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  1. #11
    Senior Member ptgatsby's Avatar
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    Quote Originally Posted by Lateralus View Post
    There's a lot of wage fixing going on; minimum wage laws, unions, etc. Many employers simply don't have the freedom to adjust wages they way they have to adjust prices.
    Unions and governments definitely have a hand in making this issue... worse. Although I'm not sure it is worse - it's a distribution problem, and so it's a question of "should some suffer a lot while many don't or should everyone suffer a little".

    However, wage stickness is true even without those influences... Workers just don't take pay cuts well. It does happen, but... the market is very resistant to it. It depends on the industry and so forth, of course, but on average, that's the case.

    That said, industries where employee pay is allowed to vary will have fewer jobs lost. The appraisal firm where I worked adjusted pay downward in late 2007. The appraisers didn't like it, but they understood, and thankfully no government or union officials came in and said "No, you can't do that". The alternatives would have been to fire half of the office or to go out of business.
    For sure, although the normal outcome is not a pay cut, but reduced hours. And sometimes collective bargaining helps, where everyone is willing to take pay cuts rather than lose some of the staff.

    Believe it or not, the government isn't responsible for every single undesirable thing that happens (if you can call the wage stickyness undesirable - I don't.)

    Keep in mind that one central reason for this is not because labor costs too much, but because work is falling off. One way or another, it causes excess labor. Paying less doesn't fix the systemic problem.

  2. #12
    Senior Member Lateralus's Avatar
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    Quote Originally Posted by ptgatsby View Post
    Unions and governments definitely have a hand in making this issue... worse. Although I'm not sure it is worse - it's a distribution problem, and so it's a question of "should some suffer a lot while many don't or should everyone suffer a little".

    However, wage stickness is true even without those influences... Workers just don't take pay cuts well. It does happen, but... the market is very resistant to it. It depends on the industry and so forth, of course, but on average, that's the case.
    It doesn't help that people are so accustomed to inflation that they realize even the lack of a yearly raise is effectively a pay cut. We see deflation so rarely, that most people don't really understand it. That's a big part of the problem.

    For sure, although the normal outcome is not a pay cut, but reduced hours. And sometimes collective bargaining helps, where everyone is willing to take pay cuts rather than lose some of the staff.

    Believe it or not, the government isn't responsible for every single undesirable thing that happens (if you can call the wage stickyness undesirable - I don't.)
    I've never said the government is responsible for everything undesirable. Undesirable things will happen regardless of what the government does. What the government tries to do, but cannot, is remove those undesirable effects. In the end, the government exacerbates problems rather than solving them.

    Keep in mind that one central reason for this is not because labor costs too much, but because work is falling off. One way or another, it causes excess labor. Paying less doesn't fix the systemic problem.
    Deflation does not always cause a reduction in demand. The US experienced deflation almost continuously from the end of the Civil War until WWI, yet the economy boomed most of that time. That is obviously a different situation than we are experiencing right now since that deflation was not the result of a credit collapse.
    "We grow up thinking that beliefs are something to be proud of, but they're really nothing but opinions one refuses to reconsider. Beliefs are easy. The stronger your beliefs are, the less open you are to growth and wisdom, because "strength of belief" is only the intensity with which you resist questioning yourself. As soon as you are proud of a belief, as soon as you think it adds something to who you are, then you've made it a part of your ego."

  3. #13
    Senior Member ptgatsby's Avatar
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    Quote Originally Posted by Lateralus View Post
    I've never said the government is responsible for everything undesirable. Undesirable things will happen regardless of what the government does. What the government tries to do, but cannot, is remove those undesirable effects. In the end, the government exacerbates problems rather than solving them.
    I wouldn't be quite as liberal with the blanket statement, but I agree that in this case, the government can do very little within the labor market (ie: keeping people on payroll without work simply makes a company insolvent. Unions have the same effect. Essentially a big version of the inefficiencies they cause.)

    All I meant was that it isn't the government or unions causing the fundamental issue - that is, people don't like pay cuts - even if they do make it worse. The average outcome will be unemployment (the major cross over being in industries that can cut hours until the employees leave on their own.)

    Deflation does not always cause a reduction in demand. The US experienced deflation almost continuously from the end of the Civil War until WWI, yet the economy boomed most of that time.
    How did the money supply contract during this time...? (I'm not familiar with the period in US history, but I believe it was a gold standard... how did that contract to cause deflation?)

  4. #14
    Senior Member Lateralus's Avatar
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    Quote Originally Posted by ptgatsby View Post
    How did the money supply contract during this time...? (I'm not familiar with the period in US history, but I believe it was a gold standard... how did that contract to cause deflation?)
    The US was on the gold standard at the time, as were most (all? I don't remember) European nations. The gold supply wasn't increasing as quickly as demand (as currency and other uses). There are a number of reasons for it. Economies around the world were booming (and it wasn't a fake credit boom) and silver was dropped as a standard by most industrializing nations. The gold supply just couldn't keep up.

