Fear of deflation?

[Gerben42]

Hence 4.5% is a spread of about of 2.07%

 

What's a "spread"? Is that how much I make if I lend you money at 4.5%, for example?

 

Anyway, I've been raised on following game plan:

 

1. Acquire skills

2. Make money using skills from step 1.

3. Retire, spending money from step 2.

 

And not acquiring debt or anything. Okay, this strategy won't make me wealthy like Warren Buffett or so, but I don't want to. I'm sure I have a better life than most CEOs, they work too much.

[mike777]

Hence 4.5% is a spread of about of 2.07%

 

What's a "spread"? Is that how much I make if I lend you money at 4.5%, for example?

 

Anyway, I've been raised on following game plan:

 

1. Acquire skills

2. Make money using skills from step 1.

3. Retire, spending money from step 2.

 

And not acquiring debt or anything. Okay, this strategy won't make me wealthy like Warren Buffett or so, but I don't want to. I'm sure I have a better life than most CEOs, they work too much.

Yes....I am advocating that you, Gerben, acquire debt.

 

Let me put this another way.

 

Yes, I advocate you leverage your wonderful, special, skills.

If not for your family...then for the betterment of mine.

[cherdano]

Hence 4.5% is a spread of about of 2.07%

 

What's a "spread"? Is that how much I make if I lend you money at 4.5%, for example?

Yup - assuming you actually get the money back, of course. It is the difference between the interest rate for the loan and the interest rate for US treasury bills, which are deemed safe. So the spread is a measure for the risk of mike777 not paying back the credit (aside from Gerben's administrative costs, of course).

[DrTodd13]

3) Yes, I mean we must, must expand the money supply somewhere in the range of 2-3% longish term.

Why? What's the proof?

[mike777]

3) Yes, I mean we must, must expand the money supply somewhere in the range of 2-3% longish term.

Why? What's the proof?

I have no internet links..but pls read.....economic papers.....ty. I am not a professor with citations.

 

If you read the literature and disagree..fair enough.

 

btw important side note....I find "proof" of most...by far most does not exist.

 

I am told it is very, very expensive to prove anything....

 

My goal is too "advance" the discussion....if you want proof...I rest....

 

Ok.. I stand by..repeat....expand money suppy in range of 2-3% normal times...Increase money suppy of zero...longish term=evil.

 

In simplish terms increase money supply per long term growth of

GDP.

 

In times of deflation.......expand money supply alot......huge...

[Al_U_Card]

In simplish terms increase money supply per long term growth of

GDP.

I agree.

 

Expand the money (medium of exchange that represents value) at the same rate as the "creation" of value.

[DrTodd13]

I have read a lot of materials on this subject and I am convinced that there is no "optimal" amount of money, even relative to the current amount. I'm of the Austrian school and many disagree with their conclusions but it isn't just about "good for the economy" for me, it is also about ethics and a system built around consistently stealing 2 to 3% of people's money per year is not ethical and never acceptable even if it produced utopia.

 

Al...when you say to create money at the same rate as the creation of value, do you mean increase it by an amount equal to GDP? The total amount of US dollars is around 11 trillion. US GDP is around 14 trillion. That sounds like 127% inflation to me. Even if you assume that "creation of value" is just the average profit from that 14 trillion then profit would be around 1.26 trillion (historical 9% rate of profit) which is still like 11.4% inflation.

[mike777]

If I understand your point you seem to feel 2-3% growth in the money supply that may result in some low level of inflation is stealing money and is evil.

 

I will try and repeat my main point, zero percent growth in the money supply is evil, it is very very destructive for your family and for mine.

 

example if the amount/supply of money in 2018 is the same as of 2008, that is horrible for your family and for mine.

 

As for today, if the choice is a balanced budget for 2008/009 and zero percent growth in the money supply, I think that is a disaster for your family and mine.

[Al_U_Card]

I have read a lot of materials on this subject and I am convinced that there is no "optimal" amount of money, even relative to the current amount. I'm of the Austrian school and many disagree with their conclusions but it isn't just about "good for the economy" for me, it is also about ethics and a system built around consistently stealing 2 to 3% of people's money per year is not ethical and never acceptable even if it produced utopia.

