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Author Topic: Handling Currency in Depressions  (Read 1956 times)

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Offline AsurasTopic starter

Handling Currency in Depressions
« on: December 13, 2009, 09:38:04 PM »
Quote from: revolverman
Governments should do nothing when depressions hit. When governments pump money into economies, all they do is boost inflation, and as such make it look like things are getting better, but in fact, people are losing real wealth because money is progressively getting more and more worthless.

If you look at this graph you'll find a remarkable coincidence between when the US went off the gold standard and when the US economy started growing. That graph is real GDP - that means "adjusted for inflation."

The reason for this is that during a recession people hoard money. By "hoarding money" they effectively take money out of the money supply - that means you can have deflation even though the government isn't printing any new money - lo and behold, we had deflation for a couple quarters recently, and we had deflation during the Great Depression, even though the government was pumping money into the economy. All that means is that the private sector is taking money out of the economy faster than the government is putting it in.

And you might say, "Well, great! Deflation means money's worth more, right? Let them take all the money out!"

Yes, but when people hoard money, it means that factories aren't getting built; it means existing factories get shut down, it means people can't get loans to go to college, it means research is not getting funded, it means unemployment. Why? The money for those investments is being hoarded.

By injecting money into the economy, you can avoid this, or at least mitigate it a great deal.

Offline Revolverman

Re: Handling Currency in Depressions
« Reply #1 on: December 13, 2009, 10:05:23 PM »
A) No one, not even the US government HAS money to inject into the Economy, without more debt. The average US household has -782 USD to their name. The piper needs to be payed, and to boost today's economy with tomorrow's money is not the way to do it, never mind the hell coming for the dollar with all the printing of Fiat money the Fed is doing.


B) Even if we had the money for all this stimulus, it would be a poor idea. The money only goes to prop up failing businesses, usually politically connected. Business don't fail just randomly. They fail for a reason, and should be allowed to fail, for better ones to take their place and boost the efficiency of the Economy.

C) "Hoarding Money" is a logical fallacy. When people save, they build REAL wealth for real investing in business and industry, rather then debt fueled boom investing that leads to the bubbles that we suffer under right now.

Offline AsurasTopic starter

Re: Handling Currency in Depressions
« Reply #2 on: December 13, 2009, 11:49:05 PM »
Quote
A) No one, not even the US government HAS money to inject into the Economy, without more debt. The average US household has -782 USD to their name. The piper needs to be payed, and to boost today's economy with tomorrow's money is not the way to do it, never mind the hell coming for the dollar with all the printing of Fiat money the Fed is doing.

  • This article says that US households have $53 trillion in net worth, so I don't know where that -$782 number comes from.
  • The US has the highest credit rating from the world's credit rating agencies. US treasury bills continue to sell on very favorable terms. So apparently few actual lenders feel that the US government is a bad investment.
  • Even if the US were not able to borrow money (which it can) it could print it. And as I've pointed out, printing money does not necessarily cause inflation.
Quote
B) Even if we had the money for all this stimulus, it would be a poor idea. The money only goes to prop up failing businesses, usually politically connected. Business don't fail just randomly. They fail for a reason, and should be allowed to fail, for better ones to take their place and boost the efficiency of the Economy.

The problem there is that things are interconnected. When a bad bank fails, it causes a somewhat better bank to fail, like dominoes. Eventually good banks start failing.

You may be able to live with letting the entire banking system fail, but how long will it take for a new one to take its place? How hard would it be to start a bank when there are no solvent banks to lend to you to start it? How many Americans for how many years will be unemployed while we undergo this ritual of creative destruction?

Quote
C) "Hoarding Money" is a logical fallacy. When people save, they build REAL wealth for real investing in business and industry, rather then debt fueled boom investing that leads to the bubbles that we suffer under right now.

That is not true during recessions. During recessions, banks lose money. When banks lose money, the money they earn is not invested, it's used to pay off debt. Billions and billions of dollars end up swirling around just to pay off debt. It doesn't get invested in the real economy. It gets taken out of the real economy, out of the money supply, and trapped in the financial system.

If you don't believe me, then try to explain how deflation happens.

