Sentences (#5)

Half a sentence this time, from Charles Hugh-Smith. It’s rare for me to agree with anything quite this much:

… deflation is the natural result of a competitive economy experiencing productivity gains.

(He continues: “isn’t this the ideal environment for innovation, enterprise and consumers? Yes, it is.”)

According to the Outside in definition, deflation is the basic signature of capitalism. It’s the politically-undirected (i.e. spontaneous) distribution of positive externalities from sound economic order. Inflation — or mere deflation-suppression — is the unambiguous signal that something very different is going on.

ADDED: Related.

January 13, 2015admin 73 Comments »
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73 Responses to this entry

  • Sentences (#5) | Neoreactive Says:

    […] Sentences (#5) […]

    Posted on January 13th, 2015 at 11:06 am Reply | Quote
  • handle Says:

    Is inflation is a monetary phenomena, then so is deflation. It’s all about changes relative to expectations.

    [Reply]

    admin Reply:

    The example of tech-deflation suggests there’s a more fundamental substrate, under non-manipulated conditions. (Currency value = industrial capability / money supply.)

    [Reply]

    Kgaard Reply:

    That’s true. But there are a lot of subtleties when talking about deflation. When prices are falling AND nominal GDP is flat-lining AND the country has a ton of debt, the optimal policy is different than if you’re talking about the US in the late 1800s: Low taxes, rising population, no major overhanging debts (after the 1870s railroad bankruptcies were worked out, that is), lots of open land to settle.

    So, you wouldn’t want to say, “Well the US did great in the late 1800s with slightly falling prices so Spain should tough it out too.” For one thing the US was an aristocracy — only about 35% of the adult population could vote. That gets you far more pro-growth fiscal policy than Spain and Italy are dealing with now.

    [Reply]

    admin Reply:

    Democracy makes sane economic policy impossible — I agree.

    vxxc2014 Reply:

    Well Sure. It’s the People’s fault, not the Financial and Govt elites who actually made decisions and did things, it’s the People’s Fault.

    The People’s only fault is not swinging the Headsman’s axe.

    Yet.

    When your Plan and survival are contingent on eternal and infinite forbearance from the victim…

    Kgaard Reply:

    And regarding your second link, the &^%$ing Germans are just WRONG about this. That was the point of the link I posted yesterday about German schoolchildren: They are taught that hyperinflation led to Hitler when in fact it was austerity. And now Europe reaps the results. Fortunately the PIIGS + France look set to override the Germans at the ECB on Jan 22. I’m actually starting to get a bit optimistic about Europe …

    [Reply]

    vxxc2014 Reply:

    That Germany was poor relative to the Anglo-Saxon Powers [most Germans were poor] and Germany after 1871 to now is very heavily export dependent led to Hitler.

    In WW1 Germans wanted external export markets like other European powers and Britain foolishly blocked this legitimate desire.

    In WW2 Germany was set on having internal export markets, also new lands to colonize in the East [hence depopulation] and was explicitly emulating the United States in this regard.

    Germany didn’t want to be the Anglo-Saxon’s bitch is all.

    Had Germany done the East slower, bite by bite they may well have succeeded.

    As far as genocide, that’s actually far more normal warfare than limited warfare, a European confection and innovation unknown to the ancients. They *may* have copied it after Islamic restraints in war, just as they absolutely copied Holy War into the Crusades. Until 1095 in Christianity War=Murder. Mortal Sin.

    Post-Christian Europe was of course going to have all the safeguards off. So it set out to do what America did just much faster.

    [I’m not German BTW].

    Posted on January 13th, 2015 at 12:16 pm Reply | Quote
  • Sentences (#5) | Reaction Times Says:

    […] Source: Outside In […]

    Posted on January 13th, 2015 at 2:51 pm Reply | Quote
  • Shenpen Says:

    I think you have it wrong. The important thing is power, in this case, the power relationship between creditors and debtors. Inflation is debtor empowerment, deflation is creditor empowerment.

    Typically there are rich creditors and poor debtors. Thus inflation is pro poor, deflation is pro rich.

    From then on it is pure ideology. You can call rich creditors “savers” or even “the provident”. You can also call them “the politically well connected robber mafia”.

    [Reply]

    admin Reply:

    This analysis, which reduces the phenomenon to politics, perfect instantiates the problem. The politicized economy is socio-historical degeneracy. Eventually Bitcoin will sort it out.

    [Reply]

    Kgaard Reply:

    Shenpen that’s not quite right. If deflation gets too bad defaults rise and the creditors lose. Particularly in fractional banking systems, where creditors are leveraging up 10 to 1 or more, creditors are as much vulnerable to the negatives of deflation as are debtors. This is why QE in the US, UK and Japan gets political support (though not 100% political support) from all parts of the political spectrum. Increasingly the same is true in Europe.

