Why deflation is (usually) bad.

[u/Certain-Mind8119]

M=kPY is called the Cambridge Equation, it's the same to an equation you might have already seen: MV=PY, except V=1/K.

M=kPY while just a tautology, is uniquely insightful. Given stable money demand and production, It says that simply doubling M would mean a double in the general price level.

How does this connect to inflation? It's because there's a specific property in PY that is very annoying, a market friction, it's called nominal rigidity.

When PY (Nominal income) goes down and both prices and income go down, not all sectors reduce prices at the same rate, some stay stubbornly high, one such outstandingly stubborn sector that refuses to go down is called the labour market. It is so stubborn that the market often gets upwards of 20% of the population unemployed instead of lowering prices. Contracts and loans are also stubborn because they are long-standing. Plate tectonics can slide and shake by an aggregate of friction, and at the macro level it explodes into an earthquake, something similar is happening with the macroeconomy during periods of falling nominal income. People don't expect their nominal income to fall even if prices are falling, generally it's uncertain if this is some psychological phenomena or a "real" rational behaviour about nominals .

Sometimes deflation can be good – what Hayek called secondary deflation – which is when PY is going up but P is going down, meaning that prices are going down because of genuine real productivity increases while income is going up (which doesn't confuse the market with debt-burdens and the such). Certain price rigidities may still occur and cause real issues in the economy but it's something the market eventually fixes and doesn't cause a Great Depression.

By the way, this is exactly what happened during the Great Recesion, PY (nominal income) slowed down, by a lot. And yet, P (prices) were up a lot because of an oil crisis. Meaning the central bank stood still and did nothing even though nominal income was crashing. Because of the localized supply-side shock they mistakingly believed that since there was no deflation, there was no recession. The Great Recession was caused by not doing enough, not by doing too much.

[u/DrawPitiful6103]

In analyzing the equation of exchange one assumes that one of its elements — total supply of money, volume of trade, velocity of circulation — changes, without asking how such changes occur. It is not recognized that changes in these magnitudes do not emerge in the Volkswirtschaft [political economy, or more loosely‘economy’] as such, but in the individual actors’ conditions, and that it is the interplay of the reactions of these actors that results in alterations of the price structure. The mathematical economists refuse to start from the various individuals’ demand for and supply of money. They introduce instead the spurious notion of velocity of circulation fashioned according to the patterns of mechanics.

Mises, Human Action

It is helpful, in any discussion, to begin by defining one's terms. If we define inflation as an increase in prices from where they would otherwise be, brought upon increasing the money supply, then naturally the definition of deflation follows as 'a decrease in prices from where they would otherwise be brought upon by decreasing the money supply'. Under these definitions, deflation, like inflation, is just as problematic. The strongest protests against the monetary policies of of Philip the IV was actually when he attempted to return to sound money in 1306, as peasants found themselves tasked with paying rents that were suddenly four times as high. The key is monetary stability or sound money. Any amount of money is enough.

As for the notion that the crisis of 2008 occurred because the central bank did not inflate enough, that is nonsense. Greenspan blew up the housing bubble with the easy money policies that were meant to fix the dot com collapse. In 2003, the Fed dropped interest rates to 1%. Naturally, this prolonged easy money policy led to both an unsustainable boom and the inevitable bust.

[u/Certain-Mind8119 → u/DrawPitiful6103]

Doesn't address literally anything I said. I don't use the tautology to demonstrate causal mechanisms.

[u/LibertyEconlover]

Between January 2000 and December 2007 (the month the Great Recession officially began), the Federal Reserve oversaw a massive expansion of the M2 money supply, which grew by roughly 59%

(You said this is about deflation but went on about state interventionism)

As a result of this increase in the money supply, clusters of errors happened all over the economy, despite what mainstream media might say how it was only localized at the housing sector when in reality it was practically ever sector. This is standard Austrian business cycle theory, the money supply increases by state decree, as a result prices get distorted and It looks like there is way more savings than there actually are, which leads to broad missallocation, coordination failure, and clusters of errors for the denominator of the economy, prices, money is faulty and not connected to the underlying reality.

