05-28-2016, 08:05 AM
Ragnarok Wrote:No! Deflation is defined by the decrease in money + credit relative to the supply of goods + services. Geeze, no wonder why the Fed is so messed up.Just because you assert this does not make it so.
Quote:On, deflation. Interesting. If the US wasn't such a debt besotted place, then deflation wouldn't be such an issue. Rags would love deflation because that means he could buy more stuff over time since his dollars would fetch more stuff as time passed.And you have a sufficient supply of dollars that you have no need to generate more? In a deflationary world the prices of every are continuously falling. Why buy today, when tomorrow it will be cheaper. So unless you have enough dollars for the rest of your life right now, you are going to need to get more. How are you going to persuade others to part with theirs?
People take on business business risk in order to earn a return on their capital. The long term return on capital is about 5%. The long term return on zero-risk securities has been about 1%. The difference is the risk premium, the extra return businessmen need over the long run in order to be willing to engage in business. Therefore the most deflation the current system could withstand would be about 1%, which would imply a zero risk return of 1% for money in a safe. But at today's world growth rates a deflationary economy such as would come from a specie-based money would would feature about 2% long-term deflation rates. Thus businessmen would demand a higher return, which requires restricting investment to only the more profitable, slowing down growth. The system would go through a series of depressions and expansions in between before things ever settled (if they ever did). I was assume the system eventually stabilizes it would return to the 5% return on capital, but with only 1% deflation, resulting from GDP growth about 1% slower than we have seen over the last 25 years, which itself is 1% lower than the quarter-century before.
I simply cannot see nuclear-armed developing nations like China or Russia willing to stay in such a straight jacket. They would have an overwhelming incentive to set up their own trading bloc anchored around one of their own fiat currencies (probably the yuan) and enjoy faster growth, allowing them to more rapidly surpass the Western countries. We went through this before in the 18th century. Britain embraced their own fiat currency, while France, because of the unpleasantness in 1720, continued to hug gold. France was eclipsed by Britain. Although only a fourth the size, Britain was able to outspend France in the Napoleonic wars. France eventually threw in the towel and got on board about a century after Great Britain did.