    Nick, How can Bitcoin sort this out when there is no mechanism to keep the value of a Bitcoin stable? The problem would be worse under Bitcoin … much worse in fact. I would never take out a loan in nominal BItcoins. It’s suicidal.

    [Reply]

    Aeroguy Reply:

    What are the mechanism’s that kept the price of gold stable? I find it interesting that you wouldn’t take out a loan in nominal bitcoins because from a speculative standpoint it’s essentially the same as a short, something critics of bitcoin have been screaming they want to do. The issue with bitcoin is the social construct aspect of money, people can’t decide if it’s money. If people around the world decided that bitcoin is money, litecoin is counterfeit, and fiat is worthless paper, bitcoin’s stability would be comparable to gold. Of course people’s perceptions are actually extremely complex systems that are difficult to control and almost never that uniform.

    Personally when I think of patchwork states, I imagine them each having their own crypto-currency. It is possible if people equate hard crypto with money and fiat with paper. The fact that people tend to operate at peak rationality when their own money is involved gives me this glimmer of hope.

    I just realized something, we all know money is a social construct and source of power. So if the wider body of people are who decides if something is money (even if manipulated into doing so), wouldn’t that make money demotist…

    [Reply]

    Kgaard Reply:

    Well, any time you hold a currency it’s an act of faith in the central banker steering that currency. But please keep in mind that all central bankers have the power to make money more scarce any time they choose (within political reason) by doing asset sales. So it’s not like they are defenseless, losing sleep every night on the expectation that one day “everybody will wake up and realize paper money has no value ahhhhhh!!!!”. It’s not going to happen in a well-managed economy, or even in a mediocre-ly managed one.

    So, I don’t think it’s helpful to think of money as a social construct. It’s not helpful to think of faith in currency as a matter of voodoo. If you hold gold you are ALSO participating in an act of faith — this time believing that central bankers will fall down on the job somehow, or that the real economy will get bad enough that QE will be needed.

    I can’t imagine a patchwork-state system with individual crypto-currencies would work at all. It would be like the American colonies — nobody knowing what others’ money is worth and spending half their time trying to figure it out.

    Bottom line I think the crypto currencies are gonna have a hard time getting to a point of popular usage. They’ll be good for anonymous purchases but that’s about it. I suppose someone could do a gold-linked crypto-currency that was anonymous. That’d be interesting. But of course there you’ve got a de facto central banker behind the thing, and you’ve got to trust that he will in fact keep the currency stable to gold. That’s a lot of trust to have. It would be easier to hold dollars or gold …

    Aeroguy Reply:

    Central bankers are a purely modern invention, useful only in the context of democracy (for maintaining the bread and circus that preserves the democratic social order). They’re record for maintaining stability is not faith inspiring. Why would an aristocratic society have need for a central banker? Gold isn’t exactly competitive as a currency in an era of electronic trade and the whole point of open source crypto-currency is that trust isn’t required. When trust is made obsolete, why continue with the farce, because we want to preserve good order in our democratic system? Decentralized market decision making rather than central political decision making. It’s far more destructive than people think they would like, but that’s a good thing because what people think they want isn’t always what’s actually good for them.

    “nobody knowing what others’ money is worth and spending half their time trying to figure it out”
    Currency speculation doesn’t exist today? Speculation is part of capitalism.

    vxxc2014 Reply:

    Kggard,

    Has it ever occurred to you the rest of Humanity does not exist to service debts?

    The Creditors just got bailed out to the tune of $30T in the USA alone and counting up daily….

    Let the people have some crumbs, it’s their labors with fracking for instance that are driving this….

    If you won’t let the people have the comparative crumbs of a cheaper tank of gas and home energy bills don’t be surprised when you meet the traditional, indeed eternal fate of incompetent tyrants.

    You are BTW at the extreme tail end of incompetence in terms of rule, esp peak rule of tyranny. You see in Tyranny as opposed to Democracy if the Tyrants make mistakes – like deliberately cutting out your soldiers/cops aka muscle as opposed to cutting them in on the swag up front – in Tyranny mistakes cost everything. In Democracy you get to write your memoirs.

    Save the Creditors, starve the people and snatch away crumb of cheaper gas!

    It’s stunning.

    [Reply]

    Kgaard Reply:

    Well I would propose that you are below the median in terms of writing so people can easily make sense of what you are saying. But setting that aside, in terms of denying people the crumbs of lower gas prices, I’ve said no such thing. This crude-price plunge is a function of improving technology, not too-tight money. It’s good. I’m all for it. Remember the distinction between falling prices caused by technological advance (good) and falling prices caused by too-tight money (bad).

