[onlooker]

I would think in terms of basic economics the little guy who has no real assets would be more immediately impacted by inflation then deflation.

[AgentR11]

Nah, real assets appreciate with the inflation rate; the little guy will only get dinged when he sells to make a capital gain, and if he's making a capital gain large enough for the inflation part of the taxes to be annoying, there is no way in heck he's a "little guy". He might be a rich guy that likes to pretend he's a little guy; but that don't make it so.

The middle class guy with no significant real assets or liabilities, can get dinged pretty hard by inflation if his wage doesn't rise along with it; but if wages aren't rising, inflation won't hold.

[onlooker]

Yes but my point is that the common man has very few assets that he truly owns. A mortgaged house does NOT qualify. Dividends/stocks also can be considered only inactive assets particularly as they are tied up mostly in retirement plans. So the point is someone who lives paycheck to paycheck will be more and sooner impacted by inflation than deflation.

[Pops]

So the point is someone who lives paycheck to paycheck will be more and sooner impacted by inflation than deflation.

No. in inflation people get raises

Inflation is the the economy expanding, businesses forming, people getting raises and taking out loans and paying interest.

Deflation is the opposite, it is the self-fulfilling expectation of doom; it is the economy and wages shrinking; money evaporates, demand disappears, business fails, loans default and the little guy gets fired.

Deflation is the great satan, a little inflation keeps the ball rolling, a little deflation and everyone freaks out and the economy freezes up.

There is a fine line between creating zombies of bad assets and tipping into a deflationary depression. During the Great Depression they didn't act enough, we're still waiting to see if they did too much this last time.


Interestingly I kinda think the biggest effect of the ZIRP was to inflate the LTO "bubble" and that is what hs propped up the US much more than other areas of the globe... but that is just another in a long line of unfounded speculation from yours truly...

[onlooker]

Inflation definition "a general increase in prices and fall in the purchasing value of money." It seems their are two or more definitions of inflation. I was referring to this quoted one. Again as people living/getting by on just their work/income will feel right away and intensely rises in prices and their relatively less buying power.

[kublikhan]

Inflation definition "a general increase in prices and fall in the purchasing value of money." It seems their are two or more definitions of inflation. I was referring to this quoted one. Again as people living/getting by on just their work/income will feel right away and intensely rises in prices and their relatively less buying power.

And there's the rub: less people will actually have a job in a deflationary spiral. So yes any money they have socked away in their weber grill will buy a bit more under deflation. But they are less likely to have a job to pay ongoing expenses. And even if they are lucky enough to still have a job, it is likely their wages/hours will be cut.

Deflation is the reduction of prices of goods, and although deflation may seem like a good thing when you’re standing at the checkout counter, it’s not. Rather, deflation is an indication that economic conditions are deteriorating. Deflation is usually associated with significant unemployment, which is only corrected after wages drop considerably. Furthermore, businesses’ profits drop significantly during periods of deflation, making it more difficult to raise additional capital to expand and develop new technologies.

What Is Deflation

[Pops]

Instead of making the banks eat the losses on stupid mortgages and their derivatives, the Fed and Treasury bought them up, that was the trillion or whatever in "bailouts", buying up the non-performing assets and just holding them on the Feds balance sheet. The gov bought those "troubled assets" from the banks and made the banks leave the money on deposit with the Fed.

Now the banks look better 2 ways: a trillion less in worthless loans on their books and a trillion more in "reserves."

So if letting the money supply dry up was the thing that made the great depression - or at least made it great, then creating zombie assets on the feds books I think is the thing that is making the great recession linger. Better than a depression? I'm not sure yet.


The banks are now 40% larger than they were when they were merely too big to fail.They paid no price for their illegal dealings in the sub-prime scam and the taxpayers bailed them out, that is the very definition of socialized risk. No wonder Rs want to raid social security, gotta have the banks backs.

[Pops]

Inflation definition "a general increase in prices and fall in the purchasing value of money." It seems their are two or more definitions of inflation. I was referring to this quoted one. Again as people living/getting by on just their work/income will feel right away and intensely rises in prices and their relatively less buying power.

That is the correct definition, you are looking at the situation incorrectly (if I may say)

Inflation is a good thing because it makes things cheaper today than tomorrow so the economy keeps hopping.

