Deflation healthy sign of productivity, saving, adding value, liberty

Actual price levels, and price levels with normal deflation, 1948-1976, showing deflation healthy sign

Actual price levels, and price levels with normal deflation, 1948-1976 [1:12]

Deflation healthy sign overcome by government

…western monetary institutions in the era of the classical gold standard were far from being perfect. Governments frequently intervened in the production of money through price control schemes, which they camouflaged with the pompous name of “bimetallism.” They actively promoted fractional-reserve banking, which promised ever-new funds for the public treasury. And they promoted the emergence of central banking through special monopoly charters for a few privileged banks.[2:18]

A paper money system… merely distributes the existing resources in a different manner; some people gain, others lose. It is a system that makes banks and financial markets vulnerable, because it induces them to economize on the essential safety valves of business: cash and equity. Why hold any substantial cash balances if the central bank stands ready to lend you any amount that might be needed, at a moment’s notice? Why use your own money if you can finance your investments with cheap credit from the printing press?[2:7]

Paper money has caused an unprecedented increase of debt on all levels: government, corporate, and individual. It has financed the growth of the state on all levels, federal, state, and local. It thus has become the technical foundation for the totalitarian menace of our days.[2:21]

…in practice, there are at any point in time two, and only two, fundamental options for monetary policy. The first option is to increase the quantity of paper money. The second option is not to increase the paper money supply. Now the question is how well each of these options harmonizes with the basic principles on which a free society is built.[2:29]

Inflation is an unjustifiable redistribution of income in favor of those who receive the new money and money titles first, and to the detriment of those who receive them last. In practice the redistribution always works out in favor of the fiat-money producers themselves (whom we misleadingly call “central banks”) and of their partners in the banking sector and at the stock exchange. The rich stay rich (longer) and the poor stay poor (longer) than they would in a free society.[2:33-34]

Deflation healthy sign of productivity growing

…throughout modern history, improvements in aggregate productivity have overshadowed occasional setbacks. According to one widely-used estimate, from 1948 to 1976 total factor productivity in the US grew by an average annual rate of 2 per cent. Had a (total factor) productivity norm been in effect during this time, US consumer prices in 1976 would on average have been roughly half as high as they were just after the Second World War.[1:11]

Deflation healthy sign because saving pays off

Imagine if all prices were to drop tomorrow by 50 percent. Would this affect our ability to feed, cloth, shelter, and transport ourselves? It would not, because the disappearance of money is not paralleled by a disappearance of the physical structure of production. In a very dramatic deflation, there is much less money around than there used to be, and thus we cannot sell our products and services at the same money prices as before. But our tools, our machines, the streets, the cars and trucks, our crops and our food supplies—all this is still in place. And thus we can go on producing, and even producing profitably, because profit does not depend on the level of money prices at which we sell, but on the difference between the prices at which we sell and the prices at which we buy. In a deflation, both sets of prices drop, and as a consequence for-profit production can go on.

There is only one fundamental change that deflation brings about. It radically modifies the structure of ownership. Firms financed per credits go bankrupt because at the lower level of prices they can no longer pay back the credits they had incurred without anticipating the deflation. Private households with mortgages and other considerable debts to pay back go bankrupt, because with the decline of money prices their monetary income declines too whereas their debts remain at the nominal level.

…bankruptcies—irrespective of how many individuals are involved—do not affect the real wealth of the nation, and in particular that they do not prevent the successful continuation of production. The point is that other people will run the firms and own the houses—people who at the time the deflation set in were out of debt and had cash in their hands to buy firms and real estate. These new owners can run the firms profitably at the much lower level of selling prices because they bought the stock, and will buy other factors of production, at lower prices too.[2:25-27]

Deflation healthy sign because adding value pays off

…deflation… stops inflation and destroys the institutