The Real Reason the Government Wants To Tax Soda

Tim Cavanaugh | September 1, 2009

The good news of deflation is starting to get around. At the Wall Street Journal's MarketBeat blog, Paul Vigna gets the shakes over the Bush-Obama Administration's failure to destroy the dollar:

I think we're closer to deflation, both here and abroad, than most people realize or care to acknowledge.

In fact, by some measures, we are experiencing it. But nobody wants to talk about that, because deflation is about as big a threat to the economy as there is, and to talk about it, to give it currency, is to court disaster. To the ruling class, perception is reality.

The Fed remains determined not to let deflation take hold, because it knows how dangerous it is, and apparently will spend any amount to prevent it. And they should, because there is nothing that will wreck the recovery and the economy like deflation. Ask anybody who lived through the Great Depression.

Consider this: what do you think the picture would look like had the government not intervened with trillions worth of various stimulants? They did, and despite that injection, the economy is still too close to deflation for our comfort.

Thanks for showing up, Paul!

Vigna's amazement that the trillions of "dollars" worth of stimulant hasn't been enough to stave off deflation is quaint, as is his assumption that we would now be experiencing horrendous deflation if not for the burial of all that Monopoly money. It's true that there's an apparent disconnect between the weakness of the dollar in international currency markets and its strength at your local Safeway. That's because the international markets are geared to respond to the sudden appearance of vast oceans of U.S. government debt. But since, among other things, this debt immediately gets bought by the Federal Reserve, no new money is actually printed.

If, on the other hand, you are participating in the dollar-denominated economy -- if you are spending actual dollars and nickels and quarters and all those other trinkets that supposedly don't matter in this post-scarcity, long-now age of abundance -- you are not willing to pay more than a dollar and a half for a gallon of milk just because Ben Bernanke's friends are getting a lot of free virtual money. Even Americans aren't that stupid.

There's a glaring error on page 2 of Das Kapital, in which the father of modern mass murder tries to refute the classical economic idea of relative value in favor of intrinsic value:

A given commodity, e.g., a quarter of wheat is exchanged for x blacking, y silk, or z gold, &c. -- in short, for other commodities in the most different proportions. Instead of one exchange-value, the wheat has, therefore, a great many. But since x blacking, y silk, or z gold &c., each represent the exchange-value of one quarter of wheat, x blacking, y silk, z gold, &c., must, as exchange-values, be replaceable by each other, or equal to each other.

The fault here is that obviously these other commodities are not of equal value to everybody. A pre-industrial economy has no need of "blacking," a silk exporter will value silk differently than a silk importer, and a society of meat eaters may have no interest in wheat at all. (Goldbugs make the same error; intrinsic value is a lie as bitter as love.)

It's perfectly reasonable that the dollar might hold different values for different people. If you're trading vast quantities of the bullshit electronic "dollars" being pumped into the economy, you're going to treat the buck the way Bernanke and Geithner want you to treat it -- as a nearly worthless marker of value. But if you actually work for a living, you know that the greenback has gotten a lot harder to earn lately, and you are less willing to spend it.

If creating inflation were as easy as the Fed would like, or if avoiding deflation were as important as Vigna thnks it is, then why does a two-liter bottle of Coca-Cola cost today exactly what it cost during the Carter Administration? For as long as I've been drinking Coke, a two-liter bottle has cost about 99 cents at the low end to $1.50 at the high end. If you pay more than that you're getting ripped off.

That's without inflation adjustment. They've tried changing the shape. They've tried changing the formula. They've dumped Mentos into it. And yet if you go to the supermarket right now, you will almost definitely find that they are offering two liters of the Real Thing for $1.99 -- with a two-for-one purchase offer. If thirty years ago you had taken $2,000, put $1,000 in one pillowcase and used the rest to buy 1,000 bottles of Coke, the Coke would now be worth the same amount as the money  (though it might be a little flat). And it has never gone to zero! Let's say that again: The price of Coke has never gone to zero.

It's a good bet nobody planned for Coke to be the one commodity that tracks the dollar precisely -- in fact, it does that because nobody planned it. It costs what the market will bear -- a concept familiar to everybody who's visited a yard sale, but alien to the government, the Federal Reserve, and apparently the Wall Street Journal.

Comments

|9.1.09 @ 10:19PM|#

A guy I knew in an old libertarian talk group from the seventies pointed out that in the nineteen twenties an ounce of gold would buy a good men's suit. And today, in 2009, with gold trading around $950, an ounce of gold will buy a very good men's suit (the kind you'd buy at Lord and Taylor, not at a made-to-measure store).
I'm not a gold bug, but that's an interesting fact, nonetheless.

Hugh Akston|9.1.09 @ 10:33PM|#

I've never been clear why deflation is a bad thing. If inflation is the phenomenon that it takes more money to purchase the same goods, wouldn't its opposite be a good?

The Angry Optimist|9.1.09 @ 10:37PM|#

Hugh - it's because his Nobelness Paul Krugman is terrified of OMG TEH LIQUIDITY TRAP! RUN!

In all seriousness, Hugh, keep in mind that it means it is cheaper to buy goods AND labor/services, meaning a certain cut in most individual salaries. But, really, the reason that the chicken littles at the Fed are so terrified is because of deflationary spiral - if you cut my salary, I buy less goods, so the guy at the Wal-Mart gets his salary cut, so he buys less goods...

On and on - but it's not as common (nor as much of a disaster) as some people make it out to be.

Hugh Akston|9.1.09 @ 10:44PM|#

That makes a certain flavor of sense TAO. BUt it seems like the answer to that would be the same as it is to people who want to raise the minimum wage every few years: while it would affect some people on the margins in the short term, real buying power won't be affected one bit in the long term. Economy-wide deflation would lower the sea level and all boats would sink together.

Now that I think about it, one might be able to glean a message like that out of the insane ranting at the top of this thread.

tarran|9.1.09 @ 10:48PM|#

That's because the international markets are geared to respond to the sudden appearance of vast oceans of U.S. government debt. But since, among other things, this debt immediately gets bought by the Federal Reserve, no new money is actually printed.

I hope that this is a type-o, because whenever the Federal Reserve buys U.S. government debt, new money is printed. Those newly printed dollars are deposited in the accounts of the Federal Government, and then paid to the construction workers standing around the America Recovery Act work-sites.

The only reason why prices aren't going up is that it takes a while for these newly printed dollars to spread out enough that people are able to bid up prices in an effort to get the stuff they want.

And yes, this whole "deflation is bad" argument strikes me as weird. Yes, deflation can be bad; it represents the removal of money from the economy, and if you remove any good in demand from the economy, people are left poorer (imagine if someone started destroying salt, for example).

However, from a macro-economic standpoint, a small amount of deflation is not bad: it encourages people to hold of consumption in favor of saving, and these savings fuel capital investments, which essentially drive increases in wealth. In the end, though, at some point, deflation will, like inflation, send false signals about the current rate of interest in an economy to entrepeneurs. While inflation send a false signal to entrepeneurs that there is a larger demand for high order capital goods than actually is the case, deflation should send the opposite signal, that there is a larger demand for lower order goods than is actually the case. I don't know how this would play out in a boom bust cycle: people making lower order goods are made aware much more quickly when they are making a malinvestment - you realize you're making too many tubes of toothpaste within a month, whereas it may take you several years between starting to build an office building and realizing that no-one wants it.

There have been periods of deflation, for example England under Elizabeth I. Usually (with the exception of the Great Depression) I believe that they are *not* associated with severe economic dislocation. On the other hand, much of the problems of the Great Depression can be explained by desperate attempts to preserve the price/production structure of the 1920's as amply documented by Murray Rothbard.

