The Economics Spin-Off Thread!

[Hygro]

However, another question comes to mind. the banks had to have a large reserve of actual money to start this process so that other parties would trust that they could pay back what they promised. That is before everyone became so trusting of the system they kept everything virtual. If they are indeed issuing all the loans they think will be profitable and people are slowly defaulting on them when they get too far in debt, then eventually this process means they will own nearly everything with no risk to themselves as long as people keep borrowing from them.

Yeah. The three forces that counter this are real economic growth above interest paid, bankruptcy laws, and deficit spending.

edit: or any fiscal policy, really. deficit spending can outweigh it on a macro accounting level, but any targeted taxes/spending combo can counteract that effect.

 

[Lexicus]

the banks had to have a large reserve of actual money to start this process so that other parties would trust that they could pay back what they promised.

Not exactly. The bank just needed trust.

That is before everyone became so trusting of the system they kept everything virtual.

Well, I think you'd be reasoning incorrectly here because all the evidence indicates that the system actually started out virtual. Physical currency was an innovation that post-dated debt and credit by tens of centuries.
Money is, fundamentally, a spreadsheet. You can use some physical representation of the spreadsheet data (like a gold coin) in actual transactions but the difference between cash and money is very like the difference between a yard stick and a yard.

I actually don't keep a credit card or borrow money because I've had friends that got in over their head from the process and I just keep a debit account for my spending, however, if this article is right I'm constantly losing money to inflation like this because banks no longer really give much interest to account holders, but instead rely on consumers to keep them open through convenience.

Yeah, I don't have a credit card and I have no debt.

They claim prices are going up by 11% every year which is higher then reported by the federal government. From my classes in economics I am under the impression that as long as inflation is happening loans benefit the ones receiving them because the amount they need to pay back is reduced by inflation. Of course if the bubble pops everyone relying on this is screwed. I hope we don't trigger another great depression with this crap.

This is just not true. As someone who has gone to the supermarket more than once in the last year, I can assure you that my dollar does not buy 11% less over that time.
It is true that inflation benefits debtors, this is something that's been an issue of political contention in the past. But it's not true that inflation triggers depressions. The kind of price bubbles that produce financial crises are always caused by factors operating in the real economy (eg wild speculation, fraud, and so on).
Anyway, what causes financial crises to be more than the 'adjustments' predicted by classical theory is lopsided distribution of income and wealth. So if your goal is to not have depressions, you should spend less time worrying about inflation and more time worrying about income inequality.

thanks for the info, now I'm even more jaded. I thought there were laws to prevent this after the Great Depression and control bank behavior because something similar happened then. Did we remove them recently?

Yeah, we had laws that regulated the behavior of the banking system pretty effectively but effective financial regulation ceased under the Clinton administration before they repealed the last laws.

 

[Cutlass]

Well, hold on there. I've come around on the idea that even a $15/hr minimum wage will likely not cause significant inflation (mostly), but I think you're greatly underselling it here. In actuality, 42% of American workers make less than $15/hr.

A national $15/hr MW isn't going to happen. Not even if Bernie gets elected. So I don't really worry about that sort of thing. But, that said, it still wouldn't really be inflationary. It would change the prices of some things. It wouldn't change the aggregate price level. And inflation is the aggregate price level.

Interesting view, thanks for sharing! When I say price "inflation" I am not talking about general inflation which is controlled by the US printing more money directly. There is also control over spending via interest rates on loans which I'm aware has a bigger effect on spending then MW probably. Price inflation is different. It can happen without changes in the amount of money. All that is required is that employees are paid more and things cost more.

That's not inflation. Inflation is the general change in the aggregate price level. That aggregate level includes the fact that different prices are going up and down all the time. It's only the aggregate which is actually inflation. A too high MW would change some prices. But not most prices. And not the aggregate price level.

 

[metalhead]

From the point of view of the guy whose salary buys him less, it sure looks like inflation.

 

[Hygro]

From the point of view of the guy whose salary buys him less, it sure looks like inflation.

Yes that's a problem, politically.

 

[civvver]

The problem with things like CPI and talking about inflation is it's not equal for everyone. There are a couple sectors that are wildly out of control and going up like crazy, then other sectors that are stagnant or dropping. I'll list a couple things as examples.

Health care is going nuts. That's where I feel the hit the most. All my other expenses could drop but my premiums went from 100% employer paid in 2013 to where now I pay 250 a month for it. And it's going up again next year cus they're still phasing in the full price hike. And it's based of your income so if I get like a 3% raise I'll incur a surcharge cus apparently I make a boat load of money (I really don't for my field, it's pretty average and I support a family of four by myself so we're quite median), so it'll probably hit 450 a month next year. For comparison that's like a 5-6% paycut. It's pretty massive. Basically my raises for the past couple years have put like $50 a month in my pocket after the premium increases. I'm not alone here either, a huge number of Americans feel the same squeeze and no one can definitively tell us why it's happening. All we know is we pay a lot more for the same or worse care.

Insurance. Same deal as health care, my auto insurance goes up like 2-3% every 6 months and it's all the personal injury protection part AKA the health care coverage on your policy. Homeowners and life insurance not going up the same thankfully.


