ALL BLOG POSTS AND COMMENTS COPYRIGHT (C) 2003-2014 VOX DAY. ALL RIGHTS RESERVED. REPRODUCTION WITHOUT WRITTEN PERMISSION IS EXPRESSLY PROHIBITED.

Friday, August 03, 2012

Wrong on trade, wrong on money

Gary North isn't merely a deceitful free trade dogmatist, he's also off-base when it comes to monetary theory too:
John Exter -- an old friend of mine -- argued in the 1970s and 1980s that monetary deflation has to come, despite FED policy. There will be a collapse of prices through de-leveraging.

He was wrong. Why? Because it is not possible for depositors to take sufficient money in paper currency notes out of banks and keep these notes out, thereby reversing the fractional reserve process, thereby deflating the money supply. That was what happened in the USA from 1930 to 1933. If hoarders spend the notes, businesses will re-deposit them in their banks. Only if they deal exclusively with other hoarders can they keep money out of banks. But the vast majority of all money transactions are based on digital money, not paper currency.

Today, large depositors can pull digital money out of bank A, but only by transferring it to bank B. Digits must be in a bank account at all times. There can be no decrease in the money supply for as long as money is digital. Hence, there can be no decrease in prices unless it is FED policy to decrease prices. This was not true, 1930 to 1933.

Deflationists never respond to this argument by invoking either monetary theory or monetary history. You can and should ignore them until one of them does answer this, and all the others publicly say, "Yes. That's it! We have waited since 1933 for this argument! I was blind, but now I see! I'm on board! I will sink or swim with this."
First, North clearly doesn't know what he's talking about with regards to money from the Austrian perspective, which is why he is, like Friedman and the monetarists, focused on M1 rather than Z1. He makes the same mistake that Robert Wenzel made when trying to criticize Karl Denninger and me back in 2011, because he is only considering commodity money and fiat money, and thereby fails to take credit money into account, which, as Mises points out, must be considered in a developed monetary system.

In a developed monetary system, on the other hand, we find commodity money, of which large quantities remain constantly in circulation and are never consumed or used in industry; credit money, whose foundation, the claim to payment, is never made use of; and possibly even fiat money, which has no use at all except as money.
- The Theory of Money and Credit, p. 103 (1953)

Like the proverbial gorilla reading Nietzsche, Gary North looks at the historical monetary statistics but fails to understand what they mean. He ludicrously claims "there can be no decrease in prices unless it is FED policy to decrease prices", an assertion easily disproved by citing the housing market, which has shown a steady decline in home prices since 2006 despite the desperate efforts of the Federal Reserve to prop them up. More importantly, North doesn't understand that the reason the broader price declines indicative of deflation have not taken place at any point in the last 70 years is due to the constant growth of outstanding credit over that time, from $355 billion in 1946 to $54.6 trillion in 2012, an amount which absolutely dwarfs the $2.3 trillion in M1 that North erroneously believes to be the controlling factor.

North is factually incorrect. The vast majority of all money transactions in the current economy are not based on digital money, they are based on credit money. Please note that I am once more saying something that North falsely claims has never been said, as I am invoking both monetary theory and monetary history to make the deflationary case. One may reasonably attempt to argue that it is incorrect, but it is a blatant lie to claim that it has not been made. I've even addressed the obvious delta between M1/M2 and various measures of inflation that tends to cast doubt upon the monetarist position in the past.

The reason that prices didn't collapse and monetary deflation didn't occur in the 1970s and 1980s because none of the required deleveraging took place. Credit money continued to expand throughout, as debt outstanding was $1.6 trillion in 1970 and $12.8 trillion in 1989. Why are the deflationists likely - not certain - to be correct today when they were wrong before? Because the long-predicted deleveraging is finally taking place in the two largest credit sectors, Household and Financial.

Household has been deleveraging since Q3-2008 and is presently down $1 trillion. Financial has been deleveraging since Q4-2008 and is presently down $3.4 trillion. The only reason this private deleveraging hasn't shown up as general deflation is due to the $5.6 trillion increase in Federal leveraging; the Federal government has literally doubled its outstanding debt in four years.

In addition to ignoring the fact that credit money is a much more important factor than fiat money, be it paper or digital, Gary North clearly doesn't realize that everyone with any exposure to the economy will sink or swim on the Federal government's ability to continue substituting its own ability to leverage for private sector deleveraging. So long as the government can continue to borrow and maintain that ratio, it can stave off deflation. But unless it can borrow infinitely, it cannot do so forever.

Labels:

149 Comments:

Anonymous Idle Spectator August 03, 2012 6:31 AM  

Think of the children.

Anonymous Roundtine August 03, 2012 7:21 AM  

Today, large depositors can pull digital money out of bank A, but only by transferring it to bank B. Digits must be in a bank account at all times. There can be no decrease in the money supply for as long as money is digital.

His argument only works if you have a cash system and the main action of individual is to hoard physical currency. Otherwise, he is so very wrong. Let me count the ways.

1) Physical currency survives debt destruction. If you borrow $1,000 in cash and then default, the cash still exists. If you borrow $1000 in credit money and default, the credit goes to money heaven.

2) FRNs are debt based currency. The Fed swaps FRNs for assets from the banks. The banks are holding digital FRNs. If their losses exceed their assets, you have a net deflationary event in the banking system and there's no physical currency surviving. The Fed can buy busted assets for full face value and hide the losses, but this only results stopping the deflation, not creating inflation.

3) His model of banking is wrong. In the currency system we have, Steve Keen has shown that banks create new credit first and then the central bank creates new reserves later. The limit on credit growth is borrowers, not the central bank or gov't regulators.

4) The central bank doesn't set interest rates, it adjusts them according to changes in market prices. It is a trend follower, not a trend setter (even now, some bonds are at negative interest rates). At best, the Fed can manipulate and counteract market forces, but it cannot control them.

Anonymous Roundtine August 03, 2012 7:23 AM  

2) should be "their losses exceed their capital"

Anonymous paradox August 03, 2012 7:24 AM  

North is just a bad economist. And he's a bad American.

Anonymous Mr Green Man August 03, 2012 7:28 AM  

I like his model - it's so quaint since he assumed away credit and debt. So, if I had a house paid off in 1979, and it happened to be in Marin County, and it went from $40k to $1mm in value during the housing boom because they locked the land, and I heloc'ed that thing at every opportunity through 2006 -- was I getting the money by hoarding, or was I stealing digits from another bank account?

Anonymous Roundtine August 03, 2012 7:32 AM  

He also neglected to mention Roosevelt devaluing the dollar by 75%, from $20 per ounce of gold to $35. That was the key act.

Blogger Nate August 03, 2012 7:44 AM  

Its with no small frustration that I must yet again point out that the arguments made by North are not my arguments.

Anonymous Rantor August 03, 2012 7:46 AM  

Scary that people believe this guy. What a buffoon. He ignores reality at his own peril and his arrogant writing style pisses me off.

"There canbe no decrease in the money supply for as long as money is digital." How did he calculate that? What happened to all the digital money held by Enron investors, bankrupt city municipal bond holders, GM Bond holders, Solyndra investors??? When stocks and bonds are wiped out, the money put into them disappears. When banks go broke, money disappears and FDIC has to put more money into them.

Iceland had lots of electronic money and when their banks went bankrupt, that was that. Iceland and the banks refused to pay off depositors. The electronic money dissapeared. Gone.

I am amazed by the ignorance North demonstrates.

Blogger Nate August 03, 2012 7:46 AM  

Vox... what is your basis for claiming that most transactions are credit vs debit today?

Anonymous Rantor August 03, 2012 7:47 AM  

@ Nate,

We will never confuse you with Gary North...

Blogger Nate August 03, 2012 7:49 AM  

" When stocks and bonds are wiped out, the money put into them disappears. "

No.