Tim Cavanaugh|9.1.09 @ 10:56PM|#

Economy-wide deflation would lower the sea level and all boats would sink together.

So the natural process does a better job of dispensing fairness than the human process?

Then why interfere with nature?

Rimfax|9.1.09 @ 10:57PM|#

Economic deflation IS a bad thing. That means the people in your area are producing less value than they were last year.

Currency deflation is a completely different thing. Currency is just a fucking tool. Slow deflation should be no more dangerous than slow inflation. It is only rapid changes that make the tool less useful.

Stupid English language and its stupid lack of context safety.

Tim Cavanaugh|9.1.09 @ 11:02PM|#

represents the removal of money from the economy, and if you remove any good in demand from the economy, people are left poorer (imagine if someone started destroying salt, for example).

Except that in this case we're not talking about destroying salt. We're talking about slightly increasing salt's tradeable (sp?) value. Nobody except t'Onion is destroying money.

Tim Cavanaugh|9.1.09 @ 11:04PM|#

Excuse me: nobody except t'Onion and de Fed is destroying money.

The Angry Optimist|9.1.09 @ 11:06PM|#

Rimfax - forgive me for saying so, but I am confused as to the difference you're trying to draw re: economic / currency deflation. Given that currency is a store of value...

|9.1.09 @ 11:13PM|#

I've never been clear why deflation is a bad thing. If inflation is the phenomenon that it takes more money to purchase the same goods, wouldn't its opposite be a good?

It's problematic because deflation is uneven. Prices and wages decrease, but as the currency grows stronger, the real debt burden increases, triggering a wave of defaults, disrupting credit markets, discouraging future investment, etc.

There's a glaring error on page 2 of Das Kapital, in which the father of modern mass murder tries to refute the classical economic idea of relative value in favor of intrinsic value...

I absolutely loathe this statement. As others have said, implying that Marx is directly responsible for Mao and Stalin is like saying that Jesus Christ is responsible for the Crusades. Well, OK, maybe some of the more militant atheists around here are fine with that too. How about this: it's like saying that Aristotle is responsible for all of the idiots in the Catholic Church in the Middle Ages who took his work to be absolute truth instead of scientific and philosophical speculation, which contributed to the suppression of the works of Galileo and Copernicus. It's silly on its face, but beyond that, I was under the impression that as libertarians we believed in personal responsibility and individual autonomy.

Even when he was wrong (and he wasn't always wrong), Karl Marx was an interesting thinker. Even in his wrongness he contributed to the advancement of human knowledge, insofar as he made a lot of cunning arguments which required heavy-duty thinking by great minds to refute. Since I am a fan of interesting thinkers, I really think it's low to describe the man in that fashion.

Elemenope|9.1.09 @ 11:17PM|#

I absolutely loathe this statement. As others have said, implying that Marx is directly responsible for Mao and Stalin is like saying that Jesus Christ is responsible for the Crusades.

This. And I got beat to it by mere minutes.

The Angry Optimist|9.1.09 @ 11:17PM|#

Emperor Norton:

"From each according to his ability, to each according to his needs!"

Enough said.

|9.1.09 @ 11:17PM|#

Inflation sucks, but deflation swallows. Why buy anything today (not consumption but invest or store for future use) if that future use is not guaranteed.

Deferred pensions, welcome your grand dilemma: deflation

tarran|9.1.09 @ 11:20PM|#

Except that in this case we're not talking about destroying salt. We're talking about slightly increasing salt's tradeable (sp?) value. Nobody except t'Onion is destroying money.

Actually no, this is wrong.

Yes, a U.S. dollar is, unlike gold, pretty much worthless for consumption (they don't burn very well, they make shitty rags for cleaning up spills etc). Thus, unlike destroying salt, or cigarettes, the destruction of U.S. dollars, particularly is stored electronically in bank ledgers, does not represent the loss of any wealth.

However, removal of U.S. dollars from the economy does not alter the value of salt or any other good. It may alter the price, but not how much people value salt in terms of hours or labor, or eggs, or butter, or minutes in the arms of Eccentrica Gallumbits.

Falling prices, which people confuse with deflation, are rather the result of people's defferment of consumption coming in line with the natural rate of saving in the economy.

The removal of money from the economic system, on the other hand, will lead to falling prices and the dislocations which I described in my earlier post.

BTW, I notice you haven't corrected the paragraph I took to be a type-o. Are you sure you want to assert that the Federal Government buying government bonds is not inflationary?

|9.1.09 @ 11:25PM|#

If creating inflation were as easy as the Fed would like, or if avoiding deflation were as important as Vigna thnks it is, then why does a two-liter bottle of Coca-Cola cost today exactly what it cost during the Carter Administration? For as long as I've been drinking Coke, a two-liter bottle has cost about 99 cents at the low end to $1.50 at the high end. If you pay more than that you're getting ripped off.

I'm sorry to interrupt your very good Mickey Rooney impersonation, but you need to keep in mind that Prices go up and down for many reasons unrelated to inflation or deflation. the production and distribution methods of Coke have become far more efficient over the time span in question. The price of most things should go down over time, all other things being equal.

Not to mention, of course, that you're cherry-picking commodities for comparison; gasoline, bread, and Big Macs have all steadily risen in price over the past 30 years.

A guy I knew in an old libertarian talk group from the seventies pointed out that in the nineteen twenties an ounce of gold would buy a good men's suit. And today, in 2009, with gold trading around $950, an ounce of gold will buy a very good men's suit (the kind you'd buy at Lord and Taylor, not at a made-to-measure store).

So you're saying we should have a suit standard? The implicit assumption of the goldbuggish argument you're repeating is that the value of a fine suit is constant (though the last time I heard it the guy was saying 1 oz of gold bought a fine toga in ancient Rome).

The Angry Optimist|9.1.09 @ 11:26PM|#

Ironic, too, that you guys should use Jesus as a defense to Marxism, given that Platonic Idealism/Christian Spirit/Body dualism (with the exaltation of the so-called "soul" above the
"mere" body) and Marxism are the three driving forces behind altruism and statism today.

|9.1.09 @ 11:27PM|#

If taxes are inevitable, why not have a soda tax? Or at least ban soft drinks and snack foods from the food stamp program? I can think of a lot of excise taxes I'd prefer -- why not a 75% surtax on top of the regular income tax rates for professional lobbyists, cranked up to 95% for former legislators and their administrative staffs?

|9.1.09 @ 11:28PM|#

Goldbugs make the same error; intrinsic value is a lie as bitter as love.

You want a store of value? Diversify!

|9.1.09 @ 11:28PM|#

But nobody wants to talk about that, because deflation is about as big a threat to the economy as there is, and to talk about it, to give it currency, is to court disaster.

If you give enough currency to deflation, it turns into inflation, right?

The Libertarian Guy|9.1.09 @ 11:29PM|#

And here I thought the real reason for a soda tax was to control how we live via government-intervening behavior modification...

|9.1.09 @ 11:30PM|#

Platonic Idealism/Christian Spirit/Body dualism (with the exaltation of the so-called "soul" above the "mere" body) and Marxism are the three driving forces

One of us doesn't know how to cunt...

The Angry Optimist|9.1.09 @ 11:30PM|#

The price of most things should go down over time, all other things being equal.

Not to mention, of course, that you're cherry-picking commodities for comparison; gasoline, bread, and Big Macs have all steadily risen in price over the past 30 years.

Let's talk about that for a second. First of all, to the Coke example, if a two liter of Coke was 99c through the Carter Administration, and the minimum wage was 2.30 (1977) - 3.35 (1981), that means that you had to work approximately 20-30 minutes during that time to "earn" a bottle of Coke. The minimum wage is now 7.25, meaning you have to work what, 8 minutes to earn a bottle of Coke?

