Robert Blumen of the Ludwig von Mises Institute "debunks" the idea of deflationary spiral, but fails to mention that nominal debts remain constant as asset prices and wages fall creating a liquidity crunch that results in cash flow problems, non-performing loans, and rising bankruptcies.
Significantly, he fails to consider Irving Fisher's The Debt Deflation Theory of Great Depressions and Hyman Minsky's The Financial Instability Hypothesis, which explain the theory underlying debt deflation.
ConclusionNo mention of private debt and its consequences.
The deflation death spiral is a theoretical description of a situation but it does not describe the reality of human action, for any number of reasons:
1. There is in reality always a diversity of expectations among the public. While some people will expect prices to continue in the same direction, others will form the opposite view. Everyone’s expectations will change not only in response to changes in the data, but taking into account their entire life experience, their own ideas, and their situation.
2. Expectations are not entirely driven by prices. A broad range of things influences our expectations about price.
3. Lower prices are not always sufficient motivation to delay purchases because everyone prefers to have what they want now, rather than later.
4. Expectations of buyers tend to be met by sellers, if not at first, then fairly soon. In some cases, buyers can hold onto their cash for a bit longer, but most businesses have no choice but to sell their inventories at what the buyer will pay. In other cases, buyers may not be able to delay purchases, or may not wish to, and will pay what they must in order to buy.
5. Everyone—buyers and sellers (and every one of us acts in both of these roles at different times)—has expectations not only about consumer prices, but about wages, employment prospects, even asset prices, the economy in general, the progress of our own life, and the future of our family. A coherent plan of saving and spending takes all of these things into account.
6. Expectations can be met. Buyers have a buying price. Even if not known in advance, they know it when they see it posted. Even if they do not know what they plan to buy in the future, a bargain price will be met by buyers.
7. People only need so much cash. Beyond that, they start to look around for either consumption goods, or investments.
Zero Hedge
Guest Post: The Deflationary Spiral Bogey
Robert Blumen | Ludwig von Mises Institute
49 comments:
Due to the Keynesians' and monetarists' total and perpetual refusal/inability to ever engage even basic Austrian concepts and analysis, such analysis is never applied by them to any factual situation. Thus, a “Minsky moment” is really nothing but an Austrian boom/bust cycle but with the obvious evidentiary fact of fiat money price distortions which cause malinvestments meticulously absent from their analysis and brains. Here is Minsky's garbage "thesis" which omits the pre-existing (1912) real explanation:
The financial instability hypothesis has both empirical and theoretical aspects. The readily observed empirical aspect is that, from time to time, capitalist economies exhibit inflations and debt deflations which seem to have the potential to spin out of control. In such processes the economic system's reactions to a movement of the economy amplify the movement--inflation feeds upon inflation and debt-deflation feeds upon debt-deflation. Government interventions aimed to contain the deterioration seem to have been inept in some of the historical crises. These historical episodes are evidence supporting the view that the economy does not always conform to the classic precepts of Smith and Walras: they implied that the economy can best be understood by assuming that it is constantly an equilibrium seeking and sustaining system.
http://www.levyinstitute.org/pubs/wp74.pdf
Oh dear. What can we do about those darn “capitalist economies” [actually, funny money economies with obscene levels of government spending - a typical Keynesian definitional fraud]? As always, the problems that Keynesians and monetarists claim to be solving do not actually exist but for their "solutions" which are ALWAYS the CAUSE of those problems.
Blumen seems to think that consumer expectations is the driver of price. As if everyone has an unlimited ability to spend and only their "expectations" of future price is their only decision.
Doesn't mention at all that under deflation money (purchasing power) contracts faster than prices. The mass aren't waiting for prices to fall. Their waiting for income to spend.
More junk spewed by the Von Mises institute. Thankfully only the nut jobs on zero hedge consider it a serious institution.
More junk spewed by the Von Mises institute.
You could not have possibly read the original article. Further, Austrians writing for other Austrians assume everyone knows at least about the TOPIC of economic miscalculation caused by funny money ("private" debt which originates with bank funny money loans). Contrary to Hickey, that is all taken into account.
It is the Keynesians and MMTers who meticulously ignore and fail to engage the analysis.
http://mises.org/daily/6362/The-Deflationary-Spiral-Bogey
And as I have explained 15,000 times, it is the regime of funny money dilution that causes the inevitable mispricing of almost everything, including interest rates and the amounts of loans that are actually potentially profitable and sustainable.
