A conversation about inflation

[adios]

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Any fixed-rate mortgage loan includes an amount sufficient to compensate for predicted inflation. Only to the extent that actual inflation exceeds what was expected is there a transfer to the borrower (and vice versa if inflation is less than expected.)

It is the case though that a sudden shift to a gold standard or similar inflation-free currency would be a pretty serious blow to anyone owing fixed-rate debt.

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Actually lenders can hedge their interest rate risk so it's really a choice on what risk lenders assume FWIW but yes they have to assume some sort of risk to make money. And yes lenders can hedge their interest rate risk and still make money on loans.

[Zygote]

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And if we're talking about switching to a full reserve system where the currency is backed by a commodity, I think we could expect to see loans a lot harder to come by than they are now or have been. Could be convinced on that though.

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Full reserve system isnt necessary and this would make loans much harder. Actually something that is necessary to take place in the US economy under given circumstances since loans are likely to get uncontrollably more difficult due to creditors lacking confidence. One way or another they need to up their credit and the tax payers/fed are losing the trust of the public and since fed isnt willing to raise rates then the legislators must further back up their currency.

More importantly, the anarcho capitalist perspective is that of free banking though. Where transparent fractional reserve and full reserve banking coexist and compete.

Either way the benefit is that loans are restricted by the wealth of the society to satisfy said loans. Economic consequences and rewards are properly placed. Increased savings allows for increased investment while decreased savings will force a decrease in investment.

Since investment would be tied to commodity savings, investors are much wiser and will not have the means to malinvest the limited resources and production of a society. "Credit systems" like Exsub's do the opposite and hit the bust phase when the limited resource fact becomes public knowledge.

The largest damage of inflation is the distortion of economic calculation for the enduring period so there is always a serious waste in resources that cant be turned back.

[T50_Omaha8]

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There are a lot of other factors to consider. However, I think that a very strong case can be made that inflation benefits the borrower, i.e. the consumer. The opponents of the FED will constantly talk about inflation being a "tax," but overlook the fact that it actually is a tax in favor of a borrower, who is spending money. They often say that the tax is against the lender and investor.


[/ QUOTE ] In the short run. If inflation is running at around 2%/yr, then increases to 4%/yr unexpectedly, this increase will be uncompensated for in lenders' projections, causing the consumer to win.

But this changes very quickly. Lenders expect inflation to remain higher, so they charge a higher interest rate. Now society is essentially back where it started, except with a higher interest rate and more inflationary uncertainty, resulting in a larger risk premium demanded by lenders to compensate.

The solution to this is to keep inflation running at one steady, predictable, and relatively low level. The most important component of inflation is not the actual amount of money in circulation, it's the amount of inflation people EXPECT to occur.

[Zygote]

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The solution to this is to keep inflation running at one steady, predictable, and relatively low level. The most important component of inflation is not the actual amount of money in circulation, it's the amount of inflation people EXPECT to occur.

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governments inflate first and foremost to distort the value of their debt. If inflation was steady and predictable then the purpose of inflating is defeated because prices should readily adjust under those circumstances thereby voiding any purposeful inflationary attempt.

[Exsubmariner]

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The solution to this is to keep inflation running at one steady, predictable, and relatively low level. The most important component of inflation is not the actual amount of money in circulation, it's the amount of inflation people EXPECT to occur.

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governments inflate first and foremost to distort the value of their debt. If inflation was steady and predictable then the purpose of inflating is defeated because prices should readily adjust under those circumstances thereby voiding any purposeful inflationary attempt.

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I think that Greenspan had a pretty good handle on this and based his policies around keeping inflation to a minimum. Thing is though, that with our present monetary system, the government issuing more money is a function of government expenditure. Spending money equals creating money and that equals more debt which equals more inflation. It's pretty vicious.

[MrMon]

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I'm sure the usual gang will chime in, but you're basically correct. Hard money/no inflation is great if you have money, it sucks if you don't, as credit markets pretty much dry up. Ours is a credit based economy.

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There are limited resources in the world. How do your "credit based economies" account for this?

Also "credit based economies" are only useful so far as they have credit. Therefore, if they practice what you preach there will eventually be a huge spike in interest rates, as the country consumes more than they have, and lenders become aware and demanding.

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..and were pretty much decided in favor of the soft money faction. The hard money faction does have a point, the value of money does decline over time, but the consequences of hard money are pretty harsh as well, and the world has decided that the downside of soft money is the lesser evil.

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Care to make a stronger point for a statement deserving as much?

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The fact that every economy in the world operates on a fiat money system. If hard currency is such a good idea, why does no one use it anymore and also kick the rest of the world in the butt with their stellar economic performance?