 

Al...when you say to create money at the same rate as the creation of value, do you mean increase it by an amount equal to GDP? The total amount of US dollars is around 11 trillion. US GDP is around 14 trillion. That sounds like 127% inflation to me. Even if you assume that "creation of value" is just the average profit from that 14 trillion then profit would be around 1.26 trillion (historical 9% rate of profit) which is still like 11.4% inflation.

Hi Todd

 

My intent concerned the growth of the amount of money. As GDP grows, so should the money supply that represents its "value". Supply and demand for goods and services plays a role in the value for money and the value of money. The underlying ethical principle would apply to both.

[DrTodd13]

If I understand your point you seem to feel 2-3% growth in the money supply that may result in some low level of inflation is stealing money and is evil.

 

I will try and repeat my main point, zero percent growth in the money supply is evil, it is very very destructive for your family and for mine.

 

example if the amount/supply of money in 2018 is the same as of 2008, that is horrible for your family and for mine.

 

As for today, if the choice is a balanced budget for 2008/009 and zero percent growth in the money supply, I think that is a disaster for your family and mine.

How can you say these things after admitting you haven't studied the topic? You've bought into the propaganda of the banking elites who like the current system because it enriches them at your expense. There is absolutely no proof, in my informed but amateur opinion, that inflation is necessary for a healthy economy. Say it as many times as you want but no one should be swayed by your economic fearmongering without at least some evidence.

 

The following is the classic treatise on the topic:

 

Von Mises: Theory of Money and Credit

[Winstonm]

If you strip it to its essence, money is an exchangeable unit that represents labor, either physical labor or intellectual labor.

 

In other cultures at different times many things have been used as money, including sea shells.

 

We now use debt-based fiat currency as it is elastic. The difficulty of expanding the supply is a big problem with gold-backed currencies. The supply of money in an economy needs to expand to accomodate growth of population and its increased labor.

 

If you have an expanding population and a stagnant money stock you have continually higher demand for a limited resource - tight borrowing and higher interest rates.

[DrTodd13]

We now use debt-based fiat currency as it is elastic. The difficulty of expanding the supply is a big problem with gold-backed currencies. The supply of money in an economy needs to expand to accomodate growth of population and its increased labor.

 

If you have an expanding population and a stagnant money stock you have continually higher demand for a limited resource - tight borrowing and higher interest rates.

You can say it needs to expand until you are blue in the face but that doesn't make it so. The only difficult thing about gold not allowing the money supply to expand is for governments and bankers who then have a much more difficult time stealing from you. We had a thriving economy while we were on the gold standard and from what I've read there is no reason it couldn't be so again.

 

While it is generally true that a fixed supply and more people results in higher demand for money, so what? The cost of money goes up like anything else would. Higher interest rates are not a bad thing!!! Another lower than the natural interest rate spurs mal-investment which when it comes to an end equals misery for everyone. How can you be in favor of natural supply and demand for everything else but not for money?

[Winstonm]

Another lower than the natural interest rate spurs mal-investment which when it comes to an end equals misery for everyone. How can you be in favor of natural supply and demand for everything else but not for money?

 

Hi Dr. Todd,

 

To answer your question, it is because the natural state of money supply is elastic in that money simply is a representative of labor - it is easier to carry around sea shells, gold coins, or paper notes than to constantly barter (In that in barter you must also find someone with need for what you offer in exchange.)

 

When populations rise, labor (money) increases - it takes more goods and services to accomodate the increased population, but the money does not represent the increased goods and services, it represents the increased labor that is traded for goods and services.

 

The Austrian School is persuasive and I believe closer to correct than other economic ideas. Even so, Von Mises recognized that a gold-backed currency was not an ideal currency though most likely necessary to curb government debts.

 

As to what you say above - I agree. The malinvestment and misallocation of resources is a direct result of mismanaging the debt supply (but not money stock) coupled with lax regulation brought about by the Minsky-like illusion of stability that preceded the collapse.

[DrTodd13]

Money is common unit of exchange. Labor isn't money. People trade labor for money.