So I don't think your assertion that prices "should" fall is correct - the amount of labor required to acquire a good has fallen. Prices are irrelevant.

Hugh Akston|9.1.09 @ 11:30PM|#

joez law strikes again.

The Angry Optimist|9.1.09 @ 11:31PM|#

Tulpa:

1. Platonic Idealism
2. Christian Mind/Body Dualism
3. Marxism

:P Sorry, once I get rolling, I write like I talk.

|9.1.09 @ 11:31PM|#

"So you're saying we should have a suit standard? "

I vote for those parachute pants MC Hammer wore back in the day...index year began 1990

The Angry Optimist|9.1.09 @ 11:32PM|#

Of course, as a good obedient little Objectivist, I am required by Cult Rites to mention Immanuel Kant, unreadable little fucker that he is.

|9.1.09 @ 11:38PM|#

5% deflation is no more damaging than 5% inflation. The problem is that the moneyed interests benefit (in the short term) from inflation but get hurt (in the short term) under deflation. Which happens to be the opposite for the poor consumer out at the end of the structure of production. Guess which group the gub'ment pays more attention to? In the long run, however, both monetary inflation and deflation are harmful.

Bruces\' Philosophers Song al|9.1.09 @ 11:38PM|#

Immanuel Kant was a real pissant
Who was very rarely stable.

Heidegger, Heidegger was a boozy beggar
Who could think you under the table.

David Hume could out-consume
Schopenhauer and Hegel

And Wittgenstein was a beery swine
Who was just as schloshed as Schlegel.

There's nothing Nietzsche couldn't teach ya
'Bout the raising of the wrist.
Socrates, himself, was permanently pissed.

John Stuart Mill, of his own free will,
On half a pint of shandy was particularly ill.

Plato, they say, could stick it away--
Half a crate of whisky every day.

Aristotle, Aristotle was a bugger for the bottle.
Hobbes was fond of his dram,

And René Descartes was a drunken fart.
'I drink, therefore I am.'

Yes, Socrates, himself, is particularly missed,
A lovely little thinker,
But a bugger when he's pissed.

The Angry Optimist|9.1.09 @ 11:39PM|#

Brandybuck, I didn't know a conservative such as yourself would sound like Williams Jennings Bryan when push comes to shove.

jk|9.1.09 @ 11:40PM|#

Consider this: what do you think the picture would look like had the government not intervened with trillions worth of various stimulants?

I would have bought a house at its fair market value with no loan.

|9.1.09 @ 11:47PM|#

I absolutely loathe this statement. As others have said, implying that Marx is directly responsible for Mao and Stalin is like saying that Jesus Christ is responsible for the Crusades.

He didn't say that. Fathers are not directly responsible for their children's actions. Calling George Washington the "father of our country" does not mean he's directly responsible for the invasion of Iraq, for instance.

Even when he was wrong (and he wasn't always wrong), Karl Marx was an interesting thinker. Even in his wrongness he contributed to the advancement of human knowledge, insofar as he made a lot of cunning arguments which required heavy-duty thinking by great minds to refute.

Yeah, he wasn't always wrong. I'm pretty sure he believed the sky was blue. The ideas he is known for, especially the dialectic and the prediction of global worker revolution, have been shown to be utterly mistaken, and indeed there was already ample evidence during his own time that his theories were wrong, but he chose to ignore them.

He wrote authoritatively about the dynamics of labor vs. capital, but NEVER ... VISITED ... A ... FACTORY. Not in his entire life. The man deserves every bit of contempt that can be poured on his grave.

As for his resistance to refutation, that's pretty easy to do when your theories are extremely vague and barely falsifiable. Had his followers not been among the more thuggish in the totalitarian ideology nursery that was 19th century Europe, he would have been forgotten along with all the other utopian theorists of that era. He wouldn't merit a movie of the week; heck, he wouldn't even be a t-shirt!

squarooticus|9.1.09 @ 11:48PM|#

Some Goldbugs make the same error

FIFY.

Any "gold bug" (or gold investor without an inherent bias towards gold) with an understanding of the subjective theory of value will understand that nothing has an intrinsic value, because the value of something always depends on demand.

|9.1.09 @ 11:49PM|#

One point on deflation. Lets assume that because of deflation, a salary is reduced 10%. On the surface, that isn't too bad because the cost of goods might be expected to be reduced by the same 10%. Overall, its just a numbers game but wait... My mortgage is a fixed commitment for a fixed dollar amount for a fixed period of time. Deflation would likely cause my home to be worth 10% less, my salary to be 10% less but my debt on the house would remain right where it was before deflation. THAT is certainly an issue for many people.

Joe M|9.1.09 @ 11:54PM|#

Deflation is NOT bad, at all. Look at the computer industry, for a good example of why. Twenty years ago, a PC with 1% of the processing speed of today's average, 0.1% of the memory, and 0% of the hard disk storage, cost about ten times what said average would cost today.

The price of the Coke is constant precisely because inflationary pressure has canceled the normal deflationary process. If minimum wage was still in the $2.50 area, a Coke would cost 1/3 of what it did then.

|9.1.09 @ 11:54PM|#

So I don't think your assertion that prices "should" fall is correct - the amount of labor required to acquire a good has fallen. Prices are irrelevant.

Ah, I see we are not aware of the meaning of "all other things being equal". Wages have gone up due to inflation (and productivity gains, to be fair, but inflation is a more significant factor).

In any case, that's not what Matt is talking about. He's saying that a 2 liter bottle of Coke has the same value now that a 2 liter bottle of Coke had in 1979. That's simply not true, as you recognize.

|9.1.09 @ 11:55PM|#

Not Matt, Tim.

The Angry Optimist|9.1.09 @ 11:56PM|#

Tulpa - sorry - missed the ceterus paribus qualifier.

I always hated it anyway!

The Angry Optimist|9.2.09 @ 12:03AM|#

Wages have gone up due to inflation (and productivity gains, to be fair, but inflation is a more significant factor).

Now that, however, I do not agree with. If inflation were the more significant factor, I think that the prices of goods and the price of labor would track along the same course, but they have not. If you graphed say, bread, from roughly 1945 - 2009, you would see it increase from 10 cents to say, 1.20 a loaf (at least, that's what I pay for a loaf of standard wheat bread). On the other hand, labor was 40 cents an hour in 1940 and is now 7.25. You can see that the increase in labor is much higher than the increase in goods, so I think that the productivity rate is a much more significant factor than inflation, given how divergent these two prices over time are.

hammeredHead|9.2.09 @ 12:04AM|#

I am surprised that no one has mentioned the idea of "sticky wages" as the reason for deflationary problems.

I am not sure how much value I give to the idea, especially in this day and age of high turnover. Personally, I view the high debt to income ratios for most consumers as the danger of deflation. Assuming that prices fall at the same rate as wages, cash-flow after debt will fall at a much faster rate than prices.

|9.2.09 @ 12:09AM|#

TAO, you're cherry-picking commodities just as Tim was. Bread has had basically constant demand while production and distribution of bread has become much more efficient, but you're treating it as some constant benchmark of value. One could just as easily make the opposite argument using gasoline as an example.

|9.2.09 @ 12:11AM|#

One point on deflation. Lets assume that because of deflation, a salary is reduced 10%. On the surface, that isn't too bad because the cost of goods might be expected to be reduced by the same 10%. Overall, its just a numbers game but wait... My mortgage is a fixed commitment for a fixed dollar amount for a fixed period of time. Deflation would likely cause my home to be worth 10% less, my salary to be 10% less but my debt on the house would remain right where it was before deflation. THAT is certainly an issue for many people.