    My argument in favor of QE has been that 2008 was a once-every-four-generations event, and required a once-every-four-generations response. Which we got.

    Looking ahead … monetary policy is likely to get trickier as humanity moves into the virtual world and the rate of creative destruction accelerates. All those real-world debts out there may get harder to service, such as the US government’s $16 trillion in liabilities. I’m not sure how this resolves but it’s a live issue. If one were gonna make a long-term argument for gold it would be simply that as the economy becomes more virtual and less currency-centric (and brick-and-mortar-centric), nominal GDP may decline just due to those forces. Then the sort of good-versus-evil choice you allude to may be more at hand. (And it may not even be precisely good versus evil since that $16T of debts is largely owed to everyday Americans.)

    Another question to consider: What was your stance on monetary policy in 2005? If you didn’t have one there’s a reason for that: These issues weren’t on many people’s radar until AFTER the crash. The moral decision matrix is a lot different after a crash than before one. The time to go after the financial evildoers is before a crash, not after one … The latter approach just hurts the man in the street — witness the 52% youth unemployment in Spain.

    Kgaard Reply:

    And as I look into it further, this oil-price plunge could be the leading edge of the above-mentioned trend toward reduced resource-intensivity of living on earth in the virtual age. US oil consumption has been flat for five years, while US production has basically doubled. The US is clearly the driver of the plunge in global crude prices.

    With inflation likely to be near zero as far as the eye can see, it’s not clear to me how crypto-currencies are gonna get the kind of traction their creators foresee. Gold is actually the better bet at this point (in theory, at least), since central banks will be constantly nudged to print to keep nominal street prices from falling. In that scenario gold rises while everything else remains flat or falls. Just a concept, that. But intellectually I think it’s sound.

    Peter A. Taylor Reply:

    I don’t see how you can predict continuing low inflation. The velocity of money is apparently anomalously low. Is this because of Fed “sterizilation”? Do they really know what they’re doing? If they do, can you predict it? Is the anomaly because of consumer or investor sentiment (i.e. “animal spirits”)? Is it because of Kling’s Patterns of Sustainable Specialization and Trade (PSST) having broken down and waiting for … what? before they get realigned? Is it because of creeping socialism/overregulation that will continue to suppress honest investment forever, but without a lot of crooked “investment”?

    The velocity of money will stay low into the indefinite future because … this time it’s different?

    I suspect that “sterilization” is a large part of what’s going on. My impression is that the Fed is sitting on a pressure cooker, and eventually it’s going to blow, but I don’t want to make any bets with you because I have no idea when this is likely to happen.

    blogospheroid Reply:

    Also depends on bankruptcy laws and the particular form of the mortgage. There are mortgage forms where the creditor just possesses the collateral and that’s that. There are mortgages where any arrears have to come from personal income. They have different effects under different regimes.

    [Reply]

    Posted on January 13th, 2015 at 5:18 pm Reply | Quote
  • Lesser Bull Says:

    I appreciate Kgaard’s willingness to keep arguing his point, and I appreciate Admin’s willingness to keep making him argue it.

    [Reply]

    Izak Reply:

    Haha!

    [Reply]

    vxxc2014 Reply:

    Brilliant!

    [Reply]

    soapjackal Reply:

    I concur.

    [Reply]

    Posted on January 13th, 2015 at 6:05 pm Reply | Quote
  • blogospheroid Says:

    I don’t see any polity maintaining a hard currency policy when they are under military attack. I read a fascinating bit at David Glasner’s showing the monetary side of WWI and the versailles treaty. Very interesting.

    I don’t see any polity maintaining a hard currency policy when they are outbid in the international market by other polities. The germans used the low value of the Euro to rebuild their industrial base and now think that they are enjoying all of these due to their hard work. Well that’s true, but don’t tell me that the relatively weak Euro, which you shared with relatively weak spain and greece didn’t help. A northern Euro would’ve very quickly risen up and made further exports difficult.

    The swiss attached themselves to the much weaker Euro and chose to maintain their industrial base.

    [Reply]

    vxxc2014 Reply:

    No export markets for Germany drove WW1 and WW2.

    The answer is to zero all debt, save that between nations [say UST] and to freeze those UST’s back to a moment in time [to prevent more looting].

    The Creditors rejected “The Market Forces” and “Market Discipline” when they screamed bailout in 2008.

    They’ve lost all their rights to property and lein.

    The People’s debts must be forgiven at least up to the bailout amounts, tens of $Trillions USD.

    Of course they owe nowhere near that much.

    People who put all of Western Civilization and Japan, Eastern Europe at mortal risk to sustain their lifestyle and insane gambling addictions don’t get to say “pay your bills.”

