What exactly is the “Austrian” analysis of reflation? Or, why shouldn’t money be kept in a state of equilibrium - even if that means increasing the money supply?
I like the wikipedia impartial definition of reflation;
If artificial monetary inflation is bad then reflation through artificial monetary inflation is also bad.
Reducing or eliminating taxes is always good, under all circumanstances, without fail…especially the eliminating bit which is the best ‘recovery’ policy any central planner could strive for.
Is this question polemical or are you really interested? There are tons of references on the site about this. See e.g. Mises on the non-neutrality of money.
Well, I’m mostly actually referring to a lecture I heard with FEE given by Steven Horwitz.
I like the question he asks. If inflation is such a bad thing, then why isn’t deflation as well?
I never mentioned anything about “neutral money” - i.e. the theory that an inflation or deflation in the money supply has no real effect on the real economy.
That stated, however, I’ll read it.
Reflation is simply inflation to the Austrian. Reflation is inflation, the increasing of money and credit in the economy, in reaction to decreasing prices of bundles of goods called Prices Indexes. Austrians believe that price indexes can not be accurate as technology keeps changing as do consumer preferences that are too complicated to measure anyway. But traditional economics uses price indexes as the best alternative to nothing. Austrians believe inflation is the increasing of the supply of money and credit and increases in price indexes are effects of inflation and not inflation themselves. The best analogy to setting policy by price indexes is like trying to drive a race car with the windshield covered allowing you to see only the track you already passed.
As for equilibrium, if you can define it, may people use the “Neutral Interest Rate” where price indexs neither increase or decrease. But price increases are results of inflation. Consequently, it is extremely difficult to compute such a rate to satisfy the condition because previous increases/decreases in the amount of money and credit are affecting the Neutral Interest Rate.
The whole premise “Reflation/Inflation” is good because deflation is an undesirable condition is nonsence to Austrians. There are two reasons for deflation: 1. Technology is always reducing the costs of things. The computer/device business has ever decreasing prices and increasing functionality but seems to be very viable. And 2. Deflation is the liquidation of previous malinvestments.
Maybe reflation in some sense, but I wasn’t really implying that policy should be set on the basis of “price levels” just money supply and demand. That is, monetary equilibrium.
So what happens when monetary demand increases?
What is better at finding the monetary equilibrium, a free market or central planning?
Who says deflation isn’t bad? I can understand why some people say deflation (i.e. a bust) is good in the sense that it provides a market correction, but I don’t know anyone who thinks deflation in and of itself is a good thing, especially an artificially induced deflation.
That’s what I wanted to know when I listened to Steve Horwitz’ lecture. Yes, both inflation and deflation are bad, but what exactly are his ideas to solve/prevent these problems? I don’t think he ever answered that question. He never even brought up the issue of what causes deflation. If I remember correctly, he merely defined what it was and described its effects which were bad. He failed to bring the context in which the deflation was happening. But we have to know the cause of it if we want to stop it from occuring, and I don’t think he pointed that out. Correct me if I’m wrong.
I believe Horowitz’s lecture was largely focused on monetary equilibrium and he mentioned that he did not want to get into a complete analysis of what inflation/deflation was very early.
In any case, a free market is of course the best mechanism for finding monetary equilibrium. Does it matter what the context in this situation?
To many of the Rothbardians the concept of deflation is just fine and as these forums are largely Rothbardian, I thought it would be the correct question to ask.
I could say that reflation is what happened to the dollar a few days ago. The Fed couldn’t keep the dollar that low compared to EUR.
Provided that the government doesn’t inflate its compulsuory dollar or borrow, but uses voluntary means of profit or cuts spending.
In a free market, it doesn’t matter what the inflation or deflation is because it is voluntary and because traditional legal practices are in place (e.g. full reserve banking).
However, under the regime of central banking, reflation is a bad thing because it prevents the market from correcting itself. It’s just another form of a government bailout via printing money to prevent as many banks from failing for practicing fractional reserve banking.
I believe it does matter, because if deflation were caused by a bust of an artificial boom under a regime of fiat paper money and central, fractional reserve banking, well then as Austrians I don’t think there’s much we can do about it other than to let happen as quickly and orderly as possible. But trying to reinflate merely because there is more demand for money doesn’t solve all the problems–in fact, it only makes the situation worse. However, if deflation happened not for corrective reasons at all, just for whatever reason the money stock decreased, well then obviously this is something we shouldn’t welcome since it would negatively affect economic life unnessarily. That’s what I mean by context. (And I still don’t know what Steve Horwitz’ solution is in this theoritical case.) Let’s assume that under a free market we’d use gold as money and most of the banking system was full reserve, personally I don’t believe there’d be much of a problem with either inflation or deflation. Both would happen but be negligible (and decentralized).
What if there were a real shock to the economy?
What do you mean by “full reserve banking” exactly? To some extent full reserve banking is the mode of finance we see today. Ever hear of a safety deposit box?
I agree that central banking is bad and I agree even more that the mode bailsout the rich at the expense of the poor. However, that does not really answer the question.
What happens with the demand for money increases - thus causing deflation? If the increase in the supply of money out of equilibrium is bad, then so must be the decrease of the supply of money, no?
I agree that reflation is not always desired, but that doesn’t mean that it is never desired. Does it?
That question is pretty vague. What do you have in mind?
Whats your definition of deflation?
To a very, very, minor extent. Most banks only keep 10% reserves for their irregular deposits. They essentially create money out of thin air.
If you agree with free and full reserve banking, what’s the dealio? People will choose the type of currency they want. For the most part, it is my prediction that people will choose some kind of hard currency like gold or silver or copper or a mixture (e.g. gold for big purchases, silver for medium purchases, and copper for small purchases). That said, if the “price of money” would increase (deflation), mines would try to expand the money supply and therefore return the monetary supply back to equilibrium. On the other hand, if the price of money would decrease (inflation), mines would operate less and therefore attempt to return the monetary supply back to equilibrium. This would be the most stable and efficient system, operating like a normal market that always “tends” towards equilibrium but never fully reaches it.
Ah! This is what I meant by inflation and deflation being negligible and decentralized (well, I don’t know if “negligible” is the right word but it wouldn’t be as extreme as it is today). Nicely put kaju.