This is in the comments and I want to elevate it to a post, from Sweden...
Precisely agree about inflation and banks. Inflation is the driving force behind all speculative business ventures. But deflation on the other hand is just the other side of the same coin. It creates incentives to hold cash instead of creating ideas that solve real problems. (I've got to study the Austrian school of economics, which I've just read about in your book, to be able to see where you're coming from.)
Bank comes from Italian and means table I've heard, as in the table they were counting coins in those times. Trading in the old times was simply goods traded for other goods. People sometimes forget that our systems today are not as universal as they seem. Studying a crisis that happened a decade or two ago won't solve the fundamental problem with the system.
Inflation certainly invites speculation, which results in misallocation and malinvestment of credit (for we are beyond money now.)
Deflation can be the other side of the coin, in which the state begins withdraw currency, and fewer dollar chase the same goods, therefore, that which does sell sells for fewer units. But there is another form of deflation, in which more better cheaper faster is produced so prices naturally fall. For example in the cell phone or computer industry. We all know in a few months the computers will be exponentially superior, but we all buy computers today. Well aware of deflation in computers, no one waits or holds on to their money.
Deflation is an indication the market is free. In a free market, which is inimicable to the state, all prices are constantly drifting down and we are constantly being offered more better cheaper faster. So yes, state manipulation of the currency causing deflation is a bad thing, but no state wants deflation. So what deflation we see is the natural kind, that should make us all happy, producers included, since they produce something narrow but buy from the entire market to meet their needs.
Another irony is deflationary free market eras are the most profitable for businesses because the perceived value of goods falls slower than deflation moves, thus widening profit margins. So no one holds cash (money) in a deflationary era because there are the best profits to be had in business.
Now if you mean deflation causes people to hold credit, then yes, and in the Austrian school Dr. North and Mish Shedlock have wrestled over this, with Mish noting few economists, even Austrians quite get this point. (Mish says no inflation, North says hyperinflation.) In essence, most Austrians say creating too much currency (credit in our system) causes hyperinflation. Mish asks then how come not so far? Mish says the currency is created, but it is parked on balance sheets, not being used.
Which makes our entire national balance sheet suspect.
So Mish has contributed to the discussion with his insights on money vs credit.
I've heard bank means shelf as to where gold was stored for people, although you may be right. But as to trading in the old times was simply barter, we have barer today. We had barter in the first records of man. And certainly the Austrian canon says subsistence, barter, coins.
Graeber most recently and others going back have long noted that what is missing in the discussion is vendor financing, something very common today. Any merchant, especially in B2B, will give his customers time to pay. See this point here...(especially the latter half where I get into vendor financing).
This is nothing new, it goes back to the Phoenicians trading with the Celts 500 BC. For most of history, money was not in the deal. It was all credit, as it is to this day. So yes we do have examples of properly working economies going back to prehistoric times. What has always been the case is the networks were so small that any failure was local and immediate and ended there and then.
What we have never seen before is every single transaction goes through a bank that is tied to every other bank, and the fractional reserve leveraging of credit to the point no one has any idea what the underlying assets are worth, nor who really owns what. As recently as 150 years ago this was impossible for the simple reason contracts were not assignable. No secondary markets to speak of.
The crises of a decade or two ago were simply warm-ups, test runs for what we have now. Since no one went to prison for the PennCentral bailout, since no one went to prison for the Chrysler bailout, every economic crisis since then followed the same pattern and every time it got worse. When the EU decides it needs to clip bank accounts in Cypress 10%, then we are very close to the end.
Yes, the system we have today is not universal, but it is different in scale, not kind. So we can know what will happen. And we do have responsible actors today, as we have had all through history. We can go back to any point in history and see examples of how to do economies right, and how state intervention is always disastrous.
This system is failing, and is certainly past the point of no return. This will not work itself out, and it will most likely result in the state changing the subject from its policy failure to war. That too has always worked.
When we've been punished enough for our sins, among the survivors will be those who know how to do economies right. Then the process starts over.
Feel free to forward this by email to three of your friends.
Precisely agree about inflation and banks. Inflation is the driving force behind all speculative business ventures. But deflation on the other hand is just the other side of the same coin. It creates incentives to hold cash instead of creating ideas that solve real problems. (I've got to study the Austrian school of economics, which I've just read about in your book, to be able to see where you're coming from.)
Bank comes from Italian and means table I've heard, as in the table they were counting coins in those times. Trading in the old times was simply goods traded for other goods. People sometimes forget that our systems today are not as universal as they seem. Studying a crisis that happened a decade or two ago won't solve the fundamental problem with the system.
Inflation certainly invites speculation, which results in misallocation and malinvestment of credit (for we are beyond money now.)