    Sure they get political support. But our politicians aren’t even Whores, they’re cum dumpsters. You bought nothing…this is all inertia.

    [Reply]

    Posted on January 13th, 2015 at 6:20 pm Reply | Quote
  • Contemplationist Says:

    Perhaps, the subject was called ‘Political Economy’ for a reason – the separation of politics from economics may infact be impossible in our fallen world.

    [Reply]

    Posted on January 13th, 2015 at 6:34 pm Reply | Quote
  • SVErshov Says:

    Considering massive monetary emission, current deflation appears to be manipulative.

    [Reply]

    Posted on January 13th, 2015 at 7:57 pm Reply | Quote
  • Misha Says:

    And inflation is the natural result of population growth

    [Reply]

    Hurlock Reply:

    These threads always collapse into utter bullshit because the two sides are talking about different things.

    When I (or Admin) talk about deflation we are talking about deflation caused by productivity gains. As your economy develops and gorws, things get more abundant and cheaper. That’s the whole point. This is deflation as a capital-productivity phenomenon.
    There is another kind of deflation which is monetary deflation, caused by a decline in the money supply. This has nothing to do with productivity and its effects are usually not positive and can be (economically) very detrimental. This is the type of deflation (I think) Kgaard and Blogospheroid are talking about.

    The issue with people like Kgaard is that they do not seem to make a distinction between the two types of deflation. To them deflation can only be a monetary phenomenon, so if there is deflation for whatever reason we must pump money into the economy to keep it stable.
    This confusion of capital-productivity deflation (good) with monetary deflation (bad) is one of the biggest if not THE biggest fallacies of modern economics. Moldbug pointed this out again and again and again.
    And his essential point (or should I say the essential Austrian point) was that economic problems are not caused exclusively by declines or increases in the money supply, but by significant instability in the money supply (i.e. they can be caused by BOTH). Which is why you optimally want a STABLE money supply that doesn’t change. In this way the development of the economy is much more predictable, thus dropping the time preference rate, thus making planning easier, thus increasing productivity and etc..

    For the simple-minded, let me elaborate on the crucial difference between capital-productivity and monetary deflation.

    Capital-productivity deflation is caused by competition. It is the most natural thing to happen in a capitalist economy. As you compete with other producers you want to satisfy your consumers better than them, in order to increase your profits. What do the consumers want? More stuff at a lower price. So you want to produce a larger amount at a lower cost than your competitors. And as entrepreneuers discover ways to produce more and at a lower cost and sell it at a cheaper price this drives all technological innovation forward and also in the long-run leads to a steady decline in prices. Here is the crucial point: while this leads to an overall decrease in prices, this doesn’t reduce the profit margin for the innovating firms. In fact when a firm discovers a new way to produce more at a lower cost and can then undercut its competitors this leads to a significant (albeit temporary) increase in its profit margin as it starts taking over the market share of the competition.
    Deflation from capital-productivity growth is caused by the producers themselves in an effort to beat the competition and increase their own profit margins. This is the whole reason why you want free markets. It’s basic Adam Smith and it is staggering that so many people have forgotten this essential insight.

    Let’s look at monetary deflation. Unlike deflation by productivity growth this one is not caused by the producers. It is caused by a decline in the money supply. This of course leads to a decline in the prices of the things produced. Now, for the producers the problem is that this time the cause of the deflation is exterior and the profit margin is not growing. In the previous case, innovation and increases in productivity by some firms lead to a price deflation as they take over the market thus increasing their profit margins, but in this case no such thing occurs. Deflation caused by monetary contraction in fact leads to a decrease in the profit margins of EVERYONE. Which is why every producer fears monetary deflation like the plague.

    In the optimal situation the money supply doesn’t suddenly contract or suddenly expand – it stays (at least relatively) stable. Which is why gold makes such great money.
    Because I am anticipating a lecture on how QE can save the world by Kgaard, a few points about inflation.
    While price deflation caused by a monetary contraction is bad for every producer on the market, price inflation caused by a monetary expansion can be good for some while bad for others. Which is why in the modern world we only ever see the latter (it’s still a bad choice compared to monetary stability). Depending on who gets the new money first, monetary inflation can be enthusiastically supported by some. By those who get the money first of course, since they make a gain at the expense of those who get the money later. This is why inflation is technically an invisible tax, or redistribution of value, i.e. of purchasing power from the guys who get the new money last, to the guys who get the new money first.

    Control of the money supply is a great weapon in the hands of governments. Via inflation they can reward some players on the market at the expense of others. They can reduce one’s profits, while increasing another’s. Which is why entrepreneuers have to obey the whims of Power. Which is why to run a sucessful business nowadays, you have to be a progressive.

