Impact on Tesla of a sudden stock market crash (and economic crisis like in 2008)

[strider]

No, if the debt is owed by the poor and held by the rich, the existence of the interest-bearing debt is deflationary, and the cancellation is inflationary. I guess this isn't obvious.

It has to do with relative propensity to spend: the poor are more likely to spend any money they get (for really obvious reasons: they have more unmet needs). Transferring money from someone with a high relative propensity to spend to someone with a low relative propensity to spend effectively reduces the circulating money (by reducing the velocity of money, if you like to put it that way). This is what this sort of debt does. Cancelling the debt has the reverse effect and is inflationary.

Of course if the rich were deeply in debt to the poor, it would be the other way around, but that's a *theoretical impossibliity* if you think about it.

(The original issuance of the debt *was* inflationary but it happened back during the boom...)

Glad you support debt jubilees. Hope this helps you figure out why they actually work.

You're confusing inflation/deflation with velocity. Inflation is an increase in the supply of currency and credit. Deflation is a reduction in the supply of currency and credit. If you print $1T and bury it in the ground, that is technically inflationary as the supply of money increased but since the velocity of that money is 0 it's as if it doesn't exist.

So my statement is correct in that debt jubilees are deflationary as the act of extinguishing the debt eliminates the money that was created by the bank when the loan was made. You are correct in that this should increase the velocity of the remaining money as the debtor will now be able to spend the money that was going to debt service on goods and services.

At the end of the day we don't need more money sloshing around as this always leads to malinvestment. We need to increase the velocity of money. There are non inflationary ways to do this such that you don't punish savers.

Please provide me examples of countries that have printed their way to prosperity. I can provide you with plenty of examples of countries that have printed their way to ruin.

I brought up Japan to make a point. You responded exactly as I expected, "they did it wrong." This is Krugman's line as well. I assume you believe that economics is a hard science like math or physics. You like econometric models w/ lots of math and symbols in them. There's only one problem. They are (and always will be) completely wrong because people never behave according to the models. If the models worked we would be able to figure out what works and what doesn't and end misallocation of resources forever. Why haven't we done so? Because economics is a social science. It is based on the behavior of irrational humans and it always will be. If it were a hard science you would be able to repeatably demonstrate outcomes yet you can't. And when the outcome fails to follow the model economists cry that they didn't do it right or that they didn't do enough.

Look, debt is what got us into this mess. More debt (and all money is debt in a fiat currency world) cannot, by definition, get us out of it. We need less debt/money in the system, not more.

When short sales and bankruptcy start to become a bigger part of society, they become a goal into themselves. People will act more recklessly, taking larger risk and taking on more debt because bankruptcy is their way out! Business owners will open more money-losing divisions hoping that their products "catch on". People buy bigger homes than they need - but don't factor in the larger yearly tax payments since they cannot budget beyond tomorrow.

I would argue that bailouts have the affect you're describing and bankruptcy does not. Many companies should have gone bankrupt in 08/09. Had they done so the people running them would have had their compensation plans wiped out (stock options, RSUs, bonuses, etc). This is a powerful incentive (many of them should also have gone to jail but that's another thread). Instead they were bailed out. They all kept their fat pay packages. Likewise stock market investors were bailed out. Many should have lost money in 08/09 (see above about bankrupt companies) but instead they were bailed out. This leads them to (correctly) think that they will be bailed out no matter what they invest in. See also: Greenspan Put, Bernanke Put.

 

[neroden]

There's a very complex distinction between debt and money. Debt is problematic and creates a lot of trouble if there's too much of it. On the other hand, it's important to have enough money and to increase the money supply. Yet, there's a sense in which all money is a type of debt...

Well, anyway, the big problem is *interest-bearing* debt. Money is often *non-interest-bearing debt*, which is a bit different.

I don't like it when the private for-profit banks create all the money, as they did in large portions the 19th century. You can't *stop* them from creating money (people have tried, they always find new ways around it), but it's good to have government-created non-interest-bearing money in large enough quantities to crowd out the role of the private banks.

