Political Crossfire Forums

[LostSoul3412]

Katsumoto wrote: Easy, the government via the banks currently takes old, worn currency out of circulation regularly. It is usually replaced with new currency. But instead of replacing the currency the government could instead raise interest rates. The result would be deflation.

But that's just replacing money, not lowering the money supply.

[Katsumoto]

LostSoul3412 wrote: Katsumoto wrote: Easy, the government via the banks currently takes old, worn currency out of circulation regularly. It is usually replaced with new currency. But instead of replacing the currency the government could instead raise interest rates. The result would be deflation.

But that's just replacing money, not lowering the money supply.

Maybe I am not explaining it well.

Try this:

http://en.wikipedia.org/wiki/Deflation#Causes_of_deflation

[Brooklyn]

Quote: Yes, that's my point: the Fed is not the cause of the cycle, it's the answer to it.

Perhaps I should have said in my original response that the supply of money causes the business cycle instead of "monetary policy". The way I said it originally makes it look like I am blaming the business cycle on the Federal Reserve. So to clarify, I am not blaming the Federal Reserve. I believe they do the best they can. My apologies for the confusion.

Quote: As well?

Absolutely. If the Federal Reserve is "the answer" to the business cycle, then the business cycle must be a monetary issue and not a land issue. The link you posted touches on this, but it the explaination is unsatisfactory at best.

[Free Thinkr]

Brooklyn wrote: Quote: As well?

Absolutely. If the Federal Reserve is "the answer" to the business cycle, then the business cycle must be a monetary issue and not a land issue.
Not really; the Fed doesn't deal exclusively with money supply, nor does it stand to reason that one cause is the only cause, or that a possible solution directly addresses the cause.

Quote: The link you posted touches on this, but it the explaination is unsatisfactory at best.
Think of it this way: as the economy grows and begins expanding, land costs rise to meet this expansion. The sudden rise in land costs draws speculators into the market, at which point the land costs rise even faster, and eventually people desperate to make use of the raging economy spend more than they should have on land, and lose their ass. *pop* The Fed tries to prevent this from happening with interest rates, but it does so at the cost of unemployment and keeping our economy artificially weak.

It's a crappy compromise that, at best, can hope to trade one tragedy for another (economic depression for congenital unemployment).

[Brooklyn]

Quote: as the economy grows and begins expanding, land costs rise to meet this expansion. The sudden rise in land costs draws speculators into the market, at which point the land costs rise even faster, and eventually people desperate to make use of the raging economy spend more than they should have on land, and lose their ass.

Don't get me wrong, I understand what the theory says. I am disputing it because the rise in the price of land shouldn't cause any cost-push inflation if the Federal Reserve doesn't not expand the money supply.

[Free Thinkr]

Brooklyn wrote: Quote: as the economy grows and begins expanding, land costs rise to meet this expansion. The sudden rise in land costs draws speculators into the market, at which point the land costs rise even faster, and eventually people desperate to make use of the raging economy spend more than they should have on land, and lose their ass.

Don't get me wrong, I understand what the theory says. I am disputing it because the rise in the price of land shouldn't cause any cost-push inflation if the Federal Reserve doesn't not expand the money supply.
It shouldn't, but it does because land is fixed in supply, and people are forced to take out excessive loans; basically, it transfers wealth that hasn't even been created yet to landowners via bankers. This isn't sustainable in the long term, and a collapse is inevitable. The Fed can only soften the blow; instead of a depression every 20 years, we get a recession every 10.

[Brooklyn]

Quote: It shouldn't, but it does because land is fixed in supply, and people are forced to take out excessive loans

As you probably know, the process of lending creates money. So George's theory of the business cycle is dependent on monetary expansion. If the money supply remains constant, the extra money needed for land must be diverted from other uses. So while land prices may rise, the goods/services in which money was diverted from, would find equilibrium at lower prices.

What George's theory is saying is that land prices are the cause of the business cycle. I believe, from the reading I have done, that land prices are an effect of the business cycle (which I believe is caused by money).

[RueTheDay]

Brooklyn wrote: What George's theory is saying is that land prices are the cause of the business cycle. I believe, from the reading I have done, that land prices are an effect of the business cycle (which I believe is caused by money).

