I wont go as far as saying you're a genius, but compared to Krugman... Joke aside: I cannot find any flaws in your reasoning (although I am of your opinion on this matter, so maybe I didn't look hard) and I think your examples are awesome. So someone else will have to do the explaining why Krugman is a genius, I certainly can't because I find flaws in his reasoning (on occasions where he actually uses reasoning)

And also: you're doing it wrong, dude. As a newbie, your first 10 posts have to be "subscribe", "cool, I like the idea", or "what GPU is best?", not a long insightful post derived from your own thoughts about one of the most controversially discussed topics on this forum.

Thank you for the hint. Yes, that's what I was trying to say, pareto-improvement = "good". The opposite of a pareto-improvment = "bad".
My point is that just like an increase in the quantity of money can cause malinvestments and inefficiencies, a decrease can also cause that society doesn't use (as a whole) its resource in the most efficient way. I claim that deflation can make us trade and invest below our possibilities in terms of real resources.


What if we have a constant monetary base? There's no production of money, there's no cost of production of money. That's what we will have with bitcoin. Well, the monetary base will actually shrink over time.
What about hoarding caused price deflation? Is it also harmless like growth caused price deflation?
Actually, I don't like the term "growth caused price delfation" because is misleading. With improvements in production you don't get "a general fall in prices" just a fall in prices in a concrete good.
Just to rembember you, I have no problem with a constant base I just don't think that money should (or even can) perform the medium of exchange and the storage of value functions together. My problems with deflation and hoarding are deeply interconnected.


You mean that the inflation premium (if predictable) is factored in the nominal interest rate. Yes, I agree.
But when there's deflation, that premium is negative.
Say you have 5% basic interest (for you, that would be the time preference that appears in the financial market and is not caused by the structure of money itself), a 3% risk premium (for a given borrower) and 20% price delfation. You won't have -12% nominal interest, the money just won't be lent unless the capital yields that the borrower expects on his investment are greater than the deflation. The borrower must give something to the capital-money saver to convince him not to hoard the money.


Me too. Also I find "demand for money" a tricky term. The demand for money is the offer of goods and services. The demand for savings is what really determines interest. But the offer of savings must come from genuine savings or imbalances will come, as explained by Hayek and others.
Anyway, after watching a long conference by Huerta de Soto, I find these two "austrian branches" more compatible than I first thought. Although I don't think FRB is the root cause of cycles, I see how it just make things worse.
The problem with FRB is that it's enforced by law. The customer cannot negociate the reserve rate with the banker. I would remove FRB for regular accounts and let banks offer "fractional reserve accounts" in which contract is specified what happens in case of a bank run. There would be no deposit insurance fund or anything like that.


Ok, so basically the prices of consumption goods fall, but the prices of production goods rise accordingly. The market realises that it really wanted to invest and not consume so much.
My claim is that this is not the way it works. With deflation capital prices also fall. Yes the bad investments get liquidated but also, as a pareto-enworsement by-product, less investments are made than what could be made and lots of wares go to the trash (for example, plenty of hours of labor that cannot be recovered). Deflation corrects the previous inbalances but it's an imbalance in itself.


Of course it doesn't go on forever. My claim is that while it is with us and "the equilibrium" is restablished, it causes economic harm too.
Without FRB and with a constant monetary base, you will have the bust when capital yields (that naturally drop by prosperity) are too low for investors to convince savers to lend instead of hoarding. That hoarding causes deflation which in turn reinforces the incentive for hoarding. That doesn't go on forever neither. By not investing enough, capital yields eventually rise enoguh to restablish the financial market functioning. A little bit of destruction before we can go back to a functioning market. That artificial limit to growth is caused by the fact that capital-money is not perishable. We all must suffer periodically so that capitalists can enjoy their rent perpetually.


Yes the problem is a disequilibrium and not the cure/symptom itself.
Let me try an analogy. You are intoxicated because you have eaten something you shouldn't.
The doctor gives you a pill that makes you through up. Yes, the problem is not the pill but having eaten poison in the first place.
But that doesn't make throwing up good for the stomach. You cannot say "deflation is good" just like you cannot say "throwing up is good". Nor "deflation is harmless" or "throwing up is harmless". It's a painful process. Would you take the pill when you're healthy? Of course not, you don't like to throw up and it's not healthy per se.


In other words, there would be no cycles with a fixed supply nor FRB, right?
What about other forms of credit? Businesses paying among themselves with IOUs causes price inflation, doesn't it?
What about businesses bartering among themselves? That should cause price inflation too.


This is what I was asking. I think it shouldn't be prohibited but neither regulated the way it is (as an unjustified rent for bankers in my opinion).
You think it's the root cause of cycles and I don't, but I also consider it harmful.
I think it is just a flawed "solution" to the cycles, just like money printing and counter-cyclical government spending.
Do you know if there was FRB germany/argentina in Gesell's times (1862-1930)?
If so, he didn't give it the attention it deserves. If not, why do you think it was so concerned with cycles and deflation?

I don't think that a reduction of complexity necessarily means that less people can survive. Specially when these LETS people tend to focus on food production. They may be paying for this reduction of complexity with other sacrifices such as a reduced standard of living. But they may argue that they're sacrificing luxuries in exchange for an "insurance against peak oil" or whatever.
But, again, I prefer Ripple over LETS. I'm just saying that I understand their desire for a localization of the economy. If, for example, transport costs suddenly rise 1000%, localized economies will be more resilient.

Well, first it should be noted that Krugman is not an economist but a political dogmatist much like those political dogmatists who constructed models and argued that the sun revolved around the earth were not scientists. But this statement does encapsulate, fairly accurately, the human action behind deflation. The problem lies in the value judgment of whether that human action is 'good' or 'bad', who stands to gain and why.

