Anyone willing to bet on a devaluation of the dollar when all the debt bubbles burst?

[Kinser79]

(06-01-2016, 07:42 AM)Mikebert Wrote: [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.

Your example is absurd. The general definition of inflation is based on babyish economics. Prices themselves are a mechanism of supply and demand. If there is a vast supply of fiat currency so much so that one could price bread at 1000 dollars then what has caused that increase in price? The supply of the currency in such profusion that the prices had to rise as a consequence of the depreciation of the currency.

Using your infantile definition of inflation it is inflation when prices rise due to supply shortages, even if the supply of money in the economy en toto remains unchanged.

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[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.

Ultimately most goods that people buy are goods that can be deferred. Food, water, shelter are all immediate needs, most other goods and services can be deferred except perhaps health care in emergency situations. A color TeeVee is not a demand that needs to be satisfied immediately.

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[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?

Okay there is a lot to respond to, and your terrible coding doesn't help one bit. Seriously you need to learn to use BB code. (Note, all the color codes and font codes apparently aren't working.)

In the short term yes a deflationary economy would impose a depression. Usually one of short duration if historical examples are used. Will people put off buying expensive drugs...yes. Is that necessarily a bad thing? No. The reason that pharmaceuticals are so expensive is two fold. First governmental manipulation of the price through governmental programs, and second government grants of monopolies on those drugs. Also if we include the costs of advertising drugs--something only two countries do, the US and NZ--we find that a great deal of that expense evaporates once advertising for drugs is prohibited and governmental monopolies are reduced. After all how expensive is ibuprofen these days?

Restaurant meals would likely be reduced for a time, but eventually they will come back. Indeed in some situations, they will never really go away. While historically restaurants were rare on ye olde farmstead, they were really common in cities because many flats were constructed without facility to store or prepare food. In most of America's major cities this remains the case. Furthermore, a lack of culinary training more generally has resulted that some restaurants will remain open even with deflationary pressures.

As for your example of living off savings. This assumes that your savings are in a commodity backed currency. I'm willing to guess that your savings is all on paper. If we were to impose historical definition of the Dollar in terms of silver or even gold for that matter, it would take 10 of the old dollars to equal 1 of the new dollar. And that assumes that the state is going to allow you to exchange your paper for gold or silver. Federal Reserve Notes were never convertible and it is conceivable that you'd lose all your savings as it becomes worthless.

After all how many southerners lost their money cause they hoarded confederate bank notes?

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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.

Deflating the currency would have a depressonary effect until equilibrium is achieved. The fact of the matter is that being a burger assembler at McDonald's only provides so much value. It matters little if that value is determined to be 15 paper dollars or 1.25 dollars in silver per hour. The fact is that even if wages fall, prices also fall, and over the course of time the value of the currency itself increases in purchasing power.

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[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.

I don't buy your source. The fact that it comes from the Federal Reserve itself makes it suspect. They have a poor track record of predicting the inflation rate and they supposedly control the currency. I trust them even less on return of capital. But still even if we assume that they are correct, a 5% return/year is erroded by a 2%/year inflation rate.

Quote: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.

There is zero risk on retrieving the face value of said bonds but they are not without risk. As I pointed out there is no such thing as a zero risk investment. In the case with a government bond (and I'm going to assume we're talking about Federal Bonds because States can't just print money--and thank the gods for that) we're assuming that inflation of the paper currency won't erode the value of that investment.

Let us suppose for example I buy a $50 bond today at the local post office (I'm actually unsure if the Post Office still does this because I quite simply don't trust the government with my money). It costs me 25 dollars today and matures in 50 years and will pay out 50 dollars at maturity. Realistically there is no risk. Now let us suppose that we only have a 2% inflation rate (and inflation rates vary widely) for those 50 years. I get a 50 dollar bill for that bond on the day it matures but I can still only buy 25 dollars worth of stuff in real terms (assuming 2016 paper dollars). Now let us assume that in 2066, we've had a couple LBJ figures who tried to have a warfare/welfare state with both guns and butter running full force and end up with 1970s style stagflation for a couple decades. Say 4% or greater per year. Then when I cash out the bond I still get 50 dollars but I may only be able to buy 10 dollars worth of goods in 2016 terms.

Those who buy bonds are betting that the rate of inflation will not be so great as to result in a major loss of value of the bonds--something that fiat currencies have a terrible track record with.

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[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. 

I may have been confused as to when the GBP went onto the gold standard. I do know that the development of the Pound necessitated that for the vast majority of its history it was on the silver standard (240 silver pennies equalling a pound--the Tower Pound I believe but I'd have to double check). That being said, most other currencies were on the gold standard following the conquest of South America. Gold drove silver out of the market.

Quote: 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.

Of course, supply of consumer goods were curtailed because the government was busy buying guns. Generally speaking during wars there is less butter because people are making guns instead.

Quote:Convertibility was suspended in 1797 and did not come back until 1821. 

And during that time the UK was almost constantly at war. Do I need to drag out the Hornblower series here? Even so, once convertibility was re-established the pound was re-defined, in terms of gold as Britannica points out

Quote: 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. 

So then you can see that commodity currencies always return to their equilibrium point. I fail to see how that presents a problem. If anything that stability in purchasing power would improve investment decisions.

I'm not going to address your models because they will likely change next week. I simply can't be arsed to keep up with whatever you pull from your rectum. That being said, my approach to money is heavily Austrian, and I've come to that conclusion because I've based my investment strategies around their economic approach and have succeeded.

That being said, personally I think that should we allow a market place in various currencies by repealing legal tender laws we'd see that in time, currency would come to be defined in terms of silver. It is plentiful enough to serve as coinage, has limited jewelry value, and even more limited industrial value in comparison to gold.

What I do find telling is that the Russians, Indians and Chinese are converting their USD into gold as soon as they get their hands on them.