Ted gave Joe 1000 dollars for Enron Stock. Enron stock became worthless. Ted has a commodity worth 0. But Joe still has 1000 dollars.

Are car wrecks deflationary?

Anonymous Josh August 03, 2012 7:57 AM  

Yes, car wrecks are deflationary, like broken windows, because capital is destroyed.

Anonymous Josh August 03, 2012 7:59 AM  

Vox... what is your basis for claiming that most transactions are credit vs debit today?

Big ticket items (houses, cars, college) are overwhelmingly financed rather than paid for.

Blogger Vox August 03, 2012 7:59 AM  

Its with no small frustration that I must yet again point out that the arguments made by North are not my arguments.

I appreciate that you wish to maintain a distinction, which is fine, but you will note that the post refers to "Gary North" and not "Nate".

Vox... what is your basis for claiming that most transactions are credit vs debit today?

1 trillion in monthly revolving consumer credit alone vs. 2.3 trillion in total M1. Also, it takes an awful lot of beer purchased with case or check to make up for a single home mortgage. But I could be wrong.

Anonymous Salt August 03, 2012 8:06 AM  

Ted gave Joe 1000 dollars for Enron Stock. Enron stock became worthless. Ted has a commodity worth 0. But Joe still has 1000 dollars.

What if Ted borrowed that 1000 dollars from a bank (credit money) and now finding himself still on the hook for that 1000 dollars?

Anonymous maniacprovost August 03, 2012 8:08 AM  

Deleveraging occurs when it is more profitable to pay off debt than to invest in our preapocalyptic economy.

Deleveraging lowers interest rates.

Lower interest rates lead to releveraging.

I think this process would tend to retard the slide into deflation, but not stop it.

Anonymous Athor Pel August 03, 2012 8:16 AM  

"maniacprovost August 03, 2012 8:08 AM

Deleveraging occurs when it is more profitable to pay off debt than to invest in our preapocalyptic economy.

Deleveraging lowers interest rates.

Lower interest rates lead to releveraging.

I think this process would tend to retard the slide into deflation, but not stop it."




The process you are describing, it's what is supposed to happen in theory.

But...

I've never seen consumer level interest rates this low in my lifetime and yet consumer debt is decreasing. What's up with that?

Anonymous JartStar August 03, 2012 8:19 AM  

We will never confuse you with Gary North...

For one thing I'm sure Nate's a better shot.

Anonymous Salt August 03, 2012 8:20 AM  

Ted gave Joe 1000 dollars for Enron Stock. Enron stock became worthless. Ted has a commodity worth 0. But Joe still has 1000 dollars.

Also, that Enron stock, which had an asset value, no longer exists; asset value (potential credit creation) to zero. Wiped out. It's irrelevant that Ted transferred 1000 dollars to Joe. Just like your car accident. The car had asset value till it didn't (insurance notwithstanding).

Blogger Joshua_D August 03, 2012 8:25 AM  

Josh August 03, 2012 7:57 AM
Yes, car wrecks are deflationary, like broken windows, because capital is destroyed.


Exactly.

Salt August 03, 2012 8:06 AM

What if Ted borrowed that 1000 dollars from a bank (credit money) and now finding himself still on the hook for that 1000 dollars?


Exactly again.

Right, a free market should naturally lead to deflation if production improves and producers don't run into any limits on materials, labor, etc. So in a free market, prices should fall just like they have fallen in the computer industry.

An external, non-free market force is required to maintain inflation. That force has been the Fed, credit money and the fractional reserve banking system. What happens when those eventually break?

Blogger Nate August 03, 2012 8:27 AM  

"I appreciate that you wish to maintain a distinction, which is fine, but you will note that the post refers to "Gary North" and not "Nate".

No No... Its not a frustratio with your dealing with North... its just that North holds positions that could be superficially confused with my own... and he does a horrible... horrible job defending those positions.

So I fear that people will read these rebuttals... all well merited... and conclude that inflationistas are all idiots like North.

Blogger Nate August 03, 2012 8:29 AM  

"What if Ted borrowed that 1000 dollars from a bank (credit money) and now finding himself still on the hook for that 1000 dollars?"

Doesn't matter. Its nothing but accounts recievable. Sucks for Ted... and it sucks for the Bank because he can't pay.. but the money still exists. Joe has it.

Thus its not deflation.

Blogger Nate August 03, 2012 8:31 AM  

"Right, a free market should naturally lead to deflation if production improves and producers don't run into any limits on materials, labor, etc. So in a free market, prices should fall just like they have fallen in the computer industry."

Bzzt. Lower prices /= Deflation.

Lower prices are just lower prices... they are indicators of lots of things... one of which can be but almost never is... deflation.

Deflation is the shrinking of the money supply. It is not the destruction of capital. Nor is it falling prices.

Blogger Joshua_D August 03, 2012 8:33 AM  

So Nate, are you just making a tautological argument of some sort? If I take 1,000 one dollar bills outside and burn them, is that deflationary?

Blogger Nate August 03, 2012 8:33 AM  

"Also, that Enron stock, which had an asset value, no longer exists; asset value (potential credit creation) to zero. Wiped out. It's irrelevant that Ted transferred 1000 dollars to Joe. Just like your car accident. The car had asset value till it didn't (insurance notwithstanding)."

Unfortunately your mal-investment doesn't affect the money supply. You're confusing mal-investment with deflation. Deflation is purely a shrinking money supply.

By the way... if I destroy 10 trillion windows... what does that do to the price of windows? Do they go up or down?

Right.

That has nothing to do with deflation or even the symptoms there of.

Blogger Nate August 03, 2012 8:35 AM  

"So Nate, are you just making a tautological argument of some sort? If I take 1,000 one dollar bills outside and burn them, is that deflationary?"

Of course that's deflationary.

Anonymous Rantor August 03, 2012 8:39 AM  

@ Nate I understand your argument, yes I give $1000, get a bond worth $1000 that pays .05% interest. Yes my money is then used by the company to do other things, it has not disappeared.

I expect to get my money back with interest and do not. The Bond issuer has an electronic entry that says they owe me $1000 plus interest. I would contend that is an electronic, monetary debt. Their accounting system must carry the bonds issued as a debt, a form of credit money, that must be paid, on some future date with money. When they liquidate that debt in bankruptcy that electronic debt money, a promise to pay money to me, is destroyed.

That is why the Fed creates electronic money to fight the deflationary destruction caused by bad debt. While their ability to create money seems limitless, as Vox has argued, it is not.

A look at interest rates over time show them to be cyclical. If we are at or near a bottom with ZIRP and some cases NIRP. the interest rates will begin to climb again, either in a few months or a few years. When that happens, the debt the US has created will become unaffordable. The US will be forced to pay higher and higher interest rates on the debt. The credit supply will be proven to be finite. Deleveraging will treble and the deflationary losses will no longer be papered over.

Blogger Nate August 03, 2012 8:40 AM  

"1 trillion in monthly revolving consumer credit alone vs. 2.3 trillion in total M1. Also, it takes an awful lot of beer purchased with case or check to make up for a single home mortgage. But I could be wrong."

As slow as housing purchases are right now I'm not sure that beer vs mortgage thing is going to stand up to much longer.

I wanted to be sure you were using a volume metric though and not a number of transaction type metric when you said "most".

Blogger Vox August 03, 2012 8:40 AM  

Are car wrecks deflationary?

Yes, if they are paid for by credit and the car loan subsequently defaults.

Yes, car wrecks are deflationary, like broken windows, because capital is destroyed.

Not necessarily. Remember wealth and capital are not necessarily money. Nate is correct to note that even if the car is destroyed or the stock goes to zero, the money paid for it still exists... unless the money paid for it was credit money. In that case, the money disappears as soon as the buyer defaults, which he can safely do in the absence of his collateral.

This is why student loans are so devastating and why the banks insisted they cannot be defaulted. They represent credit money used to purchase literally worthless college degrees with zero collateral value.