On the contrary, asset prices (land, capital, securities, etc.) are a key driver of the business cycle, but the relationship is quite complex. It is still not well understood within economics, but there have been some attempts to model the relationships - see for example Irving Fisher's "The Debt Deflation Theory of Great Depressions" and Hyman Minsky's "The Financial Instability Hypothesis" and "Stabilizing an Unstable Economy". There have been some more recent works as well:
http://www.amazon.com/Asset-Price-Bubbles-Implications-Regulatory/dp/0762308451
http://www.amazon.com/Economic-Uncertainty-Instabilities-Asset-Bubbles/dp/9812563784
http://www.amazon.com/Asset-Price-Bubbles-Implications-International/dp/0262582538

[Brooklyn]

Quote: On the contrary, asset prices (land, capital, securities, etc.) are a key driver of the business cycle, but the relationship is quite complex. It is still not well understood within economics, but there have been some attempts to model the relationships

I can understand how all assets rising in price are components of the business cycle. But aren't rising asset prices just a component of the business cycle. Or another way of saying it: Aren't rising asset prices simply one of many factors that contributes to the economy reaching its potential output? I understand that asset prices contribute to a business cycle as do many other factors. What I am thinking, is that ALL contributing factors cannot happen without expanding the money supply.

[RueTheDay]

Brooklyn wrote: Quote: On the contrary, asset prices (land, capital, securities, etc.) are a key driver of the business cycle, but the relationship is quite complex. It is still not well understood within economics, but there have been some attempts to model the relationships

I can understand how all assets rising in price are components of the business cycle. But aren't rising asset prices just a component of the business cycle. Or another way of saying it: Aren't rising asset prices simply one of many factors that contributes to the economy reaching its potential output? I understand that asset prices contribute to a business cycle as do many other factors.

The problem occurs when the prices of productive assets do not reflect what those assets can actually produce (due to unrealistic expectations during a boom and fear in the aftermath of a bust).

Additionally, I don't think that demand for assets is an inverse function of price, as it is with commodities. If anything, it's the opposite. As stock prices go up, people tend to buy more and as they go down, people tend to sell more. This alone has serious implications.

Quote:
What I am thinking, is that ALL contributing factors cannot happen without expanding the money supply.

Sure they can. The velocity of money is not a constant, and it tends to become most unstable right at the various turning points of a business cycle. That is the fatal flaw of monetarism.

[Brooklyn]

Quote: Sure they can. The velocity of money is not a constant, and it tends to become most unstable right at the various turning points of a business cycle. That is the fatal flaw of monetarism.

You see, everything I have read and have been taught so far, says that velocity is generally constant or stable. Of course, I am far from finishing my degree so maybe this is a subject I will get more exposure to later.

[RueTheDay]

Brooklyn wrote: Quote: Sure they can. The velocity of money is not a constant, and it tends to become most unstable right at the various turning points of a business cycle. That is the fatal flaw of monetarism.

You see, everything I have read and have been taught so far, says that velocity is generally constant or stable. Of course, I am far from finishing my degree so maybe this is a subject I will get more exposure to later.

You may want to go back and re-read that line in your text. I bet it says something like "in order for a strict quantity theory of money to hold, velocity must be a constant". IOW, it's an assumption, and one that has been empirically demonstrated to be untrue.

[evil muppet]

How quickly you get away from the original topic. Supply side economics.

Supply side economics is not a bad economic theory. It is just that it is associated with a certain president and a certain political party so the other political party feels obligated to turn it into a negative.

Supply side economics is based upon Say's Law. Basically that Supply will create its own demand.

Stimulating demand to improve the economy is more risky than stimulating supply.

1. If demand increases before supply, you will have an increase in prices. This will have a negative impact upon the poor.

2. An increase in demand is an increase in consumption. An increase in consumption will decrease savings. With less savings, there will be less investment available to increase supply.

3. If supply increases before demand, the general price level will fall. Lower prices will benefit consumers...ie. the poor.

4. An increase in supply will result in an increase in savings before consumption begins to increase. With more money available for savings, you will have more investment which will make increasing production cheaper.

[RueTheDay]

evil muppet wrote: How quickly you get away from the original topic. Supply side economics.

Supply side economics is not a bad economic theory. It is just that it is associated with a certain president and a certain political party so the other political party feels obligated to turn it into a negative.

Supply side economics is not an economic theory at all. It was political propaganda created by a couple of guys who worked for the Wall Street Journal's editorial page who had no formal training in economics whatsoever. You will not find "supply side economics" being taught in any curriculum at any accredited university.

Quote:
Supply side economics is based upon Say's Law. Basically that Supply will create its own demand.

