Clearly not as evidenced by the Reconstruction period. I'd argue that a managed currency would have led to greater instability during this period, and why wouldn't it? In the modern era where growth isn't quite as booming and inflation is subtle we STILL have instability. It could be argued but not shown that instability would be worse, but I digress. The overriding fact is that in a period of relatively strong deflation, GDP still average 4% per year. Very impressive.

1/21/2011 6:22:44 AM

This is a pretty good way to sidestep every argument I posted in the other thread. Hey, it's one way not to backpedal.

1/21/2011 9:02:13 AM

I'd say deflation does discourage investment, but maybe not in all cases. The Reconstruction era seems like a special case because

A) there was a lot of rebuilding going on, people had to invest in their businesses to get themselves back up on their feet and producing
B) the period overlaps with some new technology leaps. Steam powered factories were just beginning to be commonplace, there were a lot of advances in steel manufacturing so people were investing in those technologies.
C)The railroads were getting bigger and better allowing goods to move more freely, Which would have allowed for factories to increase production
D)Urbanization was just beginning, increasing the reliance on manufactured goods
E) Mechanization of Agriculture was beginning?


It just seems like there were a lot of things that we take for granted today, happening all at once.

1/21/2011 9:07:45 AM

Concurring with prior comments, yes deflation clearly does discourage investment, but historical examples are muddled with complexities and it's hard to point out any case where deflation caused reduced investment in the economy without oversimplifying.

That said, I don't know why the great depression itself doesn't give us the best yardstick for this happening. There was major deflation and major lack of liquidity, which were clearly connected I think. Of course there was more to it, but it should be easy to claim that the existence of deflation (as opposed to some deflation-less depression) directly put downward pressure on investment during the period.

However, I don't think the same thing can happen today. IMO, anyone who thinks that deflation is a major concern is just plain wrong. There is no reasonable case to avoid equities for the threat of deflation because the worst-case deflation isn't that bad while the worst-case inflation is terrrrrible. Deflation happened some after the financial crisis, but now we can't even agree if the CPI is a scam or not, and asking the Fed to create liquidity through tricks is like giving a drug addict $100 and telling him that the fate of the world depends on him getting trashed. Worrying about deflation in the modern US is like going into a Hollywood party and saying "ah snap! looks like we got TOO much cocaine".

But there's a bigger dragon stirring right now, which is tied to the fate of global fiat currencies. The great depression was way different due to the absence of globalization. Ultimately, trade balances are far too large to be ignored and even if we started down some inward spiral due to changes in domestic consumer pressures, the course of collapse will be directed by the global marketplace. There are bubbles that blow and pop and repeat, but the bubble that matters is the aging and debt of the developed world in the midst of a growing developing world. It's not even a bubble, it's a sea-saw. Deflation and inflation will ultimately change into global re-balancing instead of a long-term economic force. But the overall inventory of currencies, and their effects, do trouble me. Currency is nothing more than a novel type of debt. It's funny, because it both contains an implicit obligation tied to the issuing governments, and it doesn't. Controlled inflation is synonymous with borrowing.

IMO, in this environment, worrying about deflation is like an individual worrying about having too much money. It's just not a problem even though it has all kinds of muddling problems with fiscal policy.

1/21/2011 10:02:10 AM

So both of you are saying it discourages investment, except in situations where it didn't?

Maybe I should have clarified the thread. I don't think anyone will dispute very very strong inflation/deflation effects on the economy are bad. So lets talk about ongoing mild deflation, such as occurred during Reconstruction. It didn't discourage investment then, why would we expect it to discourage it now?

1/22/2011 8:54:27 AM

Quote :

"It didn't discourage investment then"

Proof?

1/22/2011 9:36:31 AM

You don't have proof it did. So we'll defer to the positive GDP as the arbiter.

1/22/2011 9:41:53 AM

Quote :

"It didn't discourage investment then, why would we expect it to discourage it now? "

I was just saying that the reconstruction era was a different time than now. Obviously, there are lots of variables that affect investment and I think that era's constant growth can mostly be attributed to the new technologies and societal changes that were taking place.

Why are you choosing to build an argument around just one period in history, why are you excluding all of the other deflationary periods in US history?

1/22/2011 10:21:29 AM

I wouldn't say that deflation (and I'll take this to mean a more valuable dollar) discourages investment. A continuous devaluation of a currency encourages using your dollars now, rather than later. Deflation, on the other hand, encourages saving, which is where investments must come from. In a free market, deflation is not going to be substantial enough to put off buying something you really need/want, or investing in something that you think will gain value.

If anything, deflation causes people to be a little more cautious. A frugal, rational investor is not a bad thing. The problem we have today is a market place where, in many cases, risk has been reduced or removed entirely, and greed has gone completely unchecked.