Offline Revolverman

Re: Handling Currency in Depressions
« Reply #3 on: December 14, 2009, 12:39:05 AM »
"This article says that US households have $53 trillion in net worth, so I don't know where that -$782 number comes from."

And how many households have mortgages, car payments, or credit card debt? They might have 53 Trillion dollars in stuff, but sure as hell not in liquid assets.

"The US has the highest credit rating from the world's credit rating agencies. US treasury bills continue to sell on very favorable terms. So apparently few actual lenders feel that the US government is a bad investment."

Nothing lasts forever, and since there is nothing in the foreseeable future that will suggest debt will be curtailed, and there is no such thing as a free lunch.

"Even if the US were not able to borrow money (which it can) it could print it. And as I've pointed out, printing money does not necessarily cause inflation."

That's exactly what it does. When you make more of something, its worth falls, its the same for money.


"

The problem there is that things are interconnected. When a bad bank fails, it causes a somewhat better bank to fail, like dominoes. Eventually good banks start failing.

You may be able to live with letting the entire banking system fail, but how long will it take for a new one to take its place? How hard would it be to start a bank when there are no solvent banks to lend to you to start it? How many Americans for how many years will be unemployed while we undergo this ritual of creative destruction?"

The problem with that is the entire banking system is totally rotted with Fractal reserve banking. There is no such thing as a "Good bank" in the current US banking system. Almost all of them have nearly nothing in the "Valuts" besides a promise from the Fed that they can borrow more from them (because they can print it) to cover any demands on deposits. This entire depression was caused by the fact banks have no real assets, and when the high risk loans failed, what little they had was sucked away.



"That is not true during recessions. During recessions, banks lose money. When banks lose money, the money they earn is not invested, it's used to pay off debt. Billions and billions of dollars end up swirling around just to pay off debt. It doesn't get invested in the real economy. It gets taken out of the real economy, out of the money supply, and trapped in the financial system."

So? Debt needs to be payed off.

"If you don't believe me, then try to explain how deflation happens."

When money is taken out of the system, and there is not a thing wrong with deflation.


Offline Zakharra

Re: Handling Currency in Depressions
« Reply #4 on: December 14, 2009, 01:37:38 AM »
Gold isn't set by corporations. It's set by supply and demand, and the strength of currency, and as we can see, what we have now isn't working in the slightest.

 By corporations then.  Rememberm when gold was the standard, who printed the money? The governments. They made the gold and silver coins that formed their currency.

Offline Revolverman

Re: Handling Currency in Depressions
« Reply #5 on: December 14, 2009, 01:51:14 AM »
By corporations then.  Rememberm when gold was the standard, who printed the money? The governments. They made the gold and silver coins that formed their currency.

They coined the money. Its worth came not from Government Fiat, but the fact the coins were Gold and Silver.

Offline Zakharra

Re: Handling Currency in Depressions
« Reply #6 on: December 14, 2009, 02:17:48 AM »
 Partially. Their worth came from the mix of metals and the strength of the nation that issued them. It wasn't just metal alone. Again though it was the governments that set the price for the money. Not just the market.

Offline Revolverman

Re: Handling Currency in Depressions
« Reply #7 on: December 14, 2009, 02:32:32 AM »
Partially. Their worth came from the mix of metals and the strength of the nation that issued them. It wasn't just metal alone. Again though it was the governments that set the price for the money. Not just the market.

If Zimbabwe minted gold coins, they would be just as valuable as if they were minted by the US, or any other first world nation. The strength of the nation has nothing to do with the worth of the materials.

Offline Zakharra

Re: Handling Currency in Depressions
« Reply #8 on: December 14, 2009, 03:33:11 AM »
 Now days, yes, but when gold was the currency, that kind of speculation didn't exist.  If we went back to a gold standard like in the 1800's, the market price of gold would cease to have much bearing on the price of gold as money. The raw metal would have a cost, but when minted into coins, it's value becomes set by what? The government. NOT by the market.

 Unless you are trading the raw metal, money has little value as a raw metal. When gold was the standard, did world market fluxuations happen with monetary value to the extent it does today?

