The downside to deflation in a debt-based monetary system?

[Black Flag]

I'm talking about supply of currency, not goods or services available for exchange, although they are impacted as well during a debt deflation, as happened leading into the Great Depression, as described by Irving Fisher in 1933 as nine interlinked factors for cause and effect:

Fisher is a crackpot and his economic theories are idiotic.

So let's start:
1) Debt liquidation leads to distress selling

Huh? So paying off your debt creates distress! Bizarre premise!

2) Contraction of deposit currency, as bank loans are paid off, and to a slowing down of velocity of circulation. This contraction of deposits and of their velocity, precipitated by distress selling, causes

Explain how paying off a bank loan reduces deposits.

3) A fall in the level of prices, in other words, a swelling of the dollar.
A decrease in prices over the whole economy means that the dollar increases in value.
This is a good thing - that which the market values the most (money) improves its value over time, which must logically mean that the people improve their prosperity and wealth as well - since what they value the most (and will gravitate to holding it) increases in value.

You do not seek to buy stocks or investments that degrade in value over time. Why then do you believe that your investment in money should perform differently?



8) Hoarding and slowing down still more the velocity of circulation.
Nonsense.
The assumption here is the human being do not need to spend to live.

You try that for a couple of months and see if that is true!

As I said before, Fisher is a crackpot - he invented the Rolodex, made millions and lost it all (and his families too) in the 29 crash, after famously saying "that the stock market had reached "a permanently high plateau."

Both hyperinflation and hyperdeflation are strictly monetary phenomena, having little to do with a scarcity or abundance of goods. Shortages of goods under hyperinflation are not because of a scarcity of goods, but rather a glut - virtually no scarcity - of the currency. A shortage of money under hyperdeflation also has nothing to do with the supply of goods, but rather an absolutely scarcity of currency with which to buy them.

Whereas the phenomena of hyperinflation is directly due to the death of money, again, hyperdeflation simply cannot exist since one does not need currency to enact a trade.

If there is no currency available to you, it really does not matter what the price is in that currency. You can try to price what you want or need in other things, but with no competing currencies, you're talking barter.

Exactly.

And in no time, a competing currency will appear - one need only to look into a prison - where FRN are essentially restricted to zero - the competing currency that rises is another commodity that is very heavily desired other than pretty paper with dead white men on them...cigarettes.

In any economy where currency is voided - another currency quickly and immediately appears.

The bigger economic law - the fundamental that most don't take into account, is that a debt-money based economy - an economy where money can only be created as a form of debt - is only viable in a productive, growing economy, with at least moderate inflation required to sustain it.

No.

Another form of money rises to replace it.

Again, priced in what, and is it available at any price? Who could get a loan ten years ago? Now, out of those people, how many can get one today?

But this has nothing to do with "inflation" "deflation" or interest rates that are at near-zero.

Loans are not being made because the banks fear the marketplace and the ability to repay. So, instead, they have piled up their cash into the Federal Reserve paying 0.25% interest....

There is no accepted definition for hyperdeflation, so I think of it loosely as prices falling, rapidly and substantially over a very short period of time (call it a "crash), and primarily as a result of a contraction of the money supply - which in our debt-money regime means contraction of credit, because that is the only way money is created.

I disagree.

Follow the money.

I have a debt to you of $100.
Someone pays me for a service, and my fee is $100.
That someone removes $100 from his bank acct, and pays me.
I take that $100 to pay you, and close the debt.
What do you do with the $100?
You deposit into your bank account.

The money supply has not changed at all - paying off a debt does not reduce the money supply as the money never leaves the banking system.

In a fractional reserve system, this fundamental does not change. A debt repaid is merely money from one bank account going into another bank account - the money supply in the banking system does not change.

Only by bank failure does the massive de-leveraging of reduction of the money supply create such a change in the money supply - ie: 1929

Deflation can only occur when the banking system itself contracts - as it did in 1929. Bank failures consumed deposits, which shrank the money supply, creating deflation.

This is impossible today as the FIDC guarantees such deposits, thereby re-monetizing the deposits, and maintaining the money supply

[Steven Douglas]

Sheesh, where to start...

1) Debt liquidation leads to distress selling

Huh? So paying off your debt creates distress! Bizarre premise!

Is that what you think he was referring to when he said "debt liquidation?" You "paying off your debts"?

2) Contraction of deposit currency, as bank loans are paid off, and to a slowing down of velocity of circulation. This contraction of deposits and of their velocity, precipitated by distress selling, causes

Explain how paying off a bank loan reduces deposits.

What deposits? You mean that teensy fraction of hyper-leveraged deposits?

3) A fall in the level of prices, in other words, a swelling of the dollar.