Gas. Gas was super high, though now the market is flooded with oil and demand has dropped so it's super low, though I would consider the prices close to normal. It's around $2.40 a gallon here in southeast michigan. When it was up around $4 that's a big increase, if you fill up once a week at 20 gallons that's like $100 a month. $2.40 seems a little low, I think like 2.75-3 would seem like the new normal to me at this point, but I'm not complaining! Other utilities seem pretty stagnant like electric, water and natural gas.


Cars. All the epa requirements and safety regulations really drive up the cost of new cars, plus everyone wants tech on their cars now. And since new cars cost a lot more now that in turn raises the used car prices too, plus really cheap financing makes a bigger supply of money. On the one hand you get a ton of features on a car now for your money, so overall it might actually be a better value. But do you really need all those features and would you rather have a cheaper car?


Education. Nuff said.


Dining. The grocery store is kind of a mixed bag, sometimes chicken or beef will go up for a few months but then it drops, same with milk, butter, some types of fruit. But dining out keeps going up, up, up. A big mac combo at mcdonald's is what, like $7 now? And all these fast casual resteraunts cost a ton for what they are like qdoba or chipotle is 10-12 for a burrito and a drink, and if you look at menus for dine in places that used to be cheap like applebees every sandwich is around $12.

So it really depends on where you spend your money. Thankfully for me I come out way ahead anyway cus my mortgage is dirt cheap and I bought a bunch of furniture for my house on 0% interest credit cards. Glass half full my friends.

 

[warpus]

Well, when was the last time a corporation formed the requisite state of mind to actually qualify for liability for murder?

Which to me implies:

When was the last time a corporation formed the requisite state of mind to actually qualify for legal personhood?

 

[danaphanous]

@chivver

yeah it's complex. Inflation is currently measured, as others on this thread have said, by aggregate rises in the costs incurred by the average person. They try to make it like an average cost of living increase metric. It's still not perfect though because obviously it varies from state to state.

A lot of the things you mentioned fluctuate because they are dependent on foreign imports which are not really tied to the health of our economy at all other then our demand for them and how much our currency is worth abroad. This is basically what I was saying further up.

wow, sorry to hear about your health insurance troubles! I heard it had gotten bad after ACA. I personally don't have to worry about it because my university has hospitals and full coverage but once I get my PhD I'll probably have to start paying for it.

 

[Lexicus]

It's largely a lie that AFA is causing premium increases. Prices in health insurance were rising at ridiculous rates long before AFA was even thought of. All the analysis I've seen suggests that AFA has slowed the rate of premium increase and I haven't seen anything to the contrary, though I've heard a lot of anecdotes from butthurt Republicans claiming that AFA totally destroyed their perfect plan or whatever.

 

[danaphanous]

^^^

Again, I can't tell because I'm not paying anything. I have no opinion on ACA, other then if we're going to socialize medical coverage we need to do it all the way, not halfway, because otherwise the government loses its advantage to bargain on rates since it is only one player of many. I only know that some friends have said it seemed to get worse for them after ACA but this could be just confirmation bias on their part.

 

[Lexicus]

The numbers don't bear those stories out. It has been getting worse consistently for a long time, but the underlying cause of premium increases is not the ACA (dunno why the hell I typed AFA in that post, serious brain fart on my part) but the fact that we insist on maintaining a private for-profit health insurance system.

 

[civvver]

Yes they would've gone up either way, I didn't blame ACA in my post. They actually went up primarily because our company acquired another company and they merged out plans so they pay slightly less, we pay more. They did it in the name of "consistancy" but really I think they were like holy crap this is expensive we can easily make our employees pay.

And I can't do anything about it cus my rates are still cheap compared to other companies. I know people who pay $600 a month for insurance and they have a normal white collar job. I could switch for more pay somewhere but I'd be very unlikely to find cheaper insurance.

 

[Lexicus]

really I think they were like holy crap this is expensive we can easily make our employees pay.

This is almost certainly true, and I think it's true of a lot of the stories we hear about the ACA screwing people over (ie the employer takes the opportunity to screw employees over, and blames the ACA). This is the problem with anecdotal stories on anonymous internet forums, we can't ensure we're getting the whole story and the details we do get are unverifiable in any case.

 

[danaphanous]

yes, and that's a point.

I tend to think our research hospitals should remain private though. One of the reason we have so many world-class medical research institutions is because we allow them to be private entities and receive private donations to do research for companies. As a researcher in the medical field I can tell you that the new experimental treatments that come out of this research are often too expensive to be provided to everyone which is why we need private research hospitals that take donations to provide this overly expensive new care (St. Jude Children's Hospital) or accept clients that are willing to pay the extra money to try these things. Then after the treatment is demonstrated and costs sufficiently reduced the new treatments can be applied to everyone. Right now Europe, who is fully socialized can't afford a lot of the new research that comes out of the US and Korea, but the fact that we have a private system allows these experiments to go on and eventually become affordable, progressing the field. Right now there actually are wealthy Europeans that fly here because our treatment is better then their socialized treatment even though it is more expensive. So I'd say as long as we're careful not to lose the diversity and research institutions I'm fine with it. Maybe make general hospitals accept the free care and research hospitals be a case by case consideration or continue as they do now.