Now, when this was first seriously proposed to be done permanently in the US.. the private banks screamed bloody murder! This was after the Panic of 1909. There was a big fight between the "Money Trust" (the private banks who created the money) and the Greenbackers, who wanted the US to issue "US Notes" (non-interest bearing money -- dollar bills, $20 bills, etc). There was a Congressional investigation into the Money Trust in 1912. This was common knowledge at the time but most people don't know about it now. Admit it bonaire, strider, how much of it did you know?

There was a huge political fight and it ended with a a compromise. The compromise was the Federal Reserve. The government printed non-interest-bearing money and got to control the money supply... but the private banks got to collect the *profit* from doing so. The person who prints money creates a profit, and "seignorage" is the technical term for it.

As you can probably tell, my political view is on the side of the Greenbackers -- I think the Money Trust should have been stopped completely and we should issue US Notes rather than Federal Reserve Notes. (Incidentally, this would make the National Debt not a thing. It's basically an accounting entry -- the interest rate shows how much money the US government is supposed to mail to the private banks under the deal which created the Federal Reserve. I don't think we should be mailing them any money.)

 

[neroden]

You're confusing inflation/deflation with velocity.

No, actually I'm not; you're the one getting it wrong.

Inflation is an increase in the supply of currency and credit. Deflation is a reduction in the supply of currency and credit.

Nope. Inflation is a change in the *general price level* upward and deflation is a change in the *general price level* downward. If you have a theory which relates this to the supply of money, *the only way to make it match reality* is to conclude that Inflation is an increase in supply x velocity; deflation is a reduction in supply x velocity.

This isn't controversial. You've just got it wrong.

Please provide me examples of countries that have printed their way to prosperity.

The US and the UK are the most obvious examples -- like I said, an English penny was a month's wages back in the 1300s (IIRC).

But actually, all successful countries in the world have done so. Even in the days of metal coinage. Intermittent devaluations seem to be essential to economic management. The trick is, of course, the *rate* of printing; you don't want to do it too fast; but "stable" is not correct.

 

[neroden]

You're confusing inflation/deflation with velocity. Inflation is an increase in the supply of currency and credit. Deflation is a reduction in the supply of currency and credit. If you print $1T and bury it in the ground, that is technically inflationary as the supply of money increased but since the velocity of that money is 0 it's as if it doesn't exist.

So my statement is correct in that debt jubilees are deflationary as the act of extinguishing the debt eliminates the money that was created by the bank when the loan was made. You are correct in that this should increase the velocity of the remaining money as the debtor will now be able to spend the money that was going to debt service on goods and services.

At the end of the day we don't need more money sloshing around as this always leads to malinvestment. We need to increase the velocity of money. There are non inflationary ways to do this such that you don't punish savers.

Please provide me examples of countries that have printed their way to prosperity. I can provide you with plenty of examples of countries that have printed their way to ruin.

I brought up Japan to make a point. You responded exactly as I expected, "they did it wrong." This is Krugman's line as well.

Krugman is a very smart man, and is usually right about economics, though he lost the debate with Steve Keen because he doesn't understand how modern banks operate (MMT is right, Krugman is wrong here)

I assume you believe that economics is a hard science like math or physics. You like econometric models w/ lots of math and symbols in them.

God no. It's mass psychology, 100%. You couldn't possibly have misunderstood my views more.

Social sciences are, however, still sciences *when done right* (which Milton Friedman certainly did not). The basic principles of "test your theory against the world" applies.

I've been studying this intensively since shortly before the 2008 crash, and I studied it quite a lot beforehand. I have views which are considered pretty darn heterodox by most econ professors at this point.

I held your views about inflation and deflation way back when I was a freshman in college, but they're not correct; I know better after studying a lot of economic HISTORY, dating from ancient Egypt and Sumeria to the present day. People have the same habitual behavior

Look, debt is what got us into this mess.

Debt is unavoidable. It exists even in pre-civilization cultures (consider a "debt of honor") and non-monetary cultures (such as the formalized barter system of ancient Egypt).

