23 Oct 2014

Why Money Doesn’t Measure Value

Inflation, Shameless Self-Promotion 93 Comments

Marc Miles (an economist I’ve cited in some of my more mainstream policy work) was also flummoxed by the mischievous David Gordon, so I thought I needed to be the diplomat. The best part of the post:

[S]uppose the government follows Forbes and Ames’ advice, and pegs the dollar-price of an ounce of gold. Then a few years later, an asteroid containing 170,000 tons of gold lands on the earth, effectively doubling the amount of gold held by humans in just a few weeks. If the U.S. government did nothing, the dollar-price of gold would crash. To maintain the peg, therefore, the government would flood the world with new dollars, causing the dollar-price of everything BUT gold to skyrocket. Do Tamny and Miles deny that this would sure seem like “inflation” in the eyes of the general public, and that the objective “ruler” now seemed to have a malleable length after all?

93 Responses to “Why Money Doesn’t Measure Value”

  1. Jan Masek says:

    I agree with everything, the example is just a little confusing to me. To me, to “peg” a dollar-price of an ounce of gold means, say, 1 ounce of gold = 1000 dollars. So an asteroid with a thousand ounces naturally increases money supply by a million dollars. Even if the goverment does nothing. But maybe I don’t get what to “peg” means.

    • Major.Freedom says:

      Try not to use the equals sign. Gold is not equal to dollars.

      Gold is being exchanged for dollars.

      If the supply of gold increases, that is not “equal” to the supply of dollars increasing.

      • Jan Masek says:

        I thought thay’s what Dr Murphy meant – “peg” means the clasical gold standard where (say) 1000 dollars is another way of saying one ounce of gold. But I guess that’s where i am wrong.

        • Major.Freedom says:

          Try not to use “another way of saying” either.

          Gold and paper are not equal, and neither are “another way of saying” the other.

          Jettison the Heraclitus, and onboard the Aristotle.

  2. Tel says:

    For example, if a boy sells an hour of his labor (cutting the lawn) to his neighbor for $10, and then spends that $10 at the arcade, we can ultimately explain these actions by saying, “The boy valued his enjoyment at the arcade more than the hour of leisure he gave up cutting the neighbor’s lawn.”

    The boy may not know exactly what he will spend the ten bucks on, at the moment he agrees to do the work. This is especially true if he made a standing agreement to mow the lawn each week for a year at ten bucks a go. What he does know is the general value of ten bucks in terms of the prices of those things this particular boy is likely to purchase.

    In order for money to be a useful intermediary, those prices must be reasonably stable over the typical timespan that people are planning. If the boy gets to the arcade one week, with ten bucks in hand, only to discover what he wants to buy now costs twenty, he will go home upset. If he comes back the week after with twenty bucks in hand (after mowing the lawn again) only to find the price tag has moved to thirty, he will be wondering what this game is all about.

    Small changes in price are only to be expected, and seasonal cycles are something people can plan for.

    • Jan Masek says:

      Tel, i don’t think you’re contradicting what Dr Murphy said. People can plan even for big price increases.
      Mises broke value down: there is subjective use value, subjective exchange value, objective use value and objective exchange value. Obj exch v = price, how much stuff you get. Subj exch v = how much stuff you think you can get. Subj use v = how valuable you think it will be in consumption or production, obj use v = how valuable it really is.
      People act on sibjective values, and they hope obj values turn out the same. This boy sees an obj exch v of ten bucks, adjusts it for inflation expectations and that forms his subj exch value. He then compares it against the subj use value of the arcade or all other things and eithet mows the lawn or doesn’t. How and when he agrees to do it doesnt change the picture.

  3. Innocent says:

    So Bob, just out of curiosity. If you have a ‘Gold Standard’ and the production of gold slows or even halts this causes an issue as well. For instance. Say that we end at the supposed ‘recoverable’ amount of gold left to mine of another 52,000 tons bringing the grand total of gold in the world to 223,000 tons of gold, or 446 million pounds, which at today’s exchange rate equates to about $8.5 Trillion dollars.

    I suppose I would bring it more to this… Lets divide the amount of gold by the number of people in the world. Every person could have about 1 ounce of gold… That is it…

    So my question is WHY would this be a good ‘standard’ if there is a limited amount that can possibly be mined. Let alone an asteroid containing a doubling of the amount of gold?

    Since there is a limited amount of money would it not become ‘more valuable’ hence inflationary, as more people are born? Is this not the liquidity argument that ‘shudder’ Krugman makes? At said point if you wanted ‘price’ stability would you not want to add a certain amount of fiat currency in as the population grows? While this ‘inflates’ the money supply it could actually be seen as equilibrium. If I do not add money into the supply then technically I would suffer deflation of goods price garnered into the system.

    I know I may be slightly obvious in this regard, just curious.

    • Anonymous says:

      I dont get it. The standard Austrian position is that ANY amount of money is perfectly fine. One ounce for the whole world is good enough (setting aside unimportant technical problems). Price deflation would occur, yes, which is a good thing. I dont see the problem.

    • Jan Masek says:

      The standard Austrian position is ANY amount of money is fine. Price deflation is good. So what seems to be the problem?

    • Bob Murphy says:

      Innocent, prices can adjust until everybody is holding the desired amount of “real purchasing power” in the form of cash balances.

      • Innocent says:

        I am sorry I am having a little trouble wrapping my head around that if you are using something that is still increasing ( people ) versus physical gold, I suppose the math is there but I am not seeing it please give a reference or two as to how an increase against a finite resource, physical gold as a standard, versus population growth would not cause sort of the same problems we have with inflating money supply we would then have ( to a lesser extent albeit ) with a standard deflating gold standard.

