Well it's all over the news and radio, every where you look and seemingly just about every half an hour here in the U.S. I don't have much to say on this really, the whole idea of what our country has done to get into this situation is appalling and really it would seem to me all the most likely to happen scenarios are just ways to "kick the can down the road for the next guy". There is one idea that I have heard Ron Paul mention that I really like which is to just wipe clean our debt to the federal reserve, I mean if you think about it a little that is like taking a loan out against our own savings and then paying the bank interest to do that... Currently the majority of our debt is in this form and it could be a great first step in a general corrective course.
Now remember how I have mentioned that our currency is in fact a representation of debt, this would cause a very interesting scenario that would likely be of great benefit to everyone. The act of wiping the slate clean of our own debt to ourselves as a nation would instantaneously deflate dollar values, as the volume in circulation would shrink, to what level is really up to the market but I suspect it would not be noticeable just not huge. The net effect would appear that corporations would be making more profits, workers more money because the dollar has greater spending power and prices would be cheaper.... sadly it couldn't work quite like that because either workers would need to have a pay reduction (very tough thing to accomplish psychologically) or corporations profit levels would have to drop and the initial effect would likely be the latter followed by a gradual normalization of salary.
This scenario while sounding very radical has been done before as a way to help recover from the effects of defaulting on external debt.... yes that is right there is a recent example of exactly the same thing the U.S. is going through now from the start and well into recovery, ( see the story of the second Mexican peso for more info ) Mexico defaulted on it's "external" debt which caused a lot of capital to flee the country encouraging significant amounts of inflation and poverty, as a part of their recovery plan Mexico created the New Peso, essentially a new REPLACEMENT currency to be valued at 1/1000 of the original peso. This greatly helped to bring back stability in the Mexican currency and their economy has been performing very well as a leader among the Latin American economies.
So given we have a blue print of what could happen if the U.S. govt. defaults on its external debts and how we might be able to recover.... does it not sound like the "radical" stop-gap that Ron Paul proposed could be a way to help put more money in our pockets, avert the near term problem without making matters worse and give us more time to completely make this problem obsolete? Seems like a win-win to me... What do you think?
Wednesday, July 27, 2011
Tuesday, July 26, 2011
Inflation and Deflation
Simple concepts, most young people understand at a high level even very early in life. What is it really and what are the effects? This is where things get a little more complex. For instance you hear the doom and gloom about deflation and how it will destroy an economy, and you suffer the results of inflation while buying milk and eggs in the grocery store... but at the heart of this we get back to my previous posting regarding money as a store of value and/or a medium of exchange.
As a store of value, inflation and deflation are an easy concept to understand. It essentially represents the demand of that commodity vs. the supply. Let's go to tried and true biblical reference of fish. A very common industry that several disciples participated in before being called fishers of men. At any given time there are a certain number of fish on the planet, and only so many are being traded in a market place at a time. Fish are created, born or by the miracle of Jesus, and they are destroyed, through death and consumption. What if there was a plague and the fish death rate increases? Well the intrinsic value of fish would rise, this is Deflation. Consumption increases due to a shift in taste or population growth would also increase the intrinsic value of fish causing deflation in the commodity of Fish. Now what if there was a sudden surge in viable fish births, or Jesus performs a miracle and creates fish for the masses? These would decrease the intrinsic value of fish causing inflation. Is this type of inflation or deflation bad? Not at moderate values, it is only when there is a sudden and rapid swing where this is dangerous. So let's pretend we are a fish trader, due to a plague in fish the number of fish being caught have dropped dramatically but the demand has remained constant. We are a pretty smart trader and we know the prices will rise so we hoard our catch hoping to reap the reward of selling fish at a higher cost this also decreases supply temporarily and prices begin to rise very rapidly to the point where the general population can no longer afford fish so to feed their family they shift to eating bread and corn. Now we as the fish trader go to sell our high priced fish and since the demand has subsequently fallen dramatically we can no longer sell them at the going rate of prices. Our stock may then begin to spoil and we have suffered the consequences of deflation in our commodity. In this small example we will have a localized effect, just for fish and just for a reasonable geographic region for a specific time. The effects of commodity deflation will not necessarily equate to a failing economy in general and the effects on perishable goods versus non-perishable goods will vary... if fish never spoiled we could hold on to them indefinitely if we had the means to. Inflation plays a very different role in this example what you saw was what is commonly referred to as hyper-inflation which follows rapid deflation. For standard inflation we would get a very different result, let's change our example a little and see what would happen. Now there is a boom in fish populations resulting from an increased fish birth rate, fishermen's catches are larger and more frequent so our fish stock becomes more abundant. In a market place where demand is constant this decreases the prices because we as the fish trader know that we must sell our stock in competition against other fish traders. This leads to lower fish prices but if demand does not catch up to equalize prices then we as the fish trader know that we have to reduce the supply so we stop buying fish from the fishermen who sell at the highest prices or sell us the lowest quality of fish... essentially they get fired and are less able to contribute to the economy as a whole and this will have a small but rippling effect on the general economy. This problem is limited to a specific period of time and to a geographic region.