[Exsubmariner]

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Borrowers exploiting this fact are doing so at the expense of other real people. These people will eventually demand overtly high rates of interest due to mistrust and flush tons of people out of the credit market.


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Eventually, all dollars saved by every American ends up in the capital market via one route or another. Banks make money by investing money and lending money. The only thing that higher interest rates do is to give incentive for people to save more and borrow less. So yes, credit will be more expensive. However, the same effect will be achieved when people stop borrowing because they can't afford to borrow any more.

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Do you support legislation for direct pre-income tax transfers from creditors to borrowers? Why yes or why not?


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Uh, well we kind of have that already with the FED.

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Inflation benefits the minority in this sense..

As the dollar devalues imports will be relatively more expensive and other nations will get a discount on US assets. These other nations are able to take advantage of our slow down in purchasing power through their increase, and make us work as hard as if prices were one day instantly slashed abroad for foreigners purchasing our goods.

The US business in the export industries will see huge jumps in their income. Since they use this income to pay for expenses still priced in US dollars, which are not yet priced to their value, the receivers of these dollars will eventually lose their purchasing power when prices eventually rise in the US and this especially true if the receivers are dependent for goods abroad.

Since prices of goods abroad are more heavily increased, all Americans and businesses depending on imports from abroad are heavily expensed and the economy suffers from a lack of international specialization.

Also the money doesn't spread homogeneously nor do prices rise in tandem (other than from the perspective of foreigners). Throughout the process the people who trade dollars in for goods early on benefit greatly at the expense of people trading real resources for pretty paper back by less and less creditable tax payers.

Furthermore, securities priced in US dollars like stocks/equities can rise in value as the dollar depreciates and this increase the value of shareholders. If they use these increases to pay expenses or buy goods early on they are doing so at the expense of the late receivers of those dollars.

As a matter of fact, the people who borrow a lot and spend a lot during inflation gain at the eventual expense of the entire credit community. This process also greatly distorts market forces by rewarding incorrect uses of resources throughout. This has great consequences on the ability of people in the economy to calculate correctly and the general economy forever more will suffer as a result.




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I think that we are already seeing the effect of a devalued dollar in the US stock market. People are wondering what the heck is going on with all the economic indicators pointing toward inflation (like the price of oil) and expecting things to be slowing down. But, money just keeps on flooding into the market making it go up and up. This is because foriegn investors can get cheap dollars and use them to purchase US securities. This is what they want to do and where they want to be for security purposes.

The US is the securist place to invest money on the planet. It is the most protected from war and political turmoil that plagues the rest of the world. This is the thing I think you are missing. The US will not suffer economically because of that. Investing of the world's $ back into the economy of the US is a huge economic engine. It's not like everyone is going to bail out suddenly. Do you realize how much of US business is owned by foriegn interests already. Saudi Arabia, Great Britain, Japan, China, Germany, France? It's significant.

[Exsubmariner]

The winner, by a knockout!

[Exsubmariner]

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I'm sure the usual gang will chime in, but you're basically correct. Hard money/no inflation is great if you have money, it sucks if you don't, as credit markets pretty much dry up. Ours is a credit based economy.

The arguments went on all during the late 19th century, as I've pointed out in other threads, and were pretty much decided in favor of the soft money faction. The hard money faction does have a point, the value of money does decline over time, but the consequences of hard money are pretty harsh as well, and the world has decided that the downside of soft money is the lesser evil.

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The more I read about economics and understand it, the less it seems like a science and the more it seems like an art. You see, its not about hard numbers. The hard numbers only represent the actions of people operating in the economy. To me, it seems more and more to be about relationships and actions. Debt is a great incentive to go out and produce. If you only have to produce enough to sustain yourself, you aren't going to be participating very much in the economy. If you work all year, though, you are going to be producing a lot more than you need to sustain yourself. Very few people will do that voluntarily. A 30 year mortgage is a wonderful incentive. The fact that you are producing much more than you need to is going to have enourmous benefits for everyone, just like Adam Smith demonstrated. Working people are going to become rich people and rich people are happy people.

[owsley]

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The fact that every economy in the world operates on a fiat money system. If hard currency is such a good idea, why does no one use it anymore and also kick the rest of the world in the butt with their stellar economic performance?

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Pretty much every government has chosen a fiat money system because it allows them to tax their population more without them realizing it (among other things). It is bad for the overall economy but good for the people who run the government. The people who run the government make the obvious decision in their own self interest, while the people who get hurt have no idea WTF fiat even means. Brand of cars? Italian soccer team? New sports drink?