    The problem with inflation caused by government monetary expansion is that it leads to a decrease in innovation. Now firms now that even if they don’t optimize and increase their productivity, they can still keep, or even increase their profit margins by bribing politicians. Now the most important thing for producers is not being more productive and efficient, but having more friends in the democratic party. Obvious economic issues follow.

    Once again, I urge a return to Moldbug. Sound economics is not that hard. The fallacies of modern economists are all glaringly obvious and they are always motivated by political Power. Moldbug explained all of this sufficiently well years ago after the 2008 crisis and it is quite dissapointing that I have to repeat all of this over and over again, some 6 years later.

    [Reply]

    Hurlock Reply:

    @Admin

    Whoops, my wall of text was not meant as a reply to Misha’s comment, but as a separate one, could you move it, please?

    [Reply]

    admin Reply:

    Not even sure how to do that — I’m going to sleep on it.

    Kgaard Reply:

    I think we are all agreed that there’s a distinction between falling prices due to innovation and falling prices due to too-tight money. Blogospheroid makes the important point that you know falling prices due to innovation are occurring in an overall healthy climate when overall nominal GDP is growing.

    But you are still making one key mistake and that has to do with the constant reference to “money supply.” This is the same mistake the Bitcoin people make as well as proponents of a hard gold standard (i.e. requirement for 100% gold backing of all currency in circulation). It makes no sense to talk about “money supply” in isolation, but only in conjunction with money demand. Since money demand is actually difficult to measure, one needs to look for benchmarks for whether too much or too little money has been issued. Historically the gold price was that benchmark, and gold is still a fairly useful benchmark for this.

    But again the problem with a gold standard + fractional banking + democracy is that you are GUARANTEED to have booms and crashes, and probably huge ones. You have to dig out from the crashes. When contracts are fixed throughout the economy, the only way to dig out from a crash is through devaluation. Trying to tough it out and take your medicine leads to disaster because contracts can’t adjust — they are prevented by democracy and other factors from doing so.

    One potential virtue of Bitcoin is that Bitcoin-denominated contracts are not subject to democratic oversight. So in theory a Bitcoin economy could allow for more of a ruthless Austrian-style crash+cleansing than a fiat-currency economy would. But Bitcoin still has the inescapable flaw of a fixed money supply. Which means that if the currency catches on, it must be effectively rationed, which means the value soars, which makes it useless as a medium of exchange and unit of account. (This is so basic, why don’t the Bitcoin proponents see this?)

    [Reply]

    Hurlock Reply:

    Money demand is irrelevant, any amound of money in the economy works. Who cares how much bank notes you have? What matters is what you can buy with them. Stop tunneling on nominal indicators.

    Hurlock Reply:

    Being a fixed money supply is a feature not a flaw. Did you even read my comment?
    That was the whole point.

    Hurlock Reply:

    fk it I give up, you are still missing the point

    Kgaard Reply:

    @Misha

    Dude, you are missing the point. Have a look at this chart of Singapore M2 over the last 40 years. Since 1984 it’s up 12,000%. There is 120x more M2 in Singapore today than in 1974. Just over the past 20 years Singapore M2 has grown 600%.

    http://www.tradingeconomics.com/singapore/money-supply-m2

    Singapore is everyone’s favorite country. Do you really think Singapore could have achieved what it did over the last 40 years if the total number of currency units there had been fixed in 1974? Street prices today would be 99.2% lower now than in 1974. You cannot run an economy like that.

    This is the chart you and the bitcoin heads have to rebut …

    Kgaard Reply:

    Oops … the above is directed at Hurlock, not Misha. But really anyone with a thing for Bitcoin should look at that Singapore M2 chart.

    vxxc2014 Reply:

    Hurlock Briliant gems. Stolen.

    “Which is why to run a sucessful business nowadays, you have to be a progressive.”

    “Now the most important thing for producers is not being more productive and efficient, but having more friends in the democratic party.”

    [Reply]

    admin Reply:

    That final quote is a classic.

    Marxist toady Reply:

    Hurlock, for all your invocation of Moldbug, it seems to me that you advocate what Moldbug, in “Maturity Transformation Considered Harmful,” somewhat dismissively deemed the “free market solution” — i.e., still too libertarian.

    “Our first solution is a free-market solution. In the free-market solution, Washington renounces all bailouts, guarantees, nationalizations, etc. There is an easy way to do this: break the Fed’s printing press. Pass a constitutional amendment limiting the number of dollars extant to the number of actual dollars in the world: M0, 825 billion. That’s about $2750 for every American – although not all of these dollars, of course, are in America.