"the problems that Keynesians and monetarists claim to be solving do not actually exist but for their "solutions" which are ALWAYS the CAUSE of those problems."
According to Bob economic problems are caused by Keynesianism (and now monetarism too). So, according to Bob there were no economic problems before Keynesianism and monetarism.
Bob believes this because he is a willfully deluded buffoon.
Austrians writing for other Austrians assume everyone knows at least about the TOPIC of economic miscalculation caused by funny money
you mean Austrians write assuming everyone believes in these theoretic delusions.
It's like a cult member quoting other cult members as confirmation of their convections.
"Robert Blumen is an independent enterprise software consultant based in San Francisco"
https://mises.org/daily/author/771
"Why cannot producers lower their bid prices to their labor force and their suppliers in order to preserve production? If they could lower their costs, then they could produce profitably at a lower price level.
The general price level does not matter to business firms, so long as their costs are below their sale prices. Why does a deflationary meltdown assume that business can not operate profitably at any nominal price level? Why can business not lower costs?"
Cut wages! That is the key to prosperity!
If they won't accept lower wages - break them through mass unemployment!
What is ignored is that if wages are cut or unemployment rises, which is usually associated with deflationary depressions, but nominal debts remain the same, many people cannot service the debt and they cannot sell the asset for enough to cover the debt because falling asset prices put them underwater. The remedy is bankruptcy, which also threatens the solvency of lenders if it becomes widespread.
Debt deflation could be addressed by debt forgiveness or debt restructuring but this affects not only the net worth of lenders but also could create cash flow problems for then and even threaten their own solvency.
Thea argument that liquidation would resolve the issues by shifting ownership of assets is true theoretically but the social and political process is so disruptive that no government ever chooses it voluntarily if it can avoid it. In capitalistic economies, governments intervene to preserve order as the chief priority and then the capital base as the economic foundation of the society.
On can argue that without government this situation would not have happened in the first place and if it did, it would be quickly corrected. Again, theoretically, but we will probably never see that tested in a modern complex economy since modern state is firmly established for the foreseeable future, and what kind of social, political and economic arrangements societies will develop in the future is unknowable in the present.
The austrians seems to project their imaginey world on our real world. So long as we live in an inherently inflation-biased system (which we do), then Austrian "solutions" are cruel.
The interesting question that Bob and Austrians raise is: could society function well in an inherently deflationary system where prices and wages are always in decline?
I fail to see how it could work well. By definition it seems they are AT LEAST suggesting a non-growing money supply. But while we're at it… how about a decreasing money supply???
Any increases in the amount of money in existence has an inflationary bias, but doesn't necessitate inflation, for example as MMT and Keynesians say, if money creation doesn't outpace productive capacity.
Inflation incentivizes consumption and investment, and helps relieve aggregae private debt accumulation. Bob and the Austrian seems to be saying that all of our 'funny money' private debts via Loans create Deposits (as well as government debt), IS THE CAUSE OF THE INFLATION.
That's a least partly true.
But again, could our modern globallized world economy function with a defationary-biased system?
I don't understand how.
I'll continue to support the likes of MMT, i.e. the economists looking at the system we actually have and trying to make it work better. Austrians can continue to live in their fantasy-land.
Why do those guys go into the gutter in the comments and some articles so much over there?
I'm all for reading other opinions and theories but do those guys really think I'm going to click on one of their links again?
I can't imagine, even if they were right, telling a colleague to check out one of these links. Who would want to be labeled as part of this group? Again... even if they were 100% right.
Why does a deflationary meltdown assume that business can not operate profitably at any nominal price level? Why can business not lower costs?"
Why would anyone invest in plant and equipment, when income generated from them would be reduced over time. When in contrast sitting on money would result in increased income.
price of building materials for long term capital goods would be impossible to pay off under diminishing revenue caused by deflation.
The General price level does matter, because their initial investment, weather loaned or cash is fixed at the beginning and is not adjusted by deflation.
The "deflation works" model assumes prices will fall faster than purchasing power. Which has never happend.