The *measurement* of debt in an accounting unit dates from Sumeria and was used to prevent arguments over whether a debt was paid off or not -- with unmeasured debts, these arguments turn into fights. The idea of *transferrable* IOUs is what takes us from "debt" to "money".

Now, paying interest on debt is a whole 'nother thing.

More debt (and all money is debt in a fiat currency world)

All money is debt, period. Not all debt is money, though. Both debt and money can be interest-bearing or not, which is also an important distinction.

Also, different things have different degrees of "moneyness", *and this can change overnight*. In 2007, "money market funds" were treated as "money" by big corporations and investors -- anyone would accept them as payment for a big deal -- and then suddenly in 2008, they weren't.

This was all way more obvious to people in the 19th century dealing with many types of tangible money: silver coins, gold coins, banknotes from dozens of different banks, etc., which *didn't trade at par to each other*.

cannot, by definition, get us out of it.

Yes, actually, it can. The *type* of debt and *who* owes *who* are critically important.

Allocation matters.

I would argue that bailouts have the affect you're describing and bankruptcy does not. Many companies should have gone bankrupt in 08/09. Had they done so the people running them would have had their compensation plans wiped out (stock options, RSUs, bonuses, etc). This is a powerful incentive (many of them should also have gone to jail but that's another thread). Instead they were bailed out.

Absolutely correct.

The bailouts also failed to follow Bagehot's Rule, which says "lend as much money to illiquid banks as they need to stay open, but at a penalty rate".

Most (not all) of the bailouts failed to follow the two rule of bailing out insolvent "systemically important" institutions, which are "take control of the equity and fire the management"

Where do these two rules come from? Historical experience. Governments or quasi-governmental agencies which bailed out banks... well, this has been happening since ancient Sumeria.

The ones which lent at less than a penalty rate, didn't take control of the equity, or didn't fire the management, found that the bankers proceeded to take advantage of them in the future, gambling because they knew they'd be bailed out.

The ones which didn't lend the money or didn't recapitalize the insolvent important banks found that they threw the country into deep and terrible recession.

 

[neroden]

The more debt bankers open for customers, the more money is printed into existence and the bigger bonuses the banking staff get.

So, the serious problem here is that it's *private* creation of money by banks, with attendant "interest" requirements and with a likelihood of *demonetization* due to a confidence crisis.

It's much safer to have money created by an agency of unimpeachable trustworthiness. Now, the US government certainly isn't very trustworthy, but it's more trusted than, say, Bank of America!

Money creation is fascinating. Where I live, we had a local currency -- Ithaca Hours -- for several decades. It worked as long as its primary promoter lived here -- he *made* it work. He literally just personally printed money and made it valuable because people trusted him. This *did* boost the local economy. Unfortunately, when he (and his charisma) left town, the local currency practically stopped trading -- it demonetized.

This is an important demonstration of the degree to which money is backed by *trust*. I strongly believe that the soundness of the money is based on the trustworthiness and social credibility of the backer in *other* areas (not economic areas because very few understand economics, but whether the backer keeps his or her word in other ways).

If money isn't moving, it cannot be skimmed.

True -- and it's also completely worthless. How much will you give me for my Ithaca Hours now that they're not moving and you can't buy anything with them?

 

[neroden]

As you can see, I could probably write a book on this topic after my last 10 years of study -- perhaps call it "Some Economic Theories Which Actually Work (And Some Popular Ones Which Don't)" and I probably ought to, but I've had other things on my mind.

 

[strider]

The US and the UK are the most obvious examples -- like I said, an English penny was a month's wages back in the 1300s (IIRC).

But actually, all successful countries in the world have done so. Even in the days of metal coinage. Intermittent devaluations seem to be essential to economic management. The trick is, of course, the *rate* of printing; you don't want to do it too fast; but "stable" is not correct.

I would contend that those countries succeeded in spite of their governments manipulating the currency, not because of it. Furthermore, the UK is but a shadow of its former self. The same can be said of the other European nations so it's not all rainbows and unicorns. The US benefitted from being the only western nation to not be destroyed at the end of WWII. This head start allowed us to leap ahead of the others. Also, we were in a position to make USD the world's reserve currency as part of Bretton Woods. This status has masked the effect of monetary printing.

