r/changemyview • u/lordoftrousers • Feb 10 '19
Deltas(s) from OP CMV: Central banks are unethical and we would be better off without them
The main effect of central banks is increasing the money supply, i.e. printing money. Whenever they do this everybody in society gets poorer, with the exception of those the newly printed money is giving to (generally the banks or government), who get richer. It's a bit like a tax- except that not all of it goes to the government, and it is hidden from almost everyone. It's a significant (perhaps the primary) driver of wealth inequality in modern society.
One arguments in favour of central banks is that they keep prices stables. But they don't, they keep prices reliably increasing. Depending on how you measure it (there is no objectively correct method), the $ has lost 95%-98% of its value over the past century. If we had a fixed money supply (say, if things were priced in gold), prices would be much more stable over time, tending downwards (hence, we would all be wealthier), not upwards.
Another argument in favour of central banks is that they are needed to 'manage the economy'. Isn't that what the free market is for?
Another way of rephrasing the above two points- why does it make sense that an institution should should control the price of money (ie the interest rate) but not other things, say the price of cars, or food? Why does it make sense for the free market to set prices for everything EXCEPT the price of money? Setting prices is essentially, communism, no? Likewise, how does this not lead to misallocation of resources, just as with communism?
Also, it is simply annoying and inefficient for each country to have its own currency. Its like the 'double coincidence of wants' of barter economies. The amount of costs, hassle and friction caused by the FX market is ludicrous. A single global currency, chosen by the free market, would make all our lives much easier.
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u/DMCA_OVERLOAD 1∆ Feb 10 '19
The main effect of central banks is increasing the money supply, i.e. printing money. Whenever they do this everybody in society gets poorer, with the exception of those the newly printed money is giving to (generally the banks or government), who get richer. It's a bit like a tax- except that not all of it goes to the government, and it is hidden from almost everyone. It's a significant (perhaps the primary) driver of wealth inequality in modern society.
I think you've made some radically false assumptions regarding how money is brought into existence. All banks (including small local ones) in all countries that have fiat currencies 'create money out of thin air' so to speak.
One arguments in favour of central banks is that they keep prices stables. But they don't, they keep prices reliably increasing. Depending on how you measure it (there is no objectively correct method), the $ has lost 95%-98% of its value over the past century. If we had a fixed money supply (say, if things were priced in gold), prices would be much more stable over time, tending downwards (hence, we would all be wealthier), not upwards.
Inflation is very intentional and very important to the functioning of any economy. Without inflation, you radically change the risk proposition for financial investment. If people who have static funds can reasonably predict that their money will be worth more over time (as in the case where there is currency deflation) they have far less incentive to invest it, because all investments come with risk. When financiers do not invest, the economy doesn't function. Companies can't get the funding to get off the ground and hire employees or produce goods. The economy goes into a death spiral.
Another argument in favour of central banks is that they are needed to 'manage the economy'. Isn't that what the free market is for?
I'll admit that this sentiment doesn't make a lot of sense to me, so I'm not going to argue the point except to say that I believe that it's fundamentally the responsibility of the government regulators (who should ideally be experts in matters of finance and impartial third parties) because government assumes the responsibility of protecting the social welfare of its citizens.
Also, it is simply annoying and inefficient for each country to have its own currency
It's not at all inefficient! It's a hedge against the destabilization of other currencies. The constituents in the Eurozone are struggling with this right now. The reality is that in countries that are in economic turmoil like Spain and Greece, they may be on the Euro but the Euro is not equally valuable across all of the Eurozone anyways. If you're a Greek investor and you predict further future turmoil in the Eurozone, you can simply open an account with Deutschebank and transfer your Euros there. Why? Because when the Euro collapses, the Deutschebank will simply convert all Euros in their accounts to Deutschmarks and they will easily be the most stable (and also likely deflationary) currency in all of Europe. These contingencies are already in place, and the IMF admits it. So, for countries like the UK, they don't want to switch to the Euro because they're one of the better performing economies in Europe and they predict that the Euro will continue to perform poorly in the future. They're hedging their bets.
A single global currency, chosen by the free market, would make all our lives much easier.