    The supply did catch up, eventually, as new technology made gold extraction more efficient, but that wasn't until around 1900 (I don't remember the exact year).
    "We grow up thinking that beliefs are something to be proud of, but they're really nothing but opinions one refuses to reconsider. Beliefs are easy. The stronger your beliefs are, the less open you are to growth and wisdom, because "strength of belief" is only the intensity with which you resist questioning yourself. As soon as you are proud of a belief, as soon as you think it adds something to who you are, then you've made it a part of your ego."

  5. #15
    Senior Member ptgatsby's Avatar
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    Quote Originally Posted by Lateralus View Post
    The supply did catch up, eventually, as new technology made gold extraction more efficient, but that wasn't until around 1900 (I don't remember the exact year).
    There isn't a lot of easy to get information, so I'll have to postpone my comments. What I do see is that the normal explanation is the termination of war debts as a contraction of the money supply, not gold, and that post-war demand would fill in the under-capacity issues.

    If you do have any good references, please post/PM them to me. It looks like it's going to be harder to find to this information (I haven't checked academics yet, but that can be painful )

  6. #16

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    Hmm. Maybe I should subscribe to my own threads. I thought discussion had stopped.

    Quote Originally Posted by ptgatsby View Post
    How? Every effect I can think of monetary deflation provides a negative incentive for capital investment, efficiencies and so forth.
    I'm not expert, but even in monetary deflation, future money is worth more than present money.

    Certainly, taking on loans to make improvements have higher hurdles for that reason, but the capital expenditure itself seems to make sense from a cash flow perspective--same cash flows as paying off a loan in a deflationary period.

    Quote Originally Posted by ptgatsby View Post
    As far as "better off when prices drop". Wages are sticky, prices are not. The natural outcome is unemployment.
    Unemployment is a natural consequence, of course.

    But I am thinking of the decisions that large firms with monopolies, or in markets with monopolistic competition have to make. A lot of these firms are very lean, as is, and risk a drop in quality of service or product, or expose unserved niches if their man-power is cut too much more.

    It seems like, in these situations, to not invite smaller competitors (or to take share away from them) large firms can become more efficient to as an alternative way to keep profits relatively flat.

    I know investment in R&D is deemed one of the priorities for the firm I work for during this down turn. Discretionary spending is cut-off virtually, but R&D remains a top priority. I have also read that the business sector has increased it investment in IT recently.

    The unemployment, also leaves open the door for new small businesses to start cheaper since people may be more willing to take jobs with incentives other than direct monetary compensation in private companies.

    Accept the past. Live for the present. Look forward to the future.
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  7. #17
    Senior Member ptgatsby's Avatar
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    Quote Originally Posted by ygolo View Post
    I'm not expert, but even in monetary deflation, future money is worth more than present money.

    Certainly, taking on loans to make improvements have higher hurdles for that reason, but the capital expenditure itself seems to make sense from a cash flow perspective--same cash flows as paying off a loan in a deflationary period.
    The general rule is that money now is worth more than money in the future. This is because investment/capital/consumption is better off in the present than in the future. This is true, if we ignore time horizons, no matter what.

    In an inflationary environment, however, money degrades in value. This means that money now is worth a *lot* more than money in the future. And likewise, it makes investments much more valuable than cash savings.

    In a deflationary environment, money increases in value. This means that money now is worth (relatively) less than money in the future. And opposite to above, it makes investment less valuable - companies can hold cash because cash is inherently going up in value.

    So, in a deflationary environment, in accordance with consumption/production, money is feasibly worth more in the future. Which means, cash is not spent or invested as readily.

    (* This is only for monetary inflation. Efficiencies don't really trigger quite the same thing... or actually, they do, but so long as inflation is present, even if it matches the real rate of growth of the economy, it tends to be offset. But that's a whole other issue and I'd have to find an economist to tell me if that's correct, roughly)

    But I am thinking of the decisions that large firms with monopolies, or in markets with monopolistic competition have to make. A lot of these firms are very lean, as is, and risk a drop in quality of service or product, or expose unserved niches if their man-power is cut too much more.

    It seems like, in these situations, to not invite smaller competitors (or to take share away from them) large firms can become more efficient to as an alternative way to keep profits relatively flat.
    Absolutely. But the two kinds of deflation that we are talking about operate at different levels. The monetary deflation, as above, works against investment and efficiencies... and production/consumption. Even in monopolistic forms, or close to it. Examples like dropping oil prices/demand, electricity and so forth all illustrate the same thing - we do clawback... that is, consumers are not competitors and can reduce demand.