Blogger Nate August 03, 2012 8:43 AM  

"I expect to get my money back with interest and do not. The Bond issuer has an electronic entry that says they owe me $1000 plus interest. I would contend that is an electronic, monetary debt. Their accounting system must carry the bonds issued as a debt, a form of credit money, that must be paid, on some future date with money. When they liquidate that debt in bankruptcy that electronic debt money, a promise to pay money to me, is destroyed. "

The trouble here is... you're calling bonds money... and promises to pay... money.

They aren't money.

Its not the money supply's fault that you got suckered. Failure to increase... is not a decrese. Only democrats make that argument.

Blogger Nate August 03, 2012 8:45 AM  

"Yes, if they are paid for by credit and the car loan subsequently defaults."

Oh so we're back to accounts recievables of banks magically being money... but accouts recievable of other businesses are not?

Blogger Joshua_D August 03, 2012 8:45 AM  

"He was wrong. Why? Because it is not possible for depositors to take sufficient money in paper currency notes out of banks and keep these notes out, thereby reversing the fractional reserve process, thereby deflating the money supply" - G. North

Why would an older man - who I would think has a lot of experience and wisdom under his belt - why would he ever, ever claim that something is "not possible."

What is wrong with North, and these people?

Someone always claims something is "not possible" right up until that thing happens and suddenly becomes possible. Good grief.

Blogger Nate August 03, 2012 8:46 AM  

"In that case, the money disappears as soon as the buyer defaults, which he can safely do in the absence of his collateral."

What?

Who comes and takes the 20 grand out of my checking account that you gave me for the car?

I don't care if the bank gets paid or not... the money is still in my account.

Blogger Nate August 03, 2012 8:49 AM  

"Someone always claims something is "not possible" right up until that thing happens and suddenly becomes possible. Good grief."

you realize that all deflationists are making the "its not possible" arguement right?

Vox is saying that the Fed may not be able to keep creating enough money to keep up with the money being "destroyed".

Blogger Nate August 03, 2012 8:50 AM  

"This is why student loans are so devastating and why the banks insisted they cannot be defaulted. They represent credit money used to purchase literally worthless college degrees with zero collateral value."

Its like a perpetual mal-investment machine. An economic doomsday device of epic scope.

Anonymous Rally August 03, 2012 8:56 AM  

"North is just a bad economist. And he's a bad American."

Not only that, he's a bad Caucasian.

Blogger Nate August 03, 2012 8:58 AM  

...

I'm not ducking anyone guys. I've answered your questions... but comments are disappearing.

stuff happens.

Anonymous FUBAR Nation (Ben) August 03, 2012 9:00 AM  

Vox you left out a couple of credit sectors that are still growing.

1) Student loans. It's over a trillion now and exceeds credit card loans.

2) Car companies like GM are making "subprime" car loans.

Blogger Vox August 03, 2012 9:03 AM  

Vox you left out a couple of credit sectors that are still growing.

No, I most certainly did not. Neither of those is a credit sector in the Z1 sense. GM is probably Corporate, which is increasing slightly, though might be Financial, which is not. Student loans are Household.

I'm not ducking anyone guys. I've answered your questions... but comments are disappearing.

You had a bunch get spam-trapped, I released them. I suggest you stop making all those BUY RUSSIAN WIVES CHEEP comments on the Game blogs.

Blogger Vox August 03, 2012 9:08 AM  

Vox is saying that the Fed may not be able to keep creating enough money to keep up with the money being "destroyed".

Correct. I am not saying it is impossible, I am saying that I doubt it is possible for an infinite period of time. The long history of government defaults suggests that government defaults are coming. The fact that there have not been any in the USA or Europe for an unprecedented period tends to indicate that they will be much larger than they historically have been.

The obvious avoidance solution is going to a higher level currency, either North American or global, and starting the process all over again. But this has numerous practical difficulties, such as the fact that even those who support it can't openly admit it and still expect to retain power.

Blogger Joshua_D August 03, 2012 9:08 AM  

Nate August 03, 2012 8:46 AM
"In that case, the money disappears as soon as the buyer defaults, which he can safely do in the absence of his collateral."

What?

Who comes and takes the 20 grand out of my checking account that you gave me for the car?


No one takes your $20,000, but the banks $20,000 + interest entry disappesrs, right?

I don't think Vox is making an "it's not possible" argument at all. He seems to be making a "this is what seems most likely" argument.

Also, I understand and agree with you that inflation/deflation = change in money supply. What I don't understand and don't agree with is how you think that something can be created that cannot be destroyed. I just don't understand how credit/digits could be created from thin air and then become invincible digits.

And pulling out "it's all just accounting" intuitively doesn't seem to be an adequate answer, to me.

Blogger Vox August 03, 2012 9:10 AM  

Oh so we're back to accounts recievables of banks magically being money... but accouts recievable of other businesses are not?

Governments aren't banks. Corporations issuing corporate paper aren't banks. Credit money isn't created only by banks.

Anonymous Confused August 03, 2012 9:12 AM  

So why did the government borrow 5.6 trillion dollars over the last four? Couldn't they just have printed the money had the same affect and not had the debt on the back end?

Anonymous BN August 03, 2012 9:12 AM  

Can you clarify one bit for me. In the last paragraph, you have "everyone with any exposure to the economy". What exactly does that mean. I'm not sure how broadly or narrow to interpret that.

Anonymous Josh August 03, 2012 9:18 AM  

So why did the government borrow 5.6 trillion dollars over the last four? Couldn't they just have printed the money had the same affect and not had the debt on the back end?

Not directly. The Fed prints the money and uses newly printed money to buy treasury bonds.

Blogger Nate August 03, 2012 9:20 AM  

"You had a bunch get spam-trapped, I released them. I suggest you stop making all those BUY RUSSIAN WIVES CHEEP comments on the Game blogs."

hey!

What the hell? I am a reputable female sex slave trader. I only deal in american college girls.

russian wives...

please.

Anonymous Josh August 03, 2012 9:20 AM  

What exactly does that mean. I'm not sure how broadly or narrow to interpret that.

I would assume everyone who's not holed up in their own self sufficient off the grid farm.

Anonymous jack August 03, 2012 9:22 AM  

Vox; I suggest you stop making all those BUY RUSSIAN WIVES CHEEP comments on the Game blogs.

I thought Nate was happily married?

Anyway, once again I find my head spinning over all this. Must go back and read return to great D, again, I suppose. Why not lets go back to trading rabbit skins for some flint. I can understand rabbit skins even if I can't chip flint worth a darn...

Anonymous Josh August 03, 2012 9:22 AM  

"You had a bunch get spam-trapped, I released them. I suggest you stop making all those BUY RUSSIAN WIVES CHEEP comments on the Game blogs."hey!

What the hell? I am a reputable female sex slave trader. I only deal in american college girls.


If you buy a russian bride and she turns into an angry man hating feminist, is that deflationary?

Anonymous Josh August 03, 2012 9:24 AM  

I thought Nate was happily married?

He's a seller, not a buyer.

Allegedly...

Anonymous Stilicho August 03, 2012 9:26 AM  


Who comes and takes the 20 grand out of my checking account that you gave me for the car?


No one. The 20 grand comes out of the bank's equity.

Anonymous Stilicho August 03, 2012 9:30 AM  

But this has numerous practical difficulties, such as the fact that even those who support it can't openly admit it and still expect to retain power.

Hell, even when they can openly admit it (on a smaller scale anyway), the practical difficulties are likely insurmountable. Just look at the Euro/Eu situation with Germany spoiling the central bankers dreams.

Blogger Nate August 03, 2012 9:32 AM  

"I just don't understand how credit/digits could be created from thin air and then become invincible digits."

its not the digits are invincible. Its entirely possible to go to a real money account.. say a savings account... and simply wipe it out.

