A Deflationary Economic Model

makeorbrake

Came across this the other day. Seems like a fascinating and insightful outlook.

Essentially Jeff Booth discusses the fact that our more recent technologies are deflationary in nature - and that this is going to accelerate even more - particularly with AI. He posits that deflation is inevitable and that we should embrace that - rather than fight against it.

Is it time for Keynesian economics to give way? Anyone any thoughts on this?

KyussB

Deflation is the one thing all economists agree is a Bad. Thing. that must be avoided, and avoiding deflation is one of the central mandates of all central banks. It's only inevitable long term when there is a limited supply of currency - which is not the case with fiat currency.

makeorbrake

KyussB wrote: »

Deflation is the one thing all economists agree is a Bad. Thing. that must be avoided, and avoiding deflation is one of the central mandates of all central banks. It's only inevitable long term when there is a limited supply of currency - which is not the case with fiat currency.

So even if we accept Booth's point that Moore's Law is in effect and it's leading to deflationary tech, are you saying then that we can print our way out of that - regardless of how much printing would be required to compensate? That secondary deflation is speeding up - meanwhile, more recent years have seen a move towards Modern Monetary Theory (MMT) - as per ever increasing use of Q.E.

He particularly cites artificial technology and energy. Just in case anyone hasn't got the time to watch the interview, here's a few of his tweets explaining his rationale.

KyussB

I'm not saying anything about any of that. The entire concept of inevitable permanent deflation is simply incorrect/wrong - and shows a deep misunderstanding of macroeconomics - probably rooted in Austrian Economics, which is thoroughly discredited macroeconomically.

It sounds like the author is doing a bait-and-switch, trying to say there will be permanent deflation in the overall price level, by arguing that specific cherry-picked goods/industries will drop in price - when that is fallacious reasoning.

As long as there are things people want to buy, of limited supply (and there always will be) - and a supply of money that is not limited - then overall deflation is never inevitable. Macroeconomically, it's as simple as that.

Deflation is still going to occur from time to time - but due it being a choice to not make the money available. We are about to (likely already are) experience it, due to the choice to not use fiscal policy to channel enough money, when monetary policy becomes incapable of channeling enough money.

makeorbrake

KyussB wrote: »

As long as there are things people want to buy, of limited supply (and there always will be) - and a supply of money that is not limited - then overall deflation is never inevitable. Macroeconomically, it's as simple as that.

It seemed to be inevitable for the Japanese despite 15 years of Quantitative Easing and negative interest rates?

KyussB

Japan's deflation is caused by excessive Private Debt - triggering long-term Debt Deflation - paying-down/deleveraging Private Debt, suppresses spending in the economy, and the price level.

When you let Private Debt get that bad, both monetary and fiscal policy have a hard time combatting deflation - that's why it's critical not to allow it to set in persistently, in the first place.

When it gets as bad as Japan (or just in general, when Private Debt vs GDP grows too large) - then you need to implement policy which either:
1: Raises wages generally (e.g. implement a living wage - or a Job Guarantee with government as employer of last resort, which raises wages through the whole economy, by bolstering worker bargaining power through eliminating the threat of unemployment) - which will push inflation through the knock on effects of wage inflation.

2: Or you need something like a Debt Jubilee, which is a mass cancellation of debts - e.g. by giving every person €100,000, which mandatorily pays down the persons debts first, and the remainder put in their bank account - which will cause inflation through freeing up money that would have gone into debt deleveraging, and through the remaining lump sum.

makeorbrake

@KyussB: Isn't the accumulation of private debt symptomatic of this keynesian approach in the first place? i.e. a system that aims to consistently deliver inflation?

Where does public debt fall in all of this? Does it not matter? Can money be printed off to infinity? Once CBs start down that road, can they ever get off it?

Wanderer78

makeorbrake wrote:

@KyussB: Isn't the accumulation of private debt symptomatic of this keynesian approach in the first place? i.e. a system that aims to consistently deliver inflation?

The accumulation of private debt has largely come from long term policies over the last few decades that have encouraged ever increasing asset prices, particularly in relation to housing, this has also occured due to the deregulation of the financial sector, and moving our monetary systems towards credit creation via these financial institutions and systems, and encouraging alternative money creation systems, largely government systems, I. E. Via Bond creation, to be more conservative, hence the idea of balancing budgets etc. All this has effectively forced private debt upwards

KyussB

If you look at how sectoral balances work (it's macroeconomic accounting, for the public/private/foreign sectors) - it provides a good way to understand this (but takes a bit of time to grok).

I'll leave out the foreign sector, to simplify this - but basically, if you want to hit a certain GDP target, then when Net Spending from the Public Sector reduces, Net Spending from the Private Sector has to increase - and the increase in spending from the Private Sector will come in part from Private Debt.

So, when the government is not running a large enough deficit, it can pressure the Private Sector into loading up on Private Debt, in order to keep GDP ticking along.

This means that when Private Debt is reducing, it can sometimes put pressure on Public Debt to increase - and when Public Debt decreases, it can sometimes put pressure on Private Debt to increase (don't forget the foreign sector though - it's not as simple as I make out here).

Private Debt is far more dangerous than Public Debt, due to the deflation risk, so - and this is very counterintuitive, to the narrative you hear in the news all the time - this means that government surpluses are often a bad thing, and that keeping a deficit is often a good/desired thing.

makeorbrake

Is there any conceivable downside then to this CB balance sheet expansion? - either immediate, medium or long term?

Wanderer78

makeorbrake wrote: »

Is there any conceivable downside then to this CB balance sheet expansion? - either immediate, medium or long term?

i think we re just about to find out, i suspect if this new money(debt), is put to good use, i.e. infrastructure spending, long term investments etc, it will work out well, but if its not, god only knows what. im expecting the old codgers of balancing budgets etc will kick in somewhere down the line, before we truly have done enough to stabilize things, then all this over hanging private debt issues will start surfacing again, i.e. banking sector issues etc. will we start seeing bail outs again, or even bail ins??

makeorbrake

Wanderer78 wrote: »

i think we re just about to find out, i suspect if this new money(debt), is put to good use, i.e. infrastructure spending, long term investments etc, it will work out well, but if its not, god only knows what. im expecting the old codgers of balancing budgets etc will kick in somewhere down the line, before we truly have done enough to stabilize things, then all this over hanging private debt issues will start surfacing again, i.e. banking sector issues etc. will we start seeing bail outs again, or even bail ins??

Isn't there a likelihood that central banks (and governments as they're intertwined) won't be able to kick the habit and get off of it? Isn't the gap between wealth created and global debt rising?