1/22/2011 10:36:03 AM

Quote :

"why are you excluding all of the other deflationary periods in US history?"

I haven't excluded anything. You're free to discuss them if you think it will bolster your argument.

1/22/2011 11:00:27 AM

Quote :

"You don't have proof it did."

That's an argument from ignorance, you don't get to assume something is true untill I prove it false, that's not how the burden of proof works.

Quote :

"So we'll defer to the positive GDP as the arbiter."

That's called a coincedence.

Quote :

"Why are you choosing to build an argument around just one period in history, why are you excluding all of the other deflationary periods in US history?"

Because this was the best argument he could backpedal to.

Quote :

"A continuous devaluation of a currency encourages using your dollars now, rather than later."

It encourages you to invest those dollars in things that help grow the economy. Deflation causes people not to trade money for things and thus not trade things for money. It is these two actions that are encompased by what we call "our economy".

1/22/2011 11:53:48 AM

Quote :

"Maybe I should have clarified the thread. I don't think anyone will dispute very very strong inflation/deflation effects on the economy are bad. So lets talk about ongoing mild deflation, such as occurred during Reconstruction. It didn't discourage investment then, why would we expect it to discourage it now?"

If it's ongoing and mild then we should expect a small, and probably unobservable, impact.

While I think that's a sufficient answer, I'll try to be more complete by considering some of the limiting-case kind of thought experiments that will logically follow. For the purposes of this discussion I'll just take the currency to be legal tender for all transactions. As a medium for transactions, there is a certain inventory required for liquidity in the economy, which we could say is some % of GDP, and the value of the currency relative to other assets would float to obtain, at least, this minimum value. Many other aspects of monetary policy and economic conditions will affect the desirability of cash holdings - for one, they will affect the rate of inflation, which will then affect the desirability of cash holdings. Recently, the desirability of cash holdings increased dramatically for the largest corporations in the US.



Did this happen because of deflation? Oh heck no. It happened (is happening) because CEOs desire the security. But what if the economic conditions had NOT changed and we remained in a deflationary environment (even though this doesn't make much sense, we'll chalk it up to monetary policy)? Over the long term the total value of cash holdings will appreciate relative to the rest of the economy to some new value and then stay there - if you're interested in any steady state kind of case which is a ridiculous prospect considering the behavior of markets. People will still invest to whatever extent they can beat the deflation rate at. If deflation had a rate comparable to investments, it... just wouldn't stay there. It would revalue and stabilize unless all money-makers in the economy just burnt all cash they made in a giant bonfire. In that case, cash-holders would be making money from the cash-burners, and if this was a superior investment to everything else out there, I just don't know.

I outright reject the idea that you have found some historic example that shows deflation did not discourage investment. This is like saying you found a population of diet soda drinkers where saccharin did not increase cancer incidence. Or like saying you find a period in recent history where increased CO2 concentrations did not exert an upward pressure on Earth's temperature. All of these are plain stupid and predicated on a lack of systems thinking.

Let me show you a graph.



Wow, look at those balances! We saw major fractions of GDP shift on a decadal scale between the govt., private, and export markets. Let's consider the difference between say, 6% inflation and 2% deflation. Let's say that as a company or an individual I'm investing half of my surplus and just plain saving (in cash) the other half of my surplus. Even if a major swing to deflation from inflation caused me to put every last penny of my surplus into savings and none into inflation, the swings in the balance between private, govt., and export could completely wash out the effect, since those apparently like to randomly change 10% in a year or so, and total corporate profits as well as household savings are less than 10% of GDP. And that's not even considering the possibility that when I put money into the bank, someone else borrows against that and makes investment.

Basically, your ability to look at a economic trend and attribute it to an effect is what's wrong. You don't know what's driving the economy because there isn't one thing driving the economy.

1/22/2011 3:21:23 PM

Quote :

"Does deflation discourage investment? "

According to a business owner which spoke at NCState a few years ago, small changes have no discernible impact upon investment, be it small tax increases, small tax cuts, or small levels of inflation/deflation. His explanation was that decision makers never invest for a 5% return because the uncertainties are so large that expected returns are usually 33% or greater before anyone will move. As such, a 5% change in expected returns would cause a 50% return to become 45%, not a big deal.

1/22/2011 3:31:02 PM

Quote :

"It encourages you to invest those dollars in things that help grow the economy. Deflation causes people not to trade money for things and thus not trade things for money. It is these two actions that are encompased by what we call "our economy"."

You make it sound like if there is mild deflation (1-2%) people will just stop buying things altogether. People buy things all the time, knowing that they could buy it for less sometime in the immediate future. I bought an iPhone 4 in September. I knew that I could wait a year and get a better phone for the same amount of money, or the same phone for less money. I didn't want to wait a year, though, I wanted the phone when I wanted it.