        If I only have x amount of something and everyone desires it then the value would possibly spike above what it should ( supply/demand ) OR put another way if the US government could today purchase all physical gold in a year ( there is only 8 trillion of it out there right now ) and we are running a GDP of 17 Trillion then in what way can we actually go on a gold standard? Our current economy is twice what the actual value of gold is?

        Again I am perplexed. I feel having a physical asset to back up money is a GREAT idea, but how can you reasonably accomplish this?

        • Jan Masek says:

          Number of people can grow all they want, if gold doesnt change, prices will go down, no problem. A house today costs 10 ounces, in ten years it will cost 5 ounces, why not. It’s just a number.
          The reason Austrians dont like printing of money is not that the nominal prices are higher. Americans are not a hundred times richer than the Japanese just because 1 USD = 100 JPY. The reason Austrians hate inflation is that it distorts RELATIVE prices and therefore screws up REAL stuff which is wasted. But that ONLY happens when you increase money supply (or rather the fiduciary media element of it), not when you decrease it or run it the same.

          • Innocent says:

            Jan, Thank you. No I realize this however my question comes in the form of why not create a monetary policy that holds the inflation at 0 in terms of being relative to gold? Then the only thing you ever have to worry about is fluctuations in price due to an increase or decrease in production.

            Perhaps it is an impossibility in the USA as the dollar is sort of treated like Gold in the rest of the world ( heaven knows why )

      • LK says:

        “prices can adjust until everybody is holding the desired amount of “real purchasing power” in the form of cash balances.”

        Not in the real world — real world price and wage rigidities make this a flight of fantasy. And you have not the slightest concern with the destabilising effects of debt deflation.

        • Ben B says:

          LK, the keyword here is *can*. Are you suggesting that you know apriori that prices can’t adjust?

          Price rigidity is a human creation, and not a law of the universe. Prices can adjust in response to increases in cash balances.

          Besides, if prices can’t adjust due to “price rigidity”, then why should you be concerned with debt deflation? Isn’t debt deflation impossible because of price rigidity?

        • Cosmo Kramer says:

          “And you have not the slightest concern with the destabilising effects of debt deflation.”

          The “threat” of deflation goes along with phony Keynesian economic policies. Look in the mirror.

        • Bob Roddis says:

          Debt deflation is a [THE??] core concept of the ABCT. LK’s constant assertions to the contrary are false. He just makes this up.

          Here are the sales prices for a little house just north of Detroit Michigan for the past decade. Those prices don’t seem very “sticky” to me. They went up with the boom and down with the bust.


          (The house is actually only worth about $25,000 presently and the later buyers were victims of a late night TV real estate scam).

          This phenomenon happened everywhere in the Detroit area. There are no examples anywhere of the “sticky prices” problem. So who’s empirical now?

          • LK says:

            “Debt deflation is a [THE??] core concept of the ABCT. “

            No it isn’t.

            Show me where, for example, Hayek discusses debt deflation in Prices and Production.

            • Major.Freedom says:

              LK, it would be impossible for anyone to list all the possible examples of the concept of malinvestment. To say that because debt is not explicitly mentioned and is therefore people will according to Austrian principles never invest in the wrong debt, never invest in too much debt, is to grossly misunderstand ABCT.

              Debt inflation and debt deflation are very much subsumed in ABCT, and malinvestment.

              We don’t need to prove to you in Hayek’s writings that flying time traveling cars might one day become malinvested, and subject to analysis by ABCT.

              ABCT is NOT a laundry list of “These are the only thing that humans can ever make a mistake in investment.”. That’s preposterous.

              • Bob Roddis says:

                MF, this goes to the core of LK’s M.O. on all matters Austrian. And it’s the same for all the other Austrian critics too.

                Further, since a particular formulation of the ABCT is merely an example of miscalculations, finding an alleged error in the formulation means that you must go back one whole step and analyze THE DIFFERENT AND DISTINCT MISCALCULATIONS THAT MUST HAVE OCCURRED.

                I’ve noted the same form of argument in the papers of Daniel Kuehn where he robotically looks for empirical distinctions between historical events and the classic singular ABCT. Those types of arguments are always out of context when stripped away from the notion of ongoing miscalculations of which there are clearly many varieties, including the most obvious, consumer credit card debt.

                But because Hayek didn’t write about consumer credit card debt in 1931, it cannot be part of Austrian analysis, right?

              • Major.Freedom says:

                LK has shown below that he doesn’t even know what debt deflation is, and he calls himself a post keynesian!

                The wiki link on “debt deflation” I posted below will hopefully be read by him. It even includes an explanation on debt inflation and deflation can be parts of the business cycle as pertaining to ABCT.

              • LK says:

                “Debt inflation and debt deflation are very much subsumed in ABCT”

                No, they are not, and if they were Austrians would not a advocate deflationary liquidationism as a remedy for recession.

                It is true, as is pointed out below, that Hayek came to think that secondary deflation is unhelpful, and did in fact reject liquidationism later in life, but he did not specifically discuss debt deflation.

              • LK says:

                “The wiki link on “debt deflation” I posted below will hopefully be read by him.”

                So says an ignoramus who most probably has never read the debt deflation article by Fisher cited in that wikipedia page.

                And is if wikipedia is some definitive, always reliable source! lol.. A reading of that wikipedia page shows that it is a pretty poor summary of debt deflation theory, so citing it will not refute anything I said.

              • Major.Freedom says:


                No, you’re wrong. Debt deflation is in fact subsumed in ABCT.

                Mises for example predicated ABCT on debt. Mises called his theory “the credit circulation theory.”. Credit is debt. Debt expansion and contradiction is credit expansion and contraction, and credit expansion and contraction is what Mises used to explain ABCT.

                You have no clue what you are talking about.

                “No, they are not, and if they were Austrians would not a advocate deflationary liquidationism as a remedy for recession.”

