Quote from: dinofelis on April 18, 2015, 04:47:41 AM

Quote from: twiifm on April 16, 2015, 10:22:23 PM

You don't know if investments are good or bad until hindsight.

You might hope you have an idea of what to expect ! If you have no idea whether the money you borrow has any chance of giving an ROI, then the interest on it should be huge, because the creditor takes a big risk of you defaulting !

And that's my point exactly: too cheap money (too low interest rates) invite people to be able to invest in low-return investments with no problem of default. But, contrary to your claims, the capacity of production of capital goods is limited too. So if many people can buy capital goods with very low return, because the credit conditions are easy, then most of the capital goods will be allocated to low-return undertakings. And if most capital goods are allocated to low-return undertakings, well, global return in the economy (growth!) will be very low too.

This is what it means: easy money allows serious bad allocation of resources, while the investor doing so has no problems, and is not eliminated from the race.

It is here where we get the Keynesian recipe for disaster: if the economy slows down, Keynesians lower credit rates, which will cause even more bad allocation of resources, which will in its turn generate an even worse growth. As a result, Keynesians lower even further the interest rate, until they are caught in the liquidity trap and/or stagflation.

Quote

Whether people borrow money to start business or buy houses and cars. It doesn't matter. What matters is aggregate demand drives production and jobs.

Aggregate demand ORIENTS production. But if production is badly organized, because of mis allocation of resources, which is itself a result of cheap credit, it will not provide growth.

Quote

The problem w deflation is you don't have that driver. Falling prices don't make people consume more. The rate of consumption is based on their income and confidence on future earnings

This is already 100 times that this has been contradicted. Steady, minor inflation, or deflation, have of course not the slightest influence on consumption. First of all because the effect is too small in the balance of things that make a decision to buy or not. If you are hungry, the fact that next year a loaf of bread cost 2% more or less will absolutely not influence your decision to buy it right now.
And second, because it is compensated. If you consider buying a sports car right now, or next year, you might say that next year, it will cost maybe 2% more, but you will also earn 2% more. So the fact that it will cost 2% more next year, will not be the reason why you buy it right now or not.
And we already saw that everything that happens on credit is perfectly compensated because of the difference between real and nominal interest rate: in an inflationary economy, interest rates will be higher exactly by the amount of steady inflation.

This on the theoretical side.

On the empirical side, the examples with computers and i-phones show you that people do not delay their acquisitions because the price of the item will be lower next year ; and the price drop of i-phones is way way bigger than the price drop in a mild deflation.

In other words, as well empirically, as theoretically, mild, steady inflation or deflation have absolutely no influence on consumption.

The historical correlations that one finds have most probably the opposite causal effect: when economy slows down, credit contracts, people consume less, and HENCE prices drop. So observed deflation is a consequence of economic slowing down, it is not its origin.
And when economy booms, there is credit expansion, people consume more, and HENCE prices rise, so there is most probably some inflation. But these are consequences, not the causes.

Like austerity worked so well for Europe.

Stop bringing up iphones. That has nothing to do w deflation

Lowering interest is not Keynesian its monetarism