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Friday, March 08, 2013

Inflation vs Deflation VII

In his post entitled Fiat or Shenanigans, Nate contested the idea that US money is credit money and not fiat money with the characteristics of credit money:
Remember I said our money was fiat money... with characteristics of credit money.  Right?  Vox says I am wrong about that.  And... while I considered rushing off to donate some money to an unrelated charity in his name and make a video about it...  instead... I just decided I would address his well made point like an adult...  mostly...

Vox said: "Nate's first mistake is the identification of credit money as fiat money, even though he clearly has his suspicions concerning the problematic nature of the distinction as it applies to the US monetary system.  That this distinction is false can be demonstrated in two ways, first with a legitimate appeal to authority and history, and second by the money creation process."

He then provides a quote from Mises, that I agree, does indeed say that fiat money doesn't yet exist and probably hasn't existed.  Vox appeals to Mises who appeals to history.   And Nate points out... well shit...  this book was written in 1912...  it appears we have some more history to investigate before that holds water doesn't it?  Well lets look at this new history then... especially... recent history.

Say what does our buddy Murray have to say about fiat money?

"Under a fiat money standard, governments (or their central banks) may obligate themselves to bail out, with increased issues of standard money, any bank or any major bank in distress. In the late nineteenth century, the principle became accepted that the central bank must act as the "lender of last resort", which will lend money freely to banks threatened with failure. Another recent American device to abolish the confidence limitation on bank credit is "deposit insurance", whereby the government guar­antees to furnish paper money to redeem the banks’ demand li­abilities. These and similar devices remove the market brakes on rampant credit expansion."

While the quote from Mises does date back to the 1912 text, Mises himself lived until 1973 and witnessed all of the innovations mentioned, even the removal of the convertibility to gold by President Nixon.  I am not aware of any point at which he changed his opinion on this matter, nor does Nate suggest that he did.

Given the fact that the FDIC's deposit insurance observably does not take the form of paper money being furnished to redeem the failing banks' demand liabilities, but rather transfers those liabilities to other banks in the system without any paper money at all being furnished to anyone, I think it is safe to conclude that Murray does not have a sufficient grasp on the difference between fiat money and credit money for his statements to be relevant here.  Moreover, the statement that the central bank is "the lender of last resort" itself tends to underline the fact that the "deposits" are, in fact, credit and not pure fiat.  The central bank is not actually "lending money" to banks under duress, it is merely inflating the amount of credit at their disposal.

Recall that when you make a payment from your ebanking account, the bank declares it will make the payment "provided there is sufficient credit" on your account.  It's all credit, both in electronic form and paper form.

Nate continues:
Are we done?  No... no no no... we're along way from done.   Remember.. Mises characterized fiat money by legal privilege.  Legal Privilege?   Consult the MisesWiki!  According to Hülsmann, there are four groups of legal privileges granted by the state (usually more than one is granted):
  1. legalized counterfeiting - the promises of banks are allowed to be more "elastic". For example, a coin marked "an ounce of gold" will be allowed to have any amount of gold or none, and can have any meaning. Banknotes were named "promises to pay", but were obscure on the details.
  2.  monopoly - only some monetary products may be produced by law, like a specific metal; or only the banknotes or coins of a certain bank. This limits the freedom of choice of users of money and benefits the producers and first recipients at the detriment of others.
  3. legal tender is a money, that must be accepted in exchanges under a predefined price. Some monies may be driven out of the market due to Gresham's Law.
  4.  legalized suspension of payments allows banks to avoid paying their obligations, while receiving payments from their debtors. If a bank is freed from contractual obligations to redeem its money and it is also legal tender, its banknotes become genuine paper money. With legal privileges are the banks allowed to behave more irresponsibly, which increases moral hazard.
Here we get to the crux of Nate's error.  Nate is correct to point out that the Federal Reserve's credit money is declared to be legal tender and is legally privileged by the federal government.  In this sense, he is correct in saying that the US monetary system is fiat money.  However, this only is the wider sense in which the Mises Institute defines the term:

Often called paper money, fiat money is in a wider sense any money declared to be legal tender by government fiat (ie law). In the narrower sense used here, fiat money is an intrinsically useless good used as a means of payment and a storable object.

The narrower sense of fiat money is clearly the sense Mises was using the term when he declared "most of those kinds of money that are not commodity money must be classified as credit money" and questioned whether fiat money had ever existed.  And that narrower sense cannot possibly apply to the Federal Reserve notes, as most "dollars" are a) not a good, useless or otherwise, b) not a storable object, and c) not a risk-free convertible claim to real money.

Nate would be correct to claim credit money is fiat money in the wider sense, but then, I completely agree with that.  I am simply declaring that US currency is credit money that is not fiat money in the narrower sense.  Nate is incorrect to say that it is fiat money in the narrower sense, which is the sense that most people believe it to be.  Nate continues:
Now are we done?  Well... not really.  Because what I've done here isn't intellectually honest, in the sense that I have not represented the whole of Vox's point.  The reason I hated Chapter three is not because of confusing terms like fiduciary media.  Its because Credit Money itself is a category error.

Credit money is a description of leverage. But...  Leverage can be applied to all types of money....  Thus... Credit Money... is a subcategory.  Credit Money is what happens when you take money of any other type.. and then leverage it up for lending purposes....  Leverage is something that happens to Money Types.  It isn't a money type itself.  Its like including cancer cells in a discussion of  human  cells because they form in the human body.  Cancer cells aren't human cells.

