your imaginary example where the central bank prints money and gives it away, exactly the same thing happens. Rising price signals from consumer goods would tell entreprenuers to seek profits by increasing production. The newly printed money (given away to individuals in your example) would end up as demand deposits that would be multiplied under fractional reserve banking. And there we have it; artificially low interest rates. Both consumption and lengthened production structures at the same time. Real resources are too few (rap video). The bust occurs.
I think your emphasis on increased savings misses the point about the lengthened production structure, the true cause of the bust.
So in other words, this is like getting a loan before the cost of capital goods increases, and then once that happens, production can’t be increased so the loan can’t be paid back, hence default.
Yes, that seems correct, but I don’t think that my analysis was wrong either. I think they’re complimentary. Because consumers will react to rising prices too. During the inflation before prices rise, then people are spending because they have this new money and they have a certain value stored. But when prices rise, people react and start to save more because they still want a certain value of goods stored and they realized that they value that they had stored has now been depleted by inflation. The value of goods that the savings can now buy is much less than what the savings could buy before the inflation started. In effect savings has been depleted by the inflation (and it is a phenomenon borne out by this recession where we saw an increase in savings once the recession hit). So they will save more, and the demand that producers were expecting will drop (because you can’t have increased savings and increased spending unless production has risen and that’s probably not going to happen much during a bust). The concept of sticky prices will ensure that no matter how the inflation is carried out that it will always be a shock and can never be gradual.
So it’s an increase in the price of capital goods and a decrease in a demand that are both due to inflation which cause defaults on loans due to lower profits than expected and hence failures of many businesses.
Do the data bear this out, though?
- Steal Underpants
- ?
- Profit!
That’s about the same logic.
It is, but I’m looking for a more nuanced response.
In terms of economic data, what happens during a recession. Obviously defaults increase. I’m sure that savings increase. Does spending fall though?
It’s missing the part where the bank counterfeits money and expropriates capital from savers.
Spending on useless capital investments falls because demand for them returns to reality.
Also, do we see a rise in the price of capital goods preceding the bust?
Are you serious? Look at any chart of housing prices, stock prices, oil prices, metal prices, etc circa 2006.
I’m not arguing! I’m just asking! Calm down. I agree with ABCT, I just want to learn more about it.