 

[Lexicus]

Well I'm not saying nationalize the whole thing. I've no problem with private hospitals, though for-profit hospitals are probably a bad idea.

The main issue is the insurance system being run for private profit. Running the health insurance system for private profit means that you have to skim a bunch of money off the top of the system to be thrown away (profits), and it means the incentive is for the insurance companies to spend lots of their time and effort finding reasons to deny insurance claims.

All that is a complete waste. Ideally I'd like single-payer and to just get rid of the private health insurance industry completely, but I'll settle for regulating their profits away completely. While we're at it we ought to restrict their executive pay and so forth.

 

[Vectors]

1) I notice you mentioned California raising the minimum wage and then prices rising, the reality is in California prices have been rising a long time and strongly because there is such high demand for land there. The minimum wage increase was in response to the demand making it unaffordable for people to live there.

2) It isn't just insurance, it is also drug companies getting massive profits from their drugs and charging it to insurance companies.


Importing the Canadian Medicare system would be the best plan for the US as it is the closest to how the country operates with it being implemented on a provincial instead of federal level.

 

[El_Machinae]

As a general comment to the OP, economics is hard to grasp intuitively. As well, economics under a 'gold standard' system will be slightly different from economics under a 'fiat money' system. There will be an underlying truth, but the total behaviour is not perfectly comparable. It's like how aeronautics on Mars and on Earth will be different. An Aerospace engineer who only understand Terran planes - no matter how well - cannot efficiently design something for Mars. It's the same with economics under a gold standard: the 'most efficient' or even 'best' policies under a gold standard will be different than ones under a fiat.

It is true that inflation benefits debtors

You've said this before. It's not true. Only unexpected inflation benefits debtors, and that's only true for the subset whose wages jump before prices jump. Expected inflation hurts debtors and also reduces net investment as it rises. (And expected inflation that doesn't actualize really really hurts debtors)

edit:

One of the reason we have so many world-class medical research institutions is because we allow them to be private entities and receive private donations to do research for companies.

This is something near-and-dear to my heart. You want all three (charity, government, and private) funding. Each have their specialty and they very much provide massive boosts to the aggregate. In my opinion, if you have loved ones and you're not donating to Alzheimer's research, you're not appreciating the maths on scientific research. These donations generate compounding real returns at rates people just cannot understand using Wall Street financial spreadsheets.

There's no doubt private companies do fundamentally research: but there's only one type they really do. Stuff that can be commercialized. Sure, there's a trickle of funding into laying down Open Access discoveries, but it's not very much. This research is fundamentally important, but there are hosts and hosts and hosts of discoveries they will never, ever look at.

One of the most-necessary cancer trials (showing that beta-carotene doesn't help prevent lung cancer) had zero financial incentive at the private levels to be released: cigarette companies wouldn't have released the data; supplement makers wouldn't have released the data. It was funded by charities and by governments.

In general: government provides foundational research. Companies and Charities constantly peruse these data looking for new insights and mechanisms to be exploited. Charities will then fund pilot projects on anything that might work based on the cost-effectiveness of getting the data, and we have incentive to publish negative results (though less incentive than nearly everyone would want) and to publish replications (and, with less incentive than optimal). Companies will peruse the publicly released data, and sometimes rush to a discovery or look for discoveries that can be patented. This sometimes helps, and sometimes helps. Occasionally there will be a discovery that's easily on the known horizon. If it gets done by a charity first, it's open access. If it's done by a company first, it's patented.

 

[Lexicus]

I'm talking about all of history, not just the last two hundred years or so. You're right about unexpected inflation, but through most of history when debtors were peasants/farmers and not wage workers, and no one knew to take "inflation" into account in contracts, inflation certainly was a boon to debtors.
Even as recently as the late 19th century the Populist Party demanded inflationary money policy to benefit debtors.
Today when the choices are between deflation and modest, predictable inflation modest inflation wins every time.

 

[El_Machinae]

You just need to throw in 'unexpected' when you talk about inflation being good for debtors (and even then it's not really a true statement).

Modest inflation isn't so much good for debtors as it's good for growth and for employment. Its major benefit is as a hedge against deflation, which can be devastating. But even modest expected inflation isn't so much 'good for debtors' as 'good for stability'

 

[Lexicus]

*shrug* What inflation does is reduce the burden of debt relative to the ability to pay it back. Contracts can take this into account but throughout most of history they didn't. And in any case before central banks and macroeconomics things were a lot more chaotic and the value of things could shift wildly in short periods of time.
Inflation that isn't taken into account in a contract is a straightforward redistribution of wealth from creditor to debtor.

Modest inflation isn't so much good for debtors as it's good for growth and for employment. Its major benefit is as a hedge against deflation, which can be devastating. But even modest expected inflation isn't so much 'good for debtors' as 'good for stability'

And economic growth is good for debtors. Creditors actually may become relatively more wealthy when the economy contracts. If the level of debt rises faster than the level of economic growth creditors can gradually buy up the whole economy.