We must always go back to competition.

Money is money because of the constant commodity competition   Every day the competition is on going... and every day one commodity is winning.  that one commodity that is winning... is the money.   The money types... are explanations of WHY the competition is being won.  Fiat money is fiat money because the government helped it win artificially and it wouldn't have won otherwise.  Take away the government advantage... and its not the money anymore. Commodity money types?  Well they have no artificial government advantage.

That is the true definition of sound money.

Its money that wins the competition... every minute of every day...  the on going competition... not some past competition .. on its own without aid of the government.

All modern paper currencies are fiat money.

The bits that are loaned into creation from thin air?  Those are credit money too... but it is dishonest to ignore the fact that it is fiat money as well.  Loans may have created the individual dollar bills... but those dollar bills wouldn't be money... if it wasn't Fiat.

May God have Mercy on my soul...   Ludwig Von Mises... was wrong.  You cannot disregard the fiat nature of the original money... just because most of it was created through leverage.

So Fiat?  Shenanigans?

The answer is both.  Not one.  Not the other.   Both.  To fail to grasp that... will totally blind you to the inherit problems of our current economic system.  The money is fiat money and credit money.. because much of which was created via leverage... but also much of it was created through counterfeiting.   This is why I created the word "clusterfutastrophe" while attempting to parse the US money supply.
Nate is stumbling towards the truth here, which is that credit money is fiat money in the wider sense but not the narrower one, but is still stumbling.  He is still hung up on the basic concept of credit money, which is why he erroneously calls it a category error.  What he is failing to grasp is the central importance of credit in the monetary process, one which precedes the role that government plays in either guaranteeing the credit claims or establishing the legal privilege of those claims.

"When all exchanges have to be settled in ready cash, then the possibility of performing them by means of cancellation is limited to the case exemplified by the butcher and baker and only then on the assumption, which of course only occasionally hold good, that the demands of both parties are simultaneous. At the most, it is possible to imagine that several other persons might join in and so a small circle be built up within which drafts could be used for the settlement of transactions without the actual use of money. But even in this case simultaneity would still be necessary, and, several persons being involved, would be still seldomer achieved.

These difficulties could not be overcome until credit set business free from dependence on the simultaneous occurrence of demand and supply. This, in fact, is where the importance of credit for the monetary system lies. But this could not have its full effect so long as all exchange was still direct exchange, so long even as money had not established itself as a common medium of exchange. The instrumentality of credit permits transactions between two persons to be treated as simultaneous for purposes of settlement even if they actually take place at different times"
 - Mises, The Theory of Money and Credit, p. 282

The important aspect of credit is not its ability to be leveraged, which is a consequence of the characteristics of money rather than an integral aspect of credit, but rather its ability to transcend time.  It is the fact that the credit is a claim to money rather than to some other commodity that permits its expansion beyond the existing money supply.

"A person who has a thousand loaves of bread at his immediate disposal will not dare to issue more than a thousand tickets each of which gives its holder the right to demand at any time the delivery of a loaf of bread. It is otherwise with money.... The fact that is peculiar to money alone is not that mature and secure claims to money are as highly valued in commerce as the sums of money to which they refer, but rather that such claims are complete substitutes for money, and, as such, are able to fulfil all the functions of money in those markets in which their essential characteristics of maturity and security are recognized. It is this circumstance that makes. it possible to issue more of this sort of substitute than the issuer is always in a position to convert.  And so the fiduciary medium comes into being in addition to the money certificate. Fiduciary media increase the supply of money in the broader sense of the word; they are consequently able to influence the objective
exchange-value of money."
 - Mises, The Theory of Money and Credit, p. 267

Note that the credit aspect not only predates the broader fiat aspects, but is, in fact, intrinsically necessary for the eventual expansion.  Nate concludes with a question

Its not that there is no money.   I already explained that there is always money.  Money...is like energy.  It cannot ever be destroyed.  It can change forms... its velocity can change.  But it cannot be destroyed.  The problem is... our system is so screwed up through fiat and leverage... that we can't even measure the money supply any more.  Come Vox... be sensible... you're absolutely right to point out that the leverage can't be ignored... but you were wrong to suggest that the fiat aspects can.  Now tell us Vox...  What IS the best way to measure the abomination posing as the US money supply?  He asked knowingly...
First, I'll point out that since we have a system "in which the actual transfer of money has been completely superseded by fiduciary media", it doesn't matter that we can't measure the money supply anymore.  Because we're no longer using actual money, we are merely using possibility of money in order to support the extensive system of potential claims to theoretical future money.  Or, as Nate rightly calls it, a financial abomination.  As strange as this sounds, it was anticipated at least 101 years ago, as Mises notes:

"Use is made of money, but not physical use of actually existing money or money substitutes. Money which is not present performs an economic function; it has its effect solely by reason of the possibility of its being able to be present."

In answer to Nate's question, the best way is to measure the sum total of all the current outstanding claims.  This is approximated in the Federal Reserve's Z1 Flow of Funds Accounts, specifically the L1 credit market debt outstanding report.  And it is the expansion of this supply, though not strictly speaking "inflation" per se, that effects exchange value and therefore the prices of goods and services.

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79 Comments:

Blogger Nate March 08, 2013 11:53 AM  

HA!

Brilliant mate. Honestly.

And now I have to decide if 1... you're right... and then if I disagree... if its even worth explaining why you're not.

