A conversation about inflation

[Zygote]

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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.

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let me guess... you watched milton freidman recently [img]/images/graemlins/smile.gif[/img]


anyways, he's wrong about the dollar. If you think he's right, go back to when advised buying dollars and selling euros and keep holding it.

Simple reasons dollar is in trouble:

Foreign debt owners dont need to abandon their debt for America to be in trouble. If they figure other assets, whether gold, other currencies or investments will produce higher yields, central banks will also consider trade relations, they will stop repurchasing debt or demand higher yields. If yields stay the same major debt holder are more likely to slowly repurchase less either way the US government will be forced to reduce fiscal spending which is no where near the direction the political mainstream is heading.

Many governments are increasingly taking away their hedge to dollars and become less willing to trade commodities in dollars and this is not good news for the US if they want to continue exporting inflation.

Governments like China, who are huge debt holders and are growing at substantial rates, and are in need of much limited resources like oil, may in fact benefit from abandoning their debt and devaluing the dollar and US consumerism to a point where they can purchase oil much cheaper. Its all in the balance values and the US doesnt have a blank check to spend other nations money.

Debt holders are obviously skeptical because Americas fiscal spending is not in tact. Inflation is creeping up in prices. The dollar is being heavily devalued on foreign exchange markets. If the value and sustained acceptance of dollars drops enough large debt holders may dump as well because repurchasing is may no longer worth the buck because its dropping perpetually faster than any rising benefit.

Further the housing crisis is tying the feds hands since they are protecting the market rather than curbing inflation. This a short term solution that will devastate the most in the long run. Even Bernanke (whose got friedman's confidence), in addition to the head of the GAO (government accounting office) indicates America has extremely serious problems a couple decades into the future that they can't account for on the current path.

[Zygote]

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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?

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because government isnt a business where the people at the helm of the errors suffer the consequences. Why should US politicians, fed, banking community or wallstreet care?

More so why should they care when this is the most beneficial tool they have ever seen with regards to feeding their self interest.

Further modern fiat systems havent been around that long. Many examples of them or varieties of the same showing devastating economic results throughout history do exist. None of them have been sustained for an extended period in fact. Do some research.

Commanding heights of the economy are always important for governments to always control or at least heavily influence btw.

[pvn]

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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?

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The winner by a knockout!

Also, to the OP, yes, of course inflation is beneficail to those holding debt and those owning non-cash assets (real estate, especially).

If you think inflation helps you when buying a house, think how much it helps if you're buying, say, a Fortune 500 company.

The monied elites recieve the overwhelming portion of the benefits of inflation. At the expense of the poor masses, who hold a much, much higher percentage of their net worth in cash.

You broke the code, but only read half the message.

[MrMon]

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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?

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People nowadays may not be familiar with the term, but back when the hard/soft money debates were going on, the average citizen understood it very well, it was part of every presidential election. One of the most famous speeches in American political history is William Jennings Bryan's "Cross of Gold" speech to the 1896 Democratic National Convention, a speech he gave on the lecture circuit for year's afterward it was so famous.

Stop thinking of the government as a conspiracy and give the voters of the time some credit. They knew the issues and knew exactly what they were asking for. It wasn't the bankers who demanded soft money, it was the people.

[Zygote]

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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?

[/ QUOTE ]

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?

[/ QUOTE ]

People nowadays may not be familiar with the term, but back when the hard/soft money debates were going on, the average citizen understood it very well, it was part of every presidential election. One of the most famous speeches in American political history is William Jennings Bryan's "Cross of Gold" speech to the 1896 Democratic National Convention, a speech he gave on the lecture circuit for year's afterward it was so famous.

Stop thinking of the government as a conspiracy and give the voters of the time some credit. They knew the issues and knew exactly what they were asking for. It wasn't the bankers who demanded soft money, it was the people.

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did the voters design the legislated banking fraud, the fed, bimetalism, other fixed rate varieties and or structure bretton woods and or understand nixon's abolishment of the last ties to a commodity?

most governments ban poker around the world. This must means a brilliant decision thats been settled by the voters.

[MrMon]

Considering the "Cross of Gold" speech was exactly about bimetalism, yes, they did understand it. But the fact you didn't know that doesn't say much for your canned rhetoric. I suggest you bone up on your history before you spew more of it.

[owsley]

The Great Debate of 1896 notwithstanding, are you going to even try to dispute the idea that governments use the fiat money system to tax people without them realizing it?

I don't even feel the need to respond to the idea that voters (who were what, the same voting public that didnt allow women to vote? or any number of other crazy things?) were capable of making a decision that would be satisfactory for today's economy back then? Do you seriously think that argument will convince anyone anywhere ever?

[Zygote]

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Considering the "Cross of Gold" speech was exactly about bimetalism, yes, they did understand it. But the fact you didn't know that doesn't say much for your canned rhetoric. I suggest you bone up on your history before you spew more of it.

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i do need to work on my history. no doubt about that.

i only ask you that you use your historical knowledge of this debate being settled to address the systematic flaws brought up regarding inflation and "credit based economies" in this thread.

[owsley]

Also, if you looked through history I'm sure you would find that most governments put their countries on fiat money without asking their people.

[Zygote]

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The Great Debate of 1896 notwithstanding, are you going to even try to dispute the idea that governments use the fiat money system to tax people without them realizing it?

I don't even feel the need to respond to the idea that voters (who were what, the same voting public that didnt allow women to vote? or any number of other crazy things?) were capable of making a decision that would be satisfactory for today's economy back then? Do you seriously think that argument will convince anyone anywhere ever?

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i just read the speech quickly.

what did he say that was ever absorbed by the public that turned into policy?

i cant really grasp his stance other than he seems to think government and international politics dictating the standard of money rather than free investors is a means of destroying sovereignty, and humanity. I agree. Unfortunate no one ever listened to that part.