I see two assumptions that are exaggerating the case you originally made. You have a bottle of water dropping from $1 to $0.50 in less time than it takes a store owner to sell his stock. That would be my definition of ‘hyper-deflation’. I don’t think that is remotely realistic at all across all stock that a store-owner carries. Secondly, a store owner ‘may’ not ever be required to sell any product for less than he paid throughout the entire period of prevailing deflation. As gas prices recently fell more than 50% in a relatively short period of time (a couple of months?), gas stations would purchase an order of gas at lower prices, but keep selling their current stock at the old price until the new delivery arrived, at which point they would lower their price. This could be observed as first one station received a new delivery of gasoline and took the low-price lead, followed a few days later by a different station lowering their price significantly when they got their new delivery of cheaper gasoline.

In a completely different order of idea, I am at a complete loss as to how it is that not a single editorialist in your venerable institute has made reference on what is probably the greatest misnomer used by lending institutions the world over ie the word credt.

We all know that any goods or services sold on the promise to pay in the future means that a debt has been contracted and does not imply any credit. If you fail to make good on the term of repayment, you are in breach of contract and singularily resposible for the consequences.

Knowing that any reference to indebtedness would present a major stumbling block to lending, banks easily circumvented the problem by selling ‘credit’ rather than debt. To foolish borrowers this of course meant they could now rest their conscience since the goods and services that had bought were sold to them on the strength of their ‘credit’.

I believe that as long as this fraud remains undenounced by serious institutes,foolish borrowers and greedy bankers will continue with the charade at the expence of honest taxpayers.

In a completely different order of idea, I am at a complete loss as to how it is that not a single editorialist in your venerable institute has made reference on what is probably the greatest misnomer used by lending institutions the world over ie the word credt.

We all know that any goods or services sold on the promise to pay in the future means that a debt has been contracted and does not imply any credit. If you fail to make good on the term of repayment, you are in breach of contract and singularily resposible for the consequences.

Knowing that any reference to indebtedness would present a major stumbling block to lending, banks easily circumvented the problem by selling ‘credit’ rather than debt. To foolish borrowers this of course meant they could now rest their conscience since the goods and services that had bought were sold to them on the strength of their ‘credit’.

I believe that as long as this fraud remains undenounced by serious institutes,foolish borrowers and greedy bankers will continue with the charade at the expence of honest taxpayers.

In his first comment he criticizes Reisman for teaching the quantity theory of money. He sure does. But if one thinks this is some kind of wild departure from what Mises taught, one cannot have read “The Theory of Money and Credit” with any care. Because Mises only attacks certain versions of this theory, e.g. what he calls the “mechanical version” of it. If you are interested, there are some scattered remarks on the subject in chapter 8 of the book.

As to the second comment, the subject of how to implement the gold standard (once the presses are stopped) is addressed in detail in Reisman’s own book, p. 959ff. There is also a lecture, available on this site, that deals with this matter.

And thirdly: in all fairness, Reisman’s treatise “Capitalism” is comparable only to classics like “Human Action” and a few others. If one wants to criticize it (or improve on it), it should be based on something more than a mere scattering of knowledge of Austrian economics.

The net effect is that people and industries who are reliant on loans to tide them over are rapidly running out of money.

This has a direct effect on those of us who work for wages. Because as their wages have eroded or stayed the same over the past 35 years their standard of living has only been supported by an abundance of cheap, generally available credit. So once that credit gets removed, their real spendable income drops.

Is this a good thing? In terms of the economy as seen by a disinterested observer, perhaps. It untangles horrible snarls in our web of who is owed what by whom.. and makes the big picture more elegant looking and easier to understand.

In terms of the little people, though, the toll is horrendous. The snowball continues gathering speed, each year sees more foreclosures than the one before and the hemorrhage of jobs continues to accelerate. Operating funds freeze solid for large corps and little families alike.

Finally, when we find ourselves back in a primitive barter economy, we have to reinvent tokens in order to facilitate the trade of Jill’s home grown vegetables for Jack’s shoe repair. And in order to prevent easy counterfeit of those tokens, we can make them of some metal only avaiable in limited quantity.