Either way I suppose some concrete examples of why we're saying all of this is fiduciary media will help. I'll certainly provide those in my response either way.

Blogger IM2L844 March 08, 2013 11:53 AM  

You guys officially have my opinion flip-flopping like a wet bass in a flat bottom boat.

Anonymous Josh March 08, 2013 11:57 AM  

the best way is to measure the sum total of all the current outstanding claims.

That is quite, quite good.

So in the economy, there are roughly claims to 55 trillion of future money?

Anonymous Josh March 08, 2013 11:59 AM  

You guys officially have my opinion flip-flopping like a wet bass in a flat bottom boat.

How so?

Anonymous Josh March 08, 2013 12:01 PM  

What he is failing to grasp is the central importance of credit in the monetary process, one which precedes the role that government plays in either guaranteeing the credit claims or establishing the legal privilege of those claims.

So credit money was being created in the monetary supply before the government privileges made it fiat money in the broad sense of the term.

Anonymous Daniel March 08, 2013 12:03 PM  

Between the both of you, I finally understand why I ain't got no chili.

Anonymous Salt March 08, 2013 12:04 PM  

Shoot. You guys just ain't got no chilli, yes?

Anonymous Josh March 08, 2013 12:06 PM  

This is approximated in the Federal Reserve's Z1 Flow of Funds Accounts, specifically the L1 credit market debt outstanding report.

Is there going to be a separate Z1 post?

Anonymous Spoos in August March 08, 2013 12:09 PM  

So, if I understand correctly, the fact that people are paying off their debts (or forcing them to be written down, via default) is causing monetary deflation, despite the best efforts of the Fed? While they eschew borrowing more, fewer promises of money are chasing the same amount of goods, so prices fall.

I suppose the next logical question is, what will our leading financial luminaries do about it? Bernanke, et al. don't think deflation is possible, except in the short term before the government changes the rules, so what rule changes do you create to make sure that the credit money flows??

Blogger IM2L844 March 08, 2013 12:10 PM  

How so?

In the credit is money/credit is not money way. The point of credit's inability to finalize a transaction comes to mind, but I probably need to go back and re-read this whole back and forth again before I sick my foot in my mouth.

Anonymous Daniel March 08, 2013 12:12 PM  

Can you clarify the question for me Spoos? Are you asking what Ben will do in light of his ignorance? Or what he should do in light of his institutional limitations?

Anonymous Mr. Nightstick March 08, 2013 12:23 PM  

Winner gets the chili, unless, of course, if chili is too pedestrian for Vox, yes?

Anonymous Josh March 08, 2013 12:23 PM  

The point of credit's inability to finalize a transaction comes to mind

Oh God not this again...

Blogger IM2L844 March 08, 2013 12:26 PM  

Oh God not this again...

I wasn't going to say anything, but you just had to ask ;)

Anonymous Russell March 08, 2013 12:28 PM  

"Because we're no longer using actual money, we are merely using possibility of money in order to support the extensive system of potential claims to theoretical future money."

So we can keep running up the debt as long as we can pay off the interest, and we can keep paying off the interest by printing more dollars, right?

*ducks*

Blogger jamsco March 08, 2013 12:30 PM  

So ... any chance anyone could summarize for this post. You know, for the economically ignorant.

Anonymous CunningDove March 08, 2013 12:34 PM  

Spoos in August ~ "so what rule changes do you create to make sure that the credit money flows??"

I don't expect to see rule changes at first. I honestly expect to see something like the Bush "Everyone is getting a refund!" Shenanigans... Individuals will get (some arbitrary amount) and families will get that + a percentage for every child sent to them directly from the Treasury Department. Then, we can all start looking for the Helicopters over Harlem.

Anonymous Stilicho March 08, 2013 12:39 PM  

It really is Schroedinger's money: we are merely using possibility of money in order to support the extensive system of potential claims to theoretical future money.

It's in a quantum state of uncertainty. When that state becomes certain through default...

Glad to see the time element addressed too.

Anonymous VD March 08, 2013 12:44 PM  

So ... any chance anyone could summarize for this post. You know, for the economically ignorant.

My friend... this is the summary.

Anonymous Josh March 08, 2013 12:51 PM  

So ... any chance anyone could summarize for this post. You know, for the economically ignorant.

Money today is fiat money in the broad sense, not the narrow sense, because frn don't have the characteristics of fiat (being a good, a store of value, etc). Also, it existed as credit money before given the various legal privileges of fiat money.

Anonymous Jack Amok March 08, 2013 12:54 PM  

By the beard of Retarded Spock, it wasn't enough to have Commodity Money, Fiat Money, and Credit Money, he had to go and further divide it into narrow and broad Fiat money...

But then Vox pulls out the Temporal Hammer and wields it like a hero. Well done indeed.

Jamsco, the summary is this: It doesn't really matter what the various definitions for different types of money are because we're not actually using any of them for conducting transactions. Instead we trade "potential claims to theoretical future money" back and forth. We've achieved escape velocity. Broken orbit. We're free from gravity.

Blogger foxmarks March 08, 2013 12:54 PM  

Thinking back to RGD, “you can’t print borrowers” was essential to the deflation case. It might be that you can’t print credit-worthy borrowers. But if there was a way to foist debt on the poor and unlearned (student loans, to start), there may be no limit. One could imagine driveways full of shiny new Cadillacs in every poor neighborhood.