    Increasing efficiencies is a competitive issue. It results in "deflation" (more goods produced for same money), but it is positively associated with capital investment (ie: invest capital to gain higher production).

    I know investment in R&D is deemed one of the priorities for the firm I work for during this down turn. Discretionary spending is cut-off virtually, but R&D remains a top priority. I have also read that the business sector has increased it investment in IT recently.
    It's a good policy - but that's because of retention of labor and value-added work. If you have money (and smart companies should have) and face a downturn, the best thing you can do is keep the good workers and advance your market position. If you can't do it through projects, then do it through other means.

    The unemployment, also leaves open the door for new small businesses to start cheaper since people may be more willing to take jobs with incentives other than direct monetary compensation in private companies.
    That's only true if there is no capital demand on the smaller companies, unfortunately. However, that can and does happen, but is likely industry dependent (IMO - I haven't seen any research on this)

    What it does, though, is wipe out the unprepared companies and leave entire markets open. This could be seen as leaving small companies a place to grow, but I think it works more from the failure of large companies than the success of (or available resources for) the small companies.

  8. #18

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    Quote Originally Posted by ptgatsby View Post
    The general rule is that money now is worth more than money in the future. This is because investment/capital/consumption is better off in the present than in the future. This is true, if we ignore time horizons, no matter what.

    In an inflationary environment, however, money degrades in value. This means that money now is worth a *lot* more than money in the future. And likewise, it makes investments much more valuable than cash savings.

    In a deflationary environment, money increases in value. This means that money now is worth (relatively) less than money in the future. And opposite to above, it makes investment less valuable - companies can hold cash because cash is inherently going up in value.
    You can go ahead and correct my thinking here, I am no expert in economics, but...

    I thought that whether we are in a period of inflation or one of deflation, monetary decisions are based on which cash-flow scenario has the higher rate of return (or Present Worth or Future Worth).

    I was also under the impression that the deflation/inflation rates themselves dropped out of the inequalities under consideration.

    So let's make up a scenario:
    d is the deflation rate per period
    c is the nominal interest rate per period in your money market account
    p is the nominal percentage of expenditure gained per period due to capital expenditure

    So, per unit of cash, if we just keep it in our money market account, our nominal growth after x periods is (1+c)^x.

    But if we make the expenditure, our cash flow is -1 + p*sum_from_i=1_to_i=x_of[(1+c)^(x-i)] = (p/c)*[(1+c)^x-1]-1

    We can account for deflation for both nominal values, but it would have the same effect on both.

    What we need is [(1+c)^x+1]c/[(1+c)^x-1]<p.

    So the bar for an investment is set up by the interest a firm can get in a money market fund. If the interest rates on the money markets come down, then investment become more attractive. Or in the above equation the lower c is the lower p needs to be.

    I was assuming that interest rates that businesses would get paid to them in money markets would come down during deflation, while the rates they would have to pay on loans would go up--that is the "spread" would increase during deflation, but maybe I got it backwards.

    Quote Originally Posted by ptgatsby View Post
    So, in a deflationary environment, in accordance with consumption/production, money is feasibly worth more in the future. Which means, cash is not spent or invested as readily.

    (* This is only for monetary inflation. Efficiencies don't really trigger quite the same thing... or actually, they do, but so long as inflation is present, even if it matches the real rate of growth of the economy, it tends to be offset. But that's a whole other issue and I'd have to find an economist to tell me if that's correct, roughly)
    So that is the basic mystery, then is how does the "good" deflation work?

    Accept the past. Live for the present. Look forward to the future.
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    "As our island of knowledge grows, so does the shore of our ignorance." John Wheeler
    "[A] scientist looking at nonscientific problems is just as dumb as the next guy." Richard Feynman
    "[P]etabytes of [] data is not the same thing as understanding emergent mechanisms and structures." Jim Crutchfield

  9. #19
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    What is needed, and I think most macroeconomists will agree, is something comparable to FDR's New Deal. In order to devise a policy prescription for change it helps to find out how we got in this mess and look at history. Generally speaking, over the last three decades neo-liberalism has come to dominate the political agenda. Neoliberalism--somtimes called the "Washington Consensus"--is rooted in classical economics which can be traced back to Adam Smith's The Wealth of Nations which was published in 1776. In his book, Smith was concerned with what a poor country could do to prosper and argued there are two main sources of wealth: division of labour and free markets. Take McDonalds for instance. If there is only one person working (handing till, kitchen, cleaning, etc) it is going to be extremely slow and inefficient. Then maybe you bring in another person (one on till and one in the kitchen) but it is still incredibly slow and can't service the long line-up. yet as you hire more workers and have them specialize they become very efficient and professional at their individual tasks. But eventually, you hire one too many people and they start to bump into each other at which time productivity decreases. In order to keep growing, you will need to open more McDonalds' but to do this you will need a bigger market (hence, the argument for free trade). Smith claimed that if we all act in our own self-interest the market will create itself and serve the interest of society. This is essentially the bedrock of modern capitalist economics which is based on competition and the laws of supply and demand.