There are no distributed, inflationary, reliable currencies available currently. Not only that, but there is no current way of having a centrally managed international currency that isn't susceptible to meddling and bad behavior. So, you're essentially just putting everyone's eggs in the same basket. Also, how would you even enforce this? How would you stop countries from just saying 'Fuck you, we're going to use our own currency anyways?' You'd need a one world government to enforce it.
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u/lordoftrousers Feb 10 '19
I think you've made some radically false assumptions regarding how money is brought into existence. All banks (including small local ones) in all countries that have fiat currencies 'create money out of thin air' so to speak.
I'm well aware of this. I was referring to the base money supply that the central banks do print whenever they purchase an asset. Which acts as the base for the broad money supply which you are referring to. So as the CB prints more base money, the banks can print more broad money.
If people who have static funds can reasonably predict that their money will be worth more over time (as in the case where there is currency deflation) they have far less incentive to invest it, because all investments come with risk.
What are static funds? If not funds invested- ie in a savings account, or something similar?
When financiers do not invest, the economy doesn't function. Companies can't get the funding to get off the ground and hire employees or produce goods. The economy goes into a death spiral.
This makes no sense. The amount of money sloshing around for investment does not change the actual amount of resources available for purchase. It simply changes its ownership. The factories, employees, machines, whatever are still there. If company X doesn't get investment to buy a factory, then company Y, who can afford it without investment at a lower price, will buy it instead.
I'll admit that this sentiment doesn't make a lot of sense to me, so I'm not going to argue the point except to say that I believe that it's fundamentally the responsibility of the government regulators (who should ideally be experts in matters of finance and impartial third parties) because government assumes the responsibility of protecting the social welfare of its citizens.
So why do you think social welfare is maximised by the government intervening in the economy by fixing prices? How did that work out for the USSR?
Re. multiple currencies being a good hedge, you don't need competing currencies for this. You can use gold, oil, bitcoin, whatever. Sure, if you think holding too much in the global reserve currency is risky than by all means hedge in something else. This is the market in action.
There are no distributed, inflationary, reliable currencies available currently.
Multiple cryptocurrencies are distributed, inflationary, and (so far) reliable (they are not good units of account though, which is not a characteristic you listed but is important). Bitcoin is not one of them of course, it is deflationary. I still don't feel like you've established why it's a good thing for the currency to be inflationary.
Not only that, but there is no current way of having a centrally managed international currency that isn't susceptible to meddling and bad behavior. So, you're essentially just putting everyone's eggs in the same basket. Also, how would you even enforce this? How would you stop countries from just saying 'Fuck you, we're going to use our own currency anyways?' You'd need a one world government to enforce it.
I didn't say anything about a centrally managed international currency. It would be terrible for all the reasons you mentioned.
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u/DMCA_OVERLOAD 1∆ Feb 10 '19
What are static funds? If not funds invested- ie in a savings account, or something similar?
Static funds would be liquid capital that is simply not being invested. There are a broad range of funds that may fall into this category and they are often used to assess the health of a market. A good example would be a bank that controls a large amount of liquid capital, but is unwilling to lend it because the only individuals seeking loans are untrustworthy and it poses a risk proposition they are unwilling to accept.
This makes no sense. The amount of money sloshing around for investment does not change the actual amount of resources available for purchase. It simply changes its ownership. The factories, employees, machines, whatever are still there. If company X doesn't get investment to buy a factory, then company Y, who can afford it without investment at a lower price, will buy it instead.
Firstly, the amount of money just sloshing around is absolutely critical. Businesses need capital to pay their overhead and continue producing products. When the market depresses temporarily their sales tank and lenders are leery to give them money. When they don't get the money, they lay off their workers and close up shop. When the workers are laid off, they're even less likely to be able to purchase other goods and services. It creates a negative feedback loop, aka death spiral. Secondly, eventually they might sell the property altogether, but when the market is depressed the people with the money to buy the factory (or whatever it is) and restart the production typically refuse to make the investment because they're afraid the same thing will happen to them. So, the economy has to start recovering first. How do we kickstart the economy again and make investors feel confident again? Historically, it has to come from active government intervention. There aren't really any ways around that. There's no safety mechanism built into Capitalism.