As a medium of exchange the concept is the same but the effects are much more complicated. Let's go back to the great depression where government fiat currency saw the most pronounced swings. Fiat currency causes the effects of inflation and deflation to be LESS localized by region and is not confined to a single commodity, it is however limited to a specific time. Let us assume that we use paper IOU's (oh wait that is Fiat Currency) as our medium of exchange, this has no value what-so-ever other than it's liquidity and the markets definition of it's representation to a commodities value. What happens if we make more paper IOU's? Well the liquidity increases and commodity traders demand more of it subsequently for trade, this is inflation. What happens if we decide to burn it? The liquidity of the currency then decreases and the commodity traders demand less of it, this is deflation. Rapid inflation of a medium of exchange can cause significant problems because it devalues an individuals productivity in a society and rapid deflation can cause equally bad problems because it can cause people to start treating the medium of exchange as a store of value which in turn reduces our paper I.O.U's liquidity in the market place. This is why usury was condemned in the bible and most other religions for that matter. By the way, usury is not just limited to interest rates like a bank might charge even if that is what the modern definition has become. Usury at it's basic principle is making money just for the fact that you have money, interest rates are just the easiest offenders to point a finger at.
Why is treating a medium of exchange as a store of value a bad thing? Simply put, it has the potential to hurt people on a wide scale, if a family cannot come by the currency it needs to buy the necessities of life well the result is obvious, poverty will follow if this happens on a wide scale it has the much more devastating effects, this is what happened during the great depression, and this is what is happening currently in the great recession as I have heard some refer to it. What happened to the money supplies during both of these times? The money supply shrank. After the onset of the federal reserve in the U.S. the money supply changed to be based more on debt than on actual physical currency, if you have a dollar in the bank the odds are much stronger that it is NOT original currency and it is more likely to be someone or something's debt to another entity. Ever wonder why the fed lowers interest rates to combat a declining economy? They tell you it is to encourage people to spend and stimulate job growth but in reality this is only part of the equation, the larger part is that the action of buying on credit increases the money supply which increases the liquidity. What were to happen if the liquidity of a currency were to fall is that the trade of goods and services would slow to a halt, this is a significant contributor to the great depression... even though you might be able to buy more with your money if there is not enough to conduct the actual trades then the system crumbles and crumbles rapidly.
In summary deflation of a medium of exchange, is a bad thing as it can encourage consumers to treat it as if it were a store of value. Small and reasonable amounts of inflation are healthy for a medium of exchange. Whereas in a store of value, small and reasonable deflation is healthy as this gives consumers increased value of their goods and services where as rapid inflation is the result of inefficiencies in the production/consumption rate of those goods and services.
For follow up discussion, there are some notable outlying commodities that don't seem to fit the general rule of thumb, in net searching you will often see computing technology as the great example of why a deflation in general is not a bad thing? Any ideas on what may be happening with this and similar commodities?