The point is, people will not put off buying something they really want just so they can get a 1% discount from deflation. Sure, on the aggregate, deflation might reduce spending or investment, but certainly not enough to bring the economy to a halt. Deflation is natural when you have a stable currency - as productivity/total goods increase, the same unit of currency will be worth more, because additional value has been added to the economy. No action by the central bank is required to create deflation. On the other hand, inflation creates money and gives it to the Federal Reserve's primary dealers, so they can then make a profit by loaning it to regular people. That's an injustice, pure and simple, and one that should not be encouraged by the government.

Deflation is the bogeyman of modern day economics. Yes, a deflationary spiral is typical of a depression or extreme recession - we haven't really seen that yet. Then again, the Fed hasn't tightened credit - they've kept the flow going, and there's no end in sight. All that means is that when interest rates do go up, the deflationary spiral is going to be that much worse. Volcker raised interest rates to ~20% in the 80s to curb inflation. Bernanke has had interest rates at fucking zero for a couple years now, and they'll probably stay there. Imagine how much of a hike would be needed now to repair the damage caused by these "economists" controlling our money.

1/22/2011 3:34:12 PM

Quote :

"you don't get to assume"

I didn't assume a damn thing. Growth was fantastic during the Reconstruction period in the face of strong and ongoing deflation. But, you're the shmuck who wants to play the "but, but, you don't know how deflation affected the growth" nuance in order to keep from being dead fucking wrong again.

Quote :

"That's called a coincedence."

This is called trolling.

Quote :

"Because this was the best argument he could backpedal to."

Backpedal? You haven't done anything other than tell me what one school (one that is thoroughly and continually discrediting itself as time marches forward) of economics theorizes about the matter. You haven't posted relevant examples from history. You haven't really done anything to argue the point other than to construct far fetched thought experiments. If I lock out reality, I can come up with any outcome I want on any subject.

Quote :

"Deflation causes people not to trade money for things and thus not trade things for money."

Seriously, stop fucking reposting the theory as your argument to every reply. You've done nothing to prove that this happens in reality. Prove it, or get the fuck out.

Quote :

"If it's ongoing and mild then we should expect a small, and probably unobservable, impact."

No way dude, Kris is never wrong and he isn't arguing this.

1/22/2011 3:49:02 PM

Quote :

"You make it sound like if there is mild deflation (1-2%) people will just stop buying things altogether."

I never said that, and besides, this thread is about investment, not consumer spending. When I talk about people spending money for things in the context of this thread, it's about a business hiring more employees or an investor buying a stock, not about you buying an ipod.

Quote :

"Sure, on the aggregate, deflation might reduce spending or investment, but certainly not enough to bring the economy to a halt."

But the effect is still there, if we get to set the interest rate, why not try to set it to get optimal level of inflation for economic growth?

Quote :

"Backpedal?"

Perhaps I should be clearer about this, you backpedaled away from everything on the previous thread when you made this one, like when you confused return on interest with return on investment, but that's fine.

Quote :

"I didn't assume a damn thing."

I stated you had no proof, and you stated that because I did not prove the contrary, we should assume your statement stands.

Quote :

"You haven't posted relevant examples from history."

I've stated why before, history is irrelevant, these concepts must be discussed as models.

Quote :

"If I lock out reality, I can come up with any outcome I want on any subject."

Then please, try to explain how I am wrong.

Quote :

"No way dude, Kris is never wrong and he isn't arguing this."

First off, stop getting so butthurt, secondly, kudos on ignoring his entire argument and only replying to the first sentence. Third, I've stated there is an impact the level of the impact is determined by the level of inflation, so small inflation means small impact, as the deflation gets larger, the impact gets larger, this should be obvious and not even needed to be explained, but I guess you're just grasping for straws.

[Edited on January 22, 2011 at 4:52 PM. Reason : ]

1/22/2011 4:48:59 PM

Quote :

""If it's ongoing and mild then we should expect a small, and probably unobservable, impact." No way dude, Kris is never wrong and he isn't arguing this."

Kris?

1/22/2011 4:51:53 PM

While I am not a bunny with a pancake on it's head, it seems Chance does believe that mentioning me somehow makes your argument irrelevant.

1/22/2011 4:55:18 PM

I didn't mean to say bunny=Kris, it's just that the 'reply' there shot like a rocket away from coherency. If there was one single quote to which Kris was irrelevant, it was that quote, the only one where Kris was mentioned. And if Kris didn't have anything to do with it, the fact (?!) that Kris is never wrong is bunny-with-pancake level irrelevant.