That would be deflationary.

What is not deflationary... is a reduction in the perceived value of baseball cards... or the perceived value of investments. And that's what loans are... investments.

Because the fiat system creates money from thin air... the loss of the imaginary money doesn't count in the system. It has to be converted from imaginary money to real money via purchase... once that has happened... everything changes.

Blogger Nate August 03, 2012 9:33 AM  

"
If you buy a russian bride and she turns into an angry man hating feminist, is that deflationary?"

No.. but its clearly mal-investment.

Anonymous Stilicho August 03, 2012 9:33 AM  


russian wives...

please.


What is it with you Greeks resenting the Russian Orthodox?

Anonymous Confused August 03, 2012 9:34 AM  

At Josh ...

My point is why does the Fed have to buy bonds. Just print the money and pump. Cut out the middle man cut out the debt.

Anonymous Stilicho August 03, 2012 9:35 AM  

It has to be converted from imaginary money to real money via purchase... once that has happened... everything changes.

Nate's theory of the transubstantiation of money...

Blogger Nate August 03, 2012 9:36 AM  

"No one. The 20 grand comes out of the bank's equity."

Nope. Fiat money. The 20 grand was no where. It didn't exist anywhere. Thus its destruction cannot be considered a negative.

The bank expected to gain 20 grand...and it didn't.

Me promising to give you 20 grand and not doing it... is not the same as me coming and taking 20 grand from you.

You have 20 grand in your account... you hope to have 40 grand tomorrow. You wake up... you still have 20 grand.

vs.

You have 20 grand in your account... I come and take it. now you have 0.

See the difference?

Anonymous Stilicho August 03, 2012 9:37 AM  

My point is why does the Fed have to buy bonds. Just print the money and pump. Cut out the middle man cut out the debt.

Go read Rothbard's The Case Against The Fed (at the Mises site). It's fairly short and explains the Fed money creation process in detail.

Blogger Bryan August 03, 2012 9:41 AM  

I would assume everyone who's not holed up in their own self sufficient off the grid farm.

That's the broadest possible interpretation. I wasn't sure if that's actually what he was saying or not. I wasn't sure if he was referring to people who have a large portion of their assets tied up in Wall St type places.

Blogger Nate August 03, 2012 9:41 AM  

"At Josh ...

My point is why does the Fed have to buy bonds. Just print the money and pump. Cut out the middle man cut out the debt."

They actually don't. This is a point a lot of people that work to understand the system miss. Its all smoke and mirrors.

They can... and will... do what ever they want. Inflation is what happens when they go crazy and just keep doubling down. Deflation is what happens when they chicken out.

Inflationists don't believe they are going to chicken out. Deflationists believe they either are not capable of running it up fast enough (vox) or they will chicken out.

Blogger Joshua_D August 03, 2012 9:44 AM  

Nate August 03, 2012 9:32 AM
Because the fiat system creates money from thin air... the loss of the imaginary money doesn't count in the system.


This, this doesn't seem correct to me.

If the loss of imaginary money doesn't count, then the creation of imaginary money can't count. However, we create and buy things with imaginary money all the time, so whatever we imagine is, in fact, working as a money, ie. a medium of exchange.

Once we stop imagining that money, the imaginary money will collapse and so will our imaginary money supply.

Blogger Nate August 03, 2012 9:46 AM  

"Go read Rothbard's The Case Against The Fed (at the Mises site). It's fairly short and explains the Fed money creation process in detail."

Right. It explains in detail the smoke and mirrors employed to keep people from realizing the whole thing is one giant scam rigged to rape them repeatedly.

Note also that this system was designed by men... and those men will not let it destroy them based on some technicality.

When the time comes... they will simply change the rules... inflate to all hell... and cash out before people realize what's happened.

That's the problem with inflation... in the very short term... it works.

Anonymous Josh August 03, 2012 9:46 AM  

My point is why does the Fed have to buy bonds. Just print the money and pump. Cut out the middle man cut out the debt.

Because the fed has to issue new currency in exchange for an "asset", which could be gold, or t bills, or mbs...

Anonymous Stilicho August 03, 2012 9:46 AM  

Nate, the 20K in your pocket came from the bank, which replaced it with the buyer's note. The buyer defaults, the bank is out 20k (and interest). The bank has experienced a loss. The bank's books will reflect -20k of money. You can argue that the loss occurred when the bank gave you 20K, but cannot logically argue, as you are, that no loss occurred.

Anonymous Josh August 03, 2012 9:48 AM  

That's the problem with inflation... in the very short term... it works

For the ones doing the inflating, yes.

Anonymous Stilicho August 03, 2012 9:48 AM  

When the time comes... they will simply change the rules... inflate to all hell... and cash out before people realize what's happened.

Unlike some of your other arguments re: inflation, this one could occur. Desperate bankers and governments do desperate things.

Blogger Nate August 03, 2012 9:50 AM  

"If the loss of imaginary money doesn't count, then the creation of imaginary money can't count. "

This is reasonable but false. See counterfeiting for details. Fake money spends just like real money. So much so that once its spent... it really is money.

That's why inflation works in the short term. put gold at 1000 bucks an ounce just for simplicity... print up a billion dollars and go buy gold? You get it AT that 1000 per ounce price. You just increased the money supply by 1 billion and you got a crap ton of gold to go with it.

Blogger Nate August 03, 2012 9:52 AM  

"Nate, the 20K in your pocket came from the bank, which replaced it with the buyer's note. The buyer defaults, the bank is out 20k (and interest). The bank has experienced a loss. The bank's books will reflect -20k of money."

I bought this lottery ticket see... and I put on my books 100 million dollars... and then... the lottery ticket didn't come through for me!

OMG!

I've lost 100 million dollars!

Lottery tickets are massively deflationary!!!

Anonymous Josh August 03, 2012 9:53 AM  

Nate, what are your definitions of "real money" and "fake money", so we're all on the same page?

Anonymous Confused August 03, 2012 9:54 AM  

I thought congress had the power to coin money. Deposit at the Fed a special coin made of platinum that says 1 Trillion dollars on it and then have them create the electrons for the pumping.

Then we don't owe the Fed or anyone else anything.

Blogger Nate August 03, 2012 9:54 AM  

"You can argue that the loss occurred when the bank gave you 20K, but cannot logically argue, as you are, that no loss occurred."

A loss has occurred in terms of the bank's profit... A loss has not occurred in the over all money supply.

Blogger Joshua_D August 03, 2012 9:54 AM  

Come on Nate.

The correct lottery ticket anology would be:

You bought a lottery ticket, and then went and took out a loan to buy a new house, car, bass boat and gun case.

Then the lottery ticket doesn't come through.

And then, somebody is out of some cash!

Blogger Joshua_D August 03, 2012 9:58 AM  

Nate August 03, 2012 9:50 AM
"If the loss of imaginary money doesn't count, then the creation of imaginary money can't count. "

This is reasonable but false. See counterfeiting for details. Fake money spends just like real money. So much so that once its spent... it really is money.


This isn't a good analogy, because an attempt is made to remove the counterfeit notes, in this context. So, the removal overall would be deflationary on the money supply.

I think understand the issue, which Josh is referring to above in his definition question. You seem to think some money is more real than other money, while I and others think money is money as long as it's spent as money.

Anonymous Josh August 03, 2012 9:58 AM  

I thought congress had the power to coin money. Deposit at the Fed a special coin made of platinum that says 1 Trillion dollars on it and then have them create the electrons for the pumping.

Why would the fed do that?

You sound like a greenbacker.

Blogger Joshua_D August 03, 2012 10:00 AM  

To clarify, I think the money supply = the total sum of whatever people are using as money; some folks seem to think the total money supply = just the actual FRNs in circulation.

Anonymous Josh August 03, 2012 10:05 AM  

No, the money supply consists of available money and credit.

