I\u2019m reading a bunch of articles about how the US economy is failing to thrive this year \u2013 how the Fed is arguing amongst themselves about raising vs. lowering interest rates \u2013 how there\u2019s the \u201crisk\u201d of deflation, as opposed to the \u201crisk\u201d of inflation.<\/p>\n\n\n\n
I think that this is an opportune time to review some basics.<\/p>\n\n\n\n
First off, let\u2019s talk about money for a moment: Money is nothing more or less than crystalized value. It\u2019s a way to avoid having to barter directly with everyone. It\u2019s also a standard unit that\u2019s (ostensibly) hard to forge. I create a certain amount of value for a small number of people by doing things for them. They give me money \u2013 and then I give that money to other people who do things of value for me. The important bit is that money has no inherent value, except insofar as I\u2019m willing to take it in exchange for my time and stuff. Historically, I have accepted money in return for my time. In the future, I hope that I can trade it back for someone else\u2019s efforts.<\/p>\n\n\n\n
In a fair system, the money and property that I have at any given point really ought to be related to \u201cthe value that I provided to other people\u201d minus \u201cwhat I consumed.\u201d We can tinker with that equation a little bit \u2013 throwing in concepts of leverage and compound interest. However, really seriously, the wealth on which I expect to retire is related directly to the value that I brought to other people, minus what I consumed along the way.<\/p>\n\n\n\n
I think it\u2019s appropriate to generate value for other people when you\u2019re young and fit, create a pile of crystalized value, and then trade it back later in life. That way you can relax a bit in your later years. I think it\u2019s appropriate to have societal mechanisms, including a stock market, to help accomplish that goal. It is also appropriate to tightly regulate such a market. Indeed, we\u2019re talking about \u201cmy time,\u201d at root. What worse thing could you waste or screw away?<\/p>\n\n\n\n
So we\u2019re led to talk about the stock market. How should it work?<\/p>\n\n\n\n
Assume for a moment that the market doesn\u2019t affect the supply of money. In this case it\u2019s just a casino. Everybody brings chips to the table. Some people leave with more \u2013 others leave with less. Measured over sufficiently short time periods, the money supply in the market *is* fixed. That\u2019s why day traders are assholes \u2013 and why \u201chigh speed trading\u201d needs to be abolished. Both are just mechanisms to extract money from the economy without adding value in return. That\u2019s stealing.<\/p>\n\n\n\n
Assuming that the money supply is *not* fixed, then one hopes that the stock market is adding value to it. This means \u201cmore money in the system,\u201d perhaps balanced by \u201cmore goods and services out there.\u201d Put in my terms from above: Ideally, the more that people are *doing* for each other (trade), the more *money* we might expect to see in the system \u2013 but there will also be more *stuff* in the system. The balance between time, money, and stuff will be maintained.<\/p>\n\n\n\n
That\u2019s where inflation and deflation come in. They affect the time\/money and stuff\/money ratio.<\/p>\n\n\n\n
More briefly: The money supply ought to keep pace, more or less, with the total productivity that\u2019s in the economy \u2026 i.e: More work being done by more people means more money and more stuff.<\/p>\n\n\n\n
Now, onward to inflation:<\/p>\n\n\n\n
Inflation means a *decrease* in the value of a unit of money. The usual way to get inflation is by introducing more money into the system. Inflation is *good* because you get a raise at your job, but it\u2019s *bad* because a hamburger costs more. Inflation is *awesome* if you\u2019re holding debt (more salary to pay down a fixed debt), and *terrible* if you\u2019re trying to retire on your life\u2019s savings (less hamburgers).<\/p>\n\n\n\n
Deflation means an *increase* in the value of a unit of money. You get deflation (fundamentally) by taking money *out* of the system. Say, for example, that a massive real-estate run-up evaporates, and banks have to write off nearly a trillion dollars of bad debt. Lots of money left the economy. Deflation means that your paycheck goes down \u2013 but also that hamburgers are cheaper. Deflation is *awful* if you\u2019re holding debt that you plan to pay. Deflation *rules* if you\u2019ve got lots of money.<\/p>\n\n\n\n
Let me say that again: Deflation is *bad* if you\u2019re holding debt (negative money), and *good* if you\u2019re holding money. However, in a *fair* world \u2013 the value at which I redeem my money would map (more or less) with the value at which I obtained it.<\/p>\n\n\n\n
Neither inflation nor deflation is inherently bad. If you live in the day to day of \u201ctime traded for hamburgers,\u201d without much of your effort locked up in money \u2013 they\u2019re both kinda-sorta okay. The more money you have, piled up, (positive or negative) the more they matter. If you\u2019re debt heavy and planning to work for a long time \u2013 inflation is a winner for you. If you\u2019ve got a bunch of cash and don\u2019t want to work anymore \u2013 pray for deflation.<\/p>\n\n\n\n
For the US as a whole right now? I think we want inflation more than we want deflation. We\u2019re a nation of workaholic debtors. Interestingly, if you posit a wealthy cabal of shadowy, wealthy world rulers \u2013 they would universally be in favor of deflation<\/em>.<\/p>\n\n\n\n Me? I bought a chest freezer and I\u2019m stocking up food for the winter. Hamburger, anyone?<\/p>\n","protected":false},"excerpt":{"rendered":" I\u2019m reading a bunch of articles about how the US economy is failing to thrive this year \u2013 how the Fed is arguing amongst themselves about raising vs. lowering interest rates \u2013 how there\u2019s the \u201crisk\u201d of deflation, as opposed to the \u201crisk\u201d of inflation.…<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[50,45],"tags":[],"class_list":["post-1569","post","type-post","status-publish","format-standard","hentry","category-economics","category-politics-blog"],"_links":{"self":[{"href":"https:\/\/dwan.org\/index.php\/wp-json\/wp\/v2\/posts\/1569","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/dwan.org\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/dwan.org\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/dwan.org\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/dwan.org\/index.php\/wp-json\/wp\/v2\/comments?post=1569"}],"version-history":[{"count":1,"href":"https:\/\/dwan.org\/index.php\/wp-json\/wp\/v2\/posts\/1569\/revisions"}],"predecessor-version":[{"id":1570,"href":"https:\/\/dwan.org\/index.php\/wp-json\/wp\/v2\/posts\/1569\/revisions\/1570"}],"wp:attachment":[{"href":"https:\/\/dwan.org\/index.php\/wp-json\/wp\/v2\/media?parent=1569"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/dwan.org\/index.php\/wp-json\/wp\/v2\/categories?post=1569"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/dwan.org\/index.php\/wp-json\/wp\/v2\/tags?post=1569"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}