06-01-2016, 07:42 AM
[Kinser] Mike, it isn't an assertion. It is a definition of what deflation is.
[Mike] Definitions are assertions that are generally agreed upon. You may define a common feline pet as a dog, but most people will continue to define it as a cat. Austrians choose to define inflation in terms of money supply, everyone else defines it in terms of prices.
[Kinser]I would argue that there are two different types of demands. Demands that can wait, and demands that cannot wait.
[Mike]Yes, but far fewer goods fall into the second category than you might think.
[Kinser] In a deflationary economy where your cash grows in value around 1 or 2% just by hanging under one's mattress it makes the accumulation of capital--particularly by those of fewer means--much easier.
[Mike]Impose a deflationary economy with 1.5% deflation. People stop buying things they can put off buying, which includes expensive drugs, restaurant meals and lots of other things and so we both lose our jobs as do lots and lots of other people too. So we fall back on our savings. Fortunately we do not have to face the risk of losing them in investments, we can just sit on it and watch it increase in value. So I don’t look for a job and just pull out the same income we have been living on (gross income less savings) and look for a job when it runs out. It will eventually run out, in 37 years, when both my wife and I will almost certainly be dead. So I guess I won’t look for a job. About 1.3% of US households have sufficient savings that they would never run out money. But they probably weren’t working for a living before anyways. I would point out that these folks do the bulk of the investing, and if they can maintain their family’s standard of living forever without taking on the risk of investment, why invest?
Remember deflation doesn’t just mean prices go down, workers’ incomes go down too—and faster. A deflationary economy is depressionary because of the fact that most goods fall into the first of your two categories.
[Mike] The long term return on capital is about 5%.
[Kinser]That is a very large assumption you have there.
[Mike]Not an assumption, a fact. If you want to get picky 4.8% from 1951-2000.
The figures I used were all real rates, after inflation is stripped out. I should have made that more clear. Government bonds are zero risk because the government simply creates the money needed to redeem them. You can always get the face value of the bond at maturity.
[Kinser]The GBP was throughout the 18th and 19th centuries backed by gold.
[Mike]Britain went on the gold standard in 1821. http://www.britannica.com/topic/gold-standard.
A silver basis for money was in use before. But there was significant inflation during the 18th century wars. Price inflation was very high for the Napoleonic wars. Convertibility was suspended in 1797 and did not come back until 1821. In the US the nation would go “off gold” during wartime and back on afterward. The war-time inflation was offset by peacetime deflation. I have modeled this very nicely by treating cumulative federal deficits as a kind of money. Basically I regress the price index against money/GDP to get a price model and then plot Price/Model to show how price deviated from where is “should” be from a purely monetary standpoint. The deviations are caused by changes in money velocity. The cycle you obtain lays onto the classical Kondratieff cycle during the gold standard era, and the cycles continue into the fiat era.
This method provides a way to “remove” the effect of fiat currency to get a detrended price, what I call ”reduced price” in the article. During the gold standard era, there is no fiat currency effect to remove and the reduced price and the raw price show the same cycles. During the fiat currency era the reduced price continues to show the same K-cycle. This is the tool I used to show that economically 1929=2008.
My approach to money is kind of “Austrianish” because they also use broader definitions of money, but I do not think they use anything quite like what I am doing. I would think not, since my system must be double-counting in some places but since I am simply using it to detrend, not make quantitative inflation predictions, that doesn’t matter too much.
[Mike] Definitions are assertions that are generally agreed upon. You may define a common feline pet as a dog, but most people will continue to define it as a cat. Austrians choose to define inflation in terms of money supply, everyone else defines it in terms of prices.
[Kinser]I would argue that there are two different types of demands. Demands that can wait, and demands that cannot wait.
[Mike]Yes, but far fewer goods fall into the second category than you might think.
[Kinser] In a deflationary economy where your cash grows in value around 1 or 2% just by hanging under one's mattress it makes the accumulation of capital--particularly by those of fewer means--much easier.
[Mike]Impose a deflationary economy with 1.5% deflation. People stop buying things they can put off buying, which includes expensive drugs, restaurant meals and lots of other things and so we both lose our jobs as do lots and lots of other people too. So we fall back on our savings. Fortunately we do not have to face the risk of losing them in investments, we can just sit on it and watch it increase in value. So I don’t look for a job and just pull out the same income we have been living on (gross income less savings) and look for a job when it runs out. It will eventually run out, in 37 years, when both my wife and I will almost certainly be dead. So I guess I won’t look for a job. About 1.3% of US households have sufficient savings that they would never run out money. But they probably weren’t working for a living before anyways. I would point out that these folks do the bulk of the investing, and if they can maintain their family’s standard of living forever without taking on the risk of investment, why invest?
Remember deflation doesn’t just mean prices go down, workers’ incomes go down too—and faster. A deflationary economy is depressionary because of the fact that most goods fall into the first of your two categories.
[Mike] The long term return on capital is about 5%.
[Kinser]That is a very large assumption you have there.
[Mike]Not an assumption, a fact. If you want to get picky 4.8% from 1951-2000.
The figures I used were all real rates, after inflation is stripped out. I should have made that more clear. Government bonds are zero risk because the government simply creates the money needed to redeem them. You can always get the face value of the bond at maturity.
[Kinser]The GBP was throughout the 18th and 19th centuries backed by gold.
[Mike]Britain went on the gold standard in 1821. http://www.britannica.com/topic/gold-standard.
A silver basis for money was in use before. But there was significant inflation during the 18th century wars. Price inflation was very high for the Napoleonic wars. Convertibility was suspended in 1797 and did not come back until 1821. In the US the nation would go “off gold” during wartime and back on afterward. The war-time inflation was offset by peacetime deflation. I have modeled this very nicely by treating cumulative federal deficits as a kind of money. Basically I regress the price index against money/GDP to get a price model and then plot Price/Model to show how price deviated from where is “should” be from a purely monetary standpoint. The deviations are caused by changes in money velocity. The cycle you obtain lays onto the classical Kondratieff cycle during the gold standard era, and the cycles continue into the fiat era.
This method provides a way to “remove” the effect of fiat currency to get a detrended price, what I call ”reduced price” in the article. During the gold standard era, there is no fiat currency effect to remove and the reduced price and the raw price show the same cycles. During the fiat currency era the reduced price continues to show the same K-cycle. This is the tool I used to show that economically 1929=2008.
My approach to money is kind of “Austrianish” because they also use broader definitions of money, but I do not think they use anything quite like what I am doing. I would think not, since my system must be double-counting in some places but since I am simply using it to detrend, not make quantitative inflation predictions, that doesn’t matter too much.