A decrease in prices over the whole economy means that the dollar increases in value.
This is a good thing - that which the market values the most (money) improves its value over time, which must logically mean that the people improve their prosperity and wealth as well - since what they value the most (and will gravitate to holding it) increases in value.

Assuming a constant currency supply, of course. But we aren't talking about a constant supply are we. So yes, the dollars that remain to increase in value. For whomever has them. Meanwhile, the nominal value of all debts denominated in dollars also increase in value.

You do not seek to buy stocks or investments that degrade in value over time. Why then do you believe that your investment in money should perform differently?

I don't. I don't "invest" in money, so I don't even know where that came from.

8) Hoarding and slowing down still more the velocity of circulation.
Nonsense.
The assumption here is the human being do not need to spend to live.

Banks. Not hungry tight-fisted individuals, who really will spend when they're hungry - if'n they gots anything to spend - which you obviously assume everyone would. No. Not them. Credit tightening (credit being how all our Ponzi money is created) and banks hoarding, along with major corporations shunning investments and hoarding cash. You know, like they're doing now.

Too painful to continue responding to your points. Sorry, got burnt out responding Roy L., with disagreements over mindlessly simple stuff.

See it however you want, and so will I, we're not convincing each other of anything here.

[Black Flag]

Sheesh, where to start...

Is that what you think he was referring to when he said "debt liquidation?" You "paying off your debts"?

*clear throat*

That is exactly what the term means, sir.

What deposits? You mean that teensy fraction of hyper-leveraged deposits?

Um...please read what you posted and I quoted... I mean, I am the one who is asking the question based on your quote and example



To replay YOUR QUOTE;
"Contraction of deposit currency, as bank loans are paid off, and to a slowing down of velocity of circulation. This contraction of deposits and of their velocity, precipitated by distress selling, causes:

To highlight - ...Contraction of deposit ....as loans paid off.... distress selling...

Now, please explain why paying off loans contracts deposits....

Assuming a constant currency supply, of course.

...of course...what?

Who made this assumption and why is it necessary?

But we aren't talking about a constant supply are we. So yes, the dollars that remain to increase in value. For whomever has them. Meanwhile, the nominal value of all debts denominated in dollars also increase in value.

Utter mumble mush.

You offer no rational whatsoever to why paying of debts changes the supply of money.

I don't. I don't "invest" in money, so I don't even know where that came from.

Of course you do.

When you lend money, you are investing in it. You give money in the expectation that the money offers a return.

I am NOT investing in your business when I lend you money - to invest in your business I would buy shares -

I am investing in MY money when I lend it to you - it is the money interest that the money generates - independent of the success of your business - that represents the return of my investment.

Banks. Not hungry tight-fisted individuals, who really will spend when they're hungry - if'n they gots anything to spend - which you obviously assume everyone would. No. Not them. Credit tightening (credit being how all our Ponzi money is created) and banks hoarding, along with major corporations shunning investments and hoarding cash. You know, like they're doing now.

Explain why they do this.

A bank has massive costs and their business to earn money to pay those costs (like employees, rent, capital costs, bonuses, etc.) has to come from somewhere.

You make a startling claim that they will refuse to earn money - so how are they paying these costs?

The fact that businesses are maintaining a cash-flush bank account is merely a testament to their view that the marketplace is in chaos. However, they are still paying wages, rent, producing goods and services - this has not stopped, nor will it as your pet theory demands.

You are in pain because I believe you hold to a much promoted but wholly irrational Keynesian/Fisher theory of money.

As the current market is demonstrating, their theories are horrifically wrong.

Again, go back to my example and follow the money.

Please explain how paying down debt shrinks the money supply.


PS: I am assuming (dangerously, of course) that you believe "money" is a absolutely unique economic good, holding its own laws of economics not shared by any other economic good, and the laws of economics that rule all other economic goods do not apply to money.

[Steven Douglas]

PS: I am assuming (dangerously, of course) that you believe "money" is a absolutely unique economic good, holding its own laws of economics not shared by any other economic good, and the laws of economics that rule all other economic goods do not apply to money.

Firstly, how about fuck no I don't? It's not a dangerous assumption that I would be believe, or have faith in, such a mindless crackpot assumption. The danger is that anyone would believe such a thing. Only a crackpot has such a belief. Even a mainstream crackpot. Monetized commodities have uniqueness, to be sure (as the most marketable commodities), but they do not operate according to some special set of laws -- even when blithering idiots try to will it to be so.

With that, I'll just answer one of your quotes, because I think you live in a strange fantasy world, and back and forthing with you is tiring.

You offer no rational whatsoever to why paying of debts changes the supply of money.

Oh, I don't know, something along the lines of what goes up must come down, along with firm knowledge of another fundamental: that the creation of debts changed the money supply.