Deflation can be the other side of the coin, in which the state begins withdraw currency, and fewer dollar chase the same goods, therefore, that which does sell sells for fewer units. But there is another form of deflation, in which more better cheaper faster is produced so prices naturally fall. For example in the cell phone or computer industry. We all know in a few months the computers will be exponentially superior, but we all buy computers today. Well aware of deflation in computers, no one waits or holds on to their money.
Deflation is an indication the market is free. In a free market, which is inimicable to the state, all prices are constantly drifting down and we are constantly being offered more better cheaper faster. So yes, state manipulation of the currency causing deflation is a bad thing, but no state wants deflation. So what deflation we see is the natural kind, that should make us all happy, producers included, since they produce something narrow but buy from the entire market to meet their needs.
Another irony is deflationary free market eras are the most profitable for businesses because the perceived value of goods falls slower than deflation moves, thus widening profit margins. So no one holds cash (money) in a deflationary era because there are the best profits to be had in business.
Now if you mean deflation causes people to hold credit, then yes, and in the Austrian school Dr. North and Mish Shedlock have wrestled over this, with Mish noting few economists, even Austrians quite get this point. (Mish says no inflation, North says hyperinflation.) In essence, most Austrians say creating too much currency (credit in our system) causes hyperinflation. Mish asks then how come not so far? Mish says the currency is created, but it is parked on balance sheets, not being used.
Which makes our entire national balance sheet suspect.
So Mish has contributed to the discussion with his insights on money vs credit.
I've heard bank means shelf as to where gold was stored for people, although you may be right. But as to trading in the old times was simply barter, we have barer today. We had barter in the first records of man. And certainly the Austrian canon says subsistence, barter, coins.
Graeber most recently and others going back have long noted that what is missing in the discussion is vendor financing, something very common today. Any merchant, especially in B2B, will give his customers time to pay. See this point here...(especially the latter half where I get into vendor financing).
This is nothing new, it goes back to the Phoenicians trading with the Celts 500 BC. For most of history, money was not in the deal. It was all credit, as it is to this day. So yes we do have examples of properly working economies going back to prehistoric times. What has always been the case is the networks were so small that any failure was local and immediate and ended there and then.
What we have never seen before is every single transaction goes through a bank that is tied to every other bank, and the fractional reserve leveraging of credit to the point no one has any idea what the underlying assets are worth, nor who really owns what. As recently as 150 years ago this was impossible for the simple reason contracts were not assignable. No secondary markets to speak of.
The crises of a decade or two ago were simply warm-ups, test runs for what we have now. Since no one went to prison for the PennCentral bailout, since no one went to prison for the Chrysler bailout, every economic crisis since then followed the same pattern and every time it got worse. When the EU decides it needs to clip bank accounts in Cypress 10%, then we are very close to the end.
Yes, the system we have today is not universal, but it is different in scale, not kind. So we can know what will happen. And we do have responsible actors today, as we have had all through history. We can go back to any point in history and see examples of how to do economies right, and how state intervention is always disastrous.
This system is failing, and is certainly past the point of no return. This will not work itself out, and it will most likely result in the state changing the subject from its policy failure to war. That too has always worked.
When we've been punished enough for our sins, among the survivors will be those who know how to do economies right. Then the process starts over.
Feel free to forward this by email to three of your friends.
2 comments:
Hi Johan, its the swede again.
Reading your post I realize you are well-versed about economics; I studied one or two economics classes on my recent undergraduate course in business.
I agree that deflation can be an indication that the market is free.To achieve surplus profits participants need to innovate and as a result we are offered better products for the same price. But my question is; is this the same as to say that we can buy same for less? I would say no. Same product for less, yes, but not necessarily same utility for less (utility being determined by its ability to generate future cash-flows) This varies with the elasticity of demand for different products.
Unfortunately I don't think you're at all cynical about the rest of your comments.
To achieve surplus profits participants need to innovate and as a result we are offered better products for the same price.
***How are you defining profits? I follow Drucker: profits are just another business expense.
Innovation brings us new, and therefore price blind. It is after improving iterations that at some point yield enough market to invite a conservator in, that is when they apply economies of scale and bring down the price on what is now a commodity.***
But my question is; is this the same as to say that we can buy same for less?
***When the innovator yields enough market to invite a conservator in, that is when the consevator applies economies of scale and brings down the price on what is now a commodity.***
I would say no. Same product for less, yes, but not necessarily same utility for less (utility being determined by its ability to generate future cash-flows)
***If it is the same product, how can it not be the same utility, whether less or not? And utility to whom? The fish I am having for dinner has a utility that has nothing to do with cash flow...***
This varies with the elasticity of demand for different products.
***Elasticity is effected in innovative products by means of design, in conservator products by means of price.***
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