Quite right, and everybody else seems to be missing that. It's not just an issue on a personal level, but on a systemic level. There are a lot of people in this country right now whose mortgages are underwater, which is a major factor in all of the bank failures we've seen over the past year. Under a deflationary regime, this number would only increase. That means more bank failures, and moreover, those banks that survived would be severely weakened and in no mood to lend. This would actually contract the money supply further, leading to MORE defaults as the real debt burden grows ever greater. In short, it sucks real real bad.

The Angry Optimist|9.2.09 @ 12:13AM|#

Tulpa - I am fairly sure that you could select a "basket of goods" and achieve the same result. I am fairly confident that productivity outstrips inflation as the primary reason for the rise in "real" wages (regardless of the "price" of labor).

|9.2.09 @ 12:14AM|#

My mortgage is a fixed commitment for a fixed dollar amount for a fixed period of time. Deflation would likely cause my home to be worth 10% less, my salary to be 10% less but my debt on the house would remain right where it was before deflation. THAT is certainly an issue for many people.

Sorry, bub. I didn't tell you to roll the dice on your house's value and income remaining high enough to justify your mortgage. And inflation would seriously fuck with any plans of mine to save enough money to make a responsible home purchase someday in the future.

Marx&Engels|9.2.09 @ 12:15AM|#

What is the secular basis of Judaism? Practical need, self-interest. What is the worldly religion of the Jew? Huckstering. What is his worldly God? Money. Very well then! Emancipation from huckstering and money, consequently from practical, real Jewry, would be the self-emancipation of our time.... We recognize in Jewry, therefore, a general present-time-oriented anti-social element, an element which through historical development -- to which in this harmful respect the Jews have zealously contributed -- has been brought to its present high level, at which it must necessarily dissolve itself. In the final analysis, the emancipation of the Jews is the emancipation of mankind from Jewry

This is our calling, that we shall become the templars of this Grail, gird the sword round our loins for its sake and stake our lives joyfully in the last, holy war which will be followed by the thousand-year reign of freedom.

Then there will be a struggle, an "unrelenting life-and-death struggle" against those Slavs who betray the revolution; an annihilating fight and most determined terrorism -- not in the interests of Germany, but in the interests of the revolution!

Emperor Norton, we admire how you stab your fellow bourgeoisie in the back with a dialectical defense denying us any responsibility for those who go forth in our name. We invite you to the vanguard of the Revolution!

By the way, where is my lunch? Did Menger eat it again!

The Angry Optimist|9.2.09 @ 12:16AM|#

And Tulpa and Jeff have managed to illustrate Brandybuck's point quite nicely: monied interests want inflation, because they do not have as much of their wealth in currency. The poor want deflation, because the value of their money rises, and most of their wealth is in currency.

I am tickled.

|9.2.09 @ 12:18AM|#

Or at least ban soft drinks and snack foods from the food stamp program? I can think of a lot of excise taxes I'd prefer -- why not a 75% surtax on top of the regular income tax rates for professional lobbyists, cranked up to 95% for former legislators and their administrative staffs?



ahh, a man after my own vindictive heart. too bad we have to temper those notions w/ reality.

hmm|9.2.09 @ 12:18AM|#

You made a similar mistake as Marx, although I believe Marx went on to explain or correct some of his statements about a barter economy compared to a monetary economy later in the same work. (eg. stored value (or wealth) for future use, double coincidence of wants, transaction costs of barter, and lack of relative comparison which is the issue you are pointing out)

You, however, ignored the costs of a barter transaction in claiming your coke is the same value as money stored. The minute you purchased the illiquid, or less liquid item you lessened its value relative to money below the purchase price by adding at a minimum the three things mentioned as examples, and the ability to counter the time value of money with money and not coke.(you did say pillow case to set the game equal, but you can not invest coke, which lowers its value) I can take my 1,000 to the titty bar and get trashed and look at boobs. If you know of any titty bars that take Coke Cola in exchange for lap dances and booze can you please share the location of this establishment?

Gold really doesn't fall in the barter economy mold. It retains many of the same properties of money like being generally accepted, storing value, low transaction costs. All of which are counter to the problems of a barter economy. The intrinsic value is that it is naturally scarce and not scarce by design like fiat money. Conflating gold with the inherent problems of a barter economy is a mistake. The bigger issue with gold is the your point which is a lack of relative comparison, although this issue has traditionally not been a large hurdle for gold to overcome and has in the past been easily dealt with. There's no reason to think that in the future it would be as easily dealt with.

Also if you have an investment strategy for Coke I would be interested. Other than drink lots to stay awake all night trading on foreign markets.

|9.2.09 @ 12:22AM|#

There are a lot of people in this country right now whose mortgages are underwater, which is a major factor in all of the bank failures we've seen over the past year.

Most loans (car loans being a prime example) go "underwater" immediately after they are made. Why is this such a terrible thing when we're talking about a loan for a house rather than a loan for a car?

Oh yeah -- because modern homeowners want to eat their cake and have it too; they want to enjoy the use and privileges of owning a house and use it as an ATM when they want money for something else. Seriously, homeowners, you need to factor in the use you've gotten out of the house when figuring out if you're "underwater" on your loan.

The Angry Optimist|9.2.09 @ 12:24AM|#

go Tulpa go! I cannot stand homeowner mentality sometimes. Folks, a home is a place to live; it is not primarily an investment opportunity.

alan|9.2.09 @ 12:26AM|#

go Tulpa go! I cannot stand homeowner mentality sometimes. Folks, a home is a place to live; it is not primarily an investment opportunity.

Except when you are a land lord ;)

|9.2.09 @ 12:26AM|#

Yes, a U.S. dollar is, unlike gold, pretty much worthless for consumption (they don't burn very well, they make shitty rags for cleaning up spills etc). Thus, unlike destroying salt, or cigarettes, the destruction of U.S. dollars, particularly is stored electronically in bank ledgers, does not represent the loss of any wealth.

However, removal of U.S. dollars from the economy does not alter the value of salt or any other good. It may alter the price, but not how much people value salt in terms of hours or labor, or eggs, or butter, or minutes in the arms of Eccentrica Gallumbits.


er...

destroying currency does alter the value of existing currency.

true it has minimal effect on the value of salt, but destroying salt does. (the free currency that is a product of demand combined w/ production is relevant. more dollars mean more people are in the market for commodities, obviously this is a slower signal but it is one of the tenants of free market growth...)

Joe M|9.2.09 @ 12:48AM|#

I read something interesting about how to determine how to pay for something. You should finance big purchases, and especially things that give value over time, such as houses and cars, and the length of the loan should scale to the size of the purchase. You should pay cash for something like lunch, since you use it once and it's gone. The problem is that people have basically been financing their lunches for 30 year terms.

|9.2.09 @ 12:48AM|#

I've never been clear why deflation is a bad thing. If inflation is the phenomenon that it takes more money to purchase the same goods, wouldn't its opposite be a good?

Whether it is bad or not depends on the person involved. To federal politicians, deflation is a bad thing because inflation acts as a disguised tax, and they hate having taxes taken away from them.

Whereas, the computer I'm typing this on is the result of incredible deflationary pressures, as the power and RAM and everything else improves at an exponential rate while the price keeps dropping. This is a good thing -- for me.

But, all the money the feds are pumping into the economy will eventually cause horrendous inflation, as soon as the economy improves (though the Democrats running the country seem to be doing their level best to stifle any recovery). You can't double the money supply without consequences.

Tim Cavanaugh|9.2.09 @ 12:52AM|#

If you know of any titty bars that take Coke Cola in exchange for lap dances and booze can you please share the location of this establishment?

Just give it time. People are going to be trading healthy babies for cartons of cigarettes before this thing's over.

|9.2.09 @ 12:59AM|#

Whether it is bad or not depends on the person involved. To federal politicians, deflation is a bad thing because inflation acts as a disguised tax, and they hate having taxes taken away from them.



or more precisely because inflation is an "invisible" tax. increasing prices and wages increase tax revenue as percentages remain static. true, government also has less spending power dollar for dollar, but the effect is slower to come than the increase in revenue... it's all a scam.


btw Tim C. - excellent article. need a baby?