                Yes, they would in fact advocate for it because Austrians hold that it is the credit expansion that causes the errors in the first place.

                “It is true, as is pointed out below, that Hayek came to think that secondary deflation is unhelpful, and did in fact reject liquidationism later in life, but he did not specifically discuss debt deflation.”

                Mises was the originator of ABCT, not Hayek.

                “The wiki link on “debt deflation” I posted below will hopefully be read by him.”

                “So says an ignoramus…”

                Not a response.

                You are again refuted.

              • Ben B says:

                Apparently, it’s possible to be a proponent of ABCT while also being against coerced debt deflation (secondary depression).

                “The first type [deflation] consists of policies adopted by public authorities to deliberately reduce the quantity of money in circulation. Such policies have been implemented on various historical occasions and trigger a process by which the purchasing power of the monetary unit tends to increase. Moreover this forced decrease in the quantity of money in circulation distorts the structure of society’s productive stages. Indeed the reduction in the quantity of money initially brings about a decline in loan concession and an artificial increase in the market interest rate, which in turn leads to a flattening of the productive structure, a modification forced by strictly monetary factors (and not by the true desires of consumers). Consequently many profitable capital goods stages in the productive structure erroneously appear unprofitable (especially those furthest from consumption and most capital-intensive). As a result the most specialized companies in capital-intensive sectors sustain widespread accounting losses. Furthermore in all sectors the reduced monetary demand is unaccompanied by a parallel, equally-rapid decline in costs, and thus accounting losses arise and pessimism becomes generalized. In addition the increase in the purchasing power of the monetary unit and the decrease in the products’ selling price cause a substantial rise in the real income of the owners of the original means of production, who, to the extent their prices are rigid and do not fall at the same rate as those of consumer goods, will tend to become unemployed. Therefore a prolonged, painful adjustment period begins and lasts until the entire productive structure and all original factors have adjusted to the new monetary conditions. This whole process of deliberate deflation contributes nothing and merely subjects the economic system to unnecessary pressure. Regrettably politicians’ lack of theoretical knowledge has led them on various occasions to deliberately initiate such a process.”

                Excerpt From: Jesús Huerta de Soto. “Money, Bank Credit, and Economic Cycles.” Ludwig von Mises Institute, 1998. iBooks.
                This material may be protected by copyright.

                Of course, this doesn’t mean that one has to be against all “debt deflation”, but only that deflation which is not in line with the demand of consumers. Perhaps, this is the type of deflation that Hayek was against…..

                In this case, an Austrian seems to be advocating against a particular type of debt deflation, and not all types of debt deflation.

                The only remedy for recession is an unhampered market devoid of fractional reserve banking; any other fall in the “general price level” not based on the supply of money (or a massive Ebola breakout) is a sign of sustainable growth; the “debt deflation” only negatively affects those production stages closest to consumption, while those stages furthest from consumption will see a “debt inflation”.

            • Bob Roddis says:

              Hayek often engaged in muddled thinking so why do we need to look to Hayek? Here are 5,235 comments by Hayek fans trying to figure out what exactly was Hayek’s position on “secondary deflation”.

              What we have here is a classic old-man Hayek muddling or conflating of different historical periods and different policy problems.


              But, why is “secondary deflation” a concern at all if there isn’t an “initial deflation” induced by the collapse of unsustainable prices bid up by artificial credit expansion? Prices collapse but the face value of the debt remains unchanged. The solution is bankruptcy for the debtors thereby discharging these debts. THAT IS THE ESSENCE OF THE ABCT.

              LK is obviously quite desperate to be making this argument. However, it is par for the course.

            • Bob Roddis says:

              Let’s recall that LK also attacked me for my understanding of the similarities between economic miscalculation under socialism and under Keynesianism (which LK naturally denied as a matter of fact AND as something understood by the Austrian masters). This is basic ABCT. I’ve been vindicated by Jerzy Strzelecki writing at David Stockman’s Contra Corner:

              In their essence “The Great Deformation” by David Stockman and “Economic Calculation in the Socialist Commonwealth” by Ludwig von Mises are treatises on the same subject, or, better, on the same issue. While Mises argued the impossibility of rational economic calculation within the economic system lacking private property of the means of production, Stockman’s treatise could well bear the subtitle “Economic Calculation in the Fiat Paper Money System”, as its key argument states the impossibility of rational economic allocation within the framework of fiat paper money deprived of any anchor in gold, where the interest rate is discretionally determined by the Central Bank via open market operations characteristic of the war economy” – with all its consequences.


          • Tel says:

            Admittedly a modern Austrian, discussing the mechanism of debt-deflation:

            When a bank fails, unless it is immediately taken over by another, still solvent bank, its outstanding checking deposits lose the character of money and assume that of a security in default. That is, instead of being able to be spent, as the virtual equivalent of currency, they are reduced to the status of a claim to an uncertain sum of money to be paid at an unspecified time in the future, i.e., after the assets of the bank have been liquidated and the proceeds distributed to the various parties judged to have legitimate claims to them. Thus, what had been spendable as the equivalent of currency suddenly becomes no more spendable than any other security in default.

            This change in the status of a bank’s checking deposits constitutes a fully equivalent reduction in the quantity of money in the economic system. Thus, for example, if a bank were to fail with outstanding checking deposits of $100 billion, say, and not be taken over immediately by another, still-solvent bank, the quantity of money in the economic system would also immediately fall by $100 billion.


            George is careful to note that by “deflation” he means reduction in the “spendable” supply of money.

            • LK says:

              No, Tel, what Reisman is talking about there is loss of bank accounts and contraction of the money supply — not debt deflation.

              • Tel says:

                Austrians define deflation as contraction of the money supply. With a free market economy this should indirectly result (after some time) in lower prices, but many other factors may interfere.

