tag:blogger.com,1999:blog-2098432983500045934.post1566965577375769151..comments2024-03-12T22:19:32.339-04:00Comments on The New Arthurian Economics: On Erosion (2): Ada and IdaThe Arthurianhttp://www.blogger.com/profile/16501331051089400601noreply@blogger.comBlogger6125tag:blogger.com,1999:blog-2098432983500045934.post-4582085523146547662012-08-23T06:52:52.764-04:002012-08-23T06:52:52.764-04:00Anon -
Say for the sake of argument that you neve...Anon - <br />Say for the sake of argument that you never get a "real" raise, but your wage keeps pace with inflation. You make $10 an hour in 2012 dollars (or whatever - deflator 1.0).<br />Say the deflator in 1995 was 2.0, and in 1980 was 3.0.<br />Say that your creditor charges 0% interest. (these are all oversimplifications to make it easier to get at the relevant point.)<br /><br />Say that you work 100 hours a year.<br /><br />You borrowed 100 hours worth of wage (100% of your income) in 1980 - in nominal dollars that is 100*10/3 = $333.33.<br /><br />You didn't pay it back. In 1995, you borrowed another 100 hours worth. In nominal dollars, that is 100*10/2 = $500.00<br /><br />So the total "dollars" that you borrowed was 833.33.<br />The total "hours of labor" that you borrowed was 200.<br /><br />-------<br /><br />Question: In 2012, how much has that debt been eroded by inflation?<br /><br />-------<br /><br />The right answer should be... <br />If there were no inflation, you would owe:<br />(200 hours of wage) = $2000<br />So the erosion is:<br />2000 - 833.33<br /> = 1166.67<br /><br />or, it was eroded by:<br />(2000 - 833.33) / 2000<br />= 58.3%<br /><br />-------<br /><br />If you calculate it Art's way (basically: integrating the "real deficit"), you get that you borrowed 100% of your yearly income in 1980 and another 100% in 1995, for 200%. So the "real debt art-wise" would be $2000. So you get the right answer (2000-833 is the erosion, so as a percent it's 58.3).<br /><br />-------<br /><br />If you calculate it "the normal way", you would say... i don't even know what. Can you fill this part in for me? I don't think it even makes sense enough to write down an answer. What calculation would you do to see how much the debt has been eroded?<br /><br />But, in any case, if you get a different answer than the "art method", then your answer is wrong.<br />Jerrynoreply@blogger.comtag:blogger.com,1999:blog-2098432983500045934.post-42886827369380303842012-08-20T20:13:13.602-04:002012-08-20T20:13:13.602-04:00Hi, Anon. I think you and I are very close to agre...Hi, Anon. I think you and I are very close to agreement, except for your first sentence!<br /><br />In your second sentence at the end I would add "relative to what it was", which raises the question about how far back in time we look for un-eroded values.<br /><br />Your 3rd and 4th sentences contradict each other, I think. To me, *when* the debt was contracted does matter, because that is what determines the original (un-eroded) value of the debt.<br /><br />I definitely agree with your last sentence, that the value of the debt compared to the size of the economy is the way to measure erosion of debt. But if real debt and real gdp are calculated the same way, the ratio of reals is identical to the ratio of nominals, and there can be no erosion of debt. In order to have erosion of debt relative to gdp, inflation must affect debt and gdp differently.<br />The Arthurianhttps://www.blogger.com/profile/16501331051089400601noreply@blogger.comtag:blogger.com,1999:blog-2098432983500045934.post-59090410336875410202012-08-20T04:22:34.060-04:002012-08-20T04:22:34.060-04:00I'm pretty sure you ARE wrong about this. When...I'm pretty sure you ARE wrong about this. When people talk about inflation eroding debt, they mean that the value of the debt now is being reduced. When the debt was contracted does not matter, because current debt is the sum of all previous deficits.<br />If you bought government bonds in 1982 and have held them for 30 years, those bonds will of course have been eroded by inflation more than bonds issued last year have been. But that simply tells us about the distribution of losses as the debt is eroded. It does not tell us anything about the question of the value of the debt today compared to the size of the economy, which is what people are talking about. Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2098432983500045934.post-86518771596110998302012-08-16T06:05:29.173-04:002012-08-16T06:05:29.173-04:00David, it seems to me that everyone else is "...David, it seems to me that <i>everyone else</i> is "confusing debt, which is a stock, with the deficit, which is a flow." :)<br /><br />A flow number (like GDP) represents one year's accumulation. Therefore, to calculate an inflation-adjustment for it, we need divide out only the one year's price level.<br /><br />A stock number (like debt) represents an accumulation of many years -- many years' deficits, say. But each year's deficit was created at a different price level. Therefore, to adjust total debt for inflation, it is necessary to adjust each year's piece of it separately.<br /><br />The full force of a dollar borrowed and spent in 1964 was far different from one borrowed and spent 20 years later!<br /><br />I have assembled a PDF from the four parts of this "On Erosion" series. I put it on Google Docs. You should be able to download it from there, if I did it right.<br /><br /><a href="https://docs.google.com/open?id=0B-pyd4Usl6QkNEhGeFJrb1JFc0U" rel="nofollow">https://docs.google.com/open?id=0B-pyd4Usl6QkNEhGeFJrb1JFc0U</a><br /><br />I could be wrong about this, but I can't see it. Thanks for keeping an eye on me. "It is astonishing what foolish things one can temporarily believe if one thinks too long alone..."<br />The Arthurianhttps://www.blogger.com/profile/16501331051089400601noreply@blogger.comtag:blogger.com,1999:blog-2098432983500045934.post-22334595285782884082012-08-16T05:38:02.043-04:002012-08-16T05:38:02.043-04:00It seems to me you are confusing debt, which is a ...It seems to me you are confusing debt, which is a stock, with the deficit, which is a flow.<br />BTW, I entirely agree that private not public debt is the problem for the economy.Gobanianhttps://www.blogger.com/profile/06624944704653618487noreply@blogger.comtag:blogger.com,1999:blog-2098432983500045934.post-77229996102485031012012-08-16T05:35:35.418-04:002012-08-16T05:35:35.418-04:00i have read this and the previous post twice and c...i have read this and the previous post twice and cannot understand the point you are making.<br />Why does it matter when debt was issued?Gobanianhttps://www.blogger.com/profile/06624944704653618487noreply@blogger.com