Friday, January 27, 2006

 

D for Deflation

What's wrong with deflation?

We all know inflation is bad and combine that with most people's lack of understanding on the subject (and who to blame). But what about deflation? It seems like it is something that wouldn't be all that bad. I know there are issues for lenders and borrowers, businesses and potentially employees, but is it worse than inflation?

Comments:
Hey Chris, this is Qotsaisaw. Thanks for your comments. I have read some of the people you mentioned but not all. I have read Daniel Quinn but not that book. While studying previous thinkers is important, I would say my own experience and thinking has influence me the most. I do more closely relate to the anarcho-primitivist school of anarchy, but don't believe that it is for everyone; hence the right for a community to be self-determinate. I also don't agree at all with anarcho-capitalists or free market anarchists, as I believe capitalism as we have known it historically up to this day is inherently corrupt and relies on its corruptness to function definitively. Could go more into that. I do believe a 'free market' would work, but my definition of the words free and market would not be a traditional meaning at all. I once studied libertarianism and was enthused about it for a while, but read someone who I forget, but I began to see to many holes in the platform to be viable. It seems like a radical form of Adam Smith's idea of the invisible hand of free market self-regulation, which doesn't address the exploitation of labor and the reliance on hierarchy and control through power and ordered liberties, not true autonomous entities. That just perpetuates classism and probably a dozen more -isms. That's my two cents for now. I'm curious as to your thoughts as well. Thanks,
Qotsaisaw
 
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Let's see if I can make a connection between that last comment and deflation, which is what the post was about.

It's a loose connection, but there is something to be learned on this topic too by applying free markets: they should also work in the case of money.

Why should government control the price of money? We seem to realize the allocative efficiency of the price mechanism in other commodities, but not in money. Why the heck not?
 
Ah, Travis, you have struck upon something here. Should the government be the issuer of money? If it is, and let us even assume that its money is backed by precious metals, that would mean that the government had a whole lot of precious metals sitting around doing nothing. What a liability! But governments used to (and still) do just exactly that! That's because they measured wealth in terms of accumulated precious metals instead of standard of living of consumers.

So... Who should issue currency? Private frims could mint their own money, developing reputations for the reliable weight and alloy of their currency. If they did this, then the currency would be valued at its value. (Duh) I mean, if the currency were in terms of precious metals, then the value of gold would be the opportunity cost of that gold being used in jewlery or production. Or whatever value people were placing on that gold subjectively (if that were higher).
Now, as to deflation...
Deflation might happen naturally if no more money were printed. This is actually unnatural though. Suppose we were using precious metals for currency. Deflation would only occur if those precious metals ceased to be mined. The only thing that would cause mining to cease would be if people no longer wanted the precious metals. Not gonna happen. Naturally, the money supply is expanding. Deflation vs. Inflation would be a measure of the increase in money supply compared with demand for money.
But we haven't considered banking. Deflation in regards to banking would signal a tightening of the money supply, an increase in interest rates. Lending would be more profitable and borrowing more dear. If this slows the amount of capital investment it slows the economy, and standard of living improves at a slower pace.
So, the arguement goes for a slowly expanding money supply. Which I agree with because it is natural. But I don't agree with the government acting as the agent of this growth because they are not determining the rate by any natural means, but rather changing rates according to political expediency (read:pressure from special interests). Private firms (banks) could fulfil the role more efficiently and with less political consequence.
Nathan
Nathan
 
Nathan,

Please read this: http://www.mises.org/money.asp

It's Rothbard's "What has government done to our money?"

I think it's worthwhile, especially if you want to get a feel for "Austrian" ideas on money.

I disagree with your assertion that a precious metal standard would not lead to deflation. There is no reason to believe that the quantity of the precious metal would increase faster than, or even keep up with, increases in productivity.

I'm still shaky on this topic too, but I hope you can see my point. I'll try to find empirical support if you like.
 
Thanks for the link Travis, I did say "Deflation vs. Inflation would be a measure of the increase in money supply compared with (increased) demand for money" and I guess that's where productivity as you said comes in. The greater the productivity the greater the demand for money as a medium of exchange of those produced goods.
I'm not sure this requires an increase in money supply though.
The stronger agruement against deflation is the one related to banking. But that leaves the government out of the equation, and we're agreed upon that.
Nathan
 
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