As a store of value, inflation and deflation are an easy concept to understand. It essentially represents the demand of that commodity vs. the supply. Let's go to tried and true biblical reference of fish. A very common industry that several disciples participated in before being called fishers of men. At any given time there are a certain number of fish on the planet, and only so many are being traded in a market place at a time. Fish are created, born or by the miracle of Jesus, and they are destroyed, through death and consumption. What if there was a plague and the fish death rate increases? Well the intrinsic value of fish would rise, this is Deflation. Consumption increases due to a shift in taste or population growth would also increase the intrinsic value of fish causing deflation in the commodity of Fish. Now what if there was a sudden surge in viable fish births, or Jesus performs a miracle and creates fish for the masses? These would decrease the intrinsic value of fish causing inflation. Is this type of inflation or deflation bad? Not at moderate values, it is only when there is a sudden and rapid swing where this is dangerous. So let's pretend we are a fish trader, due to a plague in fish the number of fish being caught have dropped dramatically but the demand has remained constant. We are a pretty smart trader and we know the prices will rise so we hoard our catch hoping to reap the reward of selling fish at a higher cost this also decreases supply temporarily and prices begin to rise very rapidly to the point where the general population can no longer afford fish so to feed their family they shift to eating bread and corn. Now we as the fish trader go to sell our high priced fish and since the demand has subsequently fallen dramatically we can no longer sell them at the going rate of prices. Our stock may then begin to spoil and we have suffered the consequences of deflation in our commodity. In this small example we will have a localized effect, just for fish and just for a reasonable geographic region for a specific time. The effects of commodity deflation will not necessarily equate to a failing economy in general and the effects on perishable goods versus non-perishable goods will vary... if fish never spoiled we could hold on to them indefinitely if we had the means to. Inflation plays a very different role in this example what you saw was what is commonly referred to as hyper-inflation which follows rapid deflation. For standard inflation we would get a very different result, let's change our example a little and see what would happen. Now there is a boom in fish populations resulting from an increased fish birth rate, fishermen's catches are larger and more frequent so our fish stock becomes more abundant. In a market place where demand is constant this decreases the prices because we as the fish trader know that we must sell our stock in competition against other fish traders. This leads to lower fish prices but if demand does not catch up to equalize prices then we as the fish trader know that we have to reduce the supply so we stop buying fish from the fishermen who sell at the highest prices or sell us the lowest quality of fish... essentially they get fired and are less able to contribute to the economy as a whole and this will have a small but rippling effect on the general economy. This problem is limited to a specific period of time and to a geographic region.
As a medium of exchange the concept is the same but the effects are much more complicated. Let's go back to the great depression where government fiat currency saw the most pronounced swings. Fiat currency causes the effects of inflation and deflation to be LESS localized by region and is not confined to a single commodity, it is however limited to a specific time. Let us assume that we use paper IOU's (oh wait that is Fiat Currency) as our medium of exchange, this has no value what-so-ever other than it's liquidity and the markets definition of it's representation to a commodities value. What happens if we make more paper IOU's? Well the liquidity increases and commodity traders demand more of it subsequently for trade, this is inflation. What happens if we decide to burn it? The liquidity of the currency then decreases and the commodity traders demand less of it, this is deflation. Rapid inflation of a medium of exchange can cause significant problems because it devalues an individuals productivity in a society and rapid deflation can cause equally bad problems because it can cause people to start treating the medium of exchange as a store of value which in turn reduces our paper I.O.U's liquidity in the market place. This is why usury was condemned in the bible and most other religions for that matter. By the way, usury is not just limited to interest rates like a bank might charge even if that is what the modern definition has become. Usury at it's basic principle is making money just for the fact that you have money, interest rates are just the easiest offenders to point a finger at.