    Result: the mother of all bank runs. All bank deposits are vaporized. The assets backing them become nearly worthless. Have fun paying off that $300,000 mortgage, with your $2750. Even Treasury obligations trade at pennies on the dollar – have fun paying off that $10T national debt, in a world with only 825 billion dollars.

    The good news: hyperdeflation. If you have a dollar, an actual physical greenback, you can eat for a day. If you have $20, you’re set for the month. A benjamin is unimaginable wealth. Gas? Five cents a gallon. Gold? Worthless. Ammo? Priceless. Basically, we’re looking at Mad Max Beyond Thunderdome, with 1915 prices. I’m sure this would make some people very happy. I am not one of them.”

    [Reply]

    Hurlock Reply:

    You seem confused.

    Moldbug himself said the optimal situation is one in which the money supply is fixed.
    I am simply reiterating his point.
    I am not saying that we could actually reform the current fiat system into that.
    Moldbug had other suggestions to how to move the current financial system in that direction but via more moderate and controlled means. I am assuming you have read about those.

    Posted on January 13th, 2015 at 8:50 pm Reply | Quote
  • John Says:

    How does this square with capitalism?

    Capitalism is driven by capitalists seeking return on capital. Deflation lowers such returns on capital.

    If the price of corn is falling, why would you invest your money now to grow corn?

    Wouldn’t capitalists be incentivized to promote inflation? Wouldn’t capitalists in capitalist societies in which capitalists tend to have greater influence and power tend to promote inflationary policies?

    [Reply]

    blogospheroid Reply:

    Bingo! Atleast someone sees the long picture, other than kgaard and handle.
    Deflation vs inflation is rentiers vs capitalists. Seeing reactionaries taking the side of rentiers is expected, but seeing Neo-reactionaries do the same is just sad.

    I already explained in a previous post that deflationary currencies will come with regular cuts to wages and require that the people participating in an enterprise be compensated in an equity like fashion. This can work in a high-trust society, which is not the case currently. Later I thought, there is another way in which it can happen , which is via ubiquitous surveillance. One can see that people getting pay raises, in such a scenario were indeed working their ass off and not slacking. A society of full surveillance is the future of any polity that goes in for a hard currency.

    [Reply]

    admin Reply:

    This is so wrong it isn’t even funny.

    Deflation is simply, and immediately, the positive self-valorization of capital.
    Inflation is state-appropriation of the capitalist social surplus (i.e. the positive externalities of industrial advance). This, in turn, is a pretty damn good thumbnail definition of fascism.

    [Reply]

    Marxist toady Reply:

    I agree on both counts (strikingly Marxist; at least, reminiscent of Jehu and his sources, such as Grossman) — except that this entails the realization that capital can “self-valorize” itself into extinction when deflation via competitive overproduction (or over-accumulation) results in a null rate of profit, and that inflation (state seizure) was itself part of capital’s immanent teleology, as a defense against this occurring.

    blogospheroid Reply:

    Continuous expected deflation devalues specific transfomed capital and overvalues the numeraire. So, your specific capital, your machines lose monetary value with time while your hoarded gold (the numeraire) becomes more valuable. Iterate a few rounds and everyone is holding only gold and maybe the minimum specific capital that can sustain human life, like a few farms and a well. Of course the day will come where you’re attacked by the barbarians from the land nearby who decided that they could very well live with a few percentages of inflation and have ramped up their economy compared to yours.

    admin Reply:

    @blogospheroid — “los[ing nominal] monetary value” doesn’t mean anything of economic significance, except insofar as people have been trained to respond with systematic irrationality (i.e. the Keynesian psycho-magical mumbo-jumbo of ‘wage stickiness’ and ‘money illusion’). Pandering to such stupidity is no way to run a sane society.

    John Reply:

    What do you mean losing monetary value doesn’t mean anything of economic significance?

    The entire investment decision depends on the monetary value of the machines. The monetary value of the machines is the cash flow generated by the machines’ production discounted by the risk-free rate i.e. what you get for just holding your money and not buying the machines, plus the market value of the machines. If this is not positive, you should not be investing in the machines. You are throwing away your money by doing so.

    admin Reply:

    @John — Nominal monetary value has no economic significance in itself. It’s pure fetishism (i.e. mumbo-jumbo Keynesians invoke to run interference for their statist expropriation schemes). The discounted real value of machinery under deflationary conditions is unchanged by the monetary change — if it has a salvage value of US$500 rather than US$1,000, and the US$ has doubled in value (don’t laugh, this is purely an abstract example), nothing extra has been lost as a result of the currency movement. Investment decisions (by rational actors) are unaffected.

    Inflation is about statist economic redistribution. People need to keep their eye on the ball.