Offline Vekseid

Re: Handling Currency in Depressions
« Reply #9 on: December 14, 2009, 06:29:13 AM »
Governments should do nothing when depressions hit. When governments pump money into economies, all they do is boost inflation, and as such make it look like things are getting better, but in fact, people are losing real wealth because money is progressively getting more and more worthless.

...if they are losing paper wealth, they never had real wealth in the first place.

Offline Revolverman

Re: Handling Currency in Depressions
« Reply #10 on: December 14, 2009, 12:53:37 PM »
Unless you are trading the raw metal, money has little value as a raw metal. When gold was the standard, did world market fluxuations happen with monetary value to the extent it does today?

I don't recall any time in history, besides war, that had the wild market fluctuation that we see today.


...if they are losing paper wealth, they never had real wealth in the first place.

And the US dollar is losing value everyday, so what does that say about the US economic power?

Offline Vekseid

Re: Handling Currency in Depressions
« Reply #11 on: December 14, 2009, 01:58:59 PM »
And the US dollar is losing value everyday, so what does that say about the US economic power?

Absolutely nothing. It reflects the injection of liquidity into the market, as bassackwards as that was performed, but at the end of the day we use a form of currency - whatever it is - because we trust that it is a token that can be reliably exchanged for meaningful value.

If the dollar drops in value by a factor of a thousand over the next year, say, my possessions do not magically vanish accordingly. My truck does not vanish, my phone does not disappear, neither does my computer, or Elliquiy, or any other asset I still own. Nor do my skills diminish, and I have many.

At low levels, inflation is basically a form of flat tax. At high levels, it's extremely disruptive, but e.g. Zimbabwe hasn't disappeared. People were simply forced to no longer trust the government of Zimbabwe to manage a currency.

Not that I would advise keeping cash in the bank, but the interest savings accounts provide has always been crap.

...and I should really split this to its own thread >_>

Offline Revolverman

Re: Handling Currency in Depressions
« Reply #12 on: December 14, 2009, 02:32:27 PM »
Absolutely nothing. It reflects the injection of liquidity into the market, as bassackwards as that was performed, but at the end of the day we use a form of currency - whatever it is - because we trust that it is a token that can be reliably exchanged for meaningful value.

If the dollar drops in value by a factor of a thousand over the next year, say, my possessions do not magically vanish accordingly. My truck does not vanish, my phone does not disappear, neither does my computer, or Elliquiy, or any other asset I still own. Nor do my skills diminish, and I have many.

At low levels, inflation is basically a form of flat tax. At high levels, it's extremely disruptive, but e.g. Zimbabwe hasn't disappeared. People were simply forced to no longer trust the government of Zimbabwe to manage a currency.

Not that I would advise keeping cash in the bank, but the interest savings accounts provide has always been crap.

...and I should really split this to its own thread >_>


While its true inflation cannot touch real assets, the fact it can cause money to become worthless, means that your real assets are at risk because they would have to be used as currency for day to day life, unless you have a more stable currency to use. By printing more and more cash with no real backing, it puts everyone at risk for Hyperinflation.

Offline Vekseid

Re: Handling Currency in Depressions
« Reply #13 on: December 14, 2009, 02:37:08 PM »

While its true inflation cannot touch real assets, the fact it can cause money to become worthless, means that your real assets are at risk because they would have to be used as currency for day to day life, unless you have a more stable currency to use. By printing more and more cash with no real backing, it puts everyone at risk for Hyperinflation.

Hyperinflation is a rather difficult scenario to cause in the United States, given the rather extreme value of real assets within the country (on the order of a hundred trillion dollars).

Above and beyond that, though, local governments are not absolutely barred from printing their own currency, in the event that the idiocy in Washington becomes too much for the nation to bear. There would be a lot of incentive to keep the number of such currencies relatively small, though, if there was any long term use.

Offline Revolverman

Re: Handling Currency in Depressions
« Reply #14 on: December 14, 2009, 03:06:06 PM »
Hyperinflation is a rather difficult scenario to cause in the United States, given the rather extreme value of real assets within the country (on the order of a hundred trillion dollars).