Simple and elegant, all right. We’re back in the Dark Ages, before the Italians invented banking and credit. Then the author adds this:

“Indeed, under a full-bodied, 100-percent-reserve gold standard, falling prices, caused by increased production, are likely to be accompanied by a modest elevation of the rate of profit and a somewhat greater ease of repaying debt, both owing to the increase in the production and supply of gold and thus in the spending of gold.”

So the idea is to limit expansion of the money supply by going to a gold standard. Yet this will be okay, because we’ll just increase the amount of gold in circulation. Say what?

To me, if we fail because the credit market implodes and everyone runs out of operating funds, it’s going to be hard for most of us to get our hands on any of that gold. Only the richest, most fortunate among us will be able to weather the drought. And that’s not good economic policy for the country.

I have given examples on this site before and discussed their consequences. The easiest is the period after the US Civil War when we returned to the old parity.

A more current deflation is perhaps more instructive. Greenspan had held the value of the dollar very constant during the late 1980s and early 1990s holding a value indicated by the gold price of between $350/oz and $400/oz. This, along with good fiscal policy adopted by the Republican congress and signed by Clinton, gave us the Clinton prosperity. Then about 1996 Greenspan began to force the value of the dollar up until in 1999 it had appreciated almost 40% (gold near $250/oz.) This was deflation and the consequences compounded the problems of the Greenspan/Bernanke inflation of the 2000s (most obvious a neglect of investment in oil production).

We must understand Mises. To deal with inflation we first stop the presses. But most modern Austrians fail to continue to follow Mises after this point. Mises continues saying that we must then find the new equilibrium; the value of the currency has changed. Once we find that new equilibrium we define the currency at a new parity as near the new equilibrium as possible. Failure to define at this new parity will lead to deflation and you will have the bad consequences of both inflation and deflation to deal with as we have seen in the inflation following Y2K.

Do you mean Mr. Fox?

So, when one sells their home, and the land it sits on, the portion they get for the land is sorta like buying and later selling a taxi medallion, while you got it, you have an exclusive right to rent the land at the rent they choose.

Then there are the other factors which Stanley mentioned above being related to appraisal values of the land. Obviously the value of the land in a non-Alloidal title are dominated by location, available infrastructure, quality of neighborhood, etc.

If there is a major change in demographics, large population migrations, or other large change in the demand for housing, then you can expect to see a rise in land prices in the areas experiencing this growth. Extreme urban areas may expect to see a rise in land rent in the future as a result of higher productivity in business tenants, but it appears as though great suburbia will not experience a comparable increase in rent.

“Only decades of inflation and credit expansion could make it possible for people to think of the houses they occupy as an investment. In reality, a house is a consumers’ good, just like an automobile or a refrigerator. The only difference is that it depreciates more slowly than they do…..If not for inflation, the price of new houses would not rise. They would probably even fall from year to year. In addition, the price of a house that was 5, 10, or 20 years old would be significantly less than the price of a new house.”

Houses are not “just like an automobile or a refrigerator”. I was disappointed that Prof Reisman made no mention of the land on which all houses (and condominiums, as well as rental dwellings) are built. This is a significant factor and not to include it in the discussion of house prices is to me a weakness. I hope that he will cover this aspect in the near future.

**Kitty Antonik Wakfer

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“The supermarket owner bought those bottles of water at $0.90, and we suggest that he sell them at $0.50. So, what about his losses? If he had borrowed from his bank to finance his business, he will default, and will go out of business. How do we find an example that works its way through and completes the circle?”

He might go out of business, but he could keep adjusting his production and speculation on prices until he makes a profit again (he won’t buy any more bottled waters for over $0.45 each). On the other hand, there is a sort of “default market” as well. If the bank starts to see a cluster of businesses that are not completely paying up each month due to business losses, then the banker has two alternatives: either enforce bankruptcy on the businesses that didn’t pay up, and lose all future revenues coming from those defaulted loans, or negotiate with at least some of the business that while they cannot pay this month or next month, the bank will charge higher interest rates until the weak businesses start making a profit again and return to paying their respective loans, and the bank will have more of its money again along with some future revenues secure.

Whatever alternative is decided upon, it is the correct decision from the markets point of view if it is correctly turned out to be profitable, and this is true of the defaulted businesses as well (they can’t be expected to keep going on month after month with losses, they need to go out of business and find more profitable work).

Either way, the correct course of action(s) can be determined only the by market’s actors, and not the government. Long story short, tell the Keynesians “Do what Say says!”