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how the machine works


yadayada
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https://www.youtube.com/watch?v=SJrofZGpRKc

 

Posting this because I don't get a few things in this video. He says that debt causes spending to go up, and that in turn causes inflation. But doesn't increased spending also increase efficiency and economies of scale? And increased spending in turn also probably causes capacity to go up for a lot of items right?

 

So why the hell does the central bank rise interest rates? Is that really necesairy? Since at some point the amount of borrowers will run out.

 

He also doesn't go into the long term benefits of consumer (credit card) and other debt much. It seems that debt itself greatly increases efficiency, innovation and economies of scale over the long run. You can basicly leverage up, things become cheaper and better quicker, and people have more money to pay it back and also keep spending.

 

If you simplify it:

Let's ssay there is almost no borrowing and you want to set up a phone factory. But there is little demand, and your fixed costs are high, and there is little money to spend on R&D. A phone costs like a 1200$ to make it worth your while. But now debt is injected in the economy, and suddenly a lot of people want phones because there is more disposable income. Economies of scale are created, phones become cheaper and better. There is more competition, which fuels even more the need to find efficiencies and create better phones that add value and in turn create a lot of new ways to increase efficiency's in other area's of life. And now a phone is like 350$. So if people want a phone a few years later, they have more money to pay off their debt. So it doesn't seem that the down cycle will last as long as the up cycle due to the debt created efficiencies like in his graph?

 

Same can be said for food, farming etc and innovations in other industry's and more people getting education (causing faster inovation) make food cheaper as well. Also because of disposable income, there is more money left over for studying. So a lot more smart people now can afford to specialize in some tiny niche and create innovation that makes life even more cheaper for the rest of us.

 

 

A third thing, if confidence picks up in 2-5 or maybe 10 years, it means that after printing a lot of money, the total supply of money is larger, because it is now also fueled by a lot more debt. Which should create high inflation with his logic due to even more demand that is now added by the debt and the increased supply of money into the economy that is not debt.

 

So let's take the US. 300 million people, and in 2008 5 trillion in money that was not debt, and 25 trillion in debt. Let's say in theory that 25 trillion in debt shrinks because it now has to be paid back by people who did lend to each other. So it shrinks to 15 trillion, and that fixed 5 trillion is still there in circulation. So now they print money to prevent deflation because there is only 20 trillion in circulation buying things, and there is 8 trillion$ in money (not debt) out there. But prices won't rise because the debt is shrinking. But when confidence increases again after deleveraging, and debt begins to rise you should see the delayed effect of that money printing? Since technically people feel richer now, so more debt piles on top of that 8 trillion since the US$ didn't really buy less over that time. If you keep doing this, and inflate the actual non credit money supply faster then 2% on top of population growth  over a long time, then you will get hyperinflation after a few of those cycles right?

 

BUT if you don't print, you get deflation in the short term , and higher interest rates because of that, so less borrowing, so fewer disposable income and resulting  effeciency's in the economy. Which also causes some of these now debt realized effeciencies in the economy to be undone.

 

Became a bit of a long ramble, but would love to hear some thoguhts on this.

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Velocity of money (Total supply = Quantity of Money x Spend Velocity).

 

Increase the quantity (by lending) but spend it slower (too many old or unemployed folks) & total supply falls. Increase quantity (QE) to offset velocity reduction, & keep interest rates low. Taper, & total supply falls, raising the cost (interest rate) of money.

 

Inflation only increases if the additional quantity from additional spend - cannot be met from incremental production or imports.

 

Debt increases efficiency by bankrupting poor producers & suppliers quickly.

Scale advantage just increases the average size of the collapse when it happens.

 

SD

 

 

 

 

 

 

 

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Debt increases efficiency by bankrupting poor producers & suppliers quickly.

 

 

If the debtor cannot pay the lender pays for it so the opportunity cost is still there (i.e. different capital allocation for example in another company that could have competed)

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Velocity of money (Total supply = Quantity of Money x Spend Velocity).

 

Increase the quantity (by lending) but spend it slower (too many old or unemployed folks) & total supply falls. Increase quantity (QE) to offset velocity reduction, & keep interest rates low. Taper, & total supply falls, raising the cost (interest rate) of money.

 

Inflation only increases if the additional quantity from additional spend - cannot be met from incremental production or imports.

 

Debt increases efficiency by bankrupting poor producers & suppliers quickly.

Scale advantage just increases the average size of the collapse when it happens.

 

SD

thanks, it was late and I didnt consider velocity. Doh. But still, if over time it picks up, and there are more younger people, shouldn't that increase inflation with the now larger amount of money in rotation that grew faster then the population (excluding debt). Or does it simply mean that people will borrow less when that happens?

 

Also I disagree that  scale advantage just increases average size. Industry's get consolidated because of the large scale and better handle downturns in a lot of cases. So in my example, a population of a million people borrow with a credit card 1200$ to buy a phone. After a few years because of scale and innovation, a better version now costs only 350$. And instead of 10 players with high fixed costs, there are now only 4 players or so. If the price had stayed 1200$, it means they couldn't buy a new phone because they had to pay off their debt, and you would see a big depression. But because lot's of things get cheaper and cheaper they can now afford to keep buying while paying off debt, and the through of the following downcycle should be a lot higher then the previous through.

 

Also a big debt fueled economy where everybody can spend means more widespread education and money for R&D (if prices rise). For example with farming you have new innovations that improve yields significantly every few years. Same goes for fuel efficiency (oil consumption actually decreasing in the US over last decade). If prices go high enough, there will be huge incentives to make things more efficient. And theoretically if a government tries to actively prevent this, this would decrease innovation because the incentives arent really there.

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As soon as velocity increases the central bank would stop printing, to stop inflation.

 

Scale lowers the price you pay for a good, but debt remains the same if the result is just more purchases. It also breaks down when goods are imported (from an Asia) into a largely service economy (a US, Europe). If you cannot leverage your service people, the exporter gets most of the benefit.

 

Lot of command economies in the world. Nobody wants technology permanently displacing large numbers of unskilled labour, causing unrest, & toppling the regime. Starve enough people of food & opportunity, & they will rise up. Egypt, Ukraine, Germany, etc.

 

SD

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