That's a popular misunderstanding of Say's Law. What Say's Law actually states is that there can never be a general glut - that while there may be imbalances between supply and demand in individual markets, in the aggregate they will always be in balance. Say's Law would be true in a pure barter economy; it does not hold true in a monetary economy.

Quote:
Stimulating demand to improve the economy is more risky than stimulating supply.

1. If demand increases before supply, you will have an increase in prices. This will have a negative impact upon the poor.

Why will it have a negative impact on the poor? Inflation tends to have the most harmful effect on lenders and the least harmful on borrowers. Also, you can't necessarily say that increasing demand will increase prices - it depends on whether the economy is operating at full employment when demand is increased.

Quote:
2. An increase in demand is an increase in consumption. An increase in consumption will decrease savings. With less savings, there will be less investment available to increase supply.

That is completely wrong. You fail to distinguish between planned savings and actual savings. An increase in consumption will more than likely INCREASE investment to meet the additional demand.

Quote:
3. If supply increases before demand, the general price level will fall. Lower prices will benefit consumers...ie. the poor.

Deflation is rarely a good thing.

Quote:
4. An increase in supply will result in an increase in savings before consumption begins to increase. With more money available for savings, you will have more investment which will make increasing production cheaper.

That is also incorrect. You misunderstand the basic relationship between savings and investment. The two are always equal by definition. What varies is planned savings versus actual savings and planned investment versus actual investment (ex ante vs ex post), and the difference is due to changes in national income over the corresponding time period.

[LeopardPM]

Rue wrote: Deflation is rarely a good thing.

depends upon your meaning...

Deflation, as in the actual decrease in the commodity used as money is a good thing for those who hold money, but a bad thing for those who lost it (and someone had to 'lose' it, right? For the money supply to contract...)

Deflation, as an increase in total goods vs less of an increase in total money, is a good thing for all, equally.

Give me deflation over inflation, any day of the week! Let me reap the full benefits of general society's increase in productivity and efficiency instead of having government suck these hidden benefits for itself through expansionistic fiat monetary policy.

[bob.appleyard]

LeopardPM wrote: Give me deflation over inflation, any day of the week!

I disagree. Deflation hands wealth to lenders, who, through interest, are getting enough as it is. While the two may not be connected, inflation and economic expansion tend to go hand in hand.

[evil muppet]

Quote: Why will it have a negative impact on the poor? Inflation tends to have the most harmful effect on lenders and the least harmful on borrowers. Also, you can't necessarily say that increasing demand will increase prices - it depends on whether the economy is operating at full employment when demand is increased.

All things being equal, an increase in demand without an increase in supply will cause a rise in the price level. There will be a period in time in which the supply will not catch up with the demand.

The policies of stimulating demand to improve economic performance does increase consumption over savings. They are mostly designed to increase consumer spending.

[LeopardPM]

bob.appleyard wrote: LeopardPM wrote: Give me deflation over inflation, any day of the week!

I disagree. Deflation hands wealth to lenders, who, through interest, are getting enough as it is. While the two may not be connected, inflation and economic expansion tend to go hand in hand.

I would characterize it as 'misallocated economic expansion'

Though deflation does indeed give a benefit to lenders, it gives equal benefit to ALL holders of capital and savers. By what standard do you determine that 'lenders are getting enough as it is'?

[bob.appleyard]

LeopardPM wrote: Though deflation does indeed give a benefit to lenders, it gives equal benefit to ALL holders of capital and savers.

Who are in a minority. Most people are in debt (for example, they have a a mortgage), and this has held throughout the 20th Century. So deflation would negatively affect most people's finances, thus harming the economy. You're prepared to sacrifice the performance of the economy for the sake of a wealthy minority.

Quote: By what standard do you determine that 'lenders are getting enough as it is'?

They charge interest. Wouldn't be doing it otherwise.

[Free Thinkr]

LeopardPM wrote: bob.appleyard wrote: LeopardPM wrote: Give me deflation over inflation, any day of the week!

I disagree. Deflation hands wealth to lenders, who, through interest, are getting enough as it is. While the two may not be connected, inflation and economic expansion tend to go hand in hand.

I would characterize it as 'misallocated economic expansion'

Though deflation does indeed give a benefit to lenders, it gives equal benefit to ALL holders of capital and savers. By what standard do you determine that 'lenders are getting enough as it is'?
It seems to me it would only give to holders of capital in the form of money. A factory wont increase its value one whit via deflation; quite the opposite.