                If you prefer a non-Austrian explanation of the same thing (and sounding almost identical to Reisman above) try this:

                Assuming, accordingly, that, at some point of time, a state of over-indebtedness exists, this will lead to liquidation, through the alarm either of the debtors or the creditors or both. Then we may deduce the following chain of consequences in nine links: (1) Debt liquidation leads to distress selling and to (2) Contraction of deposit currency, as bank loans are paid off, and to a slowing down of velocity of circulation. This contraction of deposits and of their velocity, precipitated by distress selling, causes (3) A fall in the level of prices, in other words a swelling of the dollar. Assuming, as above stated, that this fall of prices is not interfered with by reflation or otherwise there must be (4) A still greater fall in the net worths of business, precipitating bankruptcies and (5) A like fall in profits, which in a “capitalistic,” that is, a private-profit society, leads the concerns which are running at a loss to make (6) A reduction in output, in trade and in employment of labor. These losses, bankruptcies, and unemployment, lead to (7) Pessimism and loss of confidence, which in turn lead to (8) Hoarding and slowing down still more the velocity of circulation.

                The above eight changes cause (9) Complicated disturbances in the rates of interest, in particular, a fall in the nominal, or money, rates and a rise in the real, or commodity, rates of interest.

                Evidently debt and deflation go far toward explaining a great mass of phenomena in a very simple logical way.

                – Irving Fisher 1933.

              • LK says:

                That is not “identical” to what Reisman is talking about. And Irving Fisher was **not** an Austrian.

                All in all, you have done nothing expect prove my point.

              • Tel says:

                LK: you have not the slightest concern with the destabilising effects of debt deflation

                BR: Debt deflation is a core concept of the ABCT.

                GR: When a bank fails, […] its outstanding checking deposits lose the character of money [… which …] constitutes a fully equivalent reduction in the quantity of money in the economic system.

                LK: No, Tel, what Reisman is talking about there is loss of bank accounts and contraction of the money supply — not debt deflation.

                Me: If you prefer a non-Austrian explanation of the same thing …

                LK: Irving Fisher was **not** an Austrian.

                IF: Debt liquidation leads to distress selling and to Contraction of deposit currency

                LK: That is not “identical” to what Reisman is talking about.

                Me: I’m well aware that Irving Fisher was not an Austrian (that would be why I said “non-Austrian” using the word “non” to imply negation), however I quoted Fisher because it’s a concept that is often discussed (and referenced) amongst Austrians, and also because it forms the original and most basic description of what “debt-deflation” actually means.

                I’m also aware that GR words it a bit differently (that would be why I said “sounding almost identical” rather than “identical”) but the meaning is extremely close. Liquidation of debt leads to monetary contraction. Pretty simple concept, turns up in ABCT articles all the time.

              • Major.Freedom says:

                LK, a loss of money IS debt deflation.

                Money does not simply vaporize into thin air unless it was a defaulted liability of future payment. That is debt.

                If I have $10, that $10 won’t just disappear if I have to pay my liabilities to you. You would get the $10. There is still the $10 in existence.

                What you are thinking of when you think of monetary deflation, of an outright fall in the supply of “money”, is very much debt deflation. Debt deflation is a way ” money” is destroyed In a fractional reserve system.

              • LK says:

                No, debt deflation refers to the harmful effects of general price deflation on the real value of debt, both in terms of squeezing income and contracting other spending and forcing people to repay debt in money of higher value, as well as the distributional effects this has and the tendency — in extreme cases — for both debtors and creditors to be driven into bankruptcy.

                As usual, M_F, you think you can win debates by redefining terms, a laughable and clownish tactic.

              • Tel says:

                LK, where are you getting your definition of “debt-deflation” from?

                Irving Fisher invented the term and his theory from 1933 is the foundation of where the idea came from. Mises described a similar idea “Credit Contraction” in his book Human Action in 1940.

                As usual, M_F, you think you can win debates by redefining terms, a laughable and clownish tactic.

                In this case you are the one redefining terms. Reference your source.

              • Bob Roddis says:

                Tel: Not specifically mentioning “debt deflation” in connection with the ABCT is like not mentioning that 2 + 2 = 4 in an advanced physics book.

                Since LK has nothing, he goes on and on with this nonsense.

              • Tel says:

                Bob, modern Austrians such as Frank Shostak do specifically mention the “Debt Deflation” theory, with a reference to Irving Fisher and a rundown on exactly those 9 points I quoted.

                Mises and Rothbard described “credit contraction” which is a very closely related concept to debt deflation. Rothbard even goes into why overcompensation is likely to happen during a depression or contraction phase.

                Hayek described what he called “secondary deflation” or sometimes called it “secondary contraction”.


                There is no omission in Austrian writings about this effect. It is very well covered.

              • Anonymous says:


                “No, debt deflation refers to the harmful effects of general price deflation on the real value of debt, both in terms of squeezing income and contracting other spending and forcing people to repay debt in money of higher value, as well as the distributional effects this has and the tendency — in extreme cases — for both debtors and creditors to be driven into bankruptcy.”

                That is not debt deflation.


                What I said is debt deflation is debt deflation.

                “As usual, M_F, you think you can win debates by redefining terms, a laughable and clownish tactic.”

                LOL! Mirror dude, that mirror…

              • Major.Freedom says:


                “No, debt deflation refers to the harmful effects of general price deflation on the real value of debt, both in terms of squeezing income and contracting other spending and forcing people to repay debt in money of higher value, as well as the distributional effects this has and the tendency — in extreme cases — for both debtors and creditors to be driven into bankruptcy.”

                That is not debt deflation.


                What I said is debt deflation, is the commonly used, and Austrian interpretation and description of debt deflation.