Doug French, of the Mises Institute, has written the counter-argument to deflation being bad in In Defense of Deflation. Krugman is a well known statist and that is how he earns his living so he is biased. The reason is, as French concludes, "What Austrians know for sure is that, as Professor Hülsmann makes clear, "the dangers of deflation are chimerical, but its charms are very real." Inflation, on the other hand, only helps those who are massively indebted and inefficient — governments." Inflation helps butter the inefficient Krugman's bread because he would otherwise not make a living without the governmental interference as his predictive economic prowess is abysmal, particularly compared to the Austrians like Schiff.

Another problem statists have with deflation is the effect on assist prices and credit liquidation. As Murray Rothbard wrote in his 1963 America's Great Depression, “It is true that credit contraction may overcompensate, and, while contraction proceeds, it may cause interest rates to be higher than free-market levels, and investment lower than in the free market.  But since contraction causes no positive malinvestments, it will not lead to any painful period of depression and adjustment.”

Mr. Rothbard continues the observation that government policy can hobble the adjustment process by: “(1) Prevent or delay liquidation, (2) Inflate further, (3) Keep wage rates up, (4) Keep prices up, (5) Stimulate consumption and discourage saving and (6) Subsidize unemployment.”

I still say that Mish has a better grasp of deflation/inflation than either of them, and a far better predictive record than either as well.  Ironicly, he's not a "trained" (read academic) economist.  He's just naturally talented.  Rich Mayberry, the author of the Whatever happen to ...? series, is another such natural talent.

That said, Schiff's viewpoints are valid from a certain perspective, as are Krugman's.  In both cases, it's difficult to get someone to understand something contradictory to his worldview, particularly when his income is somewhat dependent upon him not understanding.  Both Schiff & Krugman fall into this group, while Mayberry & Mish do not.  In the latter case, both make the majority of their income from their own investments & selling data about said investments and their reasoning.  Technically that would be true for Schiff as well, but not really in practice.  Schiff also might have been influenced by his father, logically, and the long term prison sentence his father received for challenging the legitimacy of the IRS.  (Made worse by actually being correct, the government really comes down hard on that.)

Also, their inventories dropping in price mean they want to hold inventory for less time, which forces them to focus on products that customers actually want. For 'niche' products, it encourages them to form more efficient distribution channels so that they can still provide those products without having to hold them in inventory. That is, it encourages efficiency all around.

Tell that to the Japanese.  Just-in-time manufacturing ate Detroit's lunch in the 1980's.  Print-on-demand & every aspect of the Internet is doing the same thing for the media industries today.

This is a fascinating debate. I don't have time to reply now but will revisit it in the future.

The problem is that even if the fed money printing keep prices "stable" compensating the debt deflation you mention, that new printed money has the potential to increase ten fold later by fractional reserve lending.
Even if you don't see any problem with deflation for the rest of the economy, as you say the state is a big debtor.
For the banks is different. Is not that much that they borrow money, the worst part is they create it.
So with deflation their assets (the collateral that backs the debt of the bank's borrowers) drop while their liabilities (the money they have created, the clients deposits) stay the same, making them even more insolvent.
When they say "we have a liquidity problem and that's why we don't borrow among ourselves" they're lying. Their problem is that they're insolvent.
That's what the bail outs were about. And that's why central banks keep lending to them on the cheap so they can make profits just by buying, for example, bonds at a higher interest and cover with these profits their previous losses. Many suspect that they haven't yet recognized the worse part of their losses.
With deflation (or a busting bubble or both) and fractional reserve banking is very easy for a bank to go bankrupt.
Now imagine that the liquidation has ended and the banking sector hasn't collapsed in the process.
The fed has printed a lot, the banks have increased their relative reserves (they had fear to create more money and the old loans are paid) and now the banks can start an artificial boom again by creating new money. That will cause the hyper-inflation. The fed will have to rise interest again (the state will be very harmed because it has been getting so much cheap debt all this time). Also the hoarded money will come back to the financial market (and to circulation) increasing the inflationary pressure. Also a high inflation makes the dollar less attractive as the global reserve currency so other central banks will drop their dollars reinforcing the positive inflationary feedback.
All this assuming that the fed can manipulate interest rates as long as it wants, which is a doubtful premise.
I believe that the USD is doomed to hyper-inflation. After so much monetary inflation, the "not world reserve anymore" factor can do it alone.
The big question is when that will happen.
Maybe it is avoidable without letting the US banking sector fall apart. I don't know, starting WW3 or something.
That's my prediction. But, of course, with a system as complex as the world economy and with as little transparency as there is, it's hard to tell.
Also I don't spend my time watching charts nor I'm economist. I'm interested in monetary theory more from the philosophical point of view.

Patent nonsense, self-evident, obvious...TO YOU.


I remember that argument. I've never denied that deflation must eventually stop.
It is obvious that if the price of the whole world drop to pennies on the dollar someone will be smart enough to buy. That doesn't contradicts the positive feedback between hoarding and deflation, just puts a limit on it. People will still eat no matter how much they profit by hoarding, etc.

In this case the point still is...
If all merchants operate on losses, they will cease their operations fast.
Now, tell me, how does deflation makes the "smart" merchants rich?
Just to remember you, merchants use to buy wares at a time and a price and sell the same wares at a later time and a higher price. That's their business.


Is this the "predictability makes deflation impossible by perfect speculation" argument again?
Or just a new one in which "deflation in fact (and against all intuition) discourages hoarding because people will be willing to sell their mothers in exchange of your hoarded coins they know are growing in 'value' " ?
Sorry but I don't buy any of them. They seem "patent nonsense" to me.