European debt deal

[SpicyTurkey]

You mean inflation then? Devaluation is lowering the value of your currency with respect to another. You use that, as Roose Bolton point out, to up your exports and help balance your budget via trade surplus.

How do you devalue a dollar then?

Inflation can help by lowering debt burden. It's also better then default and acts as a backstop to your country being run on like a bank because you can always just print money to pay off shit (with the ability to do so acting as a force keeping you from needing to do so)

Inflation doesn't "punish" anyone. It's a strategy with pluses and minuses depending on your current economic issues.

Either way, Greece would be in alot better shape if it wasn't on the Euro. (Of course, trying to get off the Euro will fuck them even worse more then likely)

Inflation destroys wealth. You also forget that debt is adjusted for inflation. As you print more, then the debt will rise in proportion. In other words, you will be screwing yourself even further.

Yes. Who's arguing this?

I'm glad we agree on something.

[The Warmth of Winter]

How do you devalue a dollar then?

Funny answer: Become George Bush?

Serious answer: You don't. The dollar is in a floating exchange rate system as opposed to a fixed system

[Fez]

Inflation destroys wealth. You also forget that debt is adjusted for inflation. As you print more, then the debt will rise in proportion. In other words, you will be screwing yourself even further.

It destroys savings, which is not quite the same thing. Particularly if without the debt the debtor is able to better pursue the creation of wealth.

Also no, debt is not inflation-adjusted. Of course if you do inflate your way out of debt you have to be careful to not end up like the Weimer Republic.

[Padraig]

"Some sort of stability" is a strange way to put it. The idea is that Papademos & Co. implement the terms of the debt deal and then leave before the rioting in the streets gets out of hand.

I did say "the idea is" etc. The plan is not that they implement the debt deal and flee. That might happen but it isn't the plan. :)

Also no, debt is not inflation-adjusted.

I presume it depends on what currency your debt is held in and what currencies you have access to.

[Fez]

I presume it depends on what currency your debt is held in and what currencies you have access to.

Well yeah, your own inflation won't affect debt held in foreign currencies (except possibly indirectly through really complicated currency exchanges) but countries can't print foreign currency so that's a moot point.

And at this point the best option for Greece probably is to go back to the drachma, unilaterally declare all debts will be paid back in drachma at a 1-to-1 ratio, and inflate their way out of debt. Of course this will mean they'll lose access to capital markets for at least a generation probably, but I suspect they probably already have.

ETA: It would probably also cause another global recession, but that probably wouldn't do any extra damage to Greece.

[Shryke]

Well yeah, your own inflation won't affect debt held in foreign currencies (except possibly indirectly through really complicated currency exchanges) but countries can't print foreign currency so that's a moot point.

And at this point the best option for Greece probably is to go back to the drachma, unilaterally declare all debts will be paid back in drachma at a 1-to-1 ratio, and inflate their way out of debt. Of course this will mean they'll lose access to capital markets for at least a generation probably, but I suspect they probably already have.

ETA: It would probably also cause another global recession, but that probably wouldn't do any extra damage to Greece.

This would be exactly the same as default, but without being able to potentially gain any advantage from still being part of the Euro.

[Fez]

This would be exactly the same as default, but without being able to potentially gain any advantage from still being part of the Euro.

Didn't say it wouldn't be, but I think at this point there's more advantages for them to not be part of the Euro (so long as they can still retain all those non-currency economic integrations).

[The Marquis de Leech]

And at this point the best option for Greece probably is to go back to the drachma, unilaterally declare all debts will be paid back in drachma at a 1-to-1 ratio, and inflate their way out of debt. Of course this will mean they'll lose access to capital markets for at least a generation probably, but I suspect they probably already have.

Even better: Germany gets kicked out of the Euro. The Euro suddenly dramatically devalues, and the ECB is no longer hamstrung by fearing 4% inflation.

[The Marquis de Leech]

Inflation destroys wealth.

Applying your logic, a country with 10% deflation would see its wealth increase by 10%. Hint: that's not what happens (and any country that suffers 10% deflation is probably in a gold standard-induced depression).

You also forget that debt is adjusted for inflation.

No, it isn't.

[SpicyTurkey]

It destroys savings, which is not quite the same thing. Particularly if without the debt the debtor is able to better pursue the creation of wealth.

Also no, debt is not inflation-adjusted. Of course if you do inflate your way out of debt you have to be careful to not end up like the Weimer Republic.

You're right. The notion of wealth is subject ( especially when one also includes the notion of value).

When you destroy savings you also destroy capital, and that makes it difficult to pursue the creation of wealth (what ever that may mean to you).

I also misspoke. Not all debt is adjusted for inflation, but in special cases (some government debts) they are.

[SpicyTurkey]

Applying your logic, a country with 10% deflation would see its wealth increase by 10%. Hint: that's not what happens (and any country that suffers 10% deflation is probably in a gold standard-induced depression).

In an asset backed money that is created by the people (not by the government), inflation and deflation are both good. They are adjustments in the supply and demand of the asset backed money.

No, it isn't.

Sorry, what I mean to say is that some debts (where government is involved) are.