Blogger Nate August 03, 2012 10:05 AM  

"Nate, what are your definitions of "real money" and "fake money", so we're all on the same page?"

This is an awfully complicated question... one that I suspect is the root of the disagreement Vox and I have on this thing.

Credit is Potential Money... like the high credit on your credit card. It exists... but it lacks what egg heads call "velocity". Its just sitting there.

Money is the stuff in M2... or at least its the closest thing to it.

Now... lets say the high credit on my lowes credit card is 20k... but I've never used that card.

Then... lowes decides... oh... well.. now your high credit is 5k.

Has the money supply shrunk by 15k? No. Because I never used it and was never going to use it.

Anonymous Godfrey August 03, 2012 10:07 AM  

This is the key issue I like to see debated. Originally I held the inflationist position; however after reading and considering the deflationist argument I now find myself leaning in their direction.

It’s interesting to observe human nature, even among libertarians there is a tendency to stakes one’s position and then hold to it despite mounting evidence and quality argument to the contrary. I’ve noticed that intelligent people often lack the humility required to efficiently progress towards a logical supposition. I guess that is one advantage of not being intelligent.

Anonymous JartStar August 03, 2012 10:08 AM  

Nate, John Keegan has died.

I now return you to your terminology debate.

Blogger Nate August 03, 2012 10:08 AM  

"You seem to think some money is more real than other money, while I and others think money is money as long as it's spent as money."

So...

Its the SPENDING that matters. You realize this is pretty much what was described as Nate's Theory of the Transubstantiation of Money... right?

If it spends... its money.

Now...

Do the accounts receivables of banks... spend?

And remember what Keen wrote before you answer.

Blogger tz August 03, 2012 10:10 AM  

I think I can describe it much more simply. For every positive electronic entry, there needs to be a negative entry. Debits = Credits.

Some double-book entry keeping and ledgerdemain. So the movement works both ways, in the above transfer of a positive balance, but also a negative (debt) balance.

Some of these represent "collateral", e.g. a dilapidated hovel with a mortgage principle of $500,000 is a plus balance, and there is a negative balance of $500,000 for the mortgagee. Ah, but you say the property is only worth $100,000. But that means barring a monetization miracle or a winning lottery ticket, the negative balance won't be paid back - and that negative balance is in turn a positive balance for a MBS or an "asset" for the bank.

If Bank A has a NEGATIVE $1 trillion electronic balance and is merged with Bank B instead of allowing it to go bust, Bank B will make its own hole larger.

Collectively, the NEGATIVE balance is about $50 trillion just for the derivatives related to mortgage and wall street. As that collapses it takes the zombie positive balances with them as has been happening. The house goes into foreclosure and the MBS stops paying out.

The Fed theoretically could simply take every debt - mortgage, student loan, and credit card - onto its own balance sheet and issue cash for the balance and that WOULD ONLY BALANCE THINGS - no inflation or deflation, though as far as it would be a default, it would free up capital.

GDP = PQ = MV. But M is the set of positive balances including the zombie balances. P may not go down, but then Q will go down - right now government spending is faking the GDP. Either the $30k car will go to $20k, or 2/3 the number will be sold.

As the zombie positive balances disappear, the real remaining positive balances have more value.

Anonymous Toby Temple August 03, 2012 10:16 AM  

Nate. Do you consider it deflationary when a 1000 pcs of $100 become literally worthless? Not destroyed(literally obliterated). But each of the $100 bill become equal to 0.00 dollars.

Blogger Joshua_D August 03, 2012 10:16 AM  

Nate

Now... lets say the high credit on my lowes credit card is 20k... but I've never used that card.

Then... lowes decides... oh... well.. now your high credit is 5k.

Has the money supply shrunk by 15k? No. Because I never used it and was never going to use it.


Now, I don't mind being wrong, but it seems like you are making my point. My understanding of Z1 is that is credit that has been spent, right? Spent. Not potentially spent, but really spent.


Nate:

Now...

Do the accounts receivables of banks... spend?

And remember what Keen wrote before you answer.


Again, I don't mind being wrong. I'm not an accountant and I haven't read Keen, but accounts receivables are used by banks spend out ever greater amounts of loans, right? And that money is in fact spent, right?

Blogger tz August 03, 2012 10:21 AM  

I also need to expand on the distinction Vox gets but the others don't.

I can have a cryptographic digital warehouse receipt good for a fixed amount of non-fungible gold or dollars - it represents a title or ownership of the actual item. That is digital money.

I can also have something that looks the same but is a financial entity issuing credit. The bank is loaning me the dollars, but expects to be paid back. The bank still claims to have the same number of dollars, but they now only exist as my promise to pay them back. That is credit money in digital form. Of course the bank may have obtained a loan (e.g. from the Fed) in order to reissue the credit but that makes the problem worse. The same "dollar" is loaned out multiple times.

Digital money represents something real, credit money represents the promise of a debtor.

Blogger Nate August 03, 2012 10:23 AM  

"Again, I don't mind being wrong. I'm not an accountant and I haven't read Keen, but accounts receivables are used by banks spend out ever greater amounts of loans, right? And that money is in fact spent, right?"

No that's the kicker. Read Vox's column on Keen. The system does not work that way.

Blogger Nate August 03, 2012 10:25 AM  

"Now, I don't mind being wrong, but it seems like you are making my point. My understanding of Z1 is that is credit that has been spent, right? Spent. Not potentially spent, but really spent."

No no... we're getting somewhere. If you have followed this for a while you should remember me complaining about money being counted multiple times. That's my problem here. Money that is spent is already accounted for in M2... thus it cannot be reasonably counted again. But it is.

So sense you're counting the same money over and over and over... you have an artificially high estimate of what the money supply actually is... and thus.. when that falsely high number is reduced... its not really deflation because the number was never actually that high in the first place.

Blogger Nate August 03, 2012 10:27 AM  

"Digital money represents something real, credit money represents the promise of a debtor."

Correct. And the promise of a debtor is no different the the potential of a lottery ticket.. and its failure to come through is no more deflationary.

Anonymous duckman August 03, 2012 10:29 AM  

Like the proverbial gorilla reading Nietzsche, Gary North looks at the historical monetary statistics but fails to understand what they mean.

Are you honestly suggesting that gorillas that can read Nietzsche cannot understand him? I challenge you to provide one example of this phenomenon. I really don't think you can.

Anonymous Confused August 03, 2012 10:32 AM  

I like to take arguments to absurd extremes then come back to the middle. It's a method I use to come to some understanding of topics.

It seems like a government has 3 choices print, borrow or tax. It seems like what VD said is that the government borrowed 5.6 T during BO's 1st administration to give slight growth in Z1 to couner the real contraction in other areas of Z1. I would also venture a guess that this helps avoid the nasty admission that we are in a depression.

I simply believe, rightly or wrongly admittedly, that the government could have just printed the money.

Further, there is no need to tax anyone ever if Z1 is the only variable unless you wish to use taxation to stop Z1 from inflating excessively.

As far as why would the Fed accept a 1 Trillion Dollar coin? Because the government has firepower and could end the Fed much like a French King and Roman Pope ended the Templers. Albeit with less torture and no executions and quite probably far more justly.

Until I have more information that seems like a logical conclusion.

Blogger Vox August 03, 2012 10:32 AM  

Inflation is what happens when they go crazy and just keep doubling down. Deflation is what happens when they chicken out.

Yes, precisely. Although, I think it is worth mentioning that deflation is also what happens when they are desperately trying to keep inflation from going critical and they fall off the razor's edge.

My understanding of Z1 is that is credit that has been spent, right? Spent. Not potentially spent, but really spent.

Yes, Nate's mention of a change in a "credit limit" suggests he may be interpreting my use of the term credit more broadly than it is intended. Credit = debt outstanding. Note that Mises is very specific, as he notes that credit money is not only debt, but debt that that remains uncollected.