But then, the poor instead of the banksters would be getting the benefit of “first spend” on newly-created money substitutes. The benefit would flow to the automakers and autoworkers, but not to the bankers who created the credit. So there’s little incentive for the bankers to make the loan.

What if another agent makes the loan? Could Congress empower the Treasury to issue medium-of-exchange notes directly? Make them legally convertible to/from FRNs.

When the FedRes runs out of borrowers, instead of accepting deflation, why not build a parallel structure to keep the charade going?

Blogger IM2L844 March 08, 2013 12:55 PM  

It's in a quantum state of uncertainty.

But can states without properties literally exist? Sometimes, I think I can hear my bank account whimpering across time and space.

Anonymous Josh March 08, 2013 1:07 PM  

But if there was a way to foist debt on the poor and unlearned (student loans, to start), there may be no limit.

They're already doing that. The student loan sector is the only consumer sector that is seeing much increase in credit.

They problem is, can that be increased fast enough and large enough to counter other sectors seeing a contraction in credit?

Also, piling on more debt on younger consumers makes it less likely that they will be borrowing at the same level as older consumers once they graduate from school.

Blogger jamsco March 08, 2013 1:09 PM  

"Jamsco, the summary is this: It doesn't really matter ..."

Thanks, Jack

Blogger Giraffe March 08, 2013 1:12 PM  

Jamsco, the summary is this: It doesn't really matter what the various definitions for different types of money are because we're not actually using any of them for conducting transactions. Instead we trade "potential claims to theoretical future money" back and forth. We've achieved escape velocity. Broken orbit. We're free from gravity.

That's my biggest concern about this debate. It's not who wins, it's whose position reflects reality.

And reality is, as Huckleberry always said, we're all gonna die.

Blogger foxmarks March 08, 2013 1:14 PM  

I was using the student loan debacle as a model. It has worked very well to keep the bubble up for a few years. Let’s debtify new categories of people!

When the banksters run out of tricks, the political class will have to do something to stay in power. Can the political class stab the financial class in the back?

Anonymous Josh March 08, 2013 1:14 PM  

We've achieved escape velocity. Broken orbit. We're free from gravity. 

Not quite. If that was true, total outstanding credit would be pushing 80 trillion.

Anonymous scoobius dubious March 08, 2013 1:15 PM  

By all means continue this debate, there's certainly no harm in it, and probably some edifying insights. But like they say, when you're talking about a battle, the amateurs talk about strategy and the pros talk about the terrain.

When it comes to issues like inflation, or what will happen to giant amounts of debt, or what the Fed does with respect to the alleged money supply, the main thing I want to know is... who are the characters sitting at the table, in the room, having the conversation and making the decisions. Rules are human in nature, and if certain humans don't like the rules, and they are in a position to change them, then the rules, mysteriously, will somehow change. God doesn't bow to math, and much of the time, people don't either. (Whether that is wise or not is another question, probably better answered on an Asher thread.) The Romans and the Greeks of say 200 BC were not the same sort of people as the Romans and the Greeks of say 560 AD. Money meant something particular in the Venetian Republic in 1532, and it means some other particular thing today in Washington DC, in rural Oaxaca, in Idaho, in Hunan.

What are the Chinese like? What are the Jews like? What are the Anglos like? What are their respective proportions, levels of influence, and levels of mutual infiltration and counter-infiltration? What do these different types of people really want? What have they deluded themselves into believing they want? What's the seating arrangement in the room? Who's at the head of the table? Is the guy at the head of the table actually respected because of where he's sitting, or is that just a bit of theater being managed off-stage by somebody else?

Questions, questions, questions, fluttering into the mind of the concerned young person of today. Ah but it's a great time to be alive, ladies and gentlemen, and that's the theme of our program for tonight. It is so f#cking great to be alive, boys and girls. And I wanna tell ya, if there is anybody here who does NOT believe that it is F#cking Great To Be Alive, well I wish they would just leave now because this show will bring them down so much.


Anonymous Stilicho March 08, 2013 1:17 PM  

I think I can hear my bank account whimpering across time and space.


You may be hearing a metaphor that we've stretched to the limit

Blogger Nate March 08, 2013 1:20 PM  

"So ... any chance anyone could summarize for this post. You know, for the economically ignorant."

Jamsco... haven't you been paying attention?

That's my job.

Anonymous Godfrey March 08, 2013 1:22 PM  

@jamsco March 08, 2013 12:30 PM "So ... any chance anyone could summarize for this post. You know, for the economically ignorant."


Own real assets or "money" that can't be easily manipulated.

Anonymous Koanic March 08, 2013 1:23 PM  

Understood. Agree. Enlightened.

The axiomatic clarity of style is much appreciated.

Of course we are not quite done with fiatization until the mark of the beast arrives. So apparently humanity isn't going to learn from this, quelle surprise.

An abomination with Illuminati symbols all over it. And our elite, the abomination wranglers.

Blogger Nate March 08, 2013 1:30 PM  

"hen it comes to issues like inflation, or what will happen to giant amounts of debt, or what the Fed does with respect to the alleged money supply, the main thing I want to know is... who are the characters sitting at the table, in the room, having the conversation and making the decisions. Rules are human in nature, and if certain humans don't like the rules, and they are in a position to change them, then the rules, mysteriously, will somehow change. God doesn't bow to math, and much of the time, people don't either."

Dear Scoobius... on this Vox and I agree... Who is making the decisions does not matter. A situation has been created, through mind-numbing arrogance and stupidity... that will render them powerless.