In a fractional reserve debt-money regime, an original deposit, which can be multiplied many times over and put into circulation as counter-party fiduciary media - loan principle created out of thin air, expands the money supply by that much. It's nothing but debt - multiple counter-party claims on the original wealth, or deposit.

As the debt is paid down, the principle is not redeposited anywhere, nor does it remain in circulation. Fiduciary media created out of thin air and treated as money is destroyed as that debt is repaid. The banks pockets interest only, not principle as it is repaid. Only that interest can count as an actual deposit, or an asset of the bank.

The problem there: where does the bank's debtor get the interest to pay all that debt? We can see clearly where all the principle came from, because it was created by the bank. But the interest required to pay the debt must also be created - somewhere else in the economy. Because we have an economy where money can ONLY be created as a form of debt, it is all fiduciary media - multiple claims on the same currency. And there are orders of magnitude more of these claims on currency (the loans from whence fiduciary media are spawned) than there is currency in existence.

The entire system debt-money system we are now subjected to requires infinite, exponential credit expansion in order to survive, because the only way to pay down past debts (PLUS INTEREST) is to incur ever-expanding future debts. That is where the money required to pay down the interest comes from -- future principle (again, all fiduciary media).

If our presently (exponentially) expanding system ceases to expand altogether, the contraction of the money supply would be catastrophic, were it not for the central banks' ability to ultimately hyperinflate. That does not mean that hyperdeflation is not possible - only that it can be masked. You can choose to explode in the face of impending implosion, even though a tendency toward catastrophic implosion is the natural state of the system, even now. As an end game, and in the absence of hyperinflation, hyperdeflation would be inevitable, based on the fundamentals above. The reason there is no balancing the two, or, the reason why there can be no such thing as equilibrium in the long term, goes back to the exponential growth REQUIREMENT designed into the Ponzi system itself. In other words, long term equilibrium is FORBIDDEN.

Still shaking my head that there are people who believe that money operates on a special set of principles - by default, and not as artificially imposed. Damned crackpots and their perpetual economy motion machines, when will they fucking learn?

[Black Flag]

Firstly, how about fuck no I don't?

My goodness, what vile.

A simple yes or no would have sufficed.

The question was legit, as it appears you hold some belief that debt "liquidation" shrinks the money supply.

Since you have yet to reconcile your argument beyond merely a declaration, I could only assume it rests on some unstated assumption about the creation of money and its impacts.

With that, I'll just answer one of your quotes, because I think you live in a strange fantasy world, and back and forthing with you is tiring.

No, I don't.
But we are discovering that you seem to....

In a fractional reserve debt-money regime, an original deposit, which can be multiplied many times over and put into circulation as counter-party fiduciary media - loan principle created out of thin air, expands the money supply by that much. It's nothing but debt - multiple counter-party claims on the original wealth, or deposit.

First loans are not created out thin air - they exist, or do you not believe your mortgage exists?

The issue: you cannot follow the money, thus you make specious claim that paying off debt with money created by debt reduces the money supply when no such thing actually occurs. It merely moves the created money from one bank account into another bank account in the same banking system.

As the debt is paid down, the principle is not redeposited anywhere, nor does it remain in circulation.

Utter nonsense, as already exampled above.

When I pay my bank loan with $100 from my account, it merely moves into the banks cash account, ready to be re-loaned.

A depositor puts $100 into a bank.
The bank lends me $90 to me so that I can buy something today and pay for it tomorrow, and places $10 with the FED's reserve.
I spend the $90 (because that is why borrowers borrow, they want to buy something)
The guy I bought my goods from givse me my goods and takes my $90 and puts into a bank account as a deposit.


...now count how much money represents the money supply.... $10 in reserve, plus the $90 in my suppliers bank account. = $100 .... which is the amount that was deposited originally.

So, where is the "thin air" money??? It simply does not exist.

Ok, so you go to the bank to borrow money for you to spend.

The bank has the $90. It puts $9 with the FED and lends you $81.
You spend the $81 to buy (because that is why you borrow, so you can spend it).
The guy you bought your stuff from gives you the goods and deposits the $81 in the bank.

So, let's count up our money supply
$19 in the FED and $81 on deposit = $100...

No matter how many times you wish to repeat these steps, it always will end up with $100 as the amount in our small banking system's money supply.

All you need is simple arithmetic, sir, and you see your theory has serious problems.


You are confused between an accounting (that is, you pretend my debt OWING is in fact MONEY) and the fact of the actual amount of the money supply.

You are guilty of double counting - hence, you are the one who created the "thin air" money by your mistake.

Fiduciary media created out of thin air and treated as money is destroyed as that debt is repaid. The banks pockets interest only, not principle as it is repaid. Only that interest can count as an actual deposit, or an asset of the bank.