Why is treating a medium of exchange as a store of value a bad thing? Simply put, it has the potential to hurt people on a wide scale, if a family cannot come by the currency it needs to buy the necessities of life well the result is obvious, poverty will follow if this happens on a wide scale it has the much more devastating effects, this is what happened during the great depression, and this is what is happening currently in the great recession as I have heard some refer to it. What happened to the money supplies during both of these times? The money supply shrank. After the onset of the federal reserve in the U.S. the money supply changed to be based more on debt than on actual physical currency, if you have a dollar in the bank the odds are much stronger that it is NOT original currency and it is more likely to be someone or something's debt to another entity. Ever wonder why the fed lowers interest rates to combat a declining economy? They tell you it is to encourage people to spend and stimulate job growth but in reality this is only part of the equation, the larger part is that the action of buying on credit increases the money supply which increases the liquidity. What were to happen if the liquidity of a currency were to fall is that the trade of goods and services would slow to a halt, this is a significant contributor to the great depression... even though you might be able to buy more with your money if there is not enough to conduct the actual trades then the system crumbles and crumbles rapidly.
In summary deflation of a medium of exchange, is a bad thing as it can encourage consumers to treat it as if it were a store of value. Small and reasonable amounts of inflation are healthy for a medium of exchange. Whereas in a store of value, small and reasonable deflation is healthy as this gives consumers increased value of their goods and services where as rapid inflation is the result of inefficiencies in the production/consumption rate of those goods and services.
For follow up discussion, there are some notable outlying commodities that don't seem to fit the general rule of thumb, in net searching you will often see computing technology as the great example of why a deflation in general is not a bad thing? Any ideas on what may be happening with this and similar commodities?
What is Money?
Money at it's most basic form is a 2 part commodity. 1, it is a storage of value and 2, it is a mechanism to facilitate exchange of goods and services. An example of a storage of value would be gold and bitcoins ( see www.weusecoins.com to learn more ) and an example of a medium of exchange of goods and services would be fiat currency and ripple ( see ripple-project.org/ to learn more ).
People often get these items confused, notably because of the grey areas between these two things, for instance gold has been at times used as a medium of exchange and fiat currency has been used as a store of value. What really differentiates the two, well fiat currency in and of itself has NO intrinsic value, it is a human defined and generally accepted/decreed system to enable bartering without having to bring a goat or pig into your local dell store to get a laptop. This kind of commodity can come from nothing and can continually be created and destroyed and as long as it maintains a standard level of liquidity it works. Gold on the other hand has intrinsic value, meaning you can keep gold and later you can turn that gold into jewelry or component parts in say a high tech airbag deployment mechanism which is a marketable commodity. This kind of commodity has rarity and requires resource expenditure and effort in order to have more ( ie. Mining ). We can get into the anomaly of bitcoin in a later posting, which in it's current state is a store of value and NO intrinsic value.
What does this mean to you and me? Simple really, our entire economy lives and breathes because of both of these functions working as they should concurrently. Every where you look, you see the price of gold, silver, oil etc. priced against the dollar, yen, euro etc. This is because, economists and consumers need a gauge to know how stores of value can be universally traded for a medium of exchange. So when you go to the gas station to fill up the Wagon Queen Family Truckster and you end up paying five dollars per gallon, this is the two principles at work simultaneously, the economy has deemed that your gasoline which is a store of value has an exchange rate equivalent to other stores of value equaling 5 fiat dollars per gallon. What else could we have done to get this gas? Say you're a farmer and wanted the gas and you have 5 fiat dollars in bushels of corn, could the farmer not have just given his bushels of corn for the gas directly? The answer is that yes he can but if the gas station owner doesn't want any corn because he/she has a corn allergy and doesn't want to turn around and trade the corn to someone else then we need to have an easier medium of exchange and this is why we have fiat currency.
For discussion, think about this and tell us your thoughts. In current forms fiat currency has become both a store of value ( in the form of debt - see this video series www.youtube.com/watch?v=vVkFb26u9g8 for more info ) and a medium of exchange. Gold and Silver have also been used as a store of value and a medium of exchange ( gold and silver minted coins for example ). Does a successful economy need to have a currency that is representative of a store of value and a medium of exchange simultaneously or can it be functional with the 2 traits of money separated into different forms?