Anonymous Toby Temple August 03, 2012 10:34 AM  

The only way a debtor causes deflation is when he burns even a piece of the money he borrowed.

An unpaid debt means the money is there somewhere but not with the creditor who lend it.

Hence there is no decrease in the money supply which means there is no deflation.

Blogger Vox August 03, 2012 10:36 AM  

Credit is Potential Money... like the high credit on your credit card. It exists... but it lacks what egg heads call "velocity". Its just sitting there.

Money is the stuff in M2... or at least its the closest thing to it.

Now... lets say the high credit on my lowes credit card is 20k... but I've never used that card.

Then... lowes decides... oh... well.. now your high credit is 5k.

Has the money supply shrunk by 15k? No. Because I never used it and was never going to use it.


Let's work with this. I agree, the 20k on the unused Lowe's card is potential money at best. But suppose you've used 5k of the 20k on the card. 15k is obviously still potential money. Is the 5k now money or potential money?

Blogger Nate August 03, 2012 10:37 AM  

"An unpaid debt means the money is there somewhere but not with the creditor who lend it.

Hence there is no decrease in the money supply which means there is no deflation."

Ding ding ding.

Exactly.

We have a winner.

Blogger tz August 03, 2012 10:38 AM  

You can also pull money out of bank A to pay a loan to bank B. The credit and the debit both disappear.

The other thing missing is VELOCITY. Money going into and out from the account in bank A is more important. If it just sits there, nothing is spent, it doesn't contribute to the economy. I can burn $1000, or simply let the $1000 sit there, not be spent, invested, or anything else for decades. It has the same effect for the period. The $1000 is only part of the money supply if that is moving through the economy (including banks loaning it out, which is why the FDIC and such to try to convince you not to put it in your mattress). That is why things like revolving credit going down is serious. If your local businesses only get half the spending, they can only support half the merchandise and labor - so there is a cascading effect.

The reason the 1920-21 recession was swift is this never took hold. A lot of businesses went bankrupt immediately instead of dying slowly while this cascade built up slowly (as happened in the early 1930's).

GDP = PQ = MV and while M is money and credit, V is the velocity, and if that collapses, prices will too and the Fed doesn't have much control over V.

Anonymous Josh August 03, 2012 10:40 AM  

The only way a debtor causes deflation is when he burns even a piece of the money he borrowed.An unpaid debt means the money is there somewhere but not with the creditor who lend it.Hence there is no decrease in the money supply which means there is no deflation.

No...it depends on the collateral used to secure the debt...if it's unsecured, or upside down, it's deflationary.

Blogger Joshua_D August 03, 2012 10:41 AM  

Nate August 03, 2012 10:23 AM

No that's the kicker. Read Vox's column on Keen. The system does not work that way.


I just reread Vox's latest wnd column on Keen's book. Which column are you talking about?

Blogger Vox August 03, 2012 10:42 AM  

An unpaid debt means the money is there somewhere but not with the creditor who lend it.

No, this is incorrect. You are forgetting the money creation aspect. Deflation doesn't begin from the monetary base, but from the collapse of the inflation. I'll walk everyone through this in a future post; I think we're going to have to start this sooner rather than later.

Anonymous Salt August 03, 2012 10:45 AM  

Do the accounts receivables of banks... spend?

If spend means receipt of some good in exchange,

When I owned a business I sometimes got the use of credit from another vendor based upon my accounts receivable. I was able to purchase from A based on expectations of receivables of X, Y and Z.

Blogger Joshua_D August 03, 2012 10:47 AM  

tz August 03, 2012 10:38 AM

The other thing missing is VELOCITY.


I'm starting to think that Velocity is very important as well. Not because I ever disagreed, only because I haven't thought much about how velocity could be a part of "money supply."

It seems that I, like most people, tend to think very linear about these things at first (linear, is that the right word?). And of course, it's always more complicated that I think.

Anonymous Josh August 03, 2012 10:47 AM  

The problem with debt defaults is that, because of leverage, there is zero margin for error.

So bank a takes a bath on a mortgage portfolio...they are now capital impaired...

Other banks that have exposure to bank a force positions to unwind...

As these positions unwind, it stats a cycle where all banks, because they are fundamentally insolvent, are forced to seek out capital and make collateral calls...

So...instead of one bank going bust, all the banks are bust, because of the scramble to unwind highly levered positions and secure capital...

Anonymous Toby Temple August 03, 2012 10:52 AM  

~ No...it depends on the collateral used to secure the debt...if it's unsecured, or upside down, it's deflationary. ~

I think the collateral is irrelevant. The money did not disappear. It was just unreturned. The money is still there. So the supply of money did not change.

~ No, this is incorrect. Deflation doesn't begin from the monetary base, but from the collapse of the inflation ~

When you say monetary base, do you mean the original supply of money?

Blogger tz August 03, 2012 10:53 AM  

The problem with the unpaid loan is that the creditor usually marks it as an asset (and may have his own debts he expects to repay with it).

When the bank gets a deposit of $100,000 and loans $90,000 out, the bank still pretends it has $100,000 in assets, and the depositors are writing checks against the $100,000. If the $90,000 goes into default, the depositor's check for $10,001 will bounce, not because he didn't have sufficient funds, but because the bank doesn't. The $100,000 was savings for the depositor to buy or invest.

You can say that the money supply expanded the day the loan was made and simply returned to even, but if on tuesday there was $190,000 representing the loan and the deposit, and on wednesday there is $10,000 representing what the depositor can get back, that is deflation.

If everyone in a bank or credit union would act as if they only had a real cash balance of 10% of the "available" amount, that which they could write a check on today, they would act very differently. Either depositors have their full balance, or they have what can't be defaulted on.

And it isn't a series of binary transactions, but a daisy chain - starting with the overassessed house, but going through a series of securities, services, and the rest. The $500,000 goes through 10 layers, so when it disappears, $5,000,000 disappears, not just $500,000 as it was pledged as collateral across the network.

Anonymous Noah B. August 03, 2012 11:01 AM  

Mr. North's position is shockingly ignorant. However, I do believe that continuing to borrow without limit is exactly what the Fed has in mind.

Anonymous The One August 03, 2012 11:01 AM  

It's great that we are sticking to the actual definition of inflation/deflation, but the fact remains that to the average person deflation means prices going down and inflation means prices going up. The price of an item actually affects someone's life vs whatever a lowes credit card is real money or not.

Anonymous Noah B. August 03, 2012 11:02 AM  

Meanwhile, the only thing the Fed has to get right is to make us forget that indefinite borrowing is their plan.

Blogger Nate August 03, 2012 11:07 AM  

"Deflation doesn't begin from the monetary base, but from the collapse of the inflation."

yes. We agree on the cycle. We disagree on where we are on the curve.

As you see the credit collapsing you say deflation. I say not yet. The actual money supply is still growing.

You're seeing the waivering as They attempt to balance on the razor... but before they let themselves fall... they will forget the razor and dive for the fire.

They fear the ice far to much to risk it.

Anonymous VD August 03, 2012 11:09 AM  

It's great that we are sticking to the actual definition of inflation/deflation, but the fact remains that to the average person deflation means prices going down and inflation means prices going up. The price of an item actually affects someone's life vs whatever a lowes credit card is real money or not.

And dogs eat dog food. So what, the canine opinion is about as relevant here as the average person's. Anyhow, since prices go up thanks to the way debt increases demand, debt-deleveraging will cause deflation even by this metric. See: housing market.

Anonymous Salt August 03, 2012 11:16 AM  

It's said that all money is debt (incurs interest). Most of the money supply is created via Fractional Reserve Banking.

It is impossible to pay off the whole debt due to the reversal upon FRB when debt (money) is extinguished.

It would seem that the various methods of extinguishing debt need be addressed.

You are forgetting the money creation aspect. Deflation doesn't begin from the monetary base, but from the collapse of the inflation.

