Classical Model

[jueco2005]

Quote from DontMissTheBus:

I think you don't realize that Spain saw cripplingly high inflation when Inca gold came flowing into the monetary system. It's no different from printing fiat money. It was not exactly "Relatively low inflation when the markets adjusted to its value".

Further, I don't think you quite appreciate the utterly aweful deflationary crisis brought on by metal-based currencies that were prevalent up until the 20th century. I think this is a result that your knowledge of economic history extends back perhaps no more than 30 years.

I don't really think you understand the role of money (be it fiat or metal backed) in an economy. As such, you hold on to some very common, but completely inaccurate views that are entirely inconsistent within itself.

A commodity money can be adjusted in the market place. So soon the market found a way to deal with the new money from spain. It created some inflation but it created much more prosperity. Otherwise how could spain could have become so great if it was just printing or creating artificial money. Think about that word artificial.

Deflation is not bad, inflation is not bad. How these things come to be is the problem. Deflation in those days was adjusted in the market place. Those were the years of the industrial revolution. So come one man??? How in hell was the world able to develop in a deflationary system?

Real deflation is what our prosperity is all about. Wealth is created by being able to produce things with relative lower and lower opportunity costs relative to other products.

My views are inaccurate as long you haven’t read what I have read. I can give you a few books, not hard or long to read and you decide better. And trust me, I have read what you have read. I have a BS in Economics and was introduced to all Keynessian worthless material. That's why I continued my education in economics.

Thank you.

 

[Ed Breen]

Jueco, the reason we don't have a recovery is that private economic actors do no believe they are secure in making investment in assets. Those that have assets are not reinvesting in them in the U.S. at the rates needed to sustain those assets, and they are not creating new assets. This is not a debt problem. There is plenty of low cost debt available for investment. The problem is that there is no belief that there is likely to be after tax return on the investment.

Debt is only a problem when the return on investment is lower than the cost of debt service and ammortization of the debt. This is another way of saying that you have to use the debt to grow at a rate higher than the cost of the debt. The problem is that we spent the debt on aggregate demand stimulus instead of investment in assets. The problem with Greece is that they have no prospect to grow. The U.S. has every prospect to grow, despite its accumulated debt, we just have to decide that we will support economic growth through policies that support investment and that welcom after tax profit. In a capitalist system the growth dynamic was always dependent on its entrepreneural culture and its entrepreneural class. Today we have a repressive fiscal policy against entrepreneurship, a President and his academic administrative minions talking about limitting profits and using taxes to rape the successfull. With the right policy we can grow and pay the debt.

Growth is the only way you can pay debt. Debt only makes sense when it is used for profitable investment; it never makes sense to use debt to support current spending on consumption, except in the most temporary sense of emergency.

I have written more than enough here. I am pleased that you see that the Quantity Theory of Money which is a fundamental axiom for the Keynsians, Monetarists, Austrians and Supply Siders alike, is a falacy. That was the point of my first post that you responded to.

You say you don't have time for detail and I agree; it shows in what you have written about inflation and money. That being the case, I think we have taken our discussion as far as it should go.

 

[jueco2005]

Quote from Ed Breen:

Jueco, the reason we don't have a recovery is that private economic actors do no believe they are secure in making investment in assets. Those that have assets are not reinvesting in them in the U.S. at the rates needed to sustain those assets, and they are not creating new assets. This is not a debt problem. There is plenty of low cost debt available for investment. The problem is that there is no belief that there is likely to be after tax return on the investment.

I quite disagree here. Debt is really cheap but everyone is already loaded with old debt. The only viable thing is to refinance at lower rates. After tax return?? Totally out of place my friend.

Quote from Ed Breen:

Debt is only a problem when the return on investment is lower than the cost of debt service and ammortization of the debt. This is another way of saying that you have to use the debt to grow at a rate higher than the cost of the debt. The problem is that we spent the debt on aggregate demand stimulus instead of investment in assets. The problem with Greece is that they have no prospect to grow. The U.S. has every prospect to grow, despite its accumulated debt, we just have to decide that we will support economic growth through policies that support investment and that welcom after tax profit. In a capitalist system the growth dynamic was always dependent on its entrepreneural culture and its entrepreneural class. Today we have a repressive fiscal policy against entrepreneurship, a President and his academic administrative minions talking about limitting profits and using taxes to rape the successfull. With the right policy we can grow and pay the debt.[/B]

You are right now think again. In a bubble what seemed to be profitable enterprises turned out to be unprofitable. In the past boom everyone took new debt because it was easy to repay it. Now things turned sour and the old debt must be repaid or defaulted upon. Equity capital is hard to come by and only sound opportunities can afford the opportunity.

Quote from Ed Breen:

Growth is the only way you can pay debt. Debt only makes sense when it is used for profitable investment; it never makes sense to use debt to support current spending on consumption, except in the most temporary sense of emergency. [/B]

Of course. But what happens when investment debt comes bad because there was too much debt issued?? What happens when people were given cheap debt just for consumption purposes??? IT IS A DEBT CRISES MY FRIEND HOW CAN YOU NOT SEE IT?? Read yourself.