What will happen... will happen regardless of what decisions they make.

both the hyper-inflationist... and the deflationist agree.

And sadly... I suspect Vox would agree with me as well... that we're inching ever closer to a Fallout 4 Live! scenario... the longer this drags out.

Anonymous Jack Amok March 08, 2013 1:32 PM  

But if there was a way to foist debt on the poor and unlearned (student loans, to start), there may be no limit

They're already doing that. The student loan sector is the only consumer sector that is seeing much increase in credit.


Technically they're also doing it with the National Debt, foisting debt on our unborn grandkids. But it's not unlimited, because debt requires somebody to pay at least a little interest on it to preserve the fiction, er, possibility of it being future money. Since those unborn kids, being unborn and all that, can't make any payments yet, the current clowns have to make interest payments in their name until the kids are old enough to take over. But the grownups have rung up so much on the grandkid's Visa card that the grownups are having trouble making those bridge payments.

Anonymous Josh March 08, 2013 1:51 PM  

Technically they're also doing it with the National Debt, foisting debt on our unborn grandkids. But it's not unlimited, because debt requires somebody to pay at least a little interest on it to preserve the fiction, er, possibility of it being future money. Since those unborn kids, being unborn and all that, can'tmake any payments yet, the current clowns have to make interest payments in their name until the kids are old enough to take over. But the grownups have rung up so much on the grandkid's Visa card that the grownups are having trouble making those bridge payments.

There's only so much forward demand that can be pulled into the present. And then you have to pay it back.

And the heroic efforts of Ben Bernanke are having increasingly diminishing returns, as 1.2 trillion in new federal debt only creates 60% of the jobs it did a year ago.

Anonymous scoobius dubious March 08, 2013 1:52 PM  

"Who is making the decisions does not matter. A situation has been created, through mind-numbing arrogance and stupidity... that will render them powerless."

Yes, it will render them powerless. And then other people will come along who are different from the powerless people, especially with respect to the whole not being powerless thing. And then things will mysteriously become different, though in ways I can't predict from math, and neither can you.

I don't believe that Attila the Hun or Alaric the (I think) Goth found themselves terribly confounded by Roman financial pickles.

Shih Huang-ti.
An Lu-shan.
Hernan Cortez.
The false prophet Mohammed.
Temujin, and Timur the Lame.
That crackpot whose name escapes me, who started the Tai-p'ing Rebellion based on a zany misreading of a Christian missionary tract, but who managed to burn an empire to the ground.
George Washington.
V.I. Lenin.

All of these people stumbled upon a set of rules that weren't exactly to their taste, and then the next thing you know, the rules were different, and history was, too.

Wild cards are, paradoxically, a highly predictable phenomenon. Did Mises have anything to say about that?





Blogger IM2L844 March 08, 2013 1:55 PM  

You may be hearing a metaphor that we've stretched to the limit

LMAO! It's a good day when I get to have a lot of laughs and learn some stuff at the same time. Today is a good day.

Blogger Joshua_D March 08, 2013 2:01 PM  

Time is money.

Anonymous Josh March 08, 2013 2:29 PM  

Actually, in this context, time would be interest.

Or more precisely, time preference.

Blogger TontoBubbaGoldstein March 08, 2013 2:29 PM  

So ... any chance anyone could summarize for this post. You know, for the economically ignorant.

TL,DR, yes?

Anonymous Vitus_Bering March 08, 2013 2:35 PM  

Again, good enough for me...

If it spends, it's money.

Blogger TontoBubbaGoldstein March 08, 2013 2:36 PM  

So we can keep running up the debt as long as we can pay off the interest, and we can keep paying off the interest by printing more dollars, right?

I'm planning to live forever. So far...so good!

Anonymous Josh March 08, 2013 3:03 PM  

I'm planning to live forever. So far...so good!

Hey, Keynes says we're all dead in the end, are you suggesting he's wrong?

Anonymous Spoos in August March 08, 2013 3:21 PM  

To clarify what I'd asked earlier:

If one wanted to try to avert debt-disinflation (as opposed to hyperinflation), how would you do it? The present quantitative easing (i.e. money-printing) doesn't seem to be working. I wonder what alternatives there are left to Fallout 4 Live!, because I haven't really been saving bottle caps the way I should.

The refund thing might work, as a spur to getting people to incur greater debt, but I suspect that you can't adequately incentivize borrowing in a contracting money market.

Also, upon reading more closely, I noticed that what we are really seeing is lower than expected growth. The reason that this is deflationary is presumably because our economy is predicated on a predictable growth rate in the money supply?

Blogger Giraffe March 08, 2013 3:23 PM  

@Jamsco:

You may find this helpful:
http://elborak.blogspot.com/2013/03/my-take-on-inflationdeflation-debate.html

Blogger jamsco March 08, 2013 3:24 PM  

"Jamsco... haven't you been paying attention?
That's my job."

Okay, I'll wait. Your last summary was the most interesting text to come out of all of this.

Blogger Giraffe March 08, 2013 3:27 PM  

If one wanted to try to avert debt-disinflation....

I'm not an internet superintelligence, but I did read part of the ROTGD voxiversity. I think the answer is, if you don't want the hangover, don't go to the party. We already went to the party. Fighting off the hangover with more booze sort of works but our liver is starting to complain......

Blogger jamsco March 08, 2013 3:34 PM  

"on this Vox and I agree... Who is making the decisions does not matter. A situation has been created, through mind-numbing arrogance and stupidity... that will render them powerless."