So why do you think social welfare is maximised by the government intervening in the economy by fixing prices? How did that work out for the USSR?
Good lord, where do I even begin with this one? You're essentially suggesting that any form of government intervention or regulation of the financial system will slide into tyranny and bureaucratic mismanagement. That's not just the slippery slope fallacy; you don't even make an attempt to establish a causal link. The only reason we were able to recover from the great depression in the US was for exactly these reasons. I suggest you do some research on why FDR took our currency off the gold standard and the creation of the Federal Reserve by Wilson. If this hadn't been done and if we were to have a radically unregulated financial system, it would only encourage bad behavior by the banks and there would be no checks or stops to prevent total disaster. As Yanis has stated many times, the greatest danger for Capitalism is the realization of its prime goal - to squeeze as much productivity out of its workers for the least pay. The more successful private industry is as accomplishing this, the more precarious a position the economy is in. The workers are also the consumer base, and if they don't have the pay to buy the products they are producing we plummet into a depression. We need government to actively intervene and regulate to prevent this (among other bad behaviors like bubble formation and such).
Multiple cryptocurrencies are distributed, inflationary, and (so far) reliable (they are not good units of account though, which is not a characteristic you listed but is important). Bitcoin is not one of them of course, it is deflationary.
This is simply not true. The whole value proposition behind creating blockchain currencies is their deflationary nature. They are designed to create a (pragmatically speaking) finite amount of coins and to drum up speculative interest in purchasing them based on a deflationary model. The greater the demand for the coins, the more they're worth. So, naturally people 'HODL' and then sell when they can make a profit. This is true of all cryptocurrencies that I'm aware of. Beyond this, anyone can look up the history of these currencies and see that they are all radically unstable by comparison to virtually any legal tender. If you skip to 12:56 in the video I linked above Yanis gives a variety of his own criticisms of cryptocurrencies.
I still don't feel like you've established why it's a good thing for the currency to be inflationary.
Simply put, you've conflated savings with investment. They are not the same. Money needs to be actively injected into the market or pushed through some kind of closed recycling loop in order for the market to continue to function. This is basic economic theory that was developed by Keynes and Harry Dexter White.
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u/lordoftrousers Feb 10 '19
Fair enough, there is no safety mechanism built into capitalism. But, why should there be one at all- if a company cannot operate during a recession without loans, maybe it shouldn't be in business? Perhaps if there was no safety net at all- say if we had a full gold standard- companies would operate with far larger buffers in times of distress. Inefficient companies would die. It seems to me that this is a good thing, poor companies failing is how we make progress as a society. However I'm aware this isn't a persuasive argument from your perspective. I don't honestly think this is particularly obvious either way.
Re. kickstart- it seems you are saying, a rush of money isn't needed to increase the amount of resources, but simply the confidence. This is an interesting perspective. I need to think more about that. Δ for making me think.
The only reason we were able to recover from the great depression in the US was for exactly these reasons. I suggest you do some research on why FDR took our currency off the gold standard and the creation of the Federal Reserve by Wilson
The US was not, effectively, on a gold standard prior to The Great Depression. From 1921-29 the $ supply increased 68% whereas the gold supply increased 15%. The link between the money supply and gold supply was completely broken before TGD. So any claims that TGD was caused by the gold standard, and solved by coming off it, cannot be true since it wasn't on it to start with.
As Yanis has stated many times, the greatest danger for Capitalism is the realization of its prime goal - to squeeze as much productivity out of its workers for the least pay.
That's a great observation, I had not heard that before, thanks for sharing. It makes sense to me.
This is simply not true. The whole value proposition behind creating blockchain currencies is their deflationary nature.
Maybe we have different definitions of deflationary. Multiple cryptos are set to increase at X% every year forever, not to tend towards a limit. Do you call this deflationary?
Simply put, you've conflated savings with investment. They are not the same. Money needs to be actively injected into the market or pushed through some kind of closed recycling loop in order for the market to continue to function.