Social sciences are, however, still sciences *when done right* (which Milton Friedman certainly did not). The basic principles of "test your theory against the world" applies.

I've been studying this intensively since shortly before the 2008 crash, and I studied it quite a lot beforehand. I have views which are considered pretty darn heterodox by most econ professors at this point.

I held your views about inflation and deflation way back when I was a freshman in college, but they're not correct; I know better after studying a lot of economic HISTORY, dating from ancient Egypt and Sumeria to the present day. People have the same habitual behavior.

Don't patronize me. I'm not a monetarist. I'm studying Mises and was introduced to him and the Austrian school through a blogger named Pater Tenebrarum. Here is a brief history and takedown of fiat money: Why Does Fiat Money Seemingly Work?

But I'm not a Randian libertarian whacko either. I'm actually trying to figure out what the best system would be.

While your theories sound great, they don't work in the real world. The reason they don't work is because they are impossible to implement. The price of money cannot be determined by a small group of people. They will get it wrong every time because they cannot comprehend the whole of the economy. Further, politicians will ALWAYS spend based on who got them elected, not what is best for the economy. And they will always spend more than they should on pointless wars, pointless war machines, bailouts of banks and companies that should have gone bankrupt, infrastructure spending that is not worth what was spent, direct handouts to favored classes and companies in the form of tax breaks, etc.

You cannot give the level of power you propose to any person or group of people and expect them to work only for the good of the economy at large instead of for the good of themselves or their associates. You claim to be such a big fan of history, the evidence is right there. Pick an empire, any empire. Rome anyone? The politicians wanted more and more spending on unproductive things so they de-based the currency and increased the debt. It took awhile but eventually people realized they were performing good work for worthless coins and that the govt kept trying to take more and more of their wages in taxes. The result was the artisan and professional classes shrank. Those that had connections joined the political class, the rest became peasants.

You still haven't addressed the fact that inflation is theft. Money should allow someone to work one day, and buy something of equivalent value the next. Yet through inflation the next day the money is worth less than the day before. That is not ok. How is someone supposed to save enough money to buy a car or a house? Inflation always outpaces wages which means that in the long run people's standard of living declines.

Another way to think about this theft is that it is a hidden tax by the government to fund their various activities without having to raise taxes directly (which would make people quite upset and the politicians may be voted out). It's much safer to just steal from the populace via inflation.

Finally, you never addressed my idea of giving everyone in the country $1,000,000. Then we could all go out and buy 7 SP100DLs. Wouldn't that stimulate the economy?

 

[neroden]

Mises is a loon. Go look up the debunkings of him. I've studied him -- he's an idiot who puts ideology over reality. Rothbard is slightly better, but they're both really really wrong on money.

They like to work from idealistic theories in their heads, and the fact is, in the real world, they're just wrong.

They are full of little emotional appeals which have no scientific meaning, like the "inflation is theft" bullshittery. The fact is, as Prodhoun pointed out, property is theft. We still need property.

Widen your reading list and get off of the Austrian *sugar* -- that stuff doesn't work; their theories have been disproven quite dramatically by reality.

I'm patronising you because you're reading cranks. Yes, I've read them. They're wrong. They're *ahistorical* and, worse, historically *dishonest* (i.e. when they tell you something happened at some time in the past, you can't trust them -- check the historians and you find sometimes Mises and Rothbard were lying)

 

[neroden]

Finally, you never addressed my idea of giving everyone in the country $1,000,000. Then we could all go out and buy 7 SP100DLs. Wouldn't that stimulate the economy?

Believe it or not, printing a new bundle of money for everyone and handing out the same amount to everyone actually *would* improve the economy. (1 million per person is probably too much -- I did say that the *rate* of money supply x velocity change matters!)

You haven't worked through the mechanics of it. More than half of the population would use most of it to pay off debt (such as their mortgages). We'd end up with a nation of homeowners instead of a nation of debtors. The differential in wealth between the richest and the poorest would shrink massively. People with good ideas would have enough capital to start businesses without going begging at the banks. The new situation afterwards would be a lot better in many ways.....