When the population grows and things are going good, money is flowing and demand for stuff is high — today's money is cheap and things will cost more tomorrow...
that is OK though because employment/hours/wages likewise increases to meet the new demand...
which increases demand.

But if you go back and look at prices of stuff over time they appear to increase
but does it matter?
No, because wages increased, savings, assets, equities all increased in price relative to the dollar

In reality inflation is all a wash... except it stimulates people to spend ...
we all do like a raise don't we?
and we are happy when we get it aren't we?
and we feel a little richer and go out and spend it!
Voila, growing economy


But lets say there is a hitch in one part of the system, say wages do not increase because, say, ownership gets the upper hand and keeps more for itself... well then not so good.

Since people don't feel so well off without that raise demand flattens...
flat demand slows production and hurts profit so employment/hours/wages fall further...
prices might still rise as a result of profit seeking by the ownership so demand falls even further...
In deflation like this the value of money increases because there is less to go around, supply/demand works with money too, scarcity equals higher value— kinda like the US dollar at the moment
continue into a deflationary spiral...



So basically inflation is the constant increase in the relative value of stuff and decrease in the relative value of money that makes you want to spend it today rather than tomorrow - that keeps the economy hopping, moderate inflation means things are going good.

Deflation is the opposite, when money is scarce it's value increases (just supply & demand)...
everything appears to be getting cheaper by the day, so everyone hoards what dollars they can get their hands on...
but because dollars are getting scarcer and scarcer, tomorrow never arrives... which of course creates the self perpetuating decline.

[Subjectivist]

Pops you and I and everyone alive today has lived our whole lives in a perpetual growth with inflationary growth of the money supply. That doesn't mean inflation is the only way growth can occur.

A deflationary economy can also experience growth, but the growth is in real assets, not in the bank balance sheet. People still have to pay their existing debts, and they they still have living expenses so they do not all buy home safes and lock their cash up as they earn it.

Runaway Deflation or Runaway Inflation both kill the value of things, but a modest 1-2 percent is hardly noticeable by the general public in either direction.

Before 1913 in North America the economy would cycle around a set point with about 5 years of inflation then about 5 years of deflation over and over and over. Then the concept of endless growth spurred on by fossil fuels took hold and the central banks and governments of the Western World decided that inflation was good and deflation was bad because a growing cash supply allowed governments to borrow money without worrying about ever paying off the debt and the banks as lenders get endless interest profit on that perpetual debt.

That is not a requirement, if is a feature of the endless growth on a finite world paradigm. You are aware of resource constraints but you write as if endless growth is the only viable model of economic activity. It is not. Endless growth is the logic of cancer, not the logic a highly intelligent man like yourself should be promoting.

[SeaGypsy]

I'm living in one of Keynes' dream States, Australia, where monetary policy modernised 30 odd years ago & we have had 2-3% inflation fairly steadily throughout, currently under 2% for the first time since. However, in the real world, wage inflation has nowhere near kept pace for the best part of the last 20 years, for the majority of workers. In my two main sectors- logistics & community services, hourly rates have gone up $5 in twenty years, while housing has quadrupled, somewhat offset by cheaper mass produced food & more efficient vehicles. Housing is the big one to watch, the main game everyone has some skin in. I guess what I'm getting at is in such a contrived market, some of the generalities about expected outcomes of inflation are hiding the fact that housing is sucking up virtually all surplus in service economies, with wages flatlining while investors bleed customers with little or no choice in the matter.

[Pops]

Thanks for answering my question, Pops. A few more:

"The gov bought those "troubled assets" from the banks and made the banks leave the money on deposit with the Fed.

Now the banks look better 2 ways: a trillion less in worthless loans on their books and a trillion more in "reserves."

So the Fed gave the banks money, but then kept it? What has the Fed done with the money? As for the 2 ways: I get that there is a trillion less in bad loans, but how does the bailout translate to 'a trillion more in "reserves"'?

Go easy on me Pete, I'm just a designer boy!