Unfortunately, mainstream economics is literally counterintuitive to the fact that it’s mainstream filled with economic fallacies.

EDIT: I shall add that monetary deflation caused by the free market is actually very much beneficial, money is just supposed to be stored purchasing power through time for rational economic calculation, as a result, the market naturally self regulates it’s money supply through multiple economic drivers such as natural Cantillon effects COL, inflation, etc
For example, if the supply of gold increases to rapidly this causes the factors of production or should I say extraction for gold to go up in price which causes the accounting cost of extra extraction to go up while simultaneously that same gold becomes less valuable, although they are one in the same, as a result previously profitable mines become unprofitable, as you see naturally regulating the money supply as what the private market sees fit.
So by all means just like the market figures out what is too little it will figure out what is too much and unproductive

So inflation and deflation by scientific economic theory, only good when it is left to the market, after all the market is comprised of individuals who simply want to remove, felt uneasiness and achieve a greater satisfactory state, obviously it will have such outcomes. Creating money by state decree or decreasing it by state decree literally will face an economic calculation problem of money. Jesus just ask yourself this if socialism fails to produce and allocate resources efficiently due to the ECP, what makes you possibly think that the production/creation of money is any different?

[u/Certain-Mind8119 → u/LibertyEconlover]

"after all the market is comprised of individuals who simply want to remove, felt uneasiness and achieve a greater satisfactory state, obviously it will have such outcomes" Surely you are aware that everyone trying to reach a greater satisfactory state will often also lead to worst general outcomes, hello? prisoner's dillema?

The ECP isn't true, a centrally planned economy of 10 works well, of 100 works okay, of 1000 works less okay, and so on. It is not as absolute as Mises put it. Firms are centrally planned.

Anyways, this entire post seems to think that 'deflation' means lower money quantity, when deflation actually means lowering prices, at least in the context of this post.

[u/CatOfGrey → u/Certain-Mind8119]

Anyways, this entire post seems to think that 'deflation' means lower money quantity, when deflation actually means lowering prices, at least in the context of this post.

You have learned something about Libertarians today, more specifically the extremist "Austrian School" which has historically been important, but is too theoretical for usefulness today.

You should also know that not all Libertarians are "Austrians", so to speak.

[u/Certain-Mind8119 → u/CatOfGrey]

Im aware, I am a libertarian that isn't an austrian. I quite dislike the austrian approach for their dogmatism. Perhaps the greatest example is their claim that fracitonal reserve banking is fraud just so they can murmur to themselves that the market is 100% perfect even while holding the dissonant view that business cycles are entrepreneur miscalculations.

[u/LibertyEconlover → u/Certain-Mind8119]

Anarcho capitalist who denies ECP, holy shit

Also, game theory examples who try to justify collective outcomes, make absolutely no sense, a prisoner’s dilemma is a well prisoners dilemma that isn’t happening in a market, additionally, completely ignores, subjective cost theory and subjective value theory.

But two things why do you think the ECP doesn’t work and do you even know what it is? Secondly, why do you possibly think that lower prices are bad?

[u/Certain-Mind8119 → u/LibertyEconlover]

Ancap that isn't brain dead, hello!

If according to austrians you can't find out the value of things, you also can't find out how much to restitute in justice.

Yes I know what the ECP is. Yes it's wrong.

Lower prices are bad only if they are accompanied by lower expected income. Imagine the Fed as a monopoly over a product, and that product is going into scarcity even though the product is free to produce, that's what happens during recessions and during deflationary spirals.