 

If you keep increasing productive effort but keep the money supply constant then either the velocity of money will increase or prices will fall. These falling prices are not deflation. Keep velocity constant and money supply constant and prices will fall. That includes the price for labor. So, your wages fall by 10% but you are no worse off because the prices of everything else has also fallen 10%. If you have any savings then you are even better off because effectively the value of your savings keeps increasing as overall prices fall due to increased productivity. This is one of the huge differences between the Austrian school and the Keynesian school. Keynesians would say that wages resist falling and that you perpetually stay at a state of decreased output until wages rise to previous levels. Austrians would say that wages will fall and that full output is again quickly reached. For those born in the fiat money era, they are so accustomed to everything becoming more expensive then yes, wages will be somewhat sticky but, imo, only temporarily so. It would take some re-education about how an economy functions based on commodity money but it is possible and would be beneficial for the average person.

[Winstonm]

Compare what I wrote to what you wrote:

 

 

Money is common unit of exchange. money is an exchangeable unit

No difference - Except I went on to say that it REPRESENTS labor.

 

Labor isn't money. money simply is a representative of labor

Again, we are in agreement. Labor isn't money - but money Represents the value of labor.

 

People trade labor for money.  it represents the increased labor that is traded for goods and services.

In essence, we agree. People trade labor for other's labor and utilize money to facilitate the transaction.

 

The bottom line is that money is conceptual - and various goods have been used to represent the concept of money, including gold, silver, paper, and sea shells.

 

If Baker Bob trades $10 for a dozen ears of corn from Farmer Frank, and Farmer Frank then buys $10 worth of sugar from Caneman Calhoun - all that has occured is that Baker Bob has exchanged the value of his labor (making bread) and Farmer Frank accepted the exchange on the basis that he could use the exchange unit to trade his labor (planting and harvesting corn) for sugar.

 

Without the labor, the unit of exchage has no value. Gold and silver of themselves have no value - the value is added because of demand - and that makes them commodities rather than money.

 

When gold and silver are used as money, they still represent the value of the labor required to accumulate them. In a Utopia or the Garden of Eden, money would have no value as all needs would be met without labor.

 

But in our world, if you want someone to build you a house, you have to pay for it with your own labor - money simply makes the transaction easier.

[Winstonm]

If you keep increasing productive effort but keep the money supply constant then either the velocity of money will increase or prices will fall.

 

This is interesting as Austrians don't put much faith in Velocity affecting prices. (See Frank Shostak on Velocity).

 

Increasing productivity is not the same as increasing demand - increased demand can come from population gains. Productivity gains come usually from tecnnological advances - the worker producing more value per hour than before. Productivity gains make the worker more valuable which can then lead to higher wage demand.

 

What causes falling prices is oversupply or dwindling demand - or what you have now in housing and automobiles, overcapacity brought about by misallocations of resources.

 

If you increase demand and keep a constant money supply, prices will rise and costs of borrowing will rise - not that this is all bad but to extremes it leads to stagnation and crimped economic growth.

 

We had a thriving economy while we were on the gold standard and from what I've read there is no reason it couldn't be so again.

 

A great little economy....except for that little gold-standard episode from 1929 to 1939....and a few others earlier that were not quite so severe.....

 

Gold is not a cureall - it brings with it its own type of problems.

[luke warm]

maybe you guys can help me with my major concern re: gold... does that open every thing up to speculators even more than it is now? and even if it does, is it a bad thing?

[DrTodd13]

Money doesn't even represent labor any more than it represents anything else.

 

It isn't fair to say the great depression occurred during the gold standard because this was also during the era of the FED and they had some bizarre fractional reserve gold system where they kept decreasing the fractional reserve requirement. So, in essence, they were inflating the money supply and when tough times hit they contracted it. The double whammy. They now think they learned their lesson and so rather than contract now they want to inflate like crazy.

[Winstonm]

Money doesn't even represent labor any more than it represents anything else. 

 

It isn't fair to say the great depression occurred during the gold standard because this was also during the era of the FED and they had some bizarre fractional reserve gold system where they kept decreasing the fractional reserve requirement.  So, in essence, they were inflating the money supply and when tough times hit they contracted it.  The double whammy.  They now think they learned their lesson and so rather than contract now they want to inflate like crazy.

You tell me what money isn't, but you fail to say what it is.

 

The U.S. except for rare and isolated instances utilized a gold-standard until 1971. What is not fair is to discount the problems of a gold-standard.