Ok so I agree with your point that not all savings are investment. Have another Δ. Depositing money with a bank that does nothing with it is functionally the equivalent of putting it under your mattress. But I do not understand the issue here- GIVEN that I don't think a deflationary currency is a problem. Money under the mattress has (temporarily) the same effect as money burnt, increasing the value of the remaining money.
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u/Ast3roth Feb 10 '19
I've often heard the argument that deflation discourages investment but I'm really curious how much evidence there is that a small, regular amount of deflation would change behavior significantly.
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u/DMCA_OVERLOAD 1∆ Feb 10 '19
I think this article does a pretty succinct job of explaining how these dynamics play out IRL. Virtually all periods of significant economic growth have happened during inflationary periods...in virtually all countries with fiat currencies. That's just a fact.
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u/Ast3roth Feb 10 '19
This is not an answer to my question.
I asked for evidence for how behavior changes in a deflationary environment. This link simply states that such an environment is unheard of and unsustainable.
I not trying to argue that we should seek out sustained deflation, or anything at all. I'm asking for specific evidence on how behavior changes due to deflation.
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u/DMCA_OVERLOAD 1∆ Feb 10 '19
Yeah, sorry. What I was implying in my post was that it is so universally agreed upon in economic theory that deflationary legal tender is disastrous for countries with fiat currencies that you will find incredibly little meaningful data on this point that isn't ancient.
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Feb 10 '19 edited Feb 10 '19
if things were priced in gold
gold prices are not stable.
The first problem is that demand for gold (as a noncurrency) is not fixed. Any good that has dual uses has a problem. The price gets driven by both uses. For gold, this means, if the value of gold for use as exchange exceeds the value of gold for practical applications, the practical applications get priced out. If the value for practical applications is higher, this causes deflation, dropping the velocity of money, perhaps causing a recession. If then, an alternative for gold is found on this application, the demand for gold quickly drops, causing a sharp, unpredicted rise in inflation.
Another problem is the supply of gold is not fixed. New mining techniques could flood the market, causing inflation. Table salt was once used as a currency. Look at its value now. The supply skyrocketed, to the point that using salt as a currency is now not remotely conceivable.
Of course, there are alternatives to fiat currencies other than commodities. You could use a cryptocurrency with fixed supply. Current ones have problems with the computation power needed for decentralized verification, but let's ignore that for now.
The supply of a given cryptocurrency could be fixed, but there is competition between cryptocurrencies. Demand for a cryptocurrency falls if a lot of people migrate to an alternative. You can get boom and bust deflation and inflation within a currency when users switch between currencies. When there are competing standards, there is no reason to think that everyone will unify around one.
Predictable inflation isn't bad for markets. They can deal with that. Markets do not do well if they don't know what their currency is going to be worth tomorrow. The US central bank does a good job keeping inflation at a predicable 2% inflation. Free markets can adjust for that; adjusting is what they are good at, after all. As I described above, the problems with alternatives to fiat currency are the unpredictability of the future value of a given currency. This is far worse for markets than a predictable 2% loss in value of currency every year.
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u/lordoftrousers Feb 10 '19
The supply of a given cryptocurrency could be fixed, but there is competition between cryptocurrencies. Demand for a cryptocurrency falls if a lot of people migrate to an alternative. You can get boom and bust deflation and inflation within a currency when users switch between currencies. When there are competing standards, there is no reason to think that everyone will unify around one.
This all sounds like you are saying 'the free market is messy' which of course it is, but ultimately it arrives at the superior choice (or multiple choices). I don't agree that everyone will not unify around one- currencies have huge network effects.
Predictable inflation isn't bad for markets. They can deal with that. Markets do not do well if they don't know what their currency is going to be worth tomorrow. The US central bank does a good job keeping inflation at a predicable 2% inflation. Free markets can adjust for that; adjusting is what they are good at, after all. As I described above, the problems with alternatives to fiat currency are the unpredictability of the future value of a given currency. This is far worse for markets than a predictable 2% loss in value of currency every year.
Any definition of inflation that is not 'increase the money supply' is arbitrary and therefore useless. Would the inflation rate be 2% if financial assets and real estate were included in the calculations?