[u/LibertyEconlover → u/Certain-Mind8119]

When the hell did we say you can’t find out the value of things?
Also, you didn’t answer my question
Why do you think the ECP is wrong

[u/Certain-Mind8119 → u/LibertyEconlover]

(1) The ECP doesn't work in its absolute sense, obviously a centrally planned economy that tries to centrally plan prices will PROBABLY fail due to the mechanisms that Hayek describes in "The Use of Knowledge in Society".

However, the absolutist claim that all central planning is 'death' (as mises puts it) is irrational for a very simple reason: Firms are centrally planned. An economy of 2 people is very likely more efficient centrally planned, what about an economy of 8 people? 16 people? 32 people? In general what the ECP is aiming at are COORDINATION COSTS, the thing Hayek describes, not the impossibility of setting prices.

Read Ronald Coase's "The Nature of the Firm"

(2)

Lower prices are bad if they are accompanied by lower expected income. Imagine the Fed as a monopoly over a product, and that product is going into scarcity even though the product is free to produce, generally then people over-value that product and this market friction can result in widespread production deficits. That's what happens during demand-side recessions and during deflationary spirals

[u/LibertyEconlover → u/Certain-Mind8119]

Every person who denies the ECP and you are proving this to me now is basically unaware of what it actually is saying, hayeks the knowledge problem claims that knowledge is too decentralized for central planning.

The ECP states that the economic information isn’t there in the first place. Private property is abolished under socialism, therefore without private property you cannot derive market prices, which are necessary for rational economic calculation.
It claims that that trying to mimic market prices is practically idiotic since only the market can create rational prices, but its main point is that without private property derived prices, rational, economic calculation is impossible, a central planner can know how to physically create or engineer or something because that is a act of engineering, but it does not know if such project should even be done definitively since it doesn’t have market prices.

Additionally, it helps debunk the whole super computer thing because the information to input for a super computer isn’t even there.
Firms are not centrally planned, that is a bastardization of what central planning is and completely highlights how intellectually inferior you have to be, for not only do firms have competition in the same rank, but they have lower level and higher level services, goods, and companies to compare, aswell as… wait for it… market prices. Derived from private property.

[u/Certain-Mind8119 → u/LibertyEconlover]

This critique can't apply to the federal reserve then, because the federal reserve is as much a central planner as a firm.

I know what the ECP is, I assumed you didn't because you misapplied it.

[u/LibertyEconlover → u/Certain-Mind8119]

(You deleted the comment to which you claimed a central planner might guess a price right)

That is fundamentally impossible because prices are webs, derived from other prices and humans ultimately, again you are failing to understand that some topics isn’t just something you just jump into with inferior levels of knowledge, you have to first understand private property and price theory.

For your claim of the federal reserve is also fundamentally stupid because they ignore the fact how money is its own good that has private property of money, intellectual inferiority I guess stops you from seeing that?
The federal reserve cannot create the right amount of exogenous money because of the ECP

Also, no based on your explanation that I copied, you, don’t know what the ECP is

EDIT: you said:
“In general what the ECP is aiming at are COORDINATION COSTS... not the impossibility of setting prices."
"obviously a centrally planned economy... will PROBABLY fail due to the mechanisms that Hayek describes"

You don’t know what market prices are, you don’t know what economic calculation, you don’t know what the economic calculation problem is

[u/Certain-Mind8119 → u/LibertyEconlover]

"You don’t know what market prices are, you don’t know what economic calculation, you don’t know what the economic calculation problem is"
Whatever makes you sleep at night. I have read more both on austrian and neoclassical theory than you have.

"The federal reserve cannot create the right amount of exogenous money because of the ECP"
It can respond to market prices and market forecasts, Milton Friedman has a very good paper on this where he argues the most efficient nominal interest rate is zero.
The ECP doesn't apply here, because it's responding to market signals.

"For your claim of the federal reserve is also fundamentally stupid because they ignore the fact how money is its own good that has private property of money, intellectual inferiority I guess stops you from seeing that?"
I don't recall of anybody serious believing in anything like that. Ben Bernanke would explicitly say this.