God, why did I even write that? The proper response to something that is totally incoherent should not be to detail a rational response, it should be to post rick ashton videos. You know what, here you go. I hope you're happy.

http://www.youtube.com/watch?v=oHg5SJYRHA0

Quote :

"Third, I've stated there is an impact the level of the impact is determined by the level of inflation, so small inflation means small impact, as the deflation gets larger, the impact gets larger, this should be obvious and not even needed to be explained, but I guess you're just grasping for straws."

Ok, so not completely in response to what you said, I have a bit of revision to make.

Inflation (and deflation when negative) is non-zero due to either
- Revaluation or
- Changes in money supply relative to the economy or structural changes that cause a change in the need for liquidity

Note that revaluation occurs basically as speculation. It's just the bid price for the relative value of money to assets. The other reasons constitute some change in the NEED for money.

Talking about sustained deflation is a real noggin-breaker for several reasons. If you want to talk about Japan, you've bought a vastly more complicated problem because international trade is so important, and don't forget the darn demographic problems. These can be accounted for in the factors I've mentioned above but... it would be really hard.

Anyway, let's think about the economy that doesn't revalue and has sustained deflation (the Mushroom Kingdom because it certainly doesn't exist in real life). Now the Mushroom Kingdom (MK) clearly has decreasing need for money relative to GDP over time. What is causing this? Whatever it is, the deflation itself is reducing investment. The counter balance to the deflation, the thing causing deflation, could equal this and cause an equal or greater amount of investment as opposed to the MK being in a nondeflationary environment - and I am open to such arguments.

Let's say the economy grows as the Koopas work more hours (and no one invests more, due to magic).

Or Bowser constantly hordes money to make a money swimming pool.

Or maybe toadstools progressively need more operating cash due to deleveraging.

To me, these would all just slowly increase the value of cash. And yeah, investment would decrease. There's investing going on to make up for it, it's just bad investment. The money swimming pool, or puffing the toadstools with cash, they just don't add value to the economy. The economy slowly growing with a constant money supply just doesn't happen. We print more money, there, problem solved. Most real world examples do not have these issues though, and they are much more complicated, particularly due to revaluing.

1/22/2011 6:18:50 PM

http://www.google.com/search?q=reconstruction+period+deflation

lol @ the first result

1/22/2011 6:31:12 PM

Quote :

"I never said that, and besides, this thread is about investment, not consumer spending. When I talk about people spending money for things in the context of this thread, it's about a business hiring more employees or an investor buying a stock, not about you buying an ipod"

Either way, you've actually done nothing to defend your argument. You keep stating it over and over and over and over and over and over and over and over and over and over and over and over and over and over and over again and yet I haven't seen you post one single shred of ANYTHING other than your own words. Sorry, you've tried to resort to Irving Fisher who, if it weren't for guys like you who think the economy can actually be controlled by government, would have completely clowned himself out of the history.

Quote :

"you backpedaled away from everything on the previous thread when you made this one"

Are you an idiot? You were shitting up the other thread with your ever pernicious posting faggotry so I made one specifically to discuss it. You already won the other thread in your own head, so why do you care? Oh, I know, it's because you're actually nothing more than a troll who takes pleasure from being "that guy" that trolled the internets. We can all see you're not actually interesting in debating these topics given the minimal effort you put in, so it can't be anything more than trolling.

Quote :

"I stated you had no proof, and you stated that because I did not prove the contrary, we should assume your statement stands."

No, my statement was made in snark to equal yours. You can state all day that I have no proof, my proof is the growth rate, which you're again avoiding discussing.

Quote :

"I've stated why before, history is irrelevant, these concepts must be discussed as models."

Again, says fucking who?

Quote :

"Then please, try to explain how I am wrong"

Burden of proof is on you to explain how you are right.

Quote :

" stop getting so butthurt"

You're right, I am getting butthurt. Butthurt for knowingly wasting minutes of my Saturday responding to what is most certainly a sad little troll.

Quote :

"I've stated there is an impact the level of the impact is determined by the level of inflation, so small inflation means small impact, as the deflation gets larger, the impact gets larger"

Where did you state this?

Quote :

"I outright reject the idea that you have found some historic example that shows deflation did not discourage investment."

Again, on what basis? Theory alone?

Quote :

"You don't know what's driving the economy because there isn't one thing driving the economy."

I don't necessarily disagreed, but alas, you are again wrong because Kris said so.

1/22/2011 11:28:36 PM

1/23/2011 12:33:30 AM

^^are you planning on repyling to mrfrog? If not, that is fairly rude.

1/23/2011 2:23:06 AM

^ I got the feeling that his point was that I actually disagree with you, and as such, I should be having a heated argument with Kris right now.

GARRR I disagree that... these concepts must be discussed as models... as I was just doing. Garrr

1/23/2011 1:10:20 PM