....the banks will never allow it, of course. *Because* it would bypass their sources of profit.

Bush II actually did simply mail $300 checks to everyone and it is widely acknowledged to have provided a clear economic boost.

 

[neroden]

I would contend that those countries succeeded in spite of their governments manipulating the currency, not because of it.

Well, you're wrong. I suggest you go look up examples of governments which pursued "sound money" or "hard money" policies for significant periods. The governments were typically overthrown due to high unemployment and poverty, even in the pre-industrial period.

But I'm not a Randian libertarian whacko either. I'm actually trying to figure out what the best system would be.

Yeah, well, we've been trying for 5000 years. There's some evidence that the ancient Egyptian system created the most happiness. In modern terms, Scandanavia seems to have done the best.

While your theories sound great, they don't work in the real world.

Yes, in fact, they do, that's the thing.

The price of money cannot be determined by a small group of people.

*Sigh* If by the price of money you mean interest rates -- it has been determined by a small group of people pretty much forever.

Nobody has ever figured out how to have it determined in any other way than by a small group of people, and it would be an interesting project to try.

The question is whether it will be determined by a group of people who are responsible to the voters, theoretically trying to manage the system for maximum popularity -- or by a small club of private bankers managing the system for maximum greed. There are problems with both, but I think the private bankers are worse, and we have 19th century economic history to prove that I'm right about that.

In the US, post 1913, we have some weird hybrid halfway in between, but mostly government-managed.

 

[neroden]

Oh, and your late-Roman "history" is wrong too. It's... quite different than you think it was. Really, really different. I happen to have done some studying on the transition from the cash economy to the feudal economy. In addition to the very complex political situation (the deterioration of that is a whole 'nother story and exceedingly complicated), it happened due to *not* having debt jubilees and *not* having inflation erode the cost of paying debts.

People first got into debt slavery, and when they couldn't pay off the debts, then that was converted into feudal serfdom. Remind you of the situation with student loans today? It should.

Every time they attempted to make the currency "harder" it made the situation worse and accelerated the transition to feudalism. Debasing it actually helped.

On the political side, the richest people converted their money into political power and converted their political positions to money, worked to erode the central government, and those who had provincial governor type positions eventually became feudal lords. Sound familiar? It should. Eroding the value of their money worked *against* this phenomenon. The would-be feudal lords, of course, all supported "sound money" policies....

 

[bonaire]

Believe it or not, printing a new bundle of money for everyone and handing out the same amount to everyone actually *would* improve the economy. (1 million per person is probably too much -- I did say that the *rate* of money supply x velocity change matters!)

You haven't worked through the mechanics of it. More than half of the population would use most of it to pay off debt (such as their mortgages). We'd end up with a nation of homeowners instead of a nation of debtors. The differential in wealth between the richest and the poorest would shrink massively. People with good ideas would have enough capital to start businesses without going begging at the banks. The new situation afterwards would be a lot better in many ways.....

....the banks will never allow it, of course. *Because* it would bypass their sources of profit.

Bush II actually did simply mail $300 checks to everyone and it is widely acknowledged to have provided a clear economic boost.

Sending every adult $300 is temporary, though. It must become recurring to be sustainable. Many call it a paycheck... He also sent billions to the middle-east in terms of war. $1 Billion of course gives 1 million people $1000. Not bad. Didn't we spend upwards of $1+ Trillion on the middle east wars? A lot of US-based paychecks could have been ginned-up by those funds. On 9/10/01, there was concern in the press about the Pentagon saying they couldn't account for over $3 Trillion. Then 9/11 hit. Hmm.