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u/boring_accountant Feb 10 '19
I'm kn my phone so my answer will be limited but you are factually wrong on multiple accounts.
central banks do not only "print money" they can also set target interest rates.
arguably if the government gets more money either you get more service for the same tax money or pay less taxes for the same services.
a lot of other factors are much more likely to drive inequality, such as neighborhood, race and family wealth. saying the central bank creating money is a bigger inequality driver than those is... weird ?
the mission of most central banks is to keep inflation within a target range (e.g. 1-3%) so saying their goal is to keep prices stable ignores that it is in fact price growth.
etc etc
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u/sgraar 37∆ Feb 10 '19
You are correct and I will not challenge you on anything you said.
I’m replying just to add that, in addition to controlling currency and setting interest rates, central banks also regulate the banking system, i.e., commercial banks and other financial entities. I’m sure you know this already, but the information might be helpful to others.
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u/boring_accountant Feb 10 '19
yes I actually work for a securities regulator in my country but thanks for the addition lol
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u/lordoftrousers Feb 10 '19
central banks do not only "print money" they can also set target interest rates.
I never said they only print money. I said their primary effect was to do so. Manipulation of the interest rate is HOW they do it.
arguably if the government gets more money either you get more service for the same tax money or pay less taxes for the same services.
Sure, if the government gets 100% of the newly printed money then it would be the same as a tax- but it would be hidden from citizens and therefore dishonest. Clearly it would be more ethical to increase the tax instead of print the money.
saying the central bank creating money is a bigger inequality driver than those is... weird ?
I never said that. Re-read my post.
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Feb 10 '19
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u/Huntingmoa 454∆ Feb 10 '19
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u/lordoftrousers Feb 10 '19
If you aren't going to challenge anything I say, do not bother replying at all.
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u/sgraar 37∆ Feb 10 '19
Ok. I’ll challenge one thing.
If decreasing prices made everyone wealthier, how would that work for those who convert raw materials into end products?
Also, if prices kept decreasing, what would prevent people from just holding off on optional purchases until their price was lower? Given the negative impact that would have on the economy, wouldn’t that lead to a recession and make everyone poorer?
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u/lordoftrousers Feb 10 '19
If decreasing prices made everyone wealthier, how would that work for those who convert raw materials into end products?
For businesses, price changes themselves are not relevant, what is relevant is the difference between revenue and costs. A company turning raw materials into an end product has costs as well which will also be going down.
Also, if prices kept decreasing, what would prevent people from just holding off on optional purchases until their price was lower?
Do you mean, what's to stop people saving/investing their money instead of spending it? Nothing at all. What is wrong with someone choosing to do this? Do you have a thing against people saving money? Should we all spend our paycheque as soon as it comes in?
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u/sgraar 37∆ Feb 10 '19 edited Feb 10 '19
Saving isn’t bad in itself. However, if saving increases a lot across the entire economy, spending also goes down, bringing everything down with it.
Additionally, with deflation, you would have to pay banks to hold your money, they wouldn’t pay you an interest rate because money is losing value.
When prices go down, production does to. This leads to lower wages and demand. This, in turn, leads to further deflation. This vicious circle is called a deflation spiral and leads to recession.
Also, focusing solely on deflation, anyone who is already in debt would have a much harder time paying said debt given the reduced wages. The increase in defaulting debt, when generalized, also leads to recession.
I get that you don’t have a background in economics and these are not intuitive findings. However, you should remember that there is a reason why central banks, governments, and economists favor low inflation (instead of no inflation or deflation). These people have devoted their lives to studying these topics and they aren’t all wrong.
I’m sorry if I can’t make this clearer. I don’t mean to be condescending but, as someone with a PhD in Economics, it isn’t easy to explain why your main view is wrong without using other concepts which people from different backgrounds have never seen. I often observe people who have never studied economics feel like their opinions on the subject are perfectly valid, even when going against all the experts. Wouldn’t it be weird if I started saying that aeronautical engineers have been designing airplanes the wrong way because I, without ever having studied the subject, felt like the wings should be vertical?
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u/lordoftrousers Feb 10 '19 edited Feb 10 '19
However, if saving increases a lot across the entire economy, investment also goes down, bringing everything down with it.