Quote from Ed Breen:

I have written more than enough here. I am pleased that you see that the Quantity Theory of Money which is a fundamental axiom for the Keynsians, Monetarists, Austrians and Supply Siders alike, is a falacy. That was the point of my first post that you responded to.

You say you don't have time for detail and I agree; it shows in what you have written about inflation and money. That being the case, I think we have taken our discussion as far as it should go. [/B]

It was great to discuss this matter with you. Respectfully I must say you have made the right diagnostic but for the wrong causes and reasons. Therefore your prescription wont hold. Some of your thoughts can contradict each other. I would be more than glad to exchange positive discussions with you. Sometimes it just takes too much writing and could get frustrating. Hope to see you again.

 

[DontMissTheBus]

You keep saying " It created some inflation but it created much more prosperity", but again - this is not historically true; The Spanish Empire never truly recovered from its crisis;

And it seems you deny deflationary crisis existed (I never said it existed at all times; just like inflationary crisis did not exist at all times in a fiat money system). To do so is to ignore actual history (which you seem to be happy to do when it comes to history of metal based currency systems).

Finally, I really wouldn't brag about your BS degree or use it as some sort of badge of authority. There are people around here who hold degrees in economics that are quite a bit more advanced who don't feel the need to use it as an authority when discussing a point; Finally, you should know, that once you get over the basic in undergraduate economics, no one really sit around and discuss classic Keynesian settings.

Quote from jueco2005:

A commodity money can be adjusted in the market place. So soon the market found a way to deal with the new money from spain. It created some inflation but it created much more prosperity. Otherwise how could spain could have become so great if it was just printing or creating artificial money. Think about that word artificial.

Deflation is not bad, inflation is not bad. How these things come to be is the problem. Deflation in those days was adjusted in the market place. Those were the years of the industrial revolution. So come one man??? How in hell was the world able to develop in a deflationary system?

Real deflation is what our prosperity is all about. Wealth is created by being able to produce things with relative lower and lower opportunity costs relative to other products.

My views are inaccurate as long you haven’t read what I have read. I can give you a few books, not hard or long to read and you decide better. And trust me, I have read what you have read. I have a BS in Economics and was introduced to all Keynessian worthless material. That's why I continued my education in economics.

Thank you.

 

[Ed Breen]

Jueco, we have been talking past each other. You don't get my nuances and you don't have an attitude to put them together. As you acknowledge, there is no time to lay out a thesis here step by step. If I am not clear and I have tried to say too many apparently different things that can be interpreted as contradictory then that is my fault, but the general distence between our understanding is too much work right now to bridge.

I acknowledge that there is too much debt. I think that is clear in the world. That problem will be handled by growth or default or both and you can see it working out everywhere. My last point which I think you misunderstood in its nuance, is that debt is not the obstacle to growth.

The reason that we have no signifcant inflation that is measured in our price change indexes is that there is no demand for private credit. Much of my comment was trying to explain to you why there is so little demand. There are many private actors that do not have a debt problem. Entreprenuers as a type have never been well capitalize but that has never prevented the progress of a good idea. The issue has always been the confidence about the future. I started business in the early 1980's when risck capital cost 15% to 20%, that was not an obstacle, because the promise of equity value was more valuable (but you had to work quick). It all about how you view the future and the estimate of future value of anything you would create that will pay off in out years. That is why uncertainty restrains growth. Debt is not the obstacle.

Understand that I get that there is too much debt that was malinvested. I understand the Austrian view of malinvestment. I understand also that the Austrians do not appreciate the role of the entreprenuer in the business cycle or thier view of capitalism.

Contrast Iceland and Greece. Both had apparently unsurmountable debt problems. Iceland is now growing and Greece is contracting. What was the policy difference and how did that difference allow growth in one case and not in the other?

 

[jueco2005]

Quote from DontMissTheBus:

You keep saying " It created some inflation but it created much more prosperity", but again - this is not historically true; The Spanish Empire never truly recovered from its crisis;

And it seems you deny deflationary crisis existed (I never said it existed at all times; just like inflationary crisis did not exist at all times in a fiat money system). To do so is to ignore actual history (which you seem to be happy to do when it comes to history of metal based currency systems).

Finally, I really wouldn't brag about your BS degree or use it as some sort of badge of authority. There are people around here who hold degrees in economics that are quite a bit more advanced who don't feel the need to use it as an authority when discussing a point; Finally, you should know, that once you get over the basic in undergraduate economics, no one really sit around and discuss classic Keynesian settings.

I think the crisis came when gold and silver was no more to mined out. While they had gold Europe’s economy prospered.

I meant to say that fall in prices or increase in prices does not constitute a good or bad thing. How they come to be is what is important. Look at this example. Suppose there is an earthquake in Detroit and car makers can’t make cars for 6 months. What’s going to happen to the price of cars??? They will go up while the amount of money in the system is virtually unchanged. Now what about if new technology comes up and cars can be manufactured at half their costs virtually over night. Obviously there will be fall in prices but not for any bad economic reason. In fact this is what technology and growth does, making everything easier and cheaper to produce relative to other products so that we can afford it.