 

I say money is a unit that expresses the value of labor, and its usefulness is that it facilitates trade. You say money does not represent labor. O.K. Fine. Then what is it and how do you support that definition?

[eros2]

In simplish terms increase money supply per long term growth of

GDP.

 

This would be fine if GDP growth actually represented the creation of wealth. Unfortunately, the US economy is built upon consumption, which accounts for ~70% of GDP. This would also be fine if people were spending their own money. However, they are borrowing to consume, and that money originates from savers abroad in Asia and the Middle East. American "growth" is therefore largely dependant upon debt. This is a problem because taking on debt is the exact opposite of wealth creation; not only must the debt be repaid, but with interest. Wealth is created by investment. Investment is funded by saving, not consumption. The US economy is phoney and unsustainable.

 

You tell me what money isn't, but you fail to say what it is.

 

Money is a proxy for value. All else held equal and constant, it is a very good proxy. However, introduce speculators, information asymmetry, intervention and mistaken expectations, and it completely fails as an accurate indication of real value.

[Winstonm]

Money is a proxy for value.

 

I agree with this in so far as it goes -- but what does it value? No matter how hard anyone tries to look other places for the answer, the simple and complete answer is that money represents the value of labor, either physical labor or intellectual labor.

 

Debt, on the other hand, is the opposite of money - it is a claim against future productivity.

 

This is a problem because taking on debt is the exact opposite of wealth creation; not only must the debt be repaid, but with interest. Wealth is created by investment. Investment is funded by saving, not consumption. The US economy is phoney and unsustainable

 

I concur with these thoughts for the most part only I wouldn't say the economy is unsustainable - the economy has a limit and that boundary is solvency - and that makes the economy dependent upon continued borrowing from the world.

 

I call it the Blanche Dubois economy, i.e., dependent on the kindnesss of strangers - or the Jerry Seinfeld economy, i.e., the economy about nothing.

[DrTodd13]

You tell me what money isn't, but you fail to say what it is.

 

The U.S. except for rare and isolated instances utilized a gold-standard until 1971. What is not fair is to discount the problems of a gold-standard.

 

I say money is a unit that expresses the value of labor, and its usefulness is that it facilitates trade. You say money does not represent labor. O.K. Fine. Then what is it and how do you support that definition?

I did say what money is. It is anything that people agree is a common unit of exchange. Money expresses the value of everything, not just labor. I support this definition the same way every definition works. It is the way that people have agreed to define the term.

 

My contention is that as soon as you don't have a 100% reserve gold standard then the benefit of the gold standard starts to go away. So, while technically there was small amount of gold backing to our currency until 1971, that is looking at it at a shallow level. The system in 1971 much more resembled the current system in terms of restraint on money creation than it does 1910 when, IIRC, we had 100% gold backed currency.

 

To be clear, I'm not in favor of a government run monopoly on money whether that is fiat or gold-backed. However, if money must be solely created by governments then I think that gold is better that fiat. I would support anybody being able to issue currency backed by whatever they desire and to have free trade in those currencies.

[Al_U_Card]

How about:

 

money= ( (time required to perform the work)x(desire to obtain the item)x(the effectiveness of the item to fulfill the need) ) / the availability of the item

[mike777]

Feel free to disagree with the below points but it seemed a good place to start to get some basic terms down. B)

 

Again my main point is that I hope that mortgage rates get down to 4-4.5% and that is a good first step toward alleviating this crises.

 

I don't think anyone disagrees that inflation, a high rate of inflation is bad and very difficult and painful to fix. I just argue to try and fix one crises at a time. IF people are starving, feed them, teach them to fish next week.

 

 

 

 

http://www.friesian.com/money.htm

 

 

"As Milton Friedman says in Money Mischief [HBJ, 1992], anything can be money: stones, iron, gold, tobacco, silver, shells, cigarettes, copper, paper, nickel, etc. What makes these things money is not what they are, but what they are used for. They may have value in themselves, like gold ("commodity" money), or they may not ("credit" money, which means banknotes, bank deposits, tokens, markers, etc.); but their value as money is separate from their intrinsic value. What gives money value as such is that it is, or can be, used for exchange, replacing the original human system of trade, which was barter. The value of money is thus the value people attribute to what they want to exchange, no more, no less. As a medium of exchange, all money is in effect "credit" money: credit on an incomplete barter, like an IOU. An IOU can also be anything, as long as it is recognized as a contractual obligation on an incomplete exchange. Commodity money was originally the most natural money, but the value of money is not always the same as its value as a commodity. The intrinsic value of commodity money and its value as money can actually interfere with each other.[2] As a medium of exchange, money also establishes a standard of value (e.g. items A and B may both be worth $5, £5, ¥5, etc.), and as money is held in between exchanges, money becomes a store of value.

