"Deflationary Paradox" Long term rates will remain low or lower.

[moda0306]

Demand is limited to what can be produced...

I totally agree.  But there is no reason the world shouldn't be able to demand on aggregate what it supplies.  Maybe if we were indebted to aliens that wouldn't be the case.  However, something is keeping us from demanding what our society can produce.  I strongly believe that's the self-fulfilling nature of financial shocks on our monetary system.

[Kshartle]

During government intervention (any action taken by government) consumers are forced to accept less than the present technology could provide for them. The recession is an attempt to end that period and reallocate the resources to more valuable uses.

Harry Browne You Can Profit From a Monetary Crisis page 38


Best Browne investment book IMO.

[moda0306]

I probably wasn't clear, KShartle.

Demand is limited by what can be produced.  However, financial assets limit us even more, if they reflect investment in productive capacity that's well-under capacity.

For instance, the stock market went way down because of a demand shock, and old people with 401(k)'s spent less because they felt they were poorer, which made stock prices go down, etc, etc, etc.

Liquidationists that love recessions confuse me.  There are millions of businesses out there suffering due to a shock and a bond holder can look at a severe recession and say, "oh this is a necessary adjustment."  Rampant default is hardly health for an economy... it won't "come out better."  Millions will have suffered that didn't need to, and had value to bring to the economy.  Banks aren't good property managers.

Like I said, a disruption to a barter economy allow people to much more easily pay off their debts, even during a "malinvestment."  It's obviously the monetization of an economy, not just "big bad government," that causes unnecessary recessions.

This leads me to my confusion with the goals of liquidationist Austrians that supposedly love business.  Businesses that had nothing to do with the malinvestment in the run up are significantly affected by liquidationist attitudes.  Also, I often see the 1920's referred to as either a great booming economic result of the free-market principles of libertarian presidents, or a period of rampant malinvestment at the hands of the federal reserve cartel... I don't mean to make you into what may be a straw man here, but which is it?  Was there rampant malinvestment in the '20's?  If so, doesn't that say as much about free-market capitalism as it does big government?  Especially when Cool Cal was a huge proponent of the Federal Reserve?

My point is, malinvestment doesn't need to result in unemployment afterward.  Simply put, people SHOULD have to work to pay off their debts, but they can't on a macro level during recessions in a monetized economy without years of pain, unless the government maybe lowers taxes for some and pays others to build infrastructure.  Unemployment above a certain point simply shouldn't be an option.  If people want to work, the economy should adust, but doesn't due to monetary constraints.  Government can either take us back to barter or counteract these recessions.


To your next post, what resources are being reallocated?  Why are workers not being hired in other areas of the economy that are "more valuable?"  The answer: They aren't.  The other sectors of the economy are also seeing severe demand deficiencies because people don't tend to decide to spend differently... they decide not to spend at all...

[hoost]

To your next post, what resources are being reallocated?  Why are workers not being hired in other areas of the economy that are "more valuable?"  The answer: They aren't.  The other sectors of the economy are also seeing severe demand deficiencies because people don't tend to decide to spend differently... they decide not to spend at all...

The other option is that they decide to pay off debt, which, in my case and that of several friends of mine, is true.  The boom happens when people are spending more than they can afford and financing it.  The bust comes when they realize how much debt they've racked up and either decide to start paying it off or realize they can't and default.

hoost,

Recessions occur largely as an effect of zillions of contracts all based on cash flow, and sudden scarcity of cash for self-fulfilling reasons.  If you can imagne a "debt boom" in a barter economy, readjustments would result simply in those who went into too much debt having to work harder to pay off their IOU's.  There's no artificial social construct underlying every contract.  The economy can adjust more easily when people can repay their debts by providing real value, as opposed to trying to hoard a medium of exchange that everyone else is trying to hoard.  It would be similar to an entire country monetizing itself in pork bellies and promises to pay pork bellies, and all of a sudden there is a pig famine.  The economy would be crushed.  Much moreso than if an economy was built on barter of various products and services. 

Does that make some sense?  It was a new concept to me a while back but some MR guys and melveyr probably do a much better job than I of illustrating it.

I think I see where you're going with this.  During the bust, there is normally a credit contraction; I would argue credit is part of the money supply.  As the money supply contracts there are less dollars available to pay back existing debt, and the result is a downward spiral of default because there aren't enough dollars to pay back the debts.  Is this an accurate summary of what you're saying?

