[quote=capeman]Rich – You don’t take into account the loss of money through leveraged losses in the markets. If banks will lend 1:1 for margin on stocks and a stock goes to 50% then upon liquidation the former stock owners value goes from 100% to zero. This is even more severe when looking at the leverage in futures trading and currencies. Does this destroy money? No but the deflationary effects on the former owner of the securities is multiplied much more. So when Alice goes from 3 million to zero instead of 3 million to 2 million her effect on the economy will be from something to nothing while the bank will naturally tighten it’s margin requirements thereby destroying what was liquid money. That is an apparent loss of money.[/quote]
Yes, I am taking it into account and I addressed this very objection in the snippet above. *You are talking about the ability to create new money (and to a lesser extent the effect of perceived net worth); I am talking about the stock of existing money.*
If you want to conflate those things in your own analysis feel free; but I do not conflate them because they are different phenomena and each should be addressed separately to best understand the mechanics of what is going on.
Cyphire’s post clearly stated that *asset value declines reduced the existing stock of money.* I posted to correct this misapprehension. That was all I said. Now multiple people are posting to argue as if I’d stated that asset price declines don’t inhibit future money creation (all things equal), but I never stated that and in fact I stated the opposite, per this section that I will repeat from the above post:
There are some price-deflationary effects of a widespread decline in asset prices. All the stock holders who were still holding their declining stocks would definitely feel less wealthy than they did before the price drop. It’s likely that they would accordingly reduce their spending and boost their saving, which would exert a price-deflationary effect due to reduced monetary velocity and an increased demand for cash balances. In other words, while there was no change in society’s overall ability to spend, there might well be a reduction in society’s willingness to spend. But this phenomenon is very different than the actual destruction of money or spending ability.
Lower asset prices might also make it difficult for banks holding those assets on their balance sheets to lend new money into existence. But while this puts a potential damper on new money creation, it does not destroy any existing money.
Now if you want to debate about the deflationary pressures of asset price declines by the mechanism of reducing the ability to create money in the future, feel free. (I would argue that the Fed has proven itself more than capable of overcoming that, with the evidence that money supply has grown in spite of asset price declines).
And if you want to debate about the effects of “apparent loss of money” as you put it, also feel free because that is definitely a valid topic.
But don’t jumble up perceived net worth, future money supply growth, and the size of the existing money supply as if they are one thing. They are three different factors and conflating them hopelessly confuses and already complex topic.