People often get these items confused, notably because of the grey areas between these two things, for instance gold has been at times used as a medium of exchange and fiat currency has been used as a store of value. What really differentiates the two, well fiat currency in and of itself has NO intrinsic value, it is a human defined and generally accepted/decreed system to enable bartering without having to bring a goat or pig into your local dell store to get a laptop. This kind of commodity can come from nothing and can continually be created and destroyed and as long as it maintains a standard level of liquidity it works. Gold on the other hand has intrinsic value, meaning you can keep gold and later you can turn that gold into jewelry or component parts in say a high tech airbag deployment mechanism which is a marketable commodity. This kind of commodity has rarity and requires resource expenditure and effort in order to have more ( ie. Mining ). We can get into the anomaly of bitcoin in a later posting, which in it's current state is a store of value and NO intrinsic value.
What does this mean to you and me? Simple really, our entire economy lives and breathes because of both of these functions working as they should concurrently. Every where you look, you see the price of gold, silver, oil etc. priced against the dollar, yen, euro etc. This is because, economists and consumers need a gauge to know how stores of value can be universally traded for a medium of exchange. So when you go to the gas station to fill up the Wagon Queen Family Truckster and you end up paying five dollars per gallon, this is the two principles at work simultaneously, the economy has deemed that your gasoline which is a store of value has an exchange rate equivalent to other stores of value equaling 5 fiat dollars per gallon. What else could we have done to get this gas? Say you're a farmer and wanted the gas and you have 5 fiat dollars in bushels of corn, could the farmer not have just given his bushels of corn for the gas directly? The answer is that yes he can but if the gas station owner doesn't want any corn because he/she has a corn allergy and doesn't want to turn around and trade the corn to someone else then we need to have an easier medium of exchange and this is why we have fiat currency.
For discussion, think about this and tell us your thoughts. In current forms fiat currency has become both a store of value ( in the form of debt - see this video series www.youtube.com/watch?v=vVkFb26u9g8 for more info ) and a medium of exchange. Gold and Silver have also been used as a store of value and a medium of exchange ( gold and silver minted coins for example ). Does a successful economy need to have a currency that is representative of a store of value and a medium of exchange simultaneously or can it be functional with the 2 traits of money separated into different forms?
An Introduction
Here at garagEconomy, I plan on exploring all those topics relating to the economy whether it be direct or indirect. In the coming weeks and months I hope to explore topics such as what our money is, alternative forms of money and exchange, political issues such as presidential campaigns and current event hot topics (thinking debt ceiling is the biggest right now...), and maybe even some book reviews here and there.
I still have a day job so posting wont be at a great frequency at first but I hope to build up an audience over time but for now I will just write and leave most of the work up to the net community to discover my site. I hope we can engage in a similar friendly discussion on these issues similar to a close knit neighbor gathering in someone's garage drinking a beverage of choice in layman's terms. And with that, I will disclose that I will be me on here, I will not pander to any particular audience, the opinions I express will be my own and I hope that in time as the audience grows hopefully there will be people equally passionate about different sides of the issues commenting and discussing their view points as I am open minded and if I can learn a thing or two from all sides of an issue that would be great whether or not my final opinion is changed or not.
I hope you enjoy the site and may god bless every one who takes the time to visit and partake in this community!
James
I still have a day job so posting wont be at a great frequency at first but I hope to build up an audience over time but for now I will just write and leave most of the work up to the net community to discover my site. I hope we can engage in a similar friendly discussion on these issues similar to a close knit neighbor gathering in someone's garage drinking a beverage of choice in layman's terms. And with that, I will disclose that I will be me on here, I will not pander to any particular audience, the opinions I express will be my own and I hope that in time as the audience grows hopefully there will be people equally passionate about different sides of the issues commenting and discussing their view points as I am open minded and if I can learn a thing or two from all sides of an issue that would be great whether or not my final opinion is changed or not.
I hope you enjoy the site and may god bless every one who takes the time to visit and partake in this community!
James
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