So we're walking along a ridge on a path that is getting increasingly narrow, high and steep and we're about to reach the end of the ridge. At that point the path back will have crumbled. Vox and Nate are agreed that we will fall to our death, but they don't agree about which side of the ridge we'll fall. Is that about right?

Blogger tz March 08, 2013 3:35 PM  

Note that the same government that declares a FRN is money by "fiat" can say you MUST accept a JPMorgan Chase or BoA "constrictor" prepaid debit card with all the fees (see EBT and unemployment payment cards) as "money".

The Sovereign can declare by fiat that credit is money.

At least baseball cards have sentimental value. Visa/MC/Discover or gift cards for Perkins, Marie Calendars, Bennigans, Circuit City, CompUSA, Linens&Things, or even the others who didn't go bankrupt, not so much.

Blogger Nate March 08, 2013 3:45 PM  

"So we're walking along a ridge on a path that is getting increasingly narrow, high and steep and we're about to reach the end of the ridge. At that point the path back will have crumbled. Vox and Nate are agreed that we will fall to our death, but they don't agree about which side of the ridge we'll fall. Is that about right? "

Yes.

We're debating which of the two very.. very ugly deaths we're about to experience is more likely.

If you were hoping one of us was abaout to argue that it would all be ok ... no.

Anonymous Josh March 08, 2013 3:48 PM  

 Vox and Nate are agreed that we will fall to our death, but they don't agree about which side of the ridge we'll fall. Is that about right? 

Bingo

Blogger JartStar March 08, 2013 3:55 PM  

If one wanted to try to avert debt-disinflation (as opposed to hyperinflation), how would you do it?

They may have some more rabbits in their hat we don't know about, but assuming they don't they have to rewrite how money is created. One option is to turn it back over to the Treasury and literally print it. The problem with this approach is that it is last resort and as soon as it, or something like it is tried it's "Weimar!" and the game ends before it really begins.

And sadly... I suspect Vox would agree with me as well... that we're inching ever closer to a Fallout 4 Live! scenario... the longer this drags out

Whatever comes of this debate it has made me ever more aware of the precarious nature of our financial system and I'm preparing for the collapse ever more earnestly.

For anyone who's not preparing you have time, honestly you do at least until the end of the year and maybe for 2-20 years. Nobody knows when the music is going to stop or how hard the stop will be.

Blogger Nate March 08, 2013 4:30 PM  

Sure we do.

It stops some time in 2015.

Blogger JartStar March 08, 2013 4:37 PM  

Besides the ammo purchase by DHS, I think it is very interesting to see the number of post-apocalyptic shows and movies in popular culture as signs of things are coming to ahead. It may be subconscious worry manifesting itself in art like so many Cold War/Police State shows and movies from 30 years ago. What makes this unique is that the threat isn't so obvious as seeing fallout shelters and communist rhetoric.

Blogger TontoBubbaGoldstein March 08, 2013 4:43 PM  

Hey, Keynes says we're all dead in the end, are you suggesting he's wrong?

If my living forever is dependent on JMK being wrong, I must be in pretty good shape, yes?

I gotst the chili, dawg!!!

Blogger TontoBubbaGoldstein March 08, 2013 4:50 PM  

Since I am from the southern US and not eastern Europe, I am herewith never again ending a sentence with "yes?", know what I mean?



Vern?




Vernon????

Anonymous Jack Amok March 08, 2013 5:11 PM  

If one wanted to try to avert debt-disinflation (as opposed to hyperinflation), how would you do it?... wonder what alternatives there are left to Fallout 4 Live!...

Well, first of all, the problems with the monetary system and whatever way it faceplants don't actually have any direct relationship with Fallout 4 style problems. Fallout doesn't happen because of any sort of -flation, it happens when productivity isn't enough to meet basement level demand. So as long as we are productive enough to feed, clothe, shelter, transport, doctor and entertain everybody without importing things from far away lands that won't extend us credit any longer, we'll be fine.

...

...

Oh-oh.



Blogger Rantor March 08, 2013 5:15 PM  

Interestingly, inflationista Nate and deflationista Prechter see the collapse coming soon. 2015 versus 2016 respectively. Nate's inflationary view should lead us to quintuple digit Dow and Gold while Prechter sees triple digit Dow and Gold.

The good news? Most of the Ilk should live to see who is right.

As for a solution? The Biblical one seems most effective, jubilee! It worked for Iceland, it could work for us.

Anonymous John Regan March 08, 2013 5:31 PM  

I might be a little off here - I don't think so - but in the interest of explaining it more directly I thought I'd spout off a bit without getting bogged down in terms like credit money, fiat money or fiduciary media.

The 'money' that we have at this point is, at bottom, a claim against the goods and services of the polity, which the polity is deemed to have promised to fulfill. That the claims against these promises far exceed the polity's ability or willingness to make them good is the central political and economic fact of our time, yet as a practical political matter this fact cannot even be acknowledged or spoken, let alone seriously addressed, by our rulers.

The promises will be broken, as indeed many have been already, but without facing the matter forthrightly political considerations - chief among them political stability - will determine which promises will be enforced and which will be effectively forgiven. In the 'legal' system a hierarchy is clearly observable: for example, those who rent property can be ruthlessly removed within days or a couple of weeks for breaking their promise; those who 'own' property but have mortgaged it can be dispossessed within a few months or a year for breaking theirs.

Meanwhile, those who oversee financial institutions or government agencies that spectacularly fail suffer no consequence at all or are even rewarded.