Also, it's hugely ironic that Bob Roddis and Austrians tote the all important "non-aggression principle" as being fundamental, when Private Property, which is absolutely essential to their Austrian fantasy-land, came about through the 'theft of the commons', i.e. aggression.
Also, it's hugely ironic that Bob Roddis and Austrians tote the all important "non-aggression principle" as being fundamental, when Private Property, which is absolutely essential to their Austrian fantasy-land, came about through the 'theft of the commons', i.e. aggression.
What a great argument! I wish I'd thought of that! The next time some giant corporation pours radioactive sludge all over you, your kids, your cat, your wife and yard, and you complain, they can tell you that the idea that you own your cat, your house or your body is really silly because, in fact, those things actually belong to "society" and society right now would prefer your house (and your family) be used as a radioactive sludge dump.
I smell desperation.
Nice dodge Bob.
Just becaue I pointed out the irony that the moral principle that undergirds Austrian economics is born out of 'original sin' doesn't mean I'm suggesting we abolish all private property.
Contradictions are contradictions, wherever we find them. If you smell desperation maybe you should take a shower. :)
"The argument that liquidation would resolve the issues by shifting ownership of assets is true theoretically"
It's not even true theoretically. When a business is shut down and liquidated, the creditors don't magically create a new business in its place.
"The next time some giant corporation pours radioactive sludge all over you, your kids, your cat, your wife and yard, and you complain"
Yeah, Bob, that is actually illegal. You idiot.
Private Property, which is absolutely essential to their Austrian fantasy-land, came about through the 'theft of the commons', i.e. aggression.
Lars Syll posted a nice Ayn Rand quote about this.
Y It's not even true theoretically. When a business is shut down and liquidated, the creditors don't magically create a new business in its place.
They admit that capital is destroyed to malinvestment but the real resources remain that can be repurposed. The argument is that this is "creative destruction." Economic contractions are required to purge malinvestment, supposedly due to interest rates being too low, so some capital destruction is a good thing.
Schumpeter argued this way as well, and the argument is OK. What is not OK is the idea that this has to happen all at once in a liquidation due to a debt-deflationary depression.
Opponents argue that creative destruction happens in capitalistic economies as an ongoing feature rather than a bug. A debt-deflationary depression, on the other hand, is a bug.
Rand's comments are vile and totally rejected by Rothbardians. The Indians certainly had significant homesteading rights to their lands and, of course, their bodies were inviolate.
Rothbard had Rand's number 45 years ago. It's a [typical] cheap shot attempting to foist the nutcase Rand on us.
http://www.lewrockwell.com/rothbard/rothbard23.html
"but the real resources remain that can be repurposed"
Empty factories.
Whether Austrians choose to associate themselves with Rand is beside the point. Austrians still maintain the non-aggression principle as a moral foundation, and yes it is ironic that the institution of private property is essentially 'orignal sin' in regard to non-aggression.
I don't see how you can escape this Bob, other than to dodge it. You must dodge it, otherwise you'd have to admit Austrian economics is based on a contradiction.
So much for logic.
JK, the 'original sin' creates "fatal price distortions"..
That and everything else..
"The Indians certainly had significant homesteading rights to their lands"
"significant". Decided by who exactly?
"significant". Decided by who exactly?
For starters, can we agree that they had the right to not be exterminated by the Union army?
Empty factories.
If the price is right, everything gets repurposed. May take some downtime tho.
It's a [typical] cheap shot attempting to foist the nutcase Rand on us.
If good sensible Austrians disavow the nutcase Rand, I wonder why then there would be an online course at the Mises Institute on "Atlas Shrugged." Isn't that about as mainstream Austrian as it gets?
A debt-deflationary depression, on the other hand, is a bug. Tom Hickey
Indeed it is.
And there is the moral argument too. Borrowers were driven into debt by the credit cartel; it is not just that real collateral be forfeit during a depression/recession.
And it's odd that the Austrians recognize the evil of credit booms but not the evil of the inevitable busts.
"If the price is right, everything gets repurposed."
Not necessarily, you could just end up with a destructive downward spiral.
"For starters, can we agree that they had the right to not be exterminated by the Union army?"
The indians and europeans started fighting with each other over land in the early 1600s. The Union army came into being in 1861.
The indians and europeans started fighting with each other over land in the early 1600s. The Union army came into being in 1861.