    Yet eventually, with the emergence of the Great Depression--which symbolized an aggregate demand problem and underutilization of resources (huge unemployment, for example), a great economist called John Maynard Keynes began to rethink some of these classical assumptions. Keynes claimed that Smith and Ricardo and the classical economists were wrong. He argued that if the private sector was in a slump the government could/should step in and increase spending to stimulate the economy with an effective macroeconomic policy. Keynesian economic principles would be incorporated into FDR's New Deal, Bretton Woods, as well in how Europe went about post-WWII reconstruction. It should also be noted that the East Asian Tigers also had a strong developmental state with Keynesian economic policies.

    For various reasons, in the 1980s neo-liberalism came into vogue. Neoliberalism, is based on neo-classical economic assumptions and holds that privatization, deregulation, and trade liberalization are conducive to development. Moreover, neoliberals pride themselves on rolling back the size of the government and selling off state assets to the private sector. The reality is that this was the capitalist class waging war on the working class and further dispossessing them. But setting that aside, this system built on runaway capitalism as no stops in it. It could be as simple as this: you heard news that there's going to be a recession. As a result you (and millions of others) start hoarding your money and stop spending. By not spending, you're not stimulating the economy and it starts to contract. Then you really think we're headed for trouble so you become even more conservative in your spending habits. In short, what we're left with is a self-fulfilling prophecy and a lot of it is based on consumer confidence (or lack thereof). Now, within the confined of a neoliberal laissez fair system (where governments have a hands-off approach) one can see how this can just keep going down and down. Who is going to step in?

    This is where stronger regulation and government intervention is required. We need governments to step in with an important fiscal policy that spends money on projects that will bring about immediate employment and income and will usually have long-term benefits for the country as well (such as on infrastructure). We need to realize the unrealistic assumptions in neoliberalism and that speculation is a damn disaster. It was a disaster in Russia and the East Asian Financial crisis in 1998 and it is bad now. What is needed, and perhaps you'll agree with me, is a Bretton Woods 2.0

    Still more, this is a security issue. If we go into a global recession what does that mean? What sort of rough beasts do harsh conditions bring to power? (Think Hitler, Think Stalin, Think Mussolini). Harsh conditions bring pitbulls to power. Therefore, this is not only an economic catastrophe but a security one as well. What is needed is a Bretton Woods 2.0, more taxing of the wealthy, a strong Keynesian-oriented macroeconomic policy accompanied by a New Deal 2.0.

  10. #20
    Senior Member ptgatsby's Avatar
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    Quote Originally Posted by ygolo View Post
    I thought that whether we are in a period of inflation or one of deflation, monetary decisions are based on which cash-flow scenario has the higher rate of return (or Present Worth or Future Worth).
    Financial decisions are made as you said. However, not all things become equal. If a company had a lot of cash on hand, and the relative cost of their production is decreasing, they can simply wait before buying new production (and thus get more of it). This would be equivalent to "money market rates" to some degree - but keep in mind that inventory and the like gets progressively less valuable vs. the cost of production too.

    As such, any investment actually has declining value in real terms, so unless you can convince labor and the like to take progressive salary costs, it's not feasible (this was the "sticky wages" issue.) It's possible to balance it out on paper, and in theory it does (and I think the normal economic view is that it does balance - over years and years.)

    However, investment decisions are always relative... and as you say, if the market compensates, then it should be equal.

    Ask yourself if you would buy a house if deflation was about 4% per year. How much should the bank charge you in interest? (Keep in mind your wages are deflating at 4% as well, in theory.) Another way to think about it is - how much cash do you need to rent in perpetuity if deflation is 4% (same as a perpetuity, in effect, but now I *don't* need to invest it!)

    So that is the basic mystery, then is how does the "good" deflation work?
    Competition and constraints, normally. But I know the finance side goes, I don't know how it affects the monetary/economics side much. That makes the "right" amount of research, given that competition and constraints are present, dependent on if it is expected to make you more efficient (than your competitors) despite constraints (like labor costs, new production, etc.)

    Research, as far as I know, is considered under-produced by the market in general... and I know that one reason for increasing the monetary supply is to offset this kind of deflation and keep investment/consumption active.

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