                “As usual, M_F, you think you can win debates by redefining terms, a laughable and clownish tactic.”

                LOL! Mirror dude, that mirror…

              • Major.Freedom says:

                LK’s made up definition of debt deflation is also silly in itself.

                He claims general price deflation makes it more difficult to pay back debt. That is as flawed an argument as one can get in economics. If productivity doubles, and prices fall by half, this does not make debt harder to pay back at all. Prices can and do fall by increases in technology and production efficiency. This does not reduce profitability nor negatively affect firms’s ability to pay back debt.

              • LK says:

                On the contrary, this the standard definition of debt deflation, in economics:

                “The debt-deflation theory of depressions emphasizes the crucial destabilizing influence of outstanding nominal debt when price-level changes occur that were not anticipated when the debt was issued. The institution of bankruptcy introduces an asymmetry in the effect of unexpected changes in the real value of inside debt.”… etc.
                Dimand, Robert W. 1997. “Debt-Deflation Theory,” in D. Glasner and T. F. Cooley (eds.), Business Cycles and Depressions: An Encyclopedia, Garland Pub., New York. 140–141, at p. 138.

                The same fundamental process — the way that deflation causes the real value of debt to increase and the deleterious macro effects this causes — is described as the **essence** of debt deflation in Fisher’s 1933 article :

                “deflation caused by the debt reacts on the debt.
                Each dollar of debt still unpaid becomes a bigger dollar, and if the over-indebtedness with which we started was great enough, the liquidation
                of debts cannot keep up with the fall of prices which it causes. In that case, the liquidation defeats itself. While it diminishes the
                number of dollars owed, it may not do so as fas,, as it increases the value of each dollar owed. Then, the very effort of individuals to lessen their burden of debts increases it, because of the mass effect of the stampede
                to liquidate in swelling each dollar owed. Then we have the great paradox
                which, I submit, is the chief secret of most, if not all, great depressions:
                The more the debtors pay, the more they owe.
                The more the economic boat tips, the more it tends to tip. It is not tending to right itself, but is capsizing”

                Fisher, Irving. 1933. “The Debt-Deflation Theory of Great Depressions,” Econometrica 1.4: 337–357, at p. 344.

              • LK says:

                So, M_F, it is YOU who are the ignoramus here — who never properly understood what debt deflation theory is, or apparently read any proper economic writings about it beyond looking at a poorly written wikipedia page. lol

              • Major.Freedom says:


                That quote you posted does not explain what debt deflation is.

                If someone asked you what aches and chills are, then it is not an answer to say “Bacteria or viruses cause them.”

                Saying that falling prices makes debt harder to pay existing debt back, does not tell us what debt deflation is.

                Debt deflation IS a contraction in debt. You can confuse yourself and believe in all sorts of false causes for it, but those are all besides the point of what debt deflation is.

                Nothing of what you wrote contradicts anything I said. What I wrote contradicts what you said.

                Debt is credit, and Mises called ABCT the credit circulation theory, so you’re wrong about whether or not “classic” ABCT included debt. It did, period. Mises was the originator of ABCT, not Hayek.

                You still show that you don’t know what debt deflation is. It is a contraction in debt, which is also called credit. Every major Austrian talked about credit expansion and credit contraction as components in the business cycle. You don’t know this because you have only read Hayek closely. If you had read Mises as closely, you would have known that Mises’ theory of the business cycle was explained in part with debt expansion and fluctuations.

                Finally, the cited and footnoted wiki article I linked to, the sources referenced therein, not only refutes your false claims regarding what Fisher wrote, but it also refutes your absurd and convoluted definition of what debt deflation is.

              • Major.Freedom says:


                The quote you posted from 1933 Fisher confirms what I wrote. Debt deflation is a contraction of debt.

              • LK says:

                In other words, you’re too dishonest and too evasive to admit that the way I defined debt deflation is the way Fisher and other economists define it.

              • Major.Freedom says:


                I never called you an ignoramus. But when you said “No M_F, it is YOU who are the ignoramus here”, that leads me to believe that you thought I did.

                Interestingly, you are the only person who has accused another, namely me, of being an ignoramus in this thread.

                Get those negative voices out of your head LK. Take ownership of them and destroy them.

              • Major.Freedom says:


                No, the way I defined it IS the way Fisher defined it. Fisher defined it as a reduction/contraction in debt.

                That is how I define it.

                I’m not being dishonest.

                Just consider the phrase “debt deflation” itself. Deflation is what economists use to describe a “reduction in quantity”. Monetary deflation, price deflation…

                Debt deflation is just a reduction in debt.

                I don’t get what is confusing you so much.

          • Tel says:

            Here’s another example of an Austrian take on debt deflation. Astoundingly enough he starts with a reference to the exact same Irving Fisher explanation I quoted above.


            Frank Shostak also explains that if banks were not stretching their fractional-reserve to the limit the problem would not happen (also it they hadn’t debt-inflated in the first place, but I repeat myself). I’m sure Bob Roddis might have mentioned the same thing, so I guess we both repeat ourselves.

            This is also along the lines of Jesús Huerta de Soto’s theory on the dangers of bank credit expansion. So yet more examples of Austrians paying close attention to debt-deflation, and the consequences of destabilising the monetary supply.

            • LK says:

              “In his writings, Fisher argued that the size of the debt determines the severity of an economic slump. He observed that the deflation following the stock market crash of October 1929 had a greater effect on real spending than the deflation of 1921 had because nominal debt was much greater in 1929.”

              Precisely what I said above — lol.

              • Tel says:

                What you said above was that Austrian economists don’t understand debt deflation. Now you agree that Austrians do in fact understand debt deflation, so we have come full circle and once again you contradict yourself.


              • LK says:

                I asked roddis to show me where **classic** accounts of the ABCT consider debt deflation.