Ebeneezer Scrooge|9.2.09 @ 1:00AM|#

Rimfax,

Economic deflation IS a bad thing......Currency deflation is a completely different thing.

Agreed. But in today's environment how exactly do we distinguish the one from the other?

Ebeneezer Scrooge|9.2.09 @ 1:01AM|#

Emporer Norton,

As others have said, implying that Marx is directly responsible for Mao and Stalin is like saying that Jesus Christ is responsible for the Crusades.

Marx wasn't exactly a peace advocate.


Even when he was wrong (and he wasn't always wrong),

He also wasn't right very often.


Karl Marx was an interesting thinker.

Speak for yourself. There are few things I loathe more than this man's thinking.

|9.2.09 @ 1:16AM|#

And Tulpa and Jeff have managed to illustrate Brandybuck's point quite nicely: monied interests want inflation, because they do not have as much of their wealth in currency. The poor want deflation, because the value of their money rises, and most of their wealth is in currency.

You mentioned WJB. If you are correct, why was the standard bearer for the Populist movement so strongly against the gold standard? Again, the answer is debt. The midwestern farmers who supported the Populists were often heavily indebted. Today, the poor are much more heavily indebted than the rich, and deflation makes it much harder to keep their heads above the water. To those who would say, "gee, should have been more frugal, tough luck," there's not much to say, because as a practical matter it is inconceivable that such a viewpoint will ever be politically relevant, so there's no point in arguing. Suffice it to say that I disagree strongly with that viewpoint.

Tim Cavanaugh|9.2.09 @ 1:18AM|#

BTW, I notice you haven't corrected the paragraph I took to be a type-o. Are you sure you want to assert that the Federal Government buying government bonds is not inflationary?

Did I say that? I recall saying "But since, among other things, this debt immediately gets bought by the Federal Reserve, no new money is actually printed."

New money is created under the aegis of the United States Department of the Treasury. Notes are printed by the Bureau of Engraving and Printing. Coins are pressed by the United States Mint.

When the Treasury issues debt and the Fed buys it, it is not printing new money. That's the whole point. If they were actually creating printouts of all these virtual dollars we'd realize right away how badly they're fucking with our money and the ensuing revolution would be as gory and glorious as the one Karl Marx calls for earlier in this thread.

I didn't say the issuing of all that debt is not inflationary. I said they're not creating new cash.

BakedPenguin|9.2.09 @ 1:31AM|#

Immanuel Kant, unreadable little fucker that he is...

Kant's Steven King compared to Heidigger.

The Libertarian Guy|9.2.09 @ 1:43AM|#

"Karl Marx was an interesting thinker."

Yes, he was. Pity he caused so much death and desolation.

inflation will eat your young|9.2.09 @ 2:40AM|#

"In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold"
Alan Greenspan

rey|9.2.09 @ 2:49AM|#

GOLD, GUNS and IDEAS move the world.

the govt is losing grip on ideas as the web replaces mass media with its gatekeepers.... they still control the gold/money and have most of the guns (specially outside the US)...

If you love liberty, a govt. monopoly on money is the last thing you want, closely followed by attacks on the 1st and 2nd ammendments.

smartass sob|9.2.09 @ 3:43AM|#

I think it would help this discussion a great deal if you guys would define your terms. By inflation do you mean an increase in the general price level in terms of dollars, or do you mean an expansion of the money and/or credit supply? Or do you mean something else entirely? And the same applies to deflation: are you speaking of a decrease in the general price level, or a decrease in the amount of money and/or credit?

For at least the last forty years or so the main stream media and politicians have used the first definition of inflation, an increase in prices, and their definition of deflation as a decrease in the general price level. Prior to that it was fashionable to use the old Keynesian definition of "too many dollars chasing too few goods," but that leaves out any mention as to why there are too many dollars; I think it does so dishonestly and purposefully. Occasionally, if one looks in older dictionaries and other books, one will find inflation defined as an expansion of the money supply - but not often, and that definition is seldom used by anyone except libertarians and free market advocates.

The distinction is important, because the prices of goods and services can rise for any number of reasons, including, but certainly not limited to, an increase in the money supply. Likewise with deflation, a drop in the price level can be caused by various things such as increased productivity - or by a contraction of the supply of money and/or credit. We all know - or should know - who controls the money and credit supply.

andy|9.2.09 @ 4:17AM|#

For at least the last forty years or so the main stream media and politicians have used the first definition of inflation, an increase in prices

..in fact they have been trying to reduce its scope even more to just CPI, that way they can leave out increase in price of assets, like houses or commodities... this can reach absurd "higher oil prices driving inflation" rationales... I'm always reminded of Friedman's phrase about wet pavements and rain....

andy|9.2.09 @ 4:23AM|#

In my view, the only correct way to do it if we want economics to retain any semblance of scientific rigour, is to use the original definition and include the necessary disclaimer depending on your audience. (if they are professional economists you can be particularly insulting by comparing them to journalists and calling them out on shoddy definitions)

andy|9.2.09 @ 4:31AM|#

and lets not forget that MONEY IS FUNGIBLE therefore any measure of a single price, or even a basket of prices tells you little about the overall price level and is as useless as compass to surgeon.
Whereas money creation (both by the CB and by Fractional Reserve Banks) can actually be measured pretty accurately...

affenkopf|9.2.09 @ 4:41AM|#

Ironic, too, that you guys should use Jesus as a defense to Marxism, given that Platonic Idealism/Christian Spirit/Body dualism (with the exaltation of the so-called "soul" above the
"mere" body) and Marxism are the three driving forces behind altruism and statism toda

Actually the main driving force behind altruism is human nature as shaped through evolution, but Objectivists all seem to be creationists in that regard.

|9.2.09 @ 6:46AM|#

the father of modern mass murder

That's a very well-considered epithet for that lously little misanthrope.

-jcr

|9.2.09 @ 6:49AM|#

I've never been clear why deflation is a bad thing.

Falling prices are not a bad thing, and in fact we should expect them as the normal result of improvements in production methods. If the Fed ever did deliver the "price stability" that they claim to be working for, then they're taking a rake.

-jcr

|9.2.09 @ 6:54AM|#

The intrinsic value is that it is naturally scarce and not scarce by design like fiat money.

Two points: first, fiat money isn't scarce by design. The whole purpose of fiat money is to inflate it, so it's abundant by design.

Second, besides its scarcity gold has value from its utility for many applications, from jewelry to electronics. A gold frying pan, for example, would be a marvelous thing because of gold's very high thermal conductivity and chemical inertness.

-jcr

|9.2.09 @ 6:58AM|#

implying that Marx is directly responsible for Mao and Stalin is like saying that Jesus Christ is responsible for the Crusades.

Given that EVERY attempt to implement the motherfucker's ideas have resulted in mass murder, I kind of have to conclude that there's something wrong with the ideas in the first place.

There are plenty of examples of Christian communities that didn't go on murderous rampages. Show me such an example among the communists.

-jcr

Tricky Prickears|9.2.09 @ 7:36AM|#

Folks, a home is a place to live; it is not primarily an investment opportunity.

A home is something you build on a piece of property (land). The primary investment is in the land. Location, location, location, along with assorted zoning variances, determines the value of the land infinitely more than whatever piece of shit is built on it. Structures can be removed, land is forever (usually). You may or may not increase the value of the land by what you build on it. A piece of polluted land with a 10,000 Sq ft McMansion built on it is worth far less than a piece of prime land with a shotgun shack.