Above and beyond that, though, local governments are not absolutely barred from printing their own currency, in the event that the idiocy in Washington becomes too much for the nation to bear. There would be a lot of incentive to keep the number of such currencies relatively small, though, if there was any long term use.

While Hyperinflation does seem long off, many Governments have been diversifying from the USD, showing faith in the Dollar is falling off, and with the only way the Government can seem to think to fix any problem is "Print more money", the possibility for hyperinflation grows and grows. Also, I could be wrong, but isn't alot of US wealth in the hands of OPEC nations, China, and Japan?

Offline Vekseid

Re: Handling Currency in Depressions
« Reply #15 on: December 14, 2009, 03:26:43 PM »
"A lot" is an insanely relative term, as is 'wealth'. I'd look to land owning first:

http://www.fsa.usda.gov/FSA/webapp?area=home&subject=ecpa&topic=afa

Non-agricultural land holding by foreigners is about 5% of agricultural land holdings. Most foreign owned land is held by Canadians and the Netherlands, with the United Kingdom and Germany also having large shares.


Offline Revolverman

Re: Handling Currency in Depressions
« Reply #16 on: December 14, 2009, 03:44:00 PM »
"A lot" is an insanely relative term, as is 'wealth'. I'd look to land owning first:

http://www.fsa.usda.gov/FSA/webapp?area=home&subject=ecpa&topic=afa

Non-agricultural land holding by foreigners is about 5% of agricultural land holdings. Most foreign owned land is held by Canadians and the Netherlands, with the United Kingdom and Germany also having large shares.

A) Canada and the Netherlands? I wouldn't have called that.

B) I was talking more about foreign ownership of US companies, or the holding of Government paper.

Offline Vekseid

Re: Handling Currency in Depressions
« Reply #17 on: December 14, 2009, 04:12:12 PM »
Yeah, had to do some digging.
http://www.bea.gov/newsreleases/international/intinv/2009/intinv08.htm

It doesn't give a breakdown, however. I know Europe represents some two-thirds of direct investment, but that's a small portion of the overall picture.

Offline AsurasTopic starter

Re: Handling Currency in Depressions
« Reply #18 on: December 14, 2009, 07:43:16 PM »
Quote from: Revolverman
And how many households have mortgages, car payments, or credit card debt? They might have 53 Trillion dollars in stuff, but sure as hell not in liquid assets.

"Net worth" means "assets minus liabilities." In other words "value of house, car, cash, equity" minus "mortgages, car payments, and credit card debt."

This is the source. If you go to page 104, you'll see a breakdown of what American households own and what they owe. Americans own stuff worth $67 trillion - that means houses, bank deposits, stocks - and they only owe $14 trillion.

Quote from: Revolverman
Nothing lasts forever, and since there is nothing in the foreseeable future that will suggest debt will be curtailed, and there is no such thing as a free lunch.

It depends what you mean by "curtailing" debt. If you mean reducing the national debt in nominal terms, then no, that doesn't usually happen. But what does happen is that the US economy grows, inflation eats away at the debt, which means that as time goes on the debt becomes less and less burdensome.

And it was only ten years ago, after all, that we were in that situation.

But if you want to know what would cause the government to go bankrupt, doing nothing is a great way to do it. That would cause deflation, unemployment, and massively lower tax revenues; that would make the debt more burdensome far more quickly than anything Obama's done.

Quote from: revolverman
The problem with that is the entire banking system is totally rotted with Fractal reserve banking. There is no such thing as a "Good bank" in the current US banking system. Almost all of them have nearly nothing in the "Valuts" besides a promise from the Fed that they can borrow more from them (because they can print it) to cover any demands on deposits. This entire depression was caused by the fact banks have no real assets, and when the high risk loans failed, what little they had was sucked away.

How does a bank make investments if it has to keep all the cash it has on hand? How does investment happen? How does progress happen?

The development of banking and the development of modern society was not coincidental.

Quote
So? Debt needs to be payed off.


"Even if the US were not able to borrow money (which it can) it could print it. And as I've pointed out, printing money does not necessarily cause inflation."