Things are different when money is printed for any reason or destroyed from circulation for any reason. I believe this is where you and I disagree.


I just made reference to the eco degree to point out that I know already worthless stuff from mainstream economics.

I am glad to discuss things with you my friend.

 

[DontMissTheBus]

I suppose this is indeed where we disagree.

But, I think the point of our disagreement might be a little smaller than you suppose (but results in widely different views on money + banking). I believe (to rephrase your statement so as to contrast):

things are different when money is printed or destroyed at a rate that is inconsistent with the growth of the general economy.

Consider, my friend, that we have a currency based on AwesomeMetal; There is exactly a known quantity of AwesomeMetal. We know no more will ever be discovered and, being awesome, AwesomeMetal can never be destroyed.

What happens to this economy? As it grows, it requires more transactions. But there is only so much AwesomeMetal, so the value of AesomeMetal grows relative to other goods. That is, deflation. What would you do then, rationally? You would horde AwesomeMetal - the currency. As a result, the economy contracts.

Do you disagree with this limiting case?

Quote from jueco2005:



Things are different when money is printed for any reason or destroyed from circulation for any reason. I believe this is where you and I disagree.

 

[jueco2005]

Quote from DontMissTheBus:

I suppose this is indeed where we disagree.

What happens to this economy? As it grows, it requires more transactions. But there is only so much AwesomeMetal, so the value of AesomeMetal grows relative to other goods. That is, deflation. What would you do then, rationally? You would horde AwesomeMetal - the currency. As a result, the economy contracts.

Do you disagree with this limiting case?

I have used gold and silver because we are more familiar with these two metals being used as money than any other.

However, It is my personal believe that what best resembles a strong currency is one basket by a basket of sound commodities. Some precious metals, regular metals, oil, hard agricultural products and other commodities with a strong world wide acceptance.

The value of such currency is determined by its supply and demand and there has to be a way in which such currency can be supplied if highly demanded.

I do a agree with you that having a fixed amount of money for ever is counter productive. And that's why sound money is one basket by something in high acceptance by the public.

When thinking about money we must think about the barter system. In reality there was no such thing as the barter system. Although people did change goods for goods some goods had a lot more acceptance that others and the rest of the goods and services might have been expressed as a unit of those goods in high acceptance.

Whether you agree with me or not. The market itself will always determine what is money and its value will be one in terms of supply and demand automatically adjusting for any unforeseen event.

No bubbles no booms. A steady constant growth dependable only in the ability of such economy to develop new technologies.

 

[jueco2005]

Quote from Ed Breen:

Jueco, we have been talking past each other. You don't get my nuances and you don't have an attitude to put them together. As you acknowledge, there is no time to lay out a thesis here step by step. If I am not clear and I have tried to say too many apparently different things that can be interpreted as contradictory then that is my fault, but the general distence between our understanding is too much work right now to bridge.

I acknowledge that there is too much debt. I think that is clear in the world. That problem will be handled by growth or default or both and you can see it working out everywhere. My last point which I think you misunderstood in its nuance, is that debt is not the obstacle to growth.

The reason that we have no signifcant inflation that is measured in our price change indexes is that there is no demand for private credit. Much of my comment was trying to explain to you why there is so little demand. There are many private actors that do not have a debt problem. Entreprenuers as a type have never been well capitalize but that has never prevented the progress of a good idea. The issue has always been the confidence about the future. I started business in the early 1980's when risck capital cost 15% to 20%, that was not an obstacle, because the promise of equity value was more valuable (but you had to work quick). It all about how you view the future and the estimate of future value of anything you would create that will pay off in out years. That is why uncertainty restrains growth. Debt is not the obstacle.

Understand that I get that there is too much debt that was malinvested. I understand the Austrian view of malinvestment. I understand also that the Austrians do not appreciate the role of the entreprenuer in the business cycle or thier view of capitalism.

Contrast Iceland and Greece. Both had apparently unsurmountable debt problems. Iceland is now growing and Greece is contracting. What was the policy difference and how did that difference allow growth in one case and not in the other?

You and I are indeed talking in two different languages. If you know what the austrians say that you know where I come from. Although I am not an austrian guy my economic ideas are pretty similar.

I doubt iceland is growing and if it is for how long. Both countries need to make massive defaults on this unpayable debt.

 

[DontMissTheBus]

Wait... this sentence doesn't make any sense.

(1) why would a basket of something in high acceptance solve the problem of a fixed quantity? If AwesomeMetal is fully accepted by the public, it's still has a fixed quantity and all the problems associated with it. These are independent factors.

(2) isn't the US dollar, a fiat money, one of the most highly accepted medium of transaction in the world and history? You can spend your dollar pretty much anywhere to buy real goods. Not a single merchant in the US (and many elsewhere in the world) will refuse to accept dollar in return for his wares.

So how does this work in terms your anti-fiat money stance, since a fiat currency fits exactly your "sound money is one basket by something in high acceptance by the public" take?

Quote from jueco2005:



I do a agree with you that having a fixed amount of money for ever is counter productive. And that's why sound money is one basket by something in high acceptance by the public.