 

What the value of money actually is (i.e. what units of the standard will buy, in general) depends on 1) how much money there is, 2) how much money is held out of circulation, and 3) how many exchanges circulating money is used to cover. This is the "quantity theory of money" and can be expressed in a famous equation by the American astronomer and economist Simon Newcomb: MV = PT. "M" signifies the actual quantity of money; "V" signifies the "velocity," which is the rate at which money circulates or how long money is held out of circulation; "T" is the number of transactions, or exchanges; and "P" is the level of prices. This equation easily illuminates most questions about inflation or deflation, which is how money becomes less or more valuable over time. The evidence for the "quantity theory" is that historically inflation and deflation have occurred independently of economic growth and recession, as can be seen in the data from Friedman and Schwartz given below.[3]

 

Inflation is where the aggregate level of prices goes up and deflation where the aggregate level of prices goes down. Inflation will occur if V and T remain constant but M goes up, i.e. the supply of money increases without any other changes. Inflation can also occur if V goes up (people spend money more quickly) or T declines (the economy shrinks), as the other variables are constant. Most inflations, however, occur because of independent increases in the money supply. That can happen either with commodity money or credit money. A flood of silver from the New World caused a devastating inflation in 16th and 17th century Spain; and gold strikes in California, Australia, South Africa, and the Yukon produced inflations in the 19th and early 20th centuries. Now inflations are always the result of increases in the supply of credit money: it is easy to print paper, and governments that have begun issuing paper money have always eventually fallen to the temptation of just printing and spending new money.[4] Paper money achieved legitimacy in the first place only because the Bank of England, which was privately owned (founded in 1694 and nationalized in 1946),[5] was the first note issuing agency in history that behaved responsibly and restrained its issue of paper money. Consequently, Bank of England notes were "as good as gold." Inflation does not occur because of a "wage-price spiral," an "overheated" economy, excessive economic growth, or through any other natural mechanism of the market. A government debasing the currency would not have fooled anyone a century ago. Now, through deception, a government can try to blame inflation on anything but its own irresponsible actions.

 

Deflation usually occurs from one of two causes. Either the economy grows and the volume of transactions (T) increases, or the quantity of money (M) decreases. After the Civil War, when the United States issued hundreds of millions of dollars in paper money ("greenbacks") to spend on the war,[6] greenbacks and gold dollars circulated side by side: but gold dollars were worth several greenback dollars.

 

UNITED STATES PRICE LEVELS: 1929=100% [data from Milton Friedman, Money Mischief, Episodes in Monetary History, Harcourt Brace"

[eros2]

I wouldn't say the economy is unsustainable - the economy has a limit and that boundary is solvency - and that makes the economy dependent upon continued borrowing from the world.

So the world produces and America consumes? How is this sustainable? Consider the following analogy (borrowed from Peter Schiff); There are 4 people shipwrecked on an island, 3 Asians and an American. The Asians split themselves to forage, fish and start a fire. The American is designated the role of eating. However, the Asians are perfectly capable of eating the food themselves and once they realise this, the American is redundant.

 

The truth is that US creditors already know this, but are stuck between Scylla and Charybdis. They are loath to stop lending to America because a run on the greenback would destroy the value of their vast foreign currency reserves held in USD. That is not to say this eventuality will never happen. America is NOT too big to fail. China is still buying US assets and treasury bonds for example, but there will be a tipping point. Of course the short term consequences would be disastrous for all concerned, but the creditors will be better off in the long term. However, US recovery would be much much slower and significantly more painful.

 

Barack Obama's plans will only exacerbate the problem.

 

"The Americans can always be depended upon to do the right thing after they have exhausted every other possibility" - Winston Churchill.

 

I know so many people who are betting against the dollar now.