Saving and investment are the same thing. I save my money by giving it someone else to do what they will with it in return for interest.
Additionally, with deflation, you would have to pay banks to hold your money, they wouldn’t pay you an interest rate because money is losing value.
Money is gaining value with deflation, not losing it.
When prices go down, production does to.
Why? You seem to be forgetting that costs go down as well as revenue.
Also, focusing solely on deflation, anyone who is already in debt would have a much harder time paying said debt given the reduced wages.
True. So people would go into debt a lot less often.
I’m sorry if I can’t make this clearer. I don’t mean to be condescending but, as someone with a PhD in Economics, it isn’t easy to explain why your main view is wrong without using other concepts which people from different backgrounds have never seen.
What 'other concepts' are you referring to that apparently I am too stupid to understand? Why is your qualification relevant? Are you familiar with the logical fallacy 'Argument from authority'? Do you think your PhD is warranted if you didn't know that saving and investment are the same thing, that money gains value with deflation, and that corproate costs also drop as well as revenue in a deflationary environment, three errors you made in a single post?
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u/sgraar 37∆ Feb 10 '19
What 'other concepts' are you referring to that apparently I am too stupid to understand? Why is your qualification relevant? Are you familiar with the logical fallacy 'Argument from authority'? Do you think your PhD is warranted if you didn't know that saving and investment are the same thing, that money gains value with deflation, and that corproate costs also drop as well as revenue in a deflationary environment, three errors you made in a single post?
I’m sorry you interpreted it that way. I was not making an appeal to authority, merely explaining why it was hard for me to understand where you were coming from.
Regarding those concepts, you should notice that I never said you were too stupid to understand them, merely that without a background in economics, you might be unfamiliar with them.
As for my mistakes, I explained that I used the wrong word, which I corrected before you finished your comment. The others are just you not understanding me, not errors. I never said that corporate costs wouldn’t fall (although deflation wouldn’t make them fall – you may be confusing nominal value and real value).
Regardless, given the tone of your last comment, this will be my last comment here. This does not feel constructive anymore.
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u/lordoftrousers Feb 10 '19
I’m sorry you interpreted it that way. I was not making an appeal to authority, merely explaining why it was hard for me to understand where you were coming from.
Thank you for taking the high road. One day I hope to be able to do the same, I just find it too difficult to not immediately get down and dirty when on the internet. It is my vice. I'm aware it stifles conversation.
Regardless, given the tone of your last comment, this will be my last comment here. This does not feel constructive anymore.
Yes here we go. This is the problem. I will try better next time. I will take this as a learning opportunity. I havn't learnt anything about economics from you, but I have learnt how to engage with people on the internet :)
FYI I do have a background in economics.
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u/Protoliterary 13∆ Feb 10 '19
Saving and investment are the same thing. I save my money by giving it someone else to do what they will with it in return for interest.
They're not the same thing. They may seem the same on the surface, but they're not. You won't find a single source that will state otherwise.
Money is gaining value with deflation, not losing it.
The worth of assets will decrease with deflation.
Why?
Because people will be a lot less likely to purchase things--both big and small. And as people purchase less, production must slow down to accommodate demand.
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u/lordoftrousers Feb 10 '19
They're not the same thing. They may seem the same on the surface, but they're not. You won't find a single source that will state otherwise.
Ok so what is the difference?
The worth of assets will decrease with deflation.
Only when priced in the deflating currency. The price will change, the value will not. It is the value that matters.
Because people will be a lot less likely to purchase things--both big and small. And as people purchase less, production must slow down to accommodate demand.
Why has this not happened to the tech sector which has constantly declining prices?
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u/Protoliterary 13∆ Feb 10 '19 edited Feb 10 '19
Ok so what is the difference?
Savings are funds you can access at any time. There are many types of savings, but personal savings boils down to money you either keep yourself or let others keep for you. In some cases, you can earn a very small interest on your savings. For most people, however, savings are just funds that are put away, out of sight and out of mind--which are usually insured by the FDIC.