The Angry Optimist|9.2.09 @ 8:06AM|#

Actually the main driving force behind altruism is human nature as shaped through evolution, but Objectivists all seem to be creationists in that regard.

Even if that's superficially true for unevolved barbarians, you're not remotely close to finding what drives the mostly rational West and capitalistic nations in the East.

Fluffy|9.2.09 @ 8:14AM|#

The real reason the ruling class hates deflation is because deflation has the potential to change the composition of the ruling class.

When you have a general decline in prices, that includes the prices of assets held as "wealth".

But since the holders of many of those assets are leveraged, many of those holders end up upside down, and are no longer rich people.

Any process that can turn rich people into poor people will be fought tooth and nail by the ruling class.

A widespread deflation has the potential to wipe out leveraged members of the ruling class, and allow their places to be taken by savers who buy deflated assets at rock-bottom prices. This sort of class turnover is unacceptable, so inflation must be somehow created.

Have you seen all the bitching done by people who bought residential real estate at the top of the bubble, and are now underwater and wiped out? Apply that bitching to the holders of other assets, and you've got the attitude of the ruling class towards asset price deflation.

Fluffy|9.2.09 @ 8:17AM|#

Oh, and I think I should point out that back when the wealth of the ruling class was tied up in land, the ruling class made sure to construct a legal and financial system to make sure that they could leverage their land but never lose it or have their ownership of it become impaired.

That's really all that's happening here, in another form. Rather than pass laws making it nearly impossible to foreclose on the leverged assets owned by the ruling class, as was previously done, the rulers just make sure that we have permanent inflation, so that although individual members of the class will occasionally fail and be wiped out, the class as a whole is protected from having their leveraged assets decline in value to a point where their net worth is wiped out.

Fluffy|9.2.09 @ 8:24AM|#

The intrinsic value is that it is naturally scarce and not scarce by design like fiat money.

That's not an "intrinsic" value.

The statement "The exchange value of gold is less subject to manipulation than the exchange value of fiat currency because you can't just print more gold" is not the same statement as "Gold has instrinsic value".

It's still an exchange value, it's just an exchange value less subject to corruption by the state.

If I have a gallon of water, the gold in your pocket will get less of it if we're in the Sahara desert than it will if we're at Niagara Falls. Gold therefore cannot be said to have an "intrinsic" value, because its value rises and falls based on the situation. In other words, it's an exchange value just like other exchange values.

F. W. Stirnkorb|9.2.09 @ 8:55AM|#

The Federal Reserve Bank can't allow deflation for one reason, and one reason alone. The huge debt burden the US Government carries would bankrupt the country.

|9.2.09 @ 8:59AM|#

As long as technology and productivity increase, there should always be a natural tendancy towards deflation. The more productive we are, the cheaper it is to produce things and the richer we are. Some of that of course is made up for by increasing the capabilities of what we buy, but not all of it. Pick any good, be it cars, computers, houses, furniture or anything else and they are made more efficiently and cheaper today than they were 40 years ago. The natural state of things in a stable advancing economy should be mild deflation.

tarran|9.2.09 @ 9:10AM|#

I didn't say the issuing of all that debt is not inflationary. I said they're not creating new cash.

No, you were arguing that the reason why prices weren't going up in grocery stores was because the Federal Reserve was purchasing U.S. Govt Bonds (instead of something else, presumably).

A lack of physical cash has nothing to do with it. Most people don't pay cash at the supermarket. They pay with check or debit card. Those that do mainly get the money out of the bank by withdrawing on their checking account balance.

And when the Federal Reserve purchases anything, be it pens, copier toner, or U.S. bonds, they write a check which, when deposited in the bank of whomever is receiving the check, leads to an increase in the total demand deposits in the banking system. And, people bid up prices in proportion to their access to these demand deposits.

I'm sorry, but the U.S. mint has not played a significant role in price increases in nearly a hundred years, and to argue that it is a lack of action on their part that explains current price levels is to argue that the lack of teeth on my dog's tail explains the lack of puncture wounds on my guests' arms.

|9.2.09 @ 9:26AM|#

I don't think that "goldbugs" argue that gold has an "instrinsic value" - only that it has been consistently valued throughout history and tends more than most things to maintain its value.

Charles|9.2.09 @ 9:29AM|#

Various communist and socialist and communitarian communities have come and gone peacefully. Same for Christian. The mistake you're making is confusing voluntary Marxist/Communist/Christian/whatever communities with governments that rule by force. It's the governments that have done these terrible things, not the ideas.

|9.2.09 @ 9:37AM|#

Re: the exchange above between "tarran" and Tim C.

Tarran is 100% correct. When the Fed buys government debt that this is the functional equivalent of printing money.

The simple fact is that every dollar of government debt (or for that matter of any asset) that is purchased by the Fed ends up as a new dollar in the seller's bank account. Money is basically defined as cash in circulation plus money in checking accounts. Sure very little of this new money ends up as new printed cash, but make no mistake, the Fed effectively prints money when it buys govt debt.

Why all this new money is not inflationary is something of a mystery to some. Clearly velocity has slowed dramatically during the recession as banks are holding massive amounts of excess reserves. It is an open question what happens when the recession ends and velocity rebounds, but the collective wisdom of the bond markets indicates little worry about inflation. (Personally I am worried.)

|9.2.09 @ 10:23AM|#

When the Treasury issues debt and the Fed buys it, it is not printing new money.

Well, no, but read strictly literally the point is trivial. Only a fraction of the dollars in circulation are actually printed on paper anyway.

I don't believe it makes any difference to the money supply whether the Fed buys debt or the Chinese do, in the short run. The government has more money to spend, and will spend it and put it into circulation, after it issues debt, regardless of who buys the debt. Its the functional equivalent of printing money regardless of who buys the debt.

We need domo's help with this, but I think the difference in having the Fed buy debt is that it buys the debt that nobody else will at that price. This allows the Treasury to issue notes with lower interest that the "actual" demand does not justify, making it easier to issue more debt and thus, print more virtual money.

This, of course, is market manipulation, which can postpone, but not prevent, the underlying trend of the market. When the correction in interest comes on T-bills, it will be that much more abrupt, destabilizing, and destructive of the value of outstanding T-bills.

Fluffy|9.2.09 @ 10:28AM|#

The mistake you're making is confusing voluntary Marxist/Communist/Christian/whatever communities with governments that rule by force.

A voluntary Marxist community isn't a Marxist community.

Marx advocates violent revolution to seize the means of production. That means that anyone who doesn't want to join the community voluntarily must be compelled by force.

Marx also states that consciousness is determined by the means of production. This implies that compelling men to participate in the classless society will, eventually, produce men whose consciousness accepts that society as normal. He is silent on what happens in the space between - the historical time when men with consciousness formed in bourgeois time must labor against that consciousness so that the "new men" may come into being - but there does not seem to be any alternative other than terror.

troper|9.2.09 @ 10:30AM|#

http://tvtropes.org/pmwiki/pmwiki.php/Main/RidiculousFutureInflation

for laughs!

The Angry Optimist|9.2.09 @ 10:40AM|#

It's the governments that have done these terrible things, not the ideas.

you're basically saying that ideas do not have consequences. To the contrary, ideas are the sole predictor of consequences. If your ideas match reality best, those ideas will produce good results.

Christianity, in the Western context, is responsible for much of our world's misery.

|9.2.09 @ 10:49AM|#

A gold frying pan, for example, would be a marvelous thing because of gold's very high thermal conductivity and chemical inertness.

I know what I want Santa to bring me for Christmas this year.

|9.2.09 @ 10:51AM|#

Christianity, in the Western context, is responsible for much of our world's misery.