So certainly there is debt disinflation and this will continue, slowly moving its way up the food chain from the bottom dwellers to middle class 'homeowners'. The only safety valve left as this happens (other than banks just sitting on their defaulted loans as if nothing has happened, which is occurring much more than you might think) is the federal government incurring enormous deficits as it borrows new money into existence and distributes it; but then to maintain some semblance of monetary credibility that same government will have to impose increasingly draconian taxation and take lots of the 'money' it distributed back. This is "austerity" without the name. In Europe they are more honest, or maybe it's just that the people are smarter.

Perhaps the unfortunate truth here is that 'money' itself in the United States has become entirely political and reflects economic reality in this or that context only incidentally, if at all. So the issue is not so much 'inflation v. deflation' as it is "whose ox is being gored?" - the perennial and crude political question, not the central banker's faux dilemma.

Maybe that's the category error Nate is perceiving. This is all about politics, and perhaps about law. Not economics.

Anonymous Jack Amok March 08, 2013 5:52 PM  

As to averting disinflation? Well, I'm in the boat that says it's too late to avoid a train wreck, but it's never too late to try and soften the landing. Well, at least it's never too late until after the wreck...

Anyway, deflation happens when there's too little money chasing too many goods and services, so to "cure" it, you need to create more money. Well, the Tyler Durden post shows that ain't working any more, at least not when you keep trying to do it the old fashioned way.

But, there is another way... Though I think Nate is trailing in the debate, he made a very important point a while back - money isn't really created by the government or any other entity. It's created - willed into existence - by people engaging in commerce. Vox touches on the same ground with the temporal aspects in his post above.

I feel like I'm butting in too much on their show already so I'll stop here, but right now as of this post by Vox, our two contestants have laid the key to understanding this right at our feet. The equations are simple, but there's a lot of fog around the variables. They've opened up some holes to see through.

I'll lay this out - there is counterfeiting going on, but it's not the currency that's being counterfeited. Something else is.

Anonymous Anonymous March 08, 2013 6:55 PM  

When and if this debate ever ends Vox and Nate should create an ebook of the debate.

Anonymous Librarian zen0 March 08, 2013 8:21 PM  

Just in case someone does not know or forgot:

Deflation v Inflation, WND column, Feb. 2010

Blogger tz March 08, 2013 9:07 PM  

You cannot avert existing debt-deflation since the debt needs to be addressed. That either means blowing a bubble somewhere to allow something new to pay off the old (e.g. housing to pay off internet company margin loss) or to let it default.

You can game the system for a long time - Japan has done it since 1990 - but the debt remains, those who hold or owe it become zombies, and the economy stays sick. Although it will never be paid OFF, it will continue to be paid in some form though such will not be productive.

Once you have unpayable debt, the easiest is to ease bankruptcy and the safetynet and let everything collapse and reboot (USA 1921). Hyperinflation can work if you can arrange it, since the debts will be paid off with less than a cup of coffee costs (assuming the interest is not variable and adjusts quickly).

Blogger tz March 08, 2013 9:21 PM  

Let me illustrate how debt causes deflation. Assume you bought a house for $500,000, with a $2000 mortgage payment. The price of the house collapses to $100,000, but the $2000 payment stays the same. That payment is going to the $400,000 in zombie value which does nothing productive. If the payments followed the valuation they would be reasonable and free up income to spend on other things, but they don't. Each month, $2000 isn't quite going "poof", but at another point in the financial web they are receiving (back?) what they put in for the house's sale. The black hole was created but not immediately realized by the inflated values since the debt is a reasonable proportion. When values drop, the debt is no longer reasonable - it is often more than the value of what it was used for. But the black hole is now being realized.

In 1929, everyone was in debt and it was such that it could not be paid. By the late 1930s (despite Hoover's and FDR's efforts), there was no debt, but a lot of bust institutions and Gold was broken as a standard. But there was a reboot/reset.

Germany had to reboot after Weimar and again after Hitler. Those were 1921 like so worked.

Europe is trying to pull a Japan (Lost decade). They have less ground to continue but it has worked so far. It always does until the day it doesn't.

Anonymous zen0 March 08, 2013 10:11 PM  

tz says:

By the late 1930s (despite Hoover's and FDR's efforts), there was no debt,

You are totally bankrupt in this analysis. Debt to GDP returned to a (high)1929 level AFTER 1940.

It bottomed in the early 50's and has risen ever since.

You owe me.

http://theeconomiccollapseblog.com/wp-content/uploads/2010/07/Total-US-Debt-As-A-Percentage-Of-GDP.jpg

Anonymous zen0 March 08, 2013 10:14 PM  

Jack Amok says:
I'll lay this out - there is counterfeiting going on, but it's not the currency that's being counterfeited. Something else is.

Integrity!

Blogger Nate March 08, 2013 10:55 PM  

Zeno... I call BS. how the hell would they measure GDP during WWII?

Anonymous Toby Temple March 08, 2013 11:31 PM  


Wider sense. Narrower sense.

Which of this matters?

Anonymous Roundtine March 09, 2013 1:50 AM  

The Treasury can run the printing presses, but they'd need much larger denominations. Here is something I wrote last year:
Are the printing presses firing up?
. It looks at how much money is physically printed. The Fed puts out it's currency budget and forecast printing every year.