                Roddis can cite NO passages, because it does not, nor did bob in his original comments above.

                Yes, you have pointed to a couple of instances where modern Austrians have now mentioned debt deflation.

                That doesn’t mean that all Austrians understand it (and you certainly do not), nor that the few you cite have properly considered how it thwarts the alleged tendency to market clearing by wage and price flexibility that Austrians see as the solution to economic problems.

              • Major.Freedom says:

                Tel understands debt deflation more than you do LK. You don’t even know what debt deflation is.

                “Classic” ABCT need not take into account flying time travelling cars for ABCT to include how investors would be misled in such goods as affected by central banking.

              • Major.Freedom says:


                You also have to keep in mind that ABCT is per se a theory of booms only. Debt deflation is not a cause of booms, and so is not a component of any theory that explains booms.

                But what we can still deduce is that if credit expansion is per Mises a cause of what he understood as unsustainable booms, then it is reasonable to associate the subsequent recession with at least a reduction in the rate of increase in credit expansion, but there is nothing stopping us from surmising that recessions can also contain outright reductions in credit.

                The point is that credit expansion and contraction were not ignored in classic expositions of the business cycle. Mises wrote about it. Modern Austrians write about it.

              • LK says:

                So you’re saying your Austrian business cycle theory doesn’t adequately bother to explain busts? And yet it is supposed to be the definitive and universal explanation of business cycles? lol.

              • Major.Freedom says:


                ABCT explains the booms.

                Mises and Rothbard and almost all modern Austrians explain busts as the CONSEQUENCE of the boom.

                Since in your Keynesian view there is no connection of the bust whatsoever with the boom, you are narrowed into believing that the only way a bust can be explained, is what is taking place during the bust itself.

                That approach is flawed, because what you believe to be a concurrent cause of recession, could very well be another negative effect of the preceding boom.

                Since events do not take place in a vacuum, you go the silly fallback of “animal spirits”, or “contradictions in capitalism”.

              • Major.Freedom says:

                If ABCT explains the booms, and if ABCT explains busts as consequences of the booms, then ABCT explains busts in terms of booms, not busts in terms of busts.

                Austrians hold that recessions are consequences of booms. Austrian theory explains what causes that which causes the busts.

          • Tel says:

            Rothbard also understood the concept of debt deflation, which he called “credit contraction” to emphasize that it was the mirror image of inflationary credit expansion. Rothbard pointed out that liquidation of mal-investment is inevitable and the adjustment has to happen, one way or another.

            Deflation of the money supply (via credit contraction) has fared as badly as hoarding in the eyes of economists. Even the Misesian theorists deplore deflation and have seen no benefits accruing from it. Yet, deflationary credit contraction greatly helps to speed up the adjustment process, and hence the completion of business recovery, in ways as yet unrecognized. The adjustment consists, as we know, of a return to the desired consumption-saving pattern. Less adjustment is needed, however, if time preferences themselves change: i.e., if savings increase and consumption relatively declines. In short, what can help a depression is not more consumption, but, on the contrary, less consumption and more savings (and, concomitantly, more investment).


            So yeah, Rothbard was certainly well aware of the mechanism at work. He also considers the possibility of positive feedback and overcompensation:

            But, it may be objected, may not credit contraction overcompensate the errors of the boom and itself cause distortions that need correction? It is true that credit contraction may overcompensate, and, while contraction proceeds, it may cause interest rates to be higher than free-market levels, and investment lower than in the free market. But since contraction causes no positive mal-investments, it will not lead to any painful period of depression and adjustment.

            That is to say, yes credit contraction (and liquidation of mal-investment) is painful, but at least you get the sickness out of the system and don’t set yourself up for future pain.

            • LK says:

              “Yet, deflationary credit contraction greatly helps to speed up the adjustment process, and hence the completion of business recovery, in ways as yet unrecognized. “/I>

              Congratulations, Tel, you have proved that Rothbard does not understand debt deflation.

              If he did, he would know it exacerbates recession, not speeds recovery.

              • Major.Freedom says:

                No, it speeds recovery.

              • Bob Roddis says:

                According to LK, “debt deflation” is not part of Austrian analysis (although the phenomenon itself is an essential part of Austrian analysis) because Austrians do not see it in the same manner as Keynesians.

                According to me, the Minskey-ites have adopted the Austrian boom-bust analysis while completely avoiding even thinking about and/or mentioning the preceding price distortions that led to the mass miscalculation in the first place. They instead blame that on “animal spirits” and “unconstrained and unregulated capitalism”.

                How con-veeeeenient.

              • Tel says:

                Just because you have a personal dislike for Rothbard’s ethical position, proves nothing about Rothbard’s understanding of the credit contraction mechanism involved.

                You prefer to put off the liquidation of mal-investment, Rothbard recommended getting it out the way quickly.

        • Bob Roddis says:

          Isn’t “debt deflation” the opposite of “sticky prices”? The price of the stuff the debtor planned to use to pay the debt collapses.

          Keynesianism, what a web of intrigue.

          • Major.Freedom says:

            We can admit to falling, flexible prices, as long as that fact is used to justify Keynesian violence.

            • Bob Roddis says:

              “Debt deflation” sounds something beyond “flexible” prices. More like flaccid prices.

              Not “sticky” prices, but slippery prices.

  4. Tel says:

    For example, if Joe’s mom packed him an apple for lunch, while Sally’s dad packed her a banana, then if the two kids trade, it must mean that (1) Joe values a banana more than an apple and (2) Sally values an apple more than a banana. (Let’s assume the kids are trading based on the items, and not, say, because Joe wants to ask Sally to the dance and is buttering her up.)