Odd, then, that you can very roughly map the absence of misery (defined as poverty and oppression) in a country to the presence of Christianity in that country. I'm not saying correlation is causation, but I am pointing out that the lack of correlation negates causation.

|9.2.09 @ 10:57AM|#

gold has more intrinsic value in it than people do...

Russ 2000|9.2.09 @ 11:18AM|#

But, really, the reason that the chicken littles at the Fed are so terrified is because of deflationary spiral

But really, the reason the government is scared shitless about deflation is because it means they will have to deleverage. When you have less money, you can't buy as many votes.

hmm|9.2.09 @ 11:36AM|#

Two points: first, fiat money isn't scarce by design. The whole purpose of fiat money is to inflate it, so it's abundant by design.

Second, besides its scarcity gold has value from its utility for many applications, from jewelry to electronics. A gold frying pan, for example, would be a marvelous thing because of gold's very high thermal conductivity and chemical inertness.

Money has to be scarce, even if relative to a point in time, to be effective. Otherwise it has no value and becomes unaccepted. The amount of fiat money is regulated at a specific level and time, making it scarce at that time. I agree it is inflationary and more abundant than something that is absolutely scarce like gold. But the fact remains fiat money has to be set at a certain quantity available for it to work. Even if that quantity changes or increases relative to a point in time. Hence the reason hyperinflation is so bad.

I just listed money's most relevant relation to gold, it's intrinsic scarcity. Which is the point gold standard people make to counter your previous comment about inflationary characteristics of fiat money. I agree gold has intrinsic value for other applications, but it's intrinsic scarcity is what makes it more comparable to a monetary unit in a monetary economy than a bartered item in a barter economy. Other things like ease of use, storage, measure (oddly weight being absolute and money being relative, that's a weird dichotomy), and so on also contribute to it being more like a monetary unit. The same goes for a lot of precious metals.

*Gems on the other hand are a different story.

Russ 2000|9.2.09 @ 12:02PM|#

A lack of physical cash has nothing to do with it. Most people don't pay cash at the supermarket. They pay with check or debit card. Those that do mainly get the money out of the bank by withdrawing on their checking account balance.

Yes it does. Electronic cash is essentially "physical cash". If new cash is printed and it's all sitting in a bank vault, then it makes no difference. Likewise, if a bank's account at the Federal Reserve is suddenly 2% larger by the kindness of the Fed, it is essentially still sitting in the vault not doing anything.

The electronic money the Fed creates during these stimulus binges merely sits in the reserve accounts of banks. It's not permeating the rest of the economy. Essentially the fed is just doing what it was told - pretend the banks look less insolvent by making their reserve accounts look bigger.

You can have increasing prices with a shrinking money supply - when fewer people accept the currency you consider to be money (or more likely redeem it at less than face value) the price you pay denominated in your currency will increase. This is exactly how currency worked in the US prior to the creation of the Federal Reserve - not every $1 bank note was redeemed at $1.

You'd be able to get an ounce of gold (or a case of Coca Cola) for $20 in bank notes from Bank A, but it would take $60 in bank notes from Bank B because Bank B printed - and distributed - more banks notes than they had assets to cover. Bank B could then start destroying some of their banknotes as they come in to be redeemed, but their redemption value still wouldn't be as much as Bank A's notes. As the public loses trust in Bank B, one might need $80 in Bank B's notes even if Bank B destroyed a few as they were redeemed.

If Bank B had printed shitloads of currency and parked all of it in their vaults instead of distributing it, it wouldn't affect the redemption value of their outstanding notes at all.

Russ 2000|9.2.09 @ 12:17PM|#

The simple fact is that every dollar of government debt (or for that matter of any asset) that is purchased by the Fed ends up as a new dollar in the seller's bank account.

Yes, but the seller was the Treasury who merely gave the money to insolvent banks who merely keep it in their Reserve accounts to look less insolvent. Some suckers take this as a sign of health and increase their equity holdings in said banks and said banks CAN use this as a way to raise actual circulating money. It's not circulating anywhere else in the economy; at best it's propping up assets that have dropped in value by 80%.

To simplify, the Fed, treasury, and all the regulators are now just pretending that because of these new electronic funds the assets have only dropped in value by 50%. And this was only for select banks - to keep them on the sidelines while they shutter smaller ones in the same insolvent situation.

The debate here is really whether or not the pretending will stop and the government will once again consider those assets as having lost 80% of their value rather than 50%. Until we know that, the argument about whether the Fed created new cash or not is meaningless - it's not permeating the rest of the economy so it's basically not there.

Yet.

robc|9.2.09 @ 12:32PM|#

M0

The creation of new money has gone insane. If we use money supply to define inflation/defaltion, lets say M2, then we might be deflationary right now. But with that M0 increase, there is no way we arent facing a lot of inflation.

2 options:

1. hyperinflation
2. a 12-tuple dip recession because every time we start to recover and the velocity of money increases, the threat of hyper-inflation kills off the velocity and we drop back into recession. By about 2020 we should have sucked up all of that M0 excess.

Kompleat Idiot|9.2.09 @ 12:34PM|#

Coke costs what the market will bear? Maybe, but it's also heavily subsidized. Look on the ingredients list of a bottle or can for "high fructose corn syrup."

Russ 2000|9.2.09 @ 12:54PM|#

But with that M0 increase, there is no way we arent facing a lot of inflation.

And credit is dropping faster than M0 is rising.

Sean W. Malone|9.2.09 @ 1:09PM|#

I never understand why these topics are so baffling to some people.

The natural state of an economy with a currency that remains un-tampered with is gradual deflation - historically speaking, this means about 2-3% per year.

To people who freak out about dropping long-term "asset" (house) prices, I have a few words:

1. Is it more important to you that you make money on a house, or that the great bulk of humanity can afford to live at the same living standards as you now enjoy?
2. Right now, average housing prices are over 600% of the average annual salary. In 1950, housing prices were ~260% of the average salary.

With gradual deflation, prices going down across the board - a 30 year mortgage for a house would be (and used to be) absurd!

The problems most people dig up about a gradually deflating currency (again, I'm not talking about the sharp deflation caused by say, ripping trillions of dollars out from M2), are problems come as a result of the federal reserve having spent the last nearly 100 years debauching the US Dollar.

How about a world where you can afford to purchase a really decent house with a low-interest rate loan generated by actual real savings (which is encouraged by deflation), over a term of only 5-10 years??


The idea that inflation, even gradual inflation is anything but a way for governments to fund their various pet projects & wars without directly taxing people is nonsense.

I, Kahn O\'Clast|9.2.09 @ 1:15PM|#

Late to the thread so this may have been said:

"But since, among other things, this debt immediately gets bought by the Federal Reserve, no new money is actually printed. "

Actually, no, that's how money GETS printed. The issue is that the velocity of that money in the economy is effectively zero hence no apparent inflation --- Aside from asset prices, commodities, and the filling of holes in balance sheets. Eventually velocity will pick up and then WAM.

For those who are uncertain why deflation is bad, it was largely covered above: falling wages means falling consumption which means falling prices which means falling incomes and profits which means falling wages ... etc. And then you get a spiral.

This is bad enough in an economy with little debt, but given the levels of household, corporate and govt debts, deflation leads to default since the nominal value of the debt, by staying constant, rises in real terms as everyone's incomes fall through deflation. Personally, I like default and restructuring, but the mandarins prefer to deflate it away ...

Much as we did in the 70s to pay for the largesse of the great society and vietnam war etc.

mark|9.2.09 @ 1:27PM|#

I know I'm betting on commodities. Y'all can bet on bonds for all I care, just try not to lose your shirt. Keep an eye out for that black swan.

Sean W. Malone|9.2.09 @ 1:37PM|#

Falling wages DOESN'T mean falling consumption though! This is what annoys me about that ridiculousness:

In any situation where price of goods is changing, there essentially only two factors that can drive the change.