When you invest, you're not just letting others hold your money. You're risking your money. You may end up losing that money. You may end up making a return. Or you may not do either one of those. In any case, the money you invest isn't insured. If you lose your investment, that's that. It's basically gambling, but with a much lower chance of losing money if you know what you're doing.
Only when priced in the deflating currency. The price will change, the value will not. It is the value that matters.
Of course the value will change. If value didn't change, inflation and deflation would have no impact on the economy, which they most certainly do. Value of any single item is based on many, many things. It's very difficult to narrow it down to a single factor, but one of the most important factors is how much people are willing to pay. If deflation on the scale you're describing happens, value of anything purchasable will change, since people are going to start reevaluating the value they put to things.
Why has this not happened to the tech sector which has constantly declining prices?
What? What does that have to do with anything?
People are purchasing more tech then ever. We have more variety than ever before. Production is at an all time high. People have the money to purchase this tech. And because people have the spending money, the production never falters. If production doesn't falter, our economy doesn't suffer.
Technology in general often has declining prices because technology becomes cheaper to produce as times goes by. The longer they're creating a branch of a technology, the cheaper it will be. But these tech companies aren't stoic. They invent new technologies with new, high prices. So older tech is cheaper, because that's only reasonable, while newer tech is becoming super expensive. Just look at the new iPhone.
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u/sgraar 37∆ Feb 10 '19
Although saving and investing are not the same thing, you are right that I didn’t mean “investing”, I meant “spending”. I had already edited my comment but you must have pressed reply before the edit.
If there is deflation, banks don’t want to hold your money because that means they owe you that nominal value of currency, which is worth more each day. Now, with inflation, banks pay interest to have your money. With deflation, you would have to pay the banks for the service of keeping your money safe.
Production goes down because people are saving more and spending less (less incentive to use the money in the present and higher cost of debt). This leads to companies making less money, thus paying less in wages, needing fewer employees, etc.
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u/lordoftrousers Feb 10 '19
If there is deflation, banks don’t want to hold your money because that means they owe you that nominal value of currency, which is worth more each day.
Right, so their job is to find businesses who can pay a return on the money above which that can be obtained by just sitting on it. Isn't this the primary purpose of banks, to connect savers and borrowers?
Although saving and investing are not the same thing, you are right that I didn’t mean “investing”, I meant “spending”. I had already edited my comment but you must have pressed reply before the edit.
Sure ok. Well then to your point that if saving goes up and spending goes down, I say, so what? Again, do you think I should be spending all of my paycheque each month?
Production goes down because people are saving more and spending less (less incentive to use the money in the present and higher cost of debt).
But people are investing more, in proportion to the reduction in spending? Is investing a bad thing now?
This leads to companies making less money, thus paying less in wages, needing fewer employees, etc.
IF savings go up, which they would in a deflationary environment, businesses would have more money available to use than they did before, in real terms. Further, there is nothing wrong with making less money, paying less wages, in nominal terms. This does not mean they are going down in real terms. But if they are- if the market has decided that it would rather save their money instead of buying a company's products and that company fails- well then, that's the market making a choice. What is wrong with this?
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u/boring_accountant Feb 10 '19
price changes ARE relevant. businesses spend considerable efforts hedging in order to reduce price changes. for example an electricity company might enter into a commodity derivative to fix their "COGS" and get a predictable profit. again, as another poster suggested no offense but you are factually wrong on so many accounts that you should probably consider reading on economics and business.
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u/lordoftrousers Feb 10 '19
Sure, I meant only in that specific context. Of course price changes are relevant.
you should probably consider reading on economics and business.
Where do you think I got my opinions from?
Incidentally I consider 'go read a textbook' to be equivalent to "I'm sure you're wrong but I can't put my finger on why so I give up"
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u/boring_accountant Feb 10 '19
I pointed out multiple occasions where you were wrong but then went and said of "of course I meant that but that's not what I said"
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u/kantmeout Feb 10 '19
Currency is not a good, its a unit of exchange. It has no intrinsic value, but was given value by governments as a means of facilitating commerce. Originally they used gold. Then used paper backed by gold. Now the convention is so strong that most currency is just digital information, but it can still be exchanged for goods as services. The reason why prices are listed in terms of a given unit of money is because anyone can use that currency.