[SpicyTurkey]

Funny answer: Become George Bush?

lol

There are plenty of those who can fit that description, and not just George Bush.

Serious answer: You don't. The dollar is in a floating exchange rate system as opposed to a fixed system

The dollar can be inflated. Any fiat currency can be inflated.

[Shryke]

In an asset backed money that is created by the people (not by the government), inflation and deflation are both good. They are adjustments in the supply and demand of the asset backed money.

Oh god he's a gold bug. This explains so much.

When you destroy savings you also destroy capital, and that makes it difficult to pursue the creation of wealth (what ever that may mean to you).

You still don't destroy wealth. It also makes it easier to pursue the creation of wealth since you know have less problems servicing your debt and more to spend on investment and more for people to spend on goods and services. (Paradox of Thrift all up ins)

Inflation also makes it easier to bring wages back in line, because downward nominal wage rigidity is rock hard.

[Padraig]

I'm curious about one thing (possibly a stupid question but i've very little economics in my background). How does inflation effect currency exchange rates? A major factor, a minor factor or somewhere in between?

[The Marquis de Leech]

In an asset backed money that is created by the people (not by the government),

Unless you're backing the money with potatoes (or polar bears), "fiat" currency and "asset-backed" currency work off the same basic principle: money only has value because people will take it in exchange for goods and services. In other words, value is a matter of perception: gold has no more intrinsic value than paper money (in fact, it has less: I can burn paper to keep me warm, or use it to wallpaper my room, whereas there isn't much you can do with gold).

inflation and deflation are both good. They are adjustments in the supply and demand of the asset backed money.

Deflation is an incentive to hoard money. Which means nothing gets spent. Which means nothing is bought. Which means the deflation feeds off itself and the economy collapses. Deflation is a *bad* thing.

Sorry, what I mean to say is that some debts (where government is involved) are.

Those sort of debts actually have a negative return at the moment, so in essence they are getting eaten as time goes on anyway.

[The Marquis de Leech]

I'm curious about one thing (possibly a stupid question but i've very little economics in my background). How does inflation effect currency exchange rates? A major factor, a minor factor or somewhere in between?

It's complicated: there are any number of things that affect the demand and supply of a specific currency. Generally speaking, countries with lower inflation tend to see currency appreciation, and countries with higher inflation tend to see currency depreciation. This may be offset by interest rates: higher interest rates cause the currency to appreciate, so it is quite common for news headlines referring to higher inflation being accompanied by an increase in value of the currency (since people are then expecting the interest rates to go up).

[kiko]

Even better: Germany gets kicked out of the Euro. The Euro suddenly dramatically devalues, and the ECB is no longer hamstrung by fearing 4% inflation.

They still have to buy our industrial products or will end up as some kind of beach ressort for the Neuro states

[The Marquis de Leech]

They still have to buy our industrial products or will end up as some kind of beach ressort for the Neuro states

Except that they can't afford to buy your industrial products.

[SpicyTurkey]

Unless you're backing the money with potatoes (or polar bears), "fiat" currency and "asset-backed" currency work off the same basic principle: money only has value because people will take it in exchange for goods and services. In other words, value is a matter of perception: gold has no more intrinsic value than paper money (in fact, it has less: I can burn paper to keep me warm, or use it to wallpaper my room, whereas there isn't much you can do with gold).

One must be careful of the context when one refers to "Intrinsic value". The worth of an object (like you said) is subjective. If there is no demand for it, then it has no value. When contrasting fiat to gold, one can say that gold in comparison has intrinsic value. In that context it means that, stripped of its use as money, paper fiat money would have almost no subjective value, not even close to the number printed on it. Gold on the other hand has subjective value even if it is not legal money.

Deflation is an incentive to hoard money. Which means nothing gets spent. Which means nothing is bought. Which means the deflation feeds off itself and the economy collapses. Deflation is a *bad* thing.

Orchestrated deflation is certainty bad, and I would like you to understand that inflation is an excess of the supply of money over the demand for money, and in both cases (unwarranted deflation and inflation) are more likely to occur with the help of government (because of the lack of competition). As a result of governments (and central banking) we experience a huge spike in inflation and deflation regardless of demand. That is why I advocate the removal of central banking in favor of decentralized competing banks. That way money can be regulated like any other commodity.

Those sort of debts actually have a negative return at the moment, so in essence they are getting eaten as time goes on anyway.

Not if they are adjusted. The main reason for adjusting the debt is for the same reason. That it unless a central bank prints the money, and pays off its debt right away before the money is trickled down. If they do go that road, then the poor and the middle class will suffer significantly.

[SpicyTurkey]

Oh god he's a gold bug. This explains so much.

I'm in favor of competing currencies.

You still don't destroy wealth. It also makes it easier to pursue the creation of wealth since you know have less problems servicing your debt and more to spend on investment and more for people to spend on goods and services. (Paradox of Thrift all up ins)

Inflation also makes it easier to bring wages back in line, because downward nominal wage rigidity is rock hard.

Wealth is a subjective term. As a result I will try to refrain from using it.

When inflation occurs it means that the value of money has declined. As a result you're investments will decline, and you will be forced to cut on spending ( the purchasing power of the money has declined).