That's exactly what it does. When you make more of something, its worth falls, its the same for money.

No, I'll say it again:

If the public sector takes money out of the economy faster than the government puts it in, the amount of money in the economy will fall. Prices will fall.

That is how you have deflation. And again: if you don't believe me, how the hell do you explain why we had deflation last year when the government was raining money on the economy? I agree - someone must have been taking money out. And it obviously wasn't the government.

Quote from: revolverman
When money is taken out of the system, and there is not a thing wrong with deflation.

When you have deflation, prices fall, and wages fall. That means that you take a pay cut. But your banks and credit cards don't cut the amount that you owe them.

Can you see how deflation might be a bad thing?

Quote from: revolverman
I don't recall any time in history, besides war, that had the wild market fluctuation that we see today.

And the only reason that we're seeing the amount of volatility that we are now is because people tried to do the exact thing that you wanted them to do - nothing. They thought that things would be OK if they let Lehman brothers go; instead thirty million Americans are out of work.

If you want an example of a successful intervention like this, go look at the dot com crash, the largest destruction of American financial assets since the Great Depression. But the Fed lowered interest rates and pumped money into the economy. Did we get rampant inflation? No. Did we go into a depression, like we did when the Fed did nothing in 1929-1933? No. We went into a shallow recession.

Offline Vekseid

Re: Handling Currency in Depressions
« Reply #19 on: December 14, 2009, 08:03:22 PM »
The funny thing is I can tell you missed a few >_>

Another thing to keep in mind about deflation is that it discourages spending, which also brings cash flow to a halt. There are alternative currency designs that will handle deflation well (time limits, etc), but inflation is the primary way that 'use it or lose it' gets presented with something like most fiat currencies.

Offline consortium11

Re: Handling Currency in Depressions
« Reply #20 on: December 14, 2009, 09:18:20 PM »
Yeah, had to do some digging.
http://www.bea.gov/newsreleases/international/intinv/2009/intinv08.htm

It doesn't give a breakdown, however. I know Europe represents some two-thirds of direct investment, but that's a small portion of the overall picture.

I'll have to do some searching myself, ut I'm fairly certain China has bought up a huge amount of the US treasury bonds that have hit the market.

Offline Vekseid

Re: Handling Currency in Depressions
« Reply #21 on: December 14, 2009, 09:43:11 PM »
Yeah, they do, but they own next to nothing of US companies, compared to Europe or Canada.

Offline OldSchoolGamer

Re: Handling Currency in Depressions
« Reply #22 on: December 15, 2009, 03:06:14 AM »
In the end, what happens to the amount of currency in circulation will be trivial.

Once the cheap oil is gone, the economy crashes.  You can't make fertilizer, gasoline, electricity, pharma, plastics and run steel mills from dollars.  You can't eat dollars.  You also can't make these things from gold or silver.

Offline Zakharra

Re: Handling Currency in Depressions
« Reply #23 on: December 15, 2009, 08:42:43 AM »
In the end, what happens to the amount of currency in circulation will be trivial.

Once the cheap oil is gone, the economy crashes.  You can't make fertilizer, gasoline, electricity, pharma, plastics and run steel mills from dollars.  You can't eat dollars.  You also can't make these things from gold or silver.

 You have a single track mind there. The oil is not going to run out and end like that *snaps fingers* We have plenty for now and people are aware of the problem and are working to overcome it. Plus technology is moving ahead which lets us develop cheaper ways of getting oil. 'Cheap oil' has been gone for awhile, yet the world hasn't ended. We have plenty left and we know where there is more. New reserves are being found so it's not a bloody death knell like you Arte saying.

 'The end of the world is here! Oil will be gone in (X number of) years!'  Sheesh. It's not the end of the world and the economy isn't going to collapse from a lack of oil within our lifetimes.

Offline Mathim

Re: Handling Currency in Depressions
« Reply #24 on: December 31, 2009, 01:40:20 PM »
I was under the impression 'hoarding' involved material goods, not capital.

This reminds me of Margaritaville on South Park. Saving money instead of spending it (at least for the upper class) is just going to make things worse.