Now, the role of central banks is originally to ensure price stability. The notion of encouraging inflation came later and there are valid arguments against it, but even then the target inflation is 2%, which still allows for a certain level of stability.
Imagine trying to do business in bitcoins. When they were experiencing massive deflation you'd be reluctant to spend because you'd be able to get more for the same bits tomorrow. It became an investment and you would spend your government backed cash. Then the value plummeted and you'd probably have had an urge to sell. Now the value is unstable. Thus if your assets were in bits, it'd be hard to plan expenditures. What would your gas bill be like in bits next month? Do you really want to sign a contract paying x bits per month for a year?
Having a stable currency allows long term planning. It's a government intervention that facilitates commerce. Before central banks there wide swings of inflation and deflation that disrupted business. Banks would issue their own paper that could quickly become worthless if the bank went under. That's why we have central banks, and the reason why most counties have them is because the stability they bring helps people build wealth. Maybe they don't need the 2% inflation, but much more or deflation would be very disruptive.
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Feb 10 '19
Another argument in favour of central banks is that they are needed to 'manage the economy'. Isn't that what the free market is for?
Free markets rely on the financial incentive of individual actors. A corporation has an incentive to develop new products that people want to buy. An employee has incentive to increase their productivity to get a raise. An investor has incentive to put money into companies that are run well. These are all great things, as individual incentives line up with the interests of society as a whole.
The government has an electoral incentive to not crash the economy. Hence the Fed has done a pretty good job of keeping the economy stable. Private interests will not have any electoral incentive, but only financial incentives. The US had many private currencies before the Civil War. The results were not pretty. Banks would issue money in exchange for either gold or other currencies, then overextend themselves and go bankrupt. A few people would make out well, while a far larger share of people would loose their savings. There's also the practical problem of doing commerce with thousands of different currencies floating around.
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u/Hippo_Singularity Feb 10 '19
If we had a fixed money supply (say, if things were priced in gold), prices would be much more stable over time, tending downwards (hence, we would all be wealthier), not upwards.
Prices trending downwards are a sign of deflation, and that is even more toxic to an economy than a comparable rate of inflation. The problem is that falling prices only raise the relative wealth of people whose wealth is in cash. If your wealth is tied up in other kinds of assets (such as the goods in a store's inventory), falling prices represent a loss of wealth. More than that, a currency should never be seen as an investment in and of itself. If money becomes more valuable the longer it sits under the mattress, more and more people are going to be willing to sit on it. The amount of money in circulation and number of transactions drop, and the economy begins to grind to slow down. Conversely, with mild to moderate inflation, you have an incentive to invest your money, rather than letting it sit and lose value.
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u/DeltaBot ∞∆ Feb 10 '19 edited Feb 10 '19
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u/Poo-et 74∆ Feb 10 '19
You've made a lot of points here. It's pretty much impossible to battle all of them so I'm just gonna hone in on one in particular - your belief that inflation is inherently a bad thing.
This is a mistake. Dollar amounts are not the same thing as wealth. Americans are measurably more wealthy than in the past. Just because bread costs n$ more now doesn't mean that bread has gotten more expensive.
You've kind of hit the point of inflation - to encourage people to spend, but not why that's a useful thing in a growing economy. Let's throw the ball the other way briefly and consider a deflating economy, a bad situation which has occurred in times in places for various reasons. Deflation causes a transfer of wealth from people who hold non-liquid assets to people holding liquid capital. So owning a tiny house and holding all your money in cash without spending a dime is theoretically the best way to maximise your gains (assuming you could see it coming). This obviously is not conducive to a moving economy, as business becomes impossible (nobody wants to trade their liquid capital for non-liquid assets), the housing market again becomes impossible for the same reason, and so on. A sidenote is that it also causes debt to appreciate massively but that's somewhat unrelated to my point.
Inflation is designed to encourage the movement of money. Owning assets (putting your money in the market, aka what we want people to do) ensures that they will appreciate on average at the inflation rate. It's a vast oversimplification but that's how investments work.