*beach boys

It’d be interesting to find out how much of the *actual debt we actually owe* is inflation-proof. I strongly suspect the answer is “not very much at all”.

Some things are inelastic – food, an essential iTouch – and some are far more discretionary – business investment, which drove this recession. Keynes, the great adversary of you Austrians, noticed that, and the figures back it up for this year.

By using colloquial “consumers/pounds in pockets” terminology, I admit that I muddy this point. But consumer incentives are slightly affected, and business incentives powerfully affected, by this.

The inflation people want is extra demand for what they and their businesses do, not the sort that comes from a squeeze on supplies (i have a go at this in my publication – tell me what you think)

Even though I would get a 20% better iTouch if I waited a year, for £30 less, I get so much value from having it now that I don’t really care.

Well, quite! But doesn’t the same apply, mutatis mutandis, to food, clothes, petrol, housing, furniture etc etc? Even if I would be able to buy all of these things cheaper next year (because my money is constantly appreciating in value), I get so much value from having them now that I don’t really care.

I absolutely agree that we should distinguish between different types of deflation – deflation due to technological progress, for instance, is very different to deflation due to a reduction in the money supply. But saying stuff like “when the value of the pound in your pocket keeps rising, you have no incentive to invest or spend it, and the economy stays trapped in a depressed mire” doesn’t seem to me to be taking a calm, careful and balanced look at the merits and demerits of different kinds of deflation.

From c. 1992, consumer prices indices went down and down through the rest of the decade as deflation became the expected experience and real GDP growth sank to persistently miserably low levels:
http://en.wikipedia.org/wiki/Economic_history_of_Japan#Deflation_from_the_1990s_to_present

Couple of points. First, that ever-increasing performance of computers does have an effect on the market; ceteris paribus, if computers were no longer improving so fast, there would be different incentives to buy or sell. I frequently put off my upgrade decisions to buy. That is not the same as saying “demand is cratered”. The very high discount factor for people on computers clearly deals with this. Even though I would get a 20% better iTouch if I waited a year, for £30 less, I get so much value from having it now that I don’t really care.

Also, distinguish between demand- and supply-induced deflation. The thought that demand for the thing I am thinking of buying is going to fall is critical for business decisions.

For your second para, I would take more seriously the idea of multiple equilibria; if I am the only person investing, then my investment will be uneconomical; if there is a lot of investment, demand will rise and it will be. I can see how Austrians ex post find a lot of investment uneconomical, when their economic advice ends up rendering them so.

And how did we get to this point? Well, the govt found that it was cheaper to borrow by agreeing to protect against inflation. Because lenders realised, after they’d been screwed over, that inflation was one of the major uncontrolable risks they faced.

So we’ve actually had a market solution to hte temptation of govts to inflate away their debt.

I think that Adam Smith made that point in 1789….

Otherwise I agree: the gold standard wouldn’t be that good.

But this is rubbish. Consider the case of electronics, or more specifically personal computers. Because technology in the market is developing so rapidly, every year you refrain from spending £500 on a computer means that the computer you eventually buy will be that much better. In other words, the value of the pound in your pocket keeps rising (at least relative to computers). So if you’re right here, we should expect that people have “no incentive” to spend any money on computers, and therefore that there would be no market in them. But there is such a market! People do still buy computers, even though if they held on a year they could buy a better one for the same price. It’s funny that during the last couple of decades, when price deflation in computers was at its highest, the industry was about as far from a “depressed mire” as it’s possible to imagine.

More importantly, if you take the Austrians seriously (and I think you’d be stupid not to), you’d take seriously the argument that investment is not unambiguously a good thing. It’s only a good thing when it’s economical. Artificially stimulating investment by playing around with interest rates is all fine and good, except that it makes uneconomical investments seem economical (hello housing bubble!), and thereby distorts the capital structure of the economy in ways which often prove to be disastrous.

gives some examples. Many many obligations are in real terms, and can’t be inflated away. And the godawful mess takes decades to clear.

http://www.lrb.co.uk/v32/n05/john-lanchester/the-great-british-economy-disaster