The deflation is the extinguishing of money, ultimately via reversal of the FRB process. This reduces the money supply.

A lower supply of money reduces the overall quantitative velocity which reduces prices.

Blogger Nate August 03, 2012 11:19 AM  

"Anyhow, since prices go up thanks to the way debt increases demand, debt-deleveraging will cause deflation even by this metric. See: housing market."

This is one possible explanation... and not the most likely.

The most logical explanation is mal-investment. Yes... the debt makes mal-investment easier.. but mal-investment still happens every day even without the debt.

the fact is while prices are going down in housing they are going up everywhere else. For f's sake.. a bag of doritos is 4.49 now! It was 99 cents less than 10 years ago! and on top of that they've reduced the amount of doritos in the bag!

m2 is going up. prices are going up. its inflation. The housing market is in the crapper because that's where all the mal-investment was. Or at least the majority of it.

Anonymous Salt August 03, 2012 11:25 AM  

m2 is going up. prices are going up. its inflation.

M2 as a function of what? An actual growing economy? Or government spending as a life support prop (continued mal-investment) to the economy?

One debt is supportable, the other is not.

Blogger Joshua_D August 03, 2012 11:27 AM  

Nate August 03, 2012 11:19 AM

the fact is while prices are going down in housing they are going up everywhere else. For f's sake.. a bag of doritos is 4.49 now! It was 99 cents less than 10 years ago! and on top of that they've reduced the amount of doritos in the bag!


I bet the price increases in food in the USA are affected in no small part by the increase in SNAP users, which are funded by Federal debt. I rest my case. Debt is money. ;)

Anonymous Stilicho August 03, 2012 11:30 AM  

Nate:

What you fail to account for is that the bank has not just lost profits, it has lost its own equity. here is how it works:
1) Bank $0...Seller car...Buyer $0
2) Bank $20k deposit liability and $20k loan...Seller car....Buyer $20k deposit and $20k debt

$20k has just been created by the miracle of FRB.

3) Bank $20k deposit liability and $20k loan...Seller $20k deposit... Buyer car and $20k debt

The deal has bee consummated. Buyer is so happy to have the car that he celebrates, gets drunk, wrecks /destroys car, dies, defaults on loan.

The Bank still has a liability to Seller for the 20K in his checking account, but no longer has an offsetting asset because Buyer has defaulted on the loan.

4) Bank $20k deposit liability...Seller $20k deposit... Buyer $0

Now the Seller wants to spend his money. He attempts to withdraw his money. The bank does not have his money, nor does it have any corresponding asset (loan) it can sell to obtain the money. The bank can pay Seller out of it's own money (equity) or, if it does not have enough, it can default leaving Seller holding the bag. Either the new money created in step 2 gets replaced with previously existing old money, or it gets destroyed through default. Either way, the money supply that was increased through FRB, has now been decreased.

Anonymous VD August 03, 2012 11:35 AM  

This is one possible explanation... and not the most likely. The most logical explanation is mal-investment. Yes... the debt makes mal-investment easier.. but mal-investment still happens every day even without the debt.

No, you're missing the point. Debt is intrinsically inflationary even if we come at it from the simple point of basic supply and demand because it increases the available demand. Housing prices are significantly higher than they could ever be if people were required to pay cash for them. Malinvestment doesn't require debt, but debt always creates malinvestment.

Blogger Nate August 03, 2012 11:44 AM  

"Let's work with this. I agree, the 20k on the unused Lowe's card is potential money at best. But suppose you've used 5k of the 20k on the card. 15k is obviously still potential money. Is the 5k now money or potential money?"

I apologize... I missed this.

The 5k is money because it was spent. However that money is counted in m2 and thus cannot be recounted.

Blogger Nate August 03, 2012 11:48 AM  

"Housing prices are significantly higher than they could ever be if people were required to pay cash for them. Malinvestment doesn't require debt, but debt always creates malinvestment."

I don't disagree with this. I will qualify that there is always some level of malinvestment. Debt just exacerbates it.

Its still entirely likely that you can take losses in the prices in the housing market and still have inflation. While the housing market is huge... its not the whole economy. Cars are in the 40k range now... and people trade them much more often than they trade houses. At least in 2012 they do.

Blogger Nate August 03, 2012 11:49 AM  

"Now the Seller wants to spend his money. He attempts to withdraw his money. The bank does not have his money, nor does it have any corresponding asset (loan) it can sell to obtain the money."

No.

You simply don't understand how this works at all. Bank loans do not come bank reserves... nor do they come from deposits.

Anonymous Suomynona August 03, 2012 12:07 PM  

While I don't comment on these threads, I do read them. In doing so, it strikes me that economics is more akin to voodoo than any kind discipline or science. Even mathematics becomes subjective in this mysterious realm. Oi, I just did a search on both terms and see where that came from. Voodoo economics was a term coined by George H. W. Bush as a derogatory description of Reagan's economic policies. And he got elected?

That there can be so much disagreement on economics, on what appear to me to be fundamentals, is disturbing. It's not as if economics were quantum mechanics or some other unobservable, or newly discovered, phenomenon. Yet it's as if we're still arguing about the optimum number of sides a wheel should have.

It is this fuzziness that makes economics a most excellent tool to further any agenda. The economy is like the air we breath - no one is immune from the consequences, whether intended or unintended, of economic policies. And the more global the economy, the more out of our hands and the more insidious are its effects.

Blogger Nate August 03, 2012 12:10 PM  

"While I don't comment on these threads, I do read them. In doing so, it strikes me that economics is more akin to voodoo than any kind discipline or science."

Pretty much.

Remember Austrians and Keynesians disagree so radically they really can't even communicate with each other.

Anonymous Stilicho August 03, 2012 12:18 PM  

"Now the Seller wants to spend his money. He attempts to withdraw his money. The bank does not have his money, nor does it have any corresponding asset (loan) it can sell to obtain the money."

No.

You simply don't understand how this works at all. Bank loans do not come bank reserves... nor do they come from deposits.


Lay off the bourbon. It's hurting your reading comprehension. I never said that loans come from reserves. However, I did say that settlement of the Seller's checkable deposit must come from the bank's pocket in this case or the bank must default.

Of course, I suspect your reading comprehension is fine. You're just trying to change the subject. Debt deflation destroys credit inflation.

Blogger Nate August 03, 2012 12:22 PM  

"Of course, I suspect your reading comprehension is fine. You're just trying to change the subject. Debt deflation destroys credit inflation."

No it doesn't... because as long as the reserves are untouched the bank can continue to create money from thin air. They gambled on you and lost... oh well... they create more money from thin air and gamble again... rinse and repeat.

lose over and over and over again? No problem. That's what TARP is for.

Blogger Nate August 03, 2012 12:24 PM  

What is reducing the ability to inflate through credit... is the lack of qualified borrowers... and the fact that those that are qualified... have little desire to aquire debt.

No matter though. Banks are by no means the only way to inject new money into the system... and banks can create money from thin air for other things besides just loans. They can also leverage for investments.

Anonymous Stilicho August 03, 2012 12:31 PM  

Bank loans do not come bank reserves...

as long as the reserves are untouched the bank can continue to create money from thin air.

Come full circle have we?

Blogger Nate August 03, 2012 12:46 PM  

"Come full circle have we?"

Not at all. Banks don't touch their reserves. Read Keen.

Anonymous Stilicho August 03, 2012 12:53 PM  

Of course not Nate. But that has nothing to do with the fact that deflation does occur.

Anonymous Stilicho August 03, 2012 1:04 PM  

But, please explain what you think happens after step 4 (above) when the Seller wants to withdraw his $20K checkable deposit. Where does the money come from? There are no "profits" to draw it out of any more than the underpants gnomes ever realized a profit. If the owners of the bank have any equity, it comes from there. If they do no not, then the bank defaults. There is no way around that other than someone else creating more new money and giving it to this bank.