Does that mean you disagree with my view that the genocide of the Indians by the Union army was ghastly and wrong?
http://freedominourtime.blogspot.com/search?q=Indians
I wonder why then there would be an online course at the Mises Institute on "Atlas Shrugged." Isn't that about as mainstream Austrian as it gets?
Because there is nothing particularly wacky in A.S. and it was and is an important book. It's really not that difficult to differentiate good stuff people say vs. the dumb stuff people say. It really isn't.
"A.S. was and is an important book" written by a "nutcase".
"Does that mean you disagree with my view that the genocide of the Indians by the Union army was ghastly and wrong?"
I think what the Americans did to the Indians was wrong. I find it odd however that you choose to ignore 200 years of colonisation and conflict, and simply fixate on the Union army.
Y,
He's a neo-confederate....
Rsp
Y,
He's a neo-confederate....
Rsp
What a pathetic, dishonest, and defamatory thing to say. Just because you cannot refute the irrefutable fact that it was the Union army and government that committed genocide does not in any way suggest that someone who points this out supports slavery, which was your intent. We certainly know the type of scholar and person you are, Mr. Franko.
Not necessarily, you could just end up with a destructive downward spiral.
I don' know of anyone that thinks that debt deflation results in a whirlpool effect with no bottom.
The problem is that the bottom by be very deep and could end with severe social unrest and political upheaval. Even collapses come to an end if there are resources that can be mobilized. Civilizational collapse due to economic factors seems to result from dependence on vital resources that become unavailable.
In a debt-deflationary spiral the issue is not availability of real resources but of financial resources to deploy them through markets. Eventually, that works itself out, but it can get very messy in the meanwhile if there is large debt overhang — as there can be in societies in which most of the money is created by bank lending in which loans create deposits.
The indians and europeans started fighting with each other over land in the early 1600s. The Union army came into being in 1861.
That's North America. In Central and South America, the conquistadores were a hundred years earlier and their objective was gold and silver rather than land. In our focus on the the US we should forget about the other Native Americans that now comprise the bulk of "Latinos," as well as Eskimos in the north country. Dispossession is still going on due to enclosure as the neoliberal solution to "the tragedy of the commons." The real tragedy of the commons is enclosure, especially when coerced under the guise of "law."
"Eventually, that works itself out"
there are many possible outcomes, not one optimal equilibrium outcome to which the economy inevitably returns.
there are many possible outcomes, not one optimal equilibrium outcome to which the economy inevitably returns.
That's true. The point is that the deflationary spiral ends at the point that all debt is liquidated or restructured. Generally, govt steps in with some plan for restructuring before the economy bottoms out completely.
I'm confused about "the" Austrian view on the money supply.
Is it got a constant supply that depreciates over time?
Is it for a commodit-backed supply, that can increase only with an increase in the discovered amount of that commodity?
Is it "free-banking" ?
Should people use for money whatever they voluntarily agree upon for each specific transaction?
Should there be competing currencies? If so, isn't this just a recipe for some privatized monopoly to obtain the power over time?
etc.
Either a free banking system, or a full-reserve banking system using commodity money
Guys, we disagree with Bob Roddis on a lot but we should not caricature his views. Clearly he rejects Rand and extermination of Indians.
As for the Minsky moment it is indeed very similar to the Austrian bust. And Austrians should get credit for at least having credit (no pub intended) in their theory. The question is who gets the mechanism better. But at least, unlike neoclassicals there is a mechanism for a bust in ABCT.
@ PeterP
Agree. There are important areas of agreement albeit with some disagreement.
The difference is often related to prioritization. For example, most agree that the the liberal values are freedom, equality (absence of social privilege), and community (reciprocity). However, different parties prioritize these differently and also define them differently. The right defines freedom in terms of ownership (Rohtbard's self-ownership) while the left does not. Moreover, the right prioritizing freedom over the others, while the left prioritizes community.
This is reflected in the attitude toward deflation and liquidation, for example. The right emphasizes efficiency regardless of social cost, while the left emphasizes minimizing social cost even though price correction may be delayed and not deep enough to purge the system.
In other words, there are trade-offs in life, and these are made based on norms. People disagree over what norms should be adopted as criteria by individuals and through institutional arrangements.
In a democracy this is decided at the ballot box, but in a republic it is decided by elected representatives that may not follow prevailing popular view. As a result there is political tension.