    John Reply:

    The real value is a function of the nominal and inflation. The real value can be expressed by the nominal value and inflation. The real value of machinery or any other commodity does change according to nominal monetary change. An increase in the nominal value of a commodity, whether gold or machinery, relative to other commodities in a deflationary scenario is an increase in real value. And vice versa.

    If you spend 1K on a machine and it goes down to 500 bucks, and everything else halves in value as well such that after you sell the machine 500 bucks you can still afford everything else at the same level as you did with your original 1k, it still follows that you should not have bought the machine in the first place. By not buying the machine and keeping your 1k, you could have doubled your purchasing power.

    If the US dollar is doubling in value, you should not be converting your dollars into anything except that which will more than double in value risk-adjusted.

    admin Reply:

    That’s sensible enough. Deflation sets a benchmark for sound investment (and expected returns) — it runs counter to ZIRP-propelled malinvestment in that respect. Clearly, a high-benchmark corresponds to self-respecting capital, and a low-benchmark corresponds to cheap-whore fascist cronyism. Deflation discourages all economic activity that isn’t decidedly advantageous.

    vxxc2014 Reply:

    Thank you Admin!

    Chris B Reply:

    @john You seem to be conflating the IRR calculation with depreciation analysis.In IRR inflation is accounted for by reducing the real return (e.g if inflation is 2% and the return is 5% then the real return is 3%).

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    Chris B Reply:

    I never really paid much direct attention to inflation/deflation arguments before, but actually, this has been bugging me for a couple of days now. The IRR calculation which companies use to decide on capital allocation would actually express a higher rate of return if deflation was factored in. Deflation would then be beneficial and stimulate investment, as it would be clear that you rate of return is higher. It s win win.
    If however economic activity was reducing then this would take precedence over any IRR calculation as the decision to allocate capital would shift from one of deciding on returns, to one of assessing macro economic risks. This is done through reviewing customer forcasted demand and other things such as employment rates. Reducing prices as a result of reduction in demand and economic activity will result in some price reductions through cost cutting to remain competitive in harsh economic climates, but to claim that deflation is the cause and not a symptom is bizarre. I see this is where the constant usage of sticky wages and the shift to nominal GDP etc comes in – this smells really fishy to me.

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    vxxc2014 Reply:

    There’s more to Capitalism than just the Investors.

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    John Reply:

    More to it that distinguishes it from any other economic system?

    [Reply]

    Posted on January 13th, 2015 at 9:05 pm Reply | Quote
  • Chris B Says:

    @John There seems to be two scenarios of deflation being put forward 1) productivity gains and surplus manifesting indeflation which pushes further innovation to maintain returns (This drives innovation, or according to Garrett Garrett, colonisation and and machine development). 2) slack in consumer demand resulting in a race to the bottom in prices which results in reduced investment. (Or again from the first perspective – increased innovation to counter cost reductions on profitability – see adoption of automation to cut costs e.g. fast food ordering tills)
    Now, I can understand situations in which either happened, but to claim one or the other always holds true seems simplistic.

    [Reply]

    Chris B Reply:

    Typing too quickly. Correction **counter price reductions in relation to profitability**

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    blogospheroid Reply:

    Pretty much the difference between a steady or slightly growing nominal income and a falling nominal income. All examples of positive deflation, all of them, have been in the background of an increasing nominal income.

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    Chris B Reply:

    @blogospheroid – Ok, just to clarify. You advocate reducing peoples purchasing power when there is falling nominal income? Is this where the logic that it forces them to spend comes in?

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    blogospheroid Reply:

    I advocate the numeraire reducing in value. After many years of inflation, very few people have their portfolios full of cash alone. They have assets like houses, stocks and even their own human capital which rise with a fall in the numeraire. If the concern is with the loss of purchasing power it can be easily handled by the new money being sent out to the bank accounts of everyone, either a unform amount per person or a random amount.

    [Reply]

    Phil Reply:

    Do you have a reference for where Garet Garrett makes that point? I thought he only wrote novels.

    [Reply]

    Posted on January 14th, 2015 at 6:57 am Reply | Quote
  • blogospheroid Says:

    @Admin

    Making a profit is the very essence of capitalism, which means having more money left at the end of the period than at the beginning. In a deflationary system, the capitalist who ventures out by purchasing a machine loses 80% of the time and the rentier who just keeps the coins gains 100% of the time. (80% of business ventures fail)

    If you think I’m making stuff up, then let me assure you that’s not the case. The case of the gold mad people who allowed their civilization to degrade and be conquered is the story of India. The people are still mad for gold. The country ranks 130 in HDI.