Anonymous Matt_OKC August 03, 2012 1:25 PM  

Basics of Money Creation

Anonymous Noah B. August 03, 2012 1:28 PM  

"No it doesn't... because as long as the reserves are untouched the bank can continue to create money from thin air. They gambled on you and lost... oh well... they create more money from thin air and gamble again... rinse and repeat."

Nate, this seems to be a point of fundamental misunderstanding on your part. A bank can loan out the excess of deposits over its reserve requirement, plus any retained earnings/equity it may have. Once this has been lost due to defaults on loans, it has nothing more to lend.

What has largely prevented a banking system collapse in this country is the OTS allowance of ludicrous asset valuations that totally disregard current market conditions, allowing banks to continue to lend under conditions that would not have been permitted in the past. However, this sort of fraud has its limits, and the regulators have not given banks carte blanche to assign any arbitrarily chosen valuation to their assets. They've given banks just enough leeway to allow them to pretend to be treading water.

Anonymous Daniel August 03, 2012 1:31 PM  

the fact is while prices are going down in housing they are going up everywhere else. For f's sake.. a bag of doritos is 4.49 now! It was 99 cents less than 10 years ago! and on top of that they've reduced the amount of doritos in the bag!

Hmm. Doritos up by dollars. Houses, teevees, computers, compact used cars, auto repairs, heavy equipment dropping by hundreds, thousands or even hundreds of thousands.

But I guess if you are looking only at a Doritos-based economy, deflation might seem somewhat out of scope...

Anonymous Suomynona August 03, 2012 1:38 PM  

Remember Austrians and Keynesians disagree so radically they really can't even communicate with each other.

Austrians and Keynesians tend to disagree radically on politics as well as economics. I think that economics is not about math, or science, or supply or demand, or even money. I think economics is about politics, and politics is about controlling people. Economics is simply the name of a very powerful political tool.

Does a totalitarian government, like North Korea, debate their economic policies? I tend to doubt it.
Already having control over everyone's lives, that government has no need to wield their economic tool to manipulate the population.

In the freest nation, which would have the smallest, weakest, centralized government, I think there would be very little government interference in the economy, and thus little discussion or debate regarding economic policies. Neither Austrians nor Keynesians would have enough power put their policies into effect.

I may be completely wrong, as I have done no research or given very little thought to economics, but I think it is significant that there is little debate regarding the economy in the extremes of governments.

It appears the endless economic debates in which the whole world is currently embroiled is actually a power struggle which will eventually end, at which time we will be living under one of the two extremes of government. I don't imagine it will be the freest one.

How would an economy stand up during a period of anarchy?

Anonymous Noah B. August 03, 2012 1:39 PM  

The looming tax hikes in the US should also have a deflationary impact. The Fed may use that as justification for its next round of "easing."

Blogger Joshua_D August 03, 2012 1:40 PM  

Suomynoa, is Calculus just a power struggle?

Anonymous Stilicho August 03, 2012 1:43 PM  

Neither Austrians nor Keynesians would have enough power put their policies into effect.

Except that what you've described IS pretty much Austrian economic policy.

Anonymous Noah B. August 03, 2012 1:44 PM  

@Joshua_D
Personally, I struggled more with the transcendentals than the powers.

Blogger Joshua_D August 03, 2012 1:44 PM  

Daniel August 03, 2012 1:31 PM

But I guess if you are looking only at a Doritos-based economy, deflation might seem somewhat out of scope...


Let's imagine Robinson Crusoe on his island with a bag of Doritos. Now Friday ...

Anonymous Suomynona August 03, 2012 1:45 PM  

Suomynoa, is Calculus just a power struggle?

It certainly can be if it's used in formulas to manipulate people. You might as well have asked if statistics or computer models are just power struggles.

Anonymous Suomynona August 03, 2012 2:05 PM  

Except that what you've described IS pretty much Austrian economic policy.

I had considered that, but it would not be the result of any government mandate, or lack thereof. It's a fine distinction, one being a weak government with no power to call the economic shots vs one that chooses not to call them.

Anonymous Suomynona August 03, 2012 2:32 PM  

I didn't mean to derail your discussion. It is more than obvious that I have zero knowledge of economics. I don't even know what that FNR or whatever those initials are, stand for. I take the liberty of displaying my ignorance only in consideration of the fact that even academics, like North, can be so full of crap on economics - although I would consider my ignorance far less egregious.

Carry on, gentlemen. I'm outta here.

Anonymous FUBAR Nation (Ben) August 03, 2012 3:04 PM  

If you are forecasting deflation you might be right, but it'll take at least 20 years. Look at Japan which has replaced private debt with public debt. It's still able to raise money but we all know it's going to eventually collapse just like Europe.

Anonymous JartStar August 03, 2012 3:55 PM  

Sorta OT: Facebook Stock Crash Hoses California's Tax Revenue

Nothing like estimating your future tax revenue on a tech IPO.

Anonymous Noah B. August 03, 2012 4:06 PM  

The government is looking for all sorts of creative methods they can use to steer the collapse to their liking. The latest is the proposed introduction of withdrawal limits to money market funds.

Yes, dear customer, your money is perfectly safe -- but the government says you can't have it.

Blogger Nate August 03, 2012 5:53 PM  

"Nate, this seems to be a point of fundamental misunderstanding on your part. A bank can loan out the excess of deposits over its reserve requirement, plus any retained earnings/equity it may have. Once this has been lost due to defaults on loans, it has nothing more to lend."

Unless what?

What if its reserve requirement is lowered? What if its reserve requirement is lowered to... 0?

Blogger Nate August 03, 2012 6:02 PM  

"Hmm. Doritos up by dollars. Houses, teevees, computers, compact used cars, auto repairs, heavy equipment dropping by hundreds, thousands or even hundreds of thousands."

WTH?

Houses are cheaper. computers are not cheaper. auto repair is up as well as increased demand. Heavy equipment? maybe down where you are. sky rocketed here. but then here... we're actually still building things.

Don't fall for the idiotic, "computers are faster so you have to compare the price that way" garbage.

Anonymous Salt August 03, 2012 6:05 PM  

What if its reserve requirement is lowered? What if its reserve requirement is lowered to... 0?

What if its reserve requirement were raised to 100%?

Anonymous Noah B. August 03, 2012 6:22 PM  

"What if its reserve requirement is lowered? What if its reserve requirement is lowered to... 0?"

Clearly that is not current policy, although if your point is that the Fed has the hypothetical power to create money without limit, you'll get no argument here. However, it is difficult to imagine a situation in which the Fed would freely share this power with every banking institution in the country. That would lead to practically unimaginable economic chaos and would be politically untenable, to say the least.

Under the current system, banks have to at least pretend to be solvent and/or pay out enough bribes to keep the regulators quiet.

Blogger Nate August 03, 2012 7:23 PM  

"What if its reserve requirement were raised to 100%?"

We wouldn't have a fractional reserve system any more and that would be sound money.

now... unlike your scenario... mine has actually been suggested as a possibility by psycho keynesians. So what happens when the reserve requirement is reduced to nothing?

Blogger Nate August 03, 2012 7:24 PM  

"That would lead to practically unimaginable economic chaos and would be politically untenable, to say the least."

which is TOTALLY unlike what we had from 1997 to 2008.

Anonymous TheExpat August 04, 2012 12:01 AM  

Looks like Mish has also had enough with North.
http://globaleconomicanalysis.blogspot.jp/2012/08/preposterous-falsehoods-from-gary-north.html

Blogger LP 999/Eliza August 04, 2012 4:26 PM  

Great post, every clarifying and educational as I'm still getting the hand of economics. I do love these infla-defla debates.

Post a Comment

NO ANONYMOUS COMMENTS. Anonymous comments will be deleted.

Links to this post:

Create a Link

<< Home

Newer Posts Older Posts