It may help to think of the different characteristics of the money. Credit money: this money cannot exist without a banking system. If the banks fail, the money is gone. When the debt is defaulted upon or repaid, and no new debt replaces it, the money is gone. Physical money: gold and fiat, or anything else that can be exchanged without any bank involvement. If a bank has cash in the vault, I count it as cash because it will continue to exist.

If I told you your bank will fail and will be closed for 1 month, what would your first reaction be? For many people, it would be to go to the ATM and withdraw cash. If you go to your bank and demand a large amount of cash, they will tell you to come back tomorrow, or later, as they do not have that much cash on hand.


Anonymous zen0 March 09, 2013 4:55 AM  

Nate March 08, 2013 10:55 PM

Zeno... I call BS. how the hell would they measure GDP during WWII?


I don't understand the question. why would it be different than other times?

Blogger Nate March 09, 2013 11:47 AM  

"I don't understand the question. why would it be different than other times?"

That's because you don't understand that all GDP measurments are complete bunk. They do not account for malinvestment. War IS malinvestment by its very definition. All of the money used to build tanks.. aircraft carriers... all of that... is malinvestment. paying people to go shoot other people.. rather than paying them to build things that people want... is malinvestment.

All of that is factored into total war GDP artificially raising it. If we were to account for malinvestment during WWIII... the debt to GDP ratio... would actually be negative.

Blogger Nate March 09, 2013 11:50 AM  

"Wider sense. Narrower sense.

Which of this matters?"

Actually i've just found a statement that Mises makes in 1968 that definitely impacts Vox's take on this.

Blogger Nate March 09, 2013 11:54 AM  

Roundtine... what you're pointing at... is that the CASH is the actual real money. now... what would happen to prices.. if they printed up enough cash... to actually cover all the money in checking accounts... and all the money in savings accounts? Including the government's demand account at the fed?

Anonymous Noah B. March 09, 2013 12:23 PM  

"Dear Scoobius... on this Vox and I agree... Who is making the decisions does not matter. A situation has been created, through mind-numbing arrogance and stupidity... that will render them powerless."

I agree that the decision-makers are powerless to avert systemic collapse, but it does seem that they have the power to choose whether the outcome is inflationary or deflationary. Vox has taken the position in the past that the Fed is controlled by banks, therefore, the Fed will not take action that is contrary to the banks' primary interests, which in turn means that the Fed will opt for a deflationary outcome, since according to him, inflation would be the worst outcome for the banks. I would like to see some elaboration on this point. While I follow the logic, I am not convinced that the Fed is controlled more by banks than by government (banks appoint most governors to the Board of Governors, but Congress makes the rules), and it also seems that deflation could be just as detrimental to banks as inflation.

Anonymous scoobius dubious March 09, 2013 2:12 PM  

"I agree that the decision-makers are powerless to avert systemic collapse, but it does seem that they have the power to choose whether the outcome is inflationary or deflationary."

You're missing my point (or perhaps refusing to recognize it). My point is: pffft. Systemic, schmystemic. Systems are human, and when humans decide that they no longer like the systems, then in the humans vs. previously-made systems fight, the humans will win. There will simply be a new system at some point. The Caesars do not seem to have been overly troubled or constrained by the lingering legacy of the Republic. Hitler wasn't checkmated by the economic/monetary problems of the Weimar years, nor did Mao Tse-tung seem to lose much sleep over what Sun Yat-sen or the Yellow Emperor would have thought. You guys are looking at the finger, not at the moon. If the dollar gets into too much trouble, then perhaps our future overlord Kommander Karate will simply take matters into his own capable hands.

SMUG LEFTIST PUNDITS: Ha ha, Whites are going to become a minority by 2040!
MYSELF: Well, North America is a pretty big place. Whites have founded a lot more successful states in the past than non-whites have, which is one of the reasons that non-whites keep flooding in. Maybe this thing you call the "USA" is not as durable as you think it is; maybe whites will form a new separate state within a partitioned North America, and non-whites will find themselves shit out of luck: a majority population on their very own greasy shitskin turf, in which they suddenly realize they can't stand one another, and their only goal is to clamber over the nuclear-powered fence into the nice, raaaacist, white-people land. Except maybe this time, whites won't fall for malignant Jewish bullshit. Sorry, shit-people, go build your own mud huts from now on. I'm sure your Jewish and Asian overlords will help explain it to you. Me, I'm just gonna go for a relaxing spin in my rocket-car.

One never knows... do one?




Blogger Nate March 09, 2013 2:20 PM  

scoobius... if you've paid attention to previous discussions... you know your point is one that I have made.

Vox and I are both aware that rules can be changed.

Anonymous Noah B. March 09, 2013 3:30 PM  

"There will simply be a new system at some point."

I was assuming this to be the case. Either an inflationary collapse or a deflationary collapse would signify the collapse of the current monetary regime.

The inflation vs. deflation debate is of interest in that a correct prediction of the process by which the collapse will occur may improve one's odds of profiting and/or preserving assets during the transitional period to that new system, whatever it may be.

Anonymous Noah B. March 09, 2013 4:42 PM  

From Vox's WND column 2/22/10 posted earlier by zen0:

"Ben Bernanke can make noises about helicopter money, but he will never actually order the whirlybirds aloft because, in marked contrast to the national politicians, the Fed actually cares about making profits, real profits, and not imaginary, inflated ones."

It seems to me that this statement lies at the heart of the entire debate. Since the Fed delivers its profits to the Treasury and pays a statutory 6% dividend to its shareholders, what is its incentive to make profits?

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