What exactly is the "Austrian" analysis of reflation? Or, why shouldn't money be kept in a state of equilibrium - even if that means increasing the money supply?
Eduard - Gabriel Munteanu: I could say that reflation is what happened to the dollar a few days ago. The Fed couldn't keep the dollar that low compared to EUR.
I could say that reflation is what happened to the dollar a few days ago. The Fed couldn't keep the dollar that low compared to EUR.
I agree that reflation is not always desired, but that doesn't mean that it is never desired. Does it?
Anton Sugar: What if there were a real shock to the economy?
What if there were a real shock to the economy?
That question is pretty vague. What do you have in mind?
Whats your definition of deflation?
Anton Sugar:What do you mean by "full reserve banking" exactly? To some extent full reserve banking is the mode of finance we see today. Ever hear of a safety deposit box?
To a very, very, minor extent. Most banks only keep 10% reserves for their irregular deposits. They essentially create money out of thin air.
I agree that central banking is bad and I agree even more that the mode bailsout the rich at the expense of the poor. However, that does not really answer the question. What happens with the demand for money increases - thus causing deflation? If the increase in the supply of money out of equilibrium is bad, then so must be the decrease of the supply of money, no?
What happens with the demand for money increases - thus causing deflation? If the increase in the supply of money out of equilibrium is bad, then so must be the decrease of the supply of money, no?
If you agree with free and full reserve banking, what's the dealio? People will choose the type of currency they want. For the most part, it is my prediction that people will choose some kind of hard currency like gold or silver or copper or a mixture (e.g. gold for big purchases, silver for medium purchases, and copper for small purchases). That said, if the "price of money" would increase (deflation), mines would try to expand the money supply and therefore return the monetary supply back to equilibrium. On the other hand, if the price of money would decrease (inflation), mines would operate less and therefore attempt to return the monetary supply back to equilibrium. This would be the most stable and efficient system, operating like a normal market that always "tends" towards equilibrium but never fully reaches it.
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krazy kaju: If you agree with free and full reserve banking, what's the dealio? People will choose the type of currency they want. For the most part, it is my prediction that people will choose some kind of hard currency like gold or silver or copper or a mixture (e.g. gold for big purchases, silver for medium purchases, and copper for small purchases). That said, if the "price of money" would increase (deflation), mines would try to expand the money supply and therefore return the monetary supply back to equilibrium. On the other hand, if the price of money would decrease (inflation), mines would operate less and therefore attempt to return the monetary supply back to equilibrium. This would be the most stable and efficient system, operating like a normal market that always "tends" towards equilibrium but never fully reaches it.
Ah! This is what I meant by inflation and deflation being negligible and decentralized (well, I don't know if "negligible" is the right word but it wouldn't be as extreme as it is today). Nicely put kaju.
Thanks Wren! I think the best way to describe is to put it in a "profit and loss" context (instead of a supply and demand context). When we have price inflation, the profits of mines will decrease, less entrepreneurs will be interested in entering the mining business and less stockholders will be interested in holding precious metal stock because dividends will be smaller. As a result, mines will be less capitalized and therefore less able to get money to expand production. This will slow monetary growth. On the other hand, when deflation hits, mines will make a lot of money and consequently be able to afford more capital. Likewise, stock prices will rise as dividends go up and thus mines will be able to acquire more loans to expand production. Also, more entrepreneurs will see that mining is profitable and try to enter the market - thereby expanding supply. And what happens if we begin to run out of whatever commodity is used as money? Well, it's rational to suppose banks and people would prefer some other commodity that is as stable as the one they used previously used to be.
This process will continue in much the same manner as every other market - whether it is for toys, cars, machines, homes, or whatever else. There will always be a "tendency toward equilibrium." The result will be a much better monetary system than we have today.
Hey Kaju, I know this is off-topic but what would you say to the people who believe that if we're on a full gold standard and if we were some how attacked we wouldn't be able to raise enough capital to retaliate?
In what sense? Are they implying that we would need a central bank to print money to fight a war?
Wren: That question is pretty vague. What do you have in mind?
Have you ever heard of Real Business Cycle theory?
If you want, you can use Joseph Schumpeter's example of creative destruction.
krazy kaju: To a very, very, minor extent. Most banks only keep 10% reserves for their irregular deposits. They essentially create money out of thin air.
No, no, no. It isn't about "the reserves" it's about the nature of the banks. A deposit is seen as an investment on the part of the depositor. The depositor knows he cannot withdraw all his money at the same time and in return he earns an interest rate for lending this money.
If he wanted the bank to be incapable of actually getting to his money, he could always file for a safety deposit box.
Why do you think people consider interest rates on their accounts when choosing banks?
krazy kaju: If you agree with free and full reserve banking, what's the dealio?
If you agree with free and full reserve banking, what's the dealio?
I don't really "agree" with full reserve banking. I think it's an inefficient idea and one that should really be put away. Then again it really is a misnomer. Most people know they won't be able to go to the bank and just get their money. They know their are limitations to how much they can withdraw and they accept that contradict in return for interest payments on their cash.
krazy kaju: People will choose the type of currency they want. For the most part, it is my prediction that people will choose some kind of hard currency like gold or silver or copper or a mixture (e.g. gold for big purchases, silver for medium purchases, and copper for small purchases). That said, if the "price of money" would increase (deflation), mines would try to expand the money supply and therefore return the monetary supply back to equilibrium. On the other hand, if the price of money would decrease (inflation), mines would operate less and therefore attempt to return the monetary supply back to equilibrium. This would be the most stable and efficient system, operating like a normal market that always "tends" towards equilibrium but never fully reaches it.