1. Monetary expansion/destruction: In this case, the Fed or whatever monetary authority prints or destroys currency thus making more or less money chase after the same amount of stuff, thereby raising or lowering the price.

2. Increases/Decreases in Production: Generally, the trend is increases in production overall as people innovate and come up with new, more efficient/better ways of producing the same stuff. (Incidentally, increases in production are primarily why we have not *felt* the debauching of the dollar over the last hundred years so severely)... Alternatively, due to some production inhibiting event - a war, or crippling regulations for example - production can go down. In that case, the currency is unchanged, but we have more or less stuff, so more or less currency buys the same goods. Etc.


Wage rates, however, lag behind changes in price - in either situation.

In 2009 America; we have experienced massive devaluation of the dollar - i.e. massive inflation over the last 100, especially the last 30-50 years. HOWEVER, we've also been able to keep production very high due to all the great technological innovations of the last several decades. Communications, engineering, mass-production, etc. + more and easier international trade for cheaper raw materials (and labor), has kept us from experiencing the full effect of inflation.

BUT... Salaries haven't kept up with it - as the housing example above should illustrate - so regardless of the quality of life improvements and the salvation of production, nominal cost of living has still gone up faster than wages.


The same would is/would be true, but in reverse, under a more natural (read: deflationary) system.

Wages still lag behind the decreases in price! As prices come down around you, you'll consume... more, not less. Alternatively, you might save more (thus providing more money for local, national & international investment). Eventually, your salary might come down - though that seems unlikely since your boss would have to convince you to take a pay cut... more likely, you'll just not get the "cost of living" adjustment raises every year - and in either case, with prices coming down for everything just as a result of a stable currency, wages may wind up being a higher percentage of overall costs, but other overhead costs come down, probably largely balancing it out...

You're getting more goods for less money...... Right NOW, we're getting less goods for more money!

The goal of any economic problem isn't how to distribute the largest amount of currency after all, but the largest amount of "stuff", like food, shelter & clothing. The current monetary system inhibits that entirely.

Sean W. Malone|9.2.09 @ 1:42PM|#

Is it better to have rising wages trying to catch up to rising prices, or lowering wages catching up to lowered prices?

Think about it carefully. :P

Man on the street|9.2.09 @ 1:45PM|#

1. Is it more important to you that you make money on a house, or that the great bulk of humanity can afford to live at the same living standards as you now enjoy?

My current living standards are only sustainable if I have an appreciating asset to use as collateral.

Sean W. Malone|9.2.09 @ 1:46PM|#

Even better question:

Is it better to have a system where government can fund any unpopular war, or social program without taxing the citizens directly through inflation, or is it better to have a system where any and all plans politicians have must fight for financial survival and they must convince the great majority of the people to agree to new taxes each and every time?

Sean W. Malone|9.2.09 @ 1:48PM|#

"My current living standards are only sustainable if I have an appreciating asset to use as collateral."

Then you should read some Robert Kiyosaki, quit thinking of a house as an "investment", learn to make your money when you buy and not count on wishful thinking and bad math carrying you through the next 15 years.

You might also consider not funding your life through debt.

Russ 2000|9.2.09 @ 1:54PM|#

Eventually velocity will pick up and then WAM.

They've been saying that in Japan for over 20 years.

Russ 2000|9.2.09 @ 1:55PM|#

For those who are uncertain why deflation is bad, it was largely covered above: falling wages means falling consumption which means falling prices which means falling incomes and profits which means falling wages ... etc. And then you get a spiral.

There's still nothing inherently bad about that.

Unless you're in debt and your assets are overvalued. Like banks. And governments.

Sean W. Malone|9.2.09 @ 2:14PM|#

And again - you don't get a "spiral"... that certainly did not happen when there WAS a lot of deflation (or as I like to refer to it - back when the value of the dollar went UP and not down...) in the 1800s.

What happened, is more people saved money, then that savings was able to be loaned out to people who had nifty ideas that would create even more and better stuff like Cotton Gins, Steam Engines and new-fangled horseless buggies.

|9.2.09 @ 2:22PM|#

Re Tulpa's comment about Marx:

"He wrote authoritatively about the dynamics of labor vs. capital, but NEVER ... VISITED ... A ... FACTORY. Not in his entire life. The man deserves every bit of contempt that can be poured on his grave."

Clearly Ezra Klein and Matt Yglesis have been studying at the feet of the master...

smartass sob|9.2.09 @ 2:35PM|#

Unless you're in debt and your assets are overvalued. Like banks. And governments.

They aren't worried; they're in collusion partnership with each other and have alot more guns than the rest of us. :-)

Sean W. Malone|9.2.09 @ 2:48PM|#

Don't forget about the tanks & F22s!

|9.2.09 @ 3:51PM|#

Poor-minded Tim Cavanaugh. Tim exposes his false beliefs when he expresses them about gold, "Goldbugs make the same error; intrinsic value is a lie as bitter as love."
Clearly, Tim Cavanaugh shows his ignorance about the meaning of 'intrinsic value'.

The concept of 'intrinsic value' has to do with the relation of gold coins to gold bullion.

When money became coined, the names of the coins reflected the fineness of the gold ore (or silver ore in the case of silver) used within the metal of the coin.

Thus, a gold dollar coin would have been a gold coin containing its full denominational worth of precious gold ore by fineness within the metal (gold ore plus other ores).

The buying power of the gold coin should maintain in relation to the buying power of gold bullion. In other words, if not debased, the gold coin has intrinsic value relative to the market value of bullion.

|9.2.09 @ 4:34PM|#

But what if the market value of the bullion falls? Gold is just another commodity, no more beknighted than pork bellies or FCOJ.

mark|9.2.09 @ 4:42PM|#

A beknighted gold coin?

hmm|9.2.09 @ 6:27PM|#

But what if the market value of the bullion falls? Gold is just another commodity, no more beknighted than pork bellies or FCOJ.

The value in dollars falls since you are trading gold in dollars. Not the intrinsic value of gold as a money unit that many here are discussing.

|9.2.09 @ 7:33PM|#

Gold is just another commodity, no more beknighted than pork bellies or FCOJ.


nah... gold is dif than those as it does not fit the consumption model for price formation...

Michael Ejercito|9.2.09 @ 10:29PM|#

If inflation is the phenomenon that it takes more money to purchase the same goods, wouldn't its opposite be a good?

Only if one is not obligated to pay a fixed amount of money at a specified future date (like a credit card bill or a mortgage).

Not to mention, of course, that you're cherry-picking commodities for comparison; gasoline, bread, and Big Macs have all steadily risen in price over the past 30 years.

For a real comparison, look up the price of a gallon of gasoline in 1909 versus today.

Sean W. Malone|9.3.09 @ 3:26AM|#

"Only if one is not obligated to pay a fixed amount of money at a specified future date (like a credit card bill or a mortgage)."

I mad this point upthread to some extent, but this issue is largely mitigated if your mortgage is low enough that it'd be paid in 10 years or less. This was once the case about housing.

Also - I should say knowing your debt is going to be a bigger percentage of your expenses if there is deflation is a big disincentive to rack up lots of debt and a huge incentive to save.

Again... I put both of those down as check marks in the "pro" column.

(And PS: Oil production in 2009 is vastly superior to oil production in 1909... Just sayin.)

Sean W. Malone|9.3.09 @ 3:26AM|#

*I made, not mad.

I, Kahn O\'Klast|9.3.09 @ 8:10AM|#

To the comment that Japan's been waiting for the inflation for 20 years: Japan did not engage in serious quantitative easing until the early 00's and even then is was a lackluster attempt which they failed to keep up. Bernanke is unlikely to make the same error.