So I would say that much of the disagreement is traceable to disagreement over norms rather than matters decidable based on evidence.
Tom: "Either a free banking system, or a full-reserve banking system using commodity money."
So there is either government enFORCEment of a frozen or near-frozen money supply, or in the case of extreme free-banking and competing currencies no check on 'funny money' creation.
In the former, then Bob is fine with SWAT teams so long as they enFORCE his preferred money-system. In the latter, it's not 'funny money' that's the problem, but centralized 'funny money'
Seems like Bob & the Austrians have more contradictions to deal with than I previously thought.
There is quite a difference between a prohibition on fraud and the initiation of force vs. bossing people around. One is purely defensive, the other offensive. "Progressive" policies are based upon actively bossing people around.
Trying to insure "equality of result" requires quite a bit of bossing around by SWAT teams. And, of course, "inequality of result" is mostly caused by the legalization of the bossing around allegedly to achieve "equality of result". The elite is making off with most everything thanks to your beloved funny money regime.
Bob, I'm betting you won't respond to this because you usually avoid specific and stay in the abstract, but I'll ask anyway, and I'll pleasently surprised if you actualy try to answer the questions and not dodge them...
1) How would money, and new money creation (if there is any), exist in your ideal economy?
2) If there is a frozen supply of money, will we need the federal government to use SWAT teams to enforce it?
3) If there is new money creation, is it (a) regulated by a commodity that is enforced by SWAT teams, or (b) at the voluntary discretion of of each individual (meaning: any person or business could create money)
4) If (b), wouldn't this over-time lead to privatized funny-money as those most successful in the market come to exert their market influence vis-a-vis money creation? And why would a privatized currency issuer be preferable to a public currency issuer?
Why don't you try thinking about the proposal instead of thinking up smart ass questions?
1. The main problems facing mankind are and have always been assaultive behavior and fraud. Murder, rape, theft, pillage, genocide. A "lack of aggregate demand" is not a problem and is as phony as a $3 funny money bill. Thus, the proposal is made to meticulously prohibit fraud and the initiation of force. People can then voluntarily agree on whatever money they want to use. I suspect that in such a violence-free and fraud-free environment, they will choose precious metals. They will do what they will.
2. I use the term "SWAT Team" because statists cannot seem to get it through their heads as to what amounts to voluntary behavior vs. COMPELLED BEHAVIOR and DEFENSIVE behavior vs. OFFENSIVE behavior.
Defending your home and family from a home invasion by criminals is not the same thing as your pro-active invasion of someone else's house staged ostensively to teach them better eating habits. Because you people must obfuscate until your dying breath, you obfuscate the differences between voluntary and coerced behavior and defensive vs. offensive behavior. All of your proposed programs involve OFFENSIVE and COERCIVE programs that, by definition, require SWAT teams (in the event the victim refuses to obey the diktat). If there is no coercion, then, by definition, it is not a government program but a voluntary program. Those definitions are so simple but yet you guys spend your entire lives obfuscating the obvious.
3. Voluntary contractual behavior is always superior to coerced government behavior because if there is a breach of contract, the wronged party can sue for breach of contract. One generally cannot sue government officials for anything. They can and do generally lie, steal and murder with impunity.
Private contractual promises are enforceable. Government promises are mostly bullshit.
Bob, you almost entirely avoided the questions I asked.
What is wrong with you? Presumably you comment here because you're interested in engaging the issues, but you continue to avoid getting into specifics.
Please, try again.
Just to be a smartass, I'd like to double-down on my original bet that "you won't respond to this" with "this" being the important word, meaning: the ACTUAL QUESTIONS.
"Misesians advocate a return to a 100% gold coin standard, an end to fractional-reserve commercial banking, and the abolition of the central bank, while Hayekians advocate a system where consumers select currencies from a variety of alternatives."
http://mises.org/etexts/why_ae.asp
Where do you stand, Bob? How about you just answer the questions I asked? (1-4)
JK, Bob's position is simple:
1. There is an imaginary world in Bob's head, in which there is no government.
2. In this imaginary world there are no economic problems.
3. Government and Keynesianism are therefore to blame for all economic problems, because in Bob's imaginary world there is no government and no Keynesianism and there are no economic problems.
Q.E.D.
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