[Pointedstick]

To your next post, what resources are being reallocated?  Why are workers not being hired in other areas of the economy that are "more valuable?"  The answer: They aren't.  The other sectors of the economy are also seeing severe demand deficiencies because people don't tend to decide to spend differently... they decide not to spend at all...

The other option is that they decide to pay off debt, which, in my case and that of several friends of mine, is true.  The boom happens when people are spending more than they can afford and financing it.  The bust comes when they realize how much debt they've racked up and either decide to start paying it off or realize they can't and default.

You guys are talking past each other a bit… Moda's point is that in a debt-based monetary system, debt is a constant. We're all systematically encouraged to get into debt, and these debt contracts that make up the monetary system are primarily what cause the money supply to expand and contract.

When production is growing, the money supply needs to grow too. In our system, that's accomplished by government deficit spending or increasing private indebtedness. When too many people go into debt for stuff they couldn't afford, then yes, it's their fault for being shortsighted, and yes, they should sacrifice to pay it back, but those who default on their debts destroy liquidity, and banks that stop lending also destroy liquidity. This reduction in the money supply makes people feel poorer despite no actual change in the actual quantity of goods being produced or capable of being produced.

The tragedy of a debt-based monetary system, IMHO, is that the quantity of money is so elastic that it can be wildly out of sync with the underlying society's productive capacity. That gets to Moda's point about barter; when goods basically are the currency, there's never really a mismatch between goods and the means to buy them; goods are their own means to buy other goods! But when we buy goods with money that is created through someone's getting into debt, everyone's ability to buy things depends on the amount of indebtedness growing at a rate near GDP growth and not experiencing any major contractions.

hoost, you're coming at this from a very Austrian perspective, and much of it isn't contradicted by understanding MR, but you need to look at the macro flows as well as the micro decisions. They affect one another.

[hoost]

To your next post, what resources are being reallocated?  Why are workers not being hired in other areas of the economy that are "more valuable?"  The answer: They aren't.  The other sectors of the economy are also seeing severe demand deficiencies because people don't tend to decide to spend differently... they decide not to spend at all...

The other option is that they decide to pay off debt, which, in my case and that of several friends of mine, is true.  The boom happens when people are spending more than they can afford and financing it.  The bust comes when they realize how much debt they've racked up and either decide to start paying it off or realize they can't and default.

You guys are talking past each other a bit… Moda's point is that in a debt-based monetary system, debt is a constant. We're all systematically encouraged to get into debt, and these debt contracts that make up the monetary system are primarily what cause the money supply to expand and contract.

When production is growing, the money supply needs to grow too. In our system, that's accomplished by government deficit spending or increasing private indebtedness. When too many people go into debt for stuff they couldn't afford, then yes, it's their fault for being shortsighted, and yes, they should sacrifice to pay it back, but those who default on their debts destroy liquidity, and banks that stop lending also destroy liquidity. This reduction in the money supply makes people feel poorer despite no actual change in the actual quantity of goods being produced or capable of being produced.

The tragedy of a debt-based monetary system, IMHO, is that the quantity of money is so elastic that it can be wildly out of sync with the underlying society's productive capacity. That gets to Moda's point about barter; when goods basically are the currency, there's never really a mismatch between goods and the means to buy them; goods are their own means to buy other goods! But when we buy goods with money that is created through someone's getting into debt, everyone's ability to buy things depends on the amount of indebtedness growing at a rate near GDP growth and not experiencing any major contractions.

hoost, you're coming at this from a very Austrian perspective, and much of it isn't contradicted by understanding MR, but you need to look at the macro flows as well as the micro decisions. They affect one another.

Maybe we are talking past each other, but that's not my intention.  My argument is that people are not "deciding not to spend", but that they are deciding to spend on debt repayment, which is a possibility that has not been considered.

I did not say that debt was not a constant and in general I don't disagree with most of what you've said.

Now, what do you mean when you say that I need to look at the macro flows as well as the micro decisions.  And why do you say "decisions" and "flows".  Why not both flows or both decisions?  Please elaborate.

[melveyr]

Maybe we are talking past each other, but that's not my intention.  My argument is that people are not "deciding not to spend", but that they are deciding to spend on debt repayment, which is a possibility that has not been considered.

I think everyone is thinking of that possibility, even mainstream economists. As a small technical point when economists refer to spending they refer to purchasing of new goods and services. So an economist of any discipline would never include interest payments as part of spending. Economists use somewhat strange language...