You keep saying this, but you have yet to demonstrate this.

Start with you depositing $100 in a bank, and fraction it out, and have your bank lend it... and let's see how you think your theory works (for simplicity, do it with zero interest so that we concentrate on the fundamental functioning of the fractional reserve banking, and not in the business of banking)

The problem there: where does the bank's debtor get the interest to pay all that debt?

He earns it.

We can see clearly where all the principle came from, because it was created by the bank.

Not true.

It came from the depositor.

At no time does the bank lend money that does not exist.

Again, follow the money as exampled by me above.

[Black Flag]

Steven,
So, let's do the pay down of the debt.

I earn $90 and want to pay back my bank.
The guy who I bought my goods, through a series of purchases from other guys, and those guys buying things from me...

His bank deposit money moves out of his bank account and into the bank account of other guys that he bought things from. Nothing changes in the money supply as it is merely moving from one account in the same banking system into a different account in the same banking system.

These guys buy my goods and I get $90.

Instead of depositing it, I pay down my loan.

The bank takes my money and puts it into its cash account.

So, we are here:
$10 in the reserve @ the FED
$90 in the bank cash account, ready to make a new loan.

=$100 in our money supply; exactly where we have been since the beginning.

[The Gold Standard]

A depositor puts $100 into a bank.
The bank lends me $90 to me so that I can buy something today and pay for it tomorrow, and places $10 with the FED's reserve.
I spend the $90 (because that is why borrowers borrow, they want to buy something)
The guy I bought my goods from givse me my goods and takes my $90 and puts into a bank account as a deposit.


...now count how much money represents the money supply.... $10 in reserve, plus the $90 in my suppliers bank account. = $100 .... which is the amount that was deposited originally.

So, where is the "thin air" money??? It simply does not exist.

Ok, so you go to the bank to borrow money for you to spend.

The bank has the $90. It puts $9 with the FED and lends you $81.
You spend the $81 to buy (because that is why you borrow, so you can spend it).
The guy you bought your stuff from gives you the goods and deposits the $81 in the bank.

So, let's count up our money supply
$19 in the FED and $81 on deposit = $100...

No matter how many times you wish to repeat these steps, it always will end up with $100 as the amount in our small banking system's money supply.

All you need is simple arithmetic, sir, and you see your theory has serious problems.

You are forgetting the original $100. If the bank loaned that out of someone's checking account and they go buy $100 worth of groceries with it, your money supply is $200.

[Black Flag]

Steven,

So, now you will ask...
"Ok, smart-guy, where is the money created???"

It is created by the FED.

The typical creation:
The Government needs money.
To get the money, the Treasury creates a T-bill.
If the T-bill is not purchased by money already in circulation, the T-bill is purchased by the FED.
The FED "prints" (digitally or writes a check) for the amount of the T-bill, and credits the bank account of the Treasury.

This is how money is created in our banking system.

The other way, still happens at the FED.

A segment of the economy needs a bailout.
The FED gets that segment to transfer some property that has no marketable value, and monetizes it to whatever amount the FED thinks it wants.
The FED deposits this money in that segment's bank accounts, and accounts for this "loan" by the value of the unmarketable security.
Since the FED never has to dispose of these non-marketable securities, it can value them however it chooses, including a value of zero.

Money is thus created.

There is no other way money is created except via the Federal Reserve.

[Black Flag]

You are forgetting the original $100. If the bank loaned that out of someone's checking account and they go buy $100 worth of groceries with it, your money supply is $200.

Gold,
Follow the money. USE REAL MONOPOLY MONEY as it will help separate merely ACCOUNTING vs the MONEY SUPPLY.

Take 10x$10 of monopoly money.
Put it on a pile called "bank deposit"

You borrow $90 to buy groceries (because the bank needed to place a fraction of the deposit on reserve - here, we assume 10%, or $10).
So take $10 bill and put it on the pile called "Fed Reserve"
Take 9 of the bills and put it on the pile called "Grocery money"

You pay $90 to the store. Put the $90 on the pile called the Grocery Store.
What does the store do with your money?
They deposit it in the bank.
Put the money on a pile called "Bank deposit"

Did you need to go to the Monopoly box to get more money?

[The Gold Standard]

Here is how it works:

John has $100 in his checking account that he is free to spend at any time and is the same as cash in his pocket. (Money supply: $100)

A bank lends Fred $90. It either funds an account with this money or Fred deposits the money in a checking account where he is free to spend it as cash in his pocket. (Money supply: $190)

I suppose if the bank just gave Fred cash, then that would stop the pyramid off of the original $100 at that point and just start a new pyramid when that $90 is deposited somewhere. They don't usually do that though.