    The case of the rentiers benefiting over the capitalists is best illustrated by the standard advice given to anyone who asks the newbie question in a bitcoin forum “Should I mine?” Almost 80% of the well meaning folks tell him “You’re better off just buying bitcoin and holding onto it” a.k.a. don’t be a capitalist, be a rentier.

    [Reply]

    admin Reply:

    So what do you think is happening in the tech-sector, where Moore’s-Law driven deflation is the norm, and venture capital is gnawing at the gate to get in?

    Indians love gold because they know their leaders are power-crazed, thieving buffoons. You have the causality upside down.

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    blogospheroid Reply:

    The tech sector deflation is occurring in the overall environment of increasing nominal income. Intel, MS, Google, any company you can name have had increasing revenues, not reducing revenues. When there is a hard money constraint, then only the best of the firms would be able to even maintain the same salaries , leave alone lavish bonuses. There would be widespread discontent because the bottom half (perhaps more) gets pay cuts every year.

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    John Reply:

    I don’t think venture capital is trying to beat Moore’s Law’s deflationary pressures by investing in attempts at tech solutions to increase quantity produced to make up for revenue decline from Moore’s Law induced price decline.

    Apple has been successful selling hardware not by tech innovations that dramatically increased quantity produced but by propping up high prices by its monopoly on the Apple brand.

    Peter Thiel, one of the most prominent venture capitalists, says that “competition is for losers” and that investors should look for monopolies:

    http://www.wsj.com/articles/peter-thiel-competition-is-for-losers-1410535536

    The sine qua non of monopoly is price being propped up by restricting quantity, which is the opposite of a deflationary scenario.

    [Reply]

    Posted on January 14th, 2015 at 11:01 am Reply | Quote
  • Kgaard Says:

    The big issue is going to be what happens to monetary policy when humans defect to the virtual world, causing their real-world footprint to fall by, say 20% across the board. When all five senses are accessible via virtual reality, why get on a plane and go to Tahiti for a vacation? Why leave the house at all?

    The effect could be similar to what happened in the Middle Ages when 1/3rd the population died in plagues over very condensed time frames. In that period, prices for real estate and gold fell because the same quantity of real estate and gold were still available — but spread over 1/3rd fewer people. In the Great Virtual Flight, gold and real estate might keep their value (since humans will still need a place to live and central banks will be trying to keep nominal prices stable). BUT … all kinds of other things would fall in value.

    [Reply]

    Posted on January 14th, 2015 at 3:43 pm Reply | Quote
  • John Says:

    See Bernard Lietaer’s presentation on how demurrage on currencies – effectively a negative interest rate – promotes longer-term investment and economic projects, while deflationary higher rates promote shorter-term investment:

    https://www.youtube.com/watch?v=5Zoud9tFEmw&feature=player_detailpage#t=450

    [Reply]

    John Reply:

    Start watching at 7:30.

    [Reply]

    admin Reply:

    Interesting. But why would anybody want anything to do with this currency (Terra) unless forced to at gunpoint? The scheme sounds like yet another attempt to strong-arm people out of their enthusiasm for capitalistic dynamism. (Good luck with that.)

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    Aeroguy Reply:

    The part with the trees made no sense. He didn’t state the principle that you started with, which in the analogy would be how much the seed/soil/land would cost. If the seed/soil/land cost $50 for either tree and at the end of the 10 years you sold the pine for $100 and bought 2 more pines repeating the process for 100 years you would end up with 512 pines for a value of $51200 compared with a measly $1000. The numbers that he got at the end, I have no idea what entity would pay that out or how it would be made real other than from avoiding being raped by compound interest. Demurrage how diligent savers can experience the pain of credit card debt too.

    He’s trying to incentivize low time preference (a worthy goal), but interest rates are a reflection of the cost of time preference. Getting paid today is better than getting paid the same amount 2 weeks from now (because time is money and you can put that money to work, which means time preference is never 0 or negative). The value of how much better it is to be paid now rather than later is reflected in the interest rate (in a free market unmanipulated by central bankers).

    A negative interest rate first of all is only possible in a cashless society where all money is held and tracked by banks so they can implement the negative interest rate since no one in their right mind would willing give their money to a bank so they can charge you interest as if you were in debt. In this nightmare world no one would want to have money and would immediately exchange it in favor of something that could hold value, like the terra (carbon subsidies lmao) the guy was talking about earlier.

    At least you can’t nominally see the stealth tax of inflation, demurrage makes it painfully obvious, a good idea if your plan is to incite a socialist revolution.

    [Reply]

    Posted on January 15th, 2015 at 12:42 am Reply | Quote
  • Exfernal Says:

    Well, consider average money demand per capita. How would it change over time and why.

    [Reply]

    Posted on January 18th, 2015 at 1:19 pm Reply | Quote

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