To me, paying down everyone's mortgage would actually be forcing deflation. Less need for people to work (in order to pay off debts) - they could start a more simple lifestyle, choosing not to work (pump gas for commuting, pay for lunch at work, buy work clothes, etc.) When people slow the flow of money - then you must deflate to encourage more money movement. Once my own debts are paid off, I will consider retirement. I could pay them all with investments cashed in - but the returns on working money are > than mortgage interest rates (plus there's that tax deduction...) So, I am leveraging money to some degree. If the mortgage didn't have an interest rate associated with it, I would stretch it for years more and stay in debt. If it ramped to 10%, then I would pay it off tomorrow. Fed and local Banks turn those analog knobs to suit their best interest. if everyone paid off all the bank's loans, wouldn't that money just "vanish"? Maybe 6 months ago, I got mailers from banks hunting new loans in the form of many credit card applications. It has slowed down recently and to me this is a sign of some tightening. Banks need to make loans in order to create new streams of income (interest payments). Many of us don't need them and many cannot show they are worthy. Trying to hook people on 15% credit card terms isn't going to work. Younger people don't have the mind to control themselves, but the smarter we get, the "worse a customer" we become for the banks.

 

[strider]

Believe it or not, printing a new bundle of money for everyone and handing out the same amount to everyone actually *would* improve the economy. (1 million per person is probably too much -- I did say that the *rate* of money supply x velocity change matters!)

You haven't worked through the mechanics of it. More than half of the population would use most of it to pay off debt (such as their mortgages). We'd end up with a nation of homeowners instead of a nation of debtors. The differential in wealth between the richest and the poorest would shrink massively. People with good ideas would have enough capital to start businesses without going begging at the banks. The new situation afterwards would be a lot better in many ways.....

....the banks will never allow it, of course. *Because* it would bypass their sources of profit.

Bush II actually did simply mail $300 checks to everyone and it is widely acknowledged to have provided a clear economic boost.

But since under our system that money is actually debt all you are doing is pulling demand forward. You are NOT creating additional demand. At some point the debt will need to be paid and so future consumption will decrease in order to make those payments.

Sending people a pile of cash is the same thing as a bailout. It will only encourage even greater risk-taking and even higher asset prices. People will bid up housing and equities to the stratosphere and get themselves even deeper in debt on the belief that the govt will just bail them out again. That kind of investment is unproductive and will crash the economy. Higher house prices DO NOT make people richer as it is a zero sum game. Your house has gone up in value but so have the others so if you want to move you'er still looking at the same size of loan.

At some point continued debasement will cause people to lose faith in the currency and stop loaning (since they are always paid back w/ currency that is of much lower value) or at the very least jack interest rates to the the sky.

You are right that the US hasn't hit the wall (yet). But look at a chart of total credit outstanding. It is going exponential. Soon debt service will consume all disposable income. But yeah, we can just create "new" dollars that are worth 1,000 of the old ones and carry on. That means we are relegating our economy to that of a 3rd world (oh sorry, developing). Those economies do that all that time. Look how great they're doing!

The problem with Economics being a social science is that you can never run a controlled experiment to prove or disprove an action. That set of circumstances will never happen again so you can't resolve it two different ways to see which is better. It is all speculation. You say a recession ended because the govt stimulated, I say it was because people worked hard and created value, improved productivity, etc. It's he-said, she-said.

It's the same thing as setting interest rates. Let people set their own interest rates. If the govt needs to borrow money, let people bid on it. Same with loaning money any other way. People can assess risk just fine all by themselves. They don't need a bunch of ivory-tower nannycrats (who are wrong 100% of the time) to do it for them.

You are fearful of private banks creating money... you think the govt can do it any better? You're a fool. Politicians are WAY more greedy/power hungry than bankers. We'd end up building 15 more aircraft carriers. Of course you would think that's a good thing as it puts money in people's pockets. But their labor and resources are being wasted because more aircraft carriers don't improve anyone's standard of living. It would have been better if those people worked on farming technology or AI or something else that actually improves people's standard of living.

My final thought is that the problem with your theories is that they depend upon being able to determine the optimum level of inflation/printing. No one can do this. Various central banks have been trying for the last 40 years and the only thing we have to show for it a colossal debt load and asset bubble and asset bubble. They categorically suck at their jobs. S&L crisis, dot-com crash, housing bubble, now we have asset prices being bid up to the sky again.