People will choose the type of currency they want. For the most part, it is my prediction that people will choose some kind of hard currency like gold or silver or copper or a mixture (e.g. gold for big purchases, silver for medium purchases, and copper for small purchases). That said, if the "price of money" would increase (deflation), mines would try to expand the money supply and therefore return the monetary supply back to equilibrium. On the other hand, if the price of money would decrease (inflation), mines would operate less and therefore attempt to return the monetary supply back to equilibrium. This would be the most stable and efficient system, operating like a normal market that always "tends" towards equilibrium but never fully reaches it.
Mines operating with an increase or a decrease in production is a fine theory. I'm not sure how efficient it would be and how quickly they would be able to expand the supply of money, but it does answer the question originally posted.
Lee: Whats your definition of deflation?
A disequilibrium in money caused by an increase in the demand for money.
Coincidentally, this monograph on deflation appears in print next week.
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Anton Sugar:No, no, no. It isn't about "the reserves" it's about the nature of the banks. A deposit is seen as an investment on the part of the depositor. The depositor knows he cannot withdraw all his money at the same time and in return he earns an interest rate for lending this money. If he wanted the bank to be incapable of actually getting to his money, he could always file for a safety deposit box. Why do you think people consider interest rates on their accounts when choosing banks?
The problem is that you don't deposit your money for a set period of time in a normal demand deposit - you can take it out at any moment. So if I put $100 in a bank and that bank loans out $90, I in effect only have $10 (though the bank says I have the full $100). If I decide to take out $40 out of the bank in a week, that banks needs to take money out of someone else's reserves to be able to pay me.
Often times, however, this "new" money exists as electronic money in the form of checks. So the bank can get away with keeping fractional reserves for a while.
However, a certificate of deposit is different. It means that you lock your money away in the bank for a given amount of time. During that time, the bank can use that money to loan it out and you can't take it out.
Just that you can take out all of your money. The problem being that when many people at once do it you have a contraction because banks begin to fail.
A free market is unlikely to have sudden changes in the demand for currency.
krazy kaju: The problem is that you don't deposit your money for a set period of time in a normal demand deposit - you can take it out at any moment. So if I put $100 in a bank and that bank loans out $90, I in effect only have $10 (though the bank says I have the full $100). If I decide to take out $40 out of the bank in a week, that banks needs to take money out of someone else's reserves to be able to pay me.
To be clear, the required minimum for bank reserves isn't always what banks have in reserve. Some times, banks want to sure up on their ability to pay out, and keep more in reserve.
In any case, the bank does, in some way, tell you that you do possess $100, but in another way it is implied that you know that your $100 cannot be taken out of the bank all at once for the reasons that the bank will lend some of it out and pay you an interest rate for the right to do so - while binding you from instant withdrawal.
Now, I'm not a banker so I don't know all the facts, but a bank could take money out of another person's account to pay you back $40 (if this is the maximum that you may withdraw in one day) but that, in a way, is the contract written by the other person - allowing them to take out their money to do something like pay another. As long as that person is earning interest on their funds, however, I don't see the problem - or at least I think it is one much smaller than what many here believe it to be.
krazy kaju: However, a certificate of deposit is different. It means that you lock your money away in the bank for a given amount of time. During that time, the bank can use that money to loan it out and you can't take it out.
In which the interest rate may be higher.
With a deposit, however, you are still allowed to withdraw money without the type of penalty you would receive with a CD so the system is more fluid.
Again, if you don't want your currency to be used for investment by the bank then why not just get a safety deposit box? You'll have to actually pay for that privilege, but that's your choice.
krazy kaju: Just that you can take out all of your money. The problem being that when many people at once do it you have a contraction because banks begin to fail.
I was thinking more along the lines of cashing in a check. Perhaps I'm wrong about withdrawing from a savings account. I don't ever use cash, so I'm not sure...
krazy kaju: A free market is unlikely to have sudden changes in the demand for currency.
What if a natural disaster strikes then? You don't think people will want to have more cash on hand?
Anton Sugar: Have you ever heard of Real Business Cycle theory?
I have but a "real shock" is still pretty vague. I see you mentioned a natural disaster and I was going to jokingly say, "what like an asteroid hitting the earth?" earlier but thought it would seem insulting so I decided not to. My understanding is that techonological andvances can also be considered "shocks," as well as probably other things so I wanted to know what you had in mind, given that I already thought you were alluding the RBCT. Hell, even natural disasters are vague, since there are a variety of them. Anyway, the fundamental problem here is still what happens when the demand for money exceeds its supply and my answer is it depends on the circumstance/context. If we're talking about non-corrective reasons for deflation, I do believe the money supply should be increased, but only with a regime of "hard" money and non-centralized banking structure. I think there should/would be checks on both inflation and deflation as krazy kaju expounded on, so monetary equilibrium in that case is not much of a problem IMO. It's in our current unfree market situation were these issues become sloppy.
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