There are 2 kinds of money, inside money is bank money, it is "inside" the private banking system, it is just an agreement between you and the bank. Inside money is based on loans; loans the bank makes and loans you make to the bank: when you give the bank your paycheck they own that money and you own an IOU. You think you have $10 in the bank but all you really have is a receipt for $10 worth of bank promises to give it back.

Outside money is money outside the private banking system. It has no liability associated with it unlike your checking account. It is legal tender; FRNs, coins ... and bank reserves on deposit with the FED.

The only real money out there is paper money the gov prints, everything else is just a bank IOU. When people lose confidence in banks they want their FRNs right now, which is why banks are required to keep reserves. But banks don't keep all that reserve cash on hand, they keep it on deposit at the Federal Reserve.


So... The fed bought bad loans, loans that looked bad on the ledger, getting them off the books increased the "current ration" and made the banks appear healthier. The Fed paid in cash, and required the cash remain in their vaults as excess reserves... to further improve the appearance of health to the bank.


*The Fed doesn't keep it all in cash either I don't guess, it's just that they have the magic printing press.

[Pops]

Sub, economics is just psychology with dollar signs, LoL. You are arguing a belief;
endless growth/finite world = bad,
good old days = good


The thing is, this ain't 1850.

I'm just relating how things are. Prior to 1850 and certainly 1750 population growth was low and the economy moved slow, it was all farming and handwork. governments and businesses did little, there was no investment to speak of because all the wealth was held in land. There was no need for a banking system, or any other system.
You worked, you ate, you slept, you died.

Until we return back to the good old days we are stuck suffering through the travails of the modern world.

[Subjectivist]

Sub, economics is just psychology with dollar signs, LoL. You are arguing a belief;
endless growth/finite world = bad,
good old days = good


The thing is, this ain't 1850.

I'm just relating how things are. Prior to 1850 and certainly 1750 population growth was low and the economy moved slow, it was all farming and handwork. governments and businesses did little, there was no investment to speak of because all the wealth was held in land. There was no need for a banking system, or any other system.
You worked, you ate, you slept, you died.

Until we return back to the good old days we are stuck suffering through the travails of the modern world.

Fair enough, I just believe our whole fossil fuelled exuberance could have worked out better

[AgentR11]

*The Fed doesn't keep it all in cash either I don't guess, it's just that they have the magic printing press.

The only thing I'd add to that concept of "inside"/"outside" money, is that I think you're a little to attached to the notion of paper, or other physical object representing money.

The ledger for inside money, is, as you say, an asset matched by a liability, your checking account being an asset in the individuals possession, and their mortgage being a liability in the individuals possession; with a matching offset for both at the private bank.

But that federal reserve note, or coin, etc; is also matched; they're just matched against the balance sheet (not budget) of the US Federal Government. That is "full faith and credit" / "legal tender" thing. But given that all regular-people deposits in private banks are insured, and backed by the electronic system, and thus essentially tied to that same "full faith and credit"; the distinction vanishes.

I'd also go further and suggest that the bits on my debit card with the bank, and the bits of the bank's debit card with the FED, are *more* real than a piece of paper. If I have a piece of paper, I can walk to Popeye's, and buy a fried chicken lunch. If I have bits, I can cause a guy in backwater China to stuff an electronic component, or a shirt, into an envelope, and in a week or so it will just magically appear in my mailbox. My taxes are also easier to pay with the bits, than they are with the paper. My electricity and communications is easier to pay for with bits. And if I type $50 instead of $20 in the pay box with bits, its a lot easier to convince the machine that I typed the wrong number, than it is to convince the clerk an hour later at Popeye's that I gave her a $50 instead of a $20 (if I even noticed the error.)

So, I suspect, in the modern era, its better to let the idea of "cash" having a privileged position fade away; it only changes where its offsetting liability is marked, it doesn't change the existence of that offsetting liability.

If I were consumed by paranoid delusions, I'd have bits in more than one state, and some gold/silver hidden away just in case something REALLY bad happened. .... wait... errr... oh. [checks outside for guys in white coats...] /whew

[radon1]

The middle class guy with no significant real assets or liabilities, can get dinged pretty hard by inflation if his wage doesn't rise along with it; but if wages aren't rising, inflation won't hold.

Shall we tell this to Ukrainians?

[Pops]

All true Agent. Bits are great as long as everything is hunky-dory.