    Fair enough, now consider the situation where a large number of people trade many apples and bananas in a common marketplace. A general ratio emerges for exchanging apples and bananas. This is not the exact ratio of every single trade, it is a statistical property of that group of people and the relative supply/demand factors. The result is a general expectation grows amongst the crowd that exchange at a know ratio (not exact but close) will be possible.

    • Anonymous says:

      What’s the point?

    • Jan Masek says:

      What’s the point, Tel?

    • Tel says:

      In practice, the emerging ratio forms a collective outcome that tends to be stable, and a thus measure of value (or at least, a measure of relative value between those items being traded, to the extent that supply and demand don’t wildly fluctuate).

      Even though with just two individuals you are constrained to only see subjective values (as Bob points out), with large enough numbers of individuals the market finds a valuation with properties beyond the subjective whim of any particular individual.

      Bob is claiming that because buyer and seller must necessarily pull in opposite directions in their subjective valuations, therefore no “measuring rod” is possible. I’m saying that with a marketplace you get a statistical “measuring rod” which objectively measures the collective effect of preferences amongst the entire group.

      Admittedly, with caviats:
      * this measure is not fixed for all time because conditions may change, or preferences might change;
      * statistical measures are tricky to use, you can’t actually see the value, only estimate it, based on sample size;
      * prices are not stochastic because events in the marketplace are tied to earlier events (i.e. the participants learn from each other).
      * if items can’t trade or don’t trade often then your sample size collapses

  5. gienon says:

    I think a good and foolproof way of illustrating that money doesn’t measure value is to use a simple thought experiment to show how marginal utility applies to money and therefore the measurements can never be compared with changing supplies of both goods in exchange. Let me exemplify:

    If someone thinks that an exchange of a banana for $1 means that this $1 measured the value of this banana, it would be logical to assume that this person will give up every single one of his/her $1s for more homogenous bananas. After all, if one footlong is 1 foot long, so will be every other footlong.

    If we, however, imagine that someone will gladly spend $5 for 5 bananas but will not go for the 6th one for his 6th dollar (not a crazy scenario even outside Ancapistan, I think you’ll agree), we have a big problem for the “measuring rod” theory.

    I’m hopefully inching closer to a job at Forbes.

    • Bob Murphy says:

      Yep, good strategy gienon; I do this in *Lessons for the Young Economist* too. If Tamny and/or Miles replies, then I’ll include this type of point in my own response.

  6. Joseph Fetz says:

    Why is it that whenever it comes to economic scenarios, that people like to stretch that shit, as if it’s a playground of hypotheticals?

  7. Andrew_FL says:

    Asteroid is a bad example. I’m not sure but I think one that large would be sufficiently devastating to life on earth that price inflation would be the least of our concerns.

    Special case of the quantity theory of money, human extinction variant: where real quantities drop to zero prices don’t exist, velocity is zero because there is no spending or income, and M is larger than it was and simultaneously does not exist because pieces of paper and gold are both inert matter and not money at all absent humans to use them as such.

    Would’ve made more sense propose an equally large amount found buried in the Sahara desert or something.

    • Bob Murphy says:

      Give me a break. Look a helicopter couldn’t drop dollar bills on more than a small patch of land without running out of fuel, so I guess a helicopter thought experiment is dumb.

      • Andrew_FL says:

        Bob, I’m glad to see I’ve discovered the secret to getting a reaction is to pose as a pedantic monetarist, but sorry to see you took my comment as a nuisance.

        For the record I assume we’d agree that the Helicopter analogy is “dumb” because that’s not how money enters the economy in practice. This was more or less the spirit in which my comment was intended.

        Also it was supposed to be kind of humorous because i was applying an accounty identity to terms that don’t exist in this context. Thought you’d appreciate that.

        • Major.Freedom says:

          Andrew, what is the REAL motivation for you to act the role of the pedant?

          And don’t give me any Melvin BS about “just trying to improve accuracy here people, snark, hur durr.”

          • Andrew_FL says:

            No malice intended, MF, I thought I was being funny. Sorry.

            • Major.Freedom says:

              Sorry Andrew, my bad. Sometimes, well oftentimes, words cannot convey one’s constitution…

              • Andrew_FL says:

                I’m glad we’re cool. You’re a sharp guy, certainly not someone I’d relish disliking me.

      • Grane Peer says:

        Instead of a helicopter how about Santa?

        • Andrew_FL says:

          My preference, to illustrate how contrived a situation you’d really need for money to be short run neutral, is a little more convoluted:

          Imagine that we have an economy where all money is digital. There is no physical money in this economy at all, or at least, no one uses it. (Problems that would arise from this, we won’t deal with here. Our concern is with showing what happens in a very narrow scenario) The monetary authority announces a few months ahead of time that on some date, everyone will wake up, and a computer virus that authority created will have doubled the amount of money in their bank accounts, double the amount of money they have in some kind of electronic wallets will double, values specified on various electronic accounting books will double, and so on and so forth.

          Under these circumstances, everyone will negotiate until pretty much all prices are set to double, all other things being equal, immediately on the same day that all the electronic money is doubled.

          Obviously this is very different from what happens in the real world when the supply of money expands. In the real world the money enters the economy in specific ways.

          A lot of people claim that an analogous or better scenario to illustrate this is re-denomination, but that’s wrong. The prices in the old units don’t increase and the actual amount of money isn’t different just cause you change the base unit to something smaller.

    • Tel says:

      It’s only “you didn’t build that” warmed over again.

      The war on small business is a great common ground for unions, government and the big corporates. You will be surprised will agree to an absurdity if they see it as a way to knock out the competition.

  8. Bob Roddis says:

    While money may not “measure” “value”, voluntary monetary transactions clearly provide the best possible objective manifestation of underlying subjective values at that moment. How can we say that and not confuse non-Austrians?

    Further, we can maintain the above position and at the same time affirmatively state that concepts like “stable prices” and even “the price level” are mostly nonsense, at least in terms of something that must be maintained, especially by violence, fraud or theft of purchasing power.

    • Harold says:

      Objective manifestation looks a lot like measurement.
      Why can we not say that the price a person is just willing to accept (or pay) measures the valuer of that good to that person at that time?

      • Ben B says:

        If we say something appears to be at least greater than a yard, then are we providing a measurement?

        All we know from an exchange is that the buyer (or seller) of money values the money more (or less) than that which he gives up (or receives). Is this a measurement? What is the difference between the value of what he gives up and that of which he receives? These are not equal, nor are they necessarily approximately the same.

        • Harold says:

          I specified the indifference point, at which point the value is the same. I can measure my cupboard by saying it is the same height as this broom. I can then use the broom to measure anything else. If I can measure the value to me of bananas in dollars, then I can use dollars to measure the value to me of anything else.

          A transaction does not give you this figure, just like the broom is not likely to be the exact same height as my cupboard. Nevertheless, we can in principle measure the cupboard with the broom. Can we in principle measure the indifference point, and hence the value, with dollars? This is a different question than asking if a transaction measures value.

  9. Bob Roddis says:

    A. Everyone should buy a year’s worth of Tom Woods’ Liberty Classroom. After listening to one of 876 lectures on Austrian Economics by Professor Jeff Herbener, I learned the following:

    1. Entrepreneurs first “appraise” the scope of both “demand” for that which they plan to produce and sell and the “supply” they must first obtain or create.

    2. This is a two stage process (at least). Once the goods are manufactured, the entrepreneur must again appraise the market (which may very well have changed since the first appraisement) to determine if the goods should be sold or retained and at what price to charge if sold.


    Because Herberner is an Austrian master and he is actually saying this (as opposed to me logically and correctly applying Austrian concepts and analysis), there should be no objection from You-Know-Who.

    B. I think that this illuminates the current issue of “measurement”. “Appraisement” is a better term.

    C. Just this one lecture buries the nonsense about “mark-up pricing” and the claim that Austrians insist that prices (and not production or sales offers) are the only thing cut in a slump.

    D. Tom Woods is always having sales on a year’s subscription, so the prices are slippery.

    • Andrew_FL says:

      Shouldn’t appraisement be a continuous, or ongoing process, rather than one in stages?

      Also, the appraisement, it shouldn’t be forgotten, is evaluated on the basis of the Entrepreneur’s subjective preferences, as well. This is the key to understanding certain paradoxes which arise from the naive belief that an entrepreneur always and only seeks profit purely in monetary terms.

      (I don’t mean to suggest you contradicted this point, but I thought it should be mentioned)

      • Bob Roddis says:

        Yes, appraisement is ongoing.

        • Tel says:

          Entrepreneurship is an ongoing process, and appraisal is part of that.

          * Find new ideas.
          * Estimate the value.
          * Try it out.
          * Learn from the results, sharpen your estimates.
          * Repeat.

          This could be anything from price discovery to product development to service improvement.

  10. Major.Freedom says:

    From Mises’ Theory of Money and Credit:

    “Our theory of banking, like that of the currency principle, leads ultimately to a theory of business cycles. It is true that the Currency School did not inquire thoroughly into even this problem. It did not ask what consequences follow from the unrestricted extension of credit on the part of the credit-issuing banks; it did not even inquire whether it was possible for them permanently to depress the natural rate of interest. It set itself more modest aims and was content to ask what would happen if the banks in one country extended the issue of fiduciary media more than those of other countries. Thus it arrived at its doctrine of the “external drain” and at its explanation of the English crises that had occurred up to the middle of the nineteenth century.

    “If our doctrine of crises is to be applied to more recent history, then it must be observed that the banks have never gone as far as they might in extending credit and expanding the issue of fiduciary media. They have always left off long before reaching this limit, whether because of growing uneasiness on their own part and on the part of all those who had not forgotten the earlier crises, or whether because they had to defer to legislative regulations concerning the maximum circulation of fiduciary media. And so the crises broke out before they need have broken out. It is only in this sense that we can interpret the statement that it is apparently true after all to say that restriction of loans is the cause of economic crises, or at least their immediate impulse; that if the banks would only go on reducing the rate of interest on loans they could continue to postpone the collapse of the market. If the stress is laid upon the word postpone, then this line of argument can be assented to without more ado. Certainly, the banks would be able to postpone the collapse; but nevertheless, as has been shown, the moment must eventually come when no further extension of the circulation of fiduciary media is possible. Then the catastrophe occurs, and its consequences are the worse and the reaction against the bull tendency of the market the stronger, the longer the period during which the rate of interest on loans has been below the natural rate of interest and the greater the extent to which roundabout processes of production that are not justified by the state of the capital market have been adopted.”

    So much for the assertion that debt deflation is not in any classic ABCT expositions.

  11. Bob Roddis says:

    We are at peak debt. Household, business and government balance sheets are tapped-out. The problem is not too little CPI inflation, but the unavoidability of a pay-back era of sustained debt deflation. Yet the entire purpose of the Fed’s money printing regime—ZIRP, QE and all the rest—-is to force more debt into an economy that is already saturated. And as I have demonstrated elsewhere, the end result is that the Fed’s massive liquidity injections do not flow into the busted and exhausted Main Street credit channel, but only into the “Wall Street Bubble Channel” where they fund endless carry trades, speculations and eventually rip-roaring bubbles.


  12. Bob Roddis says:

    Of course, debt deflation – writing down, defaulting, foreclosing – is what a Great Correction is meant to do.

    In America, except at the household level, the authorities have been able to push off the moment of truth…apparently indefinitely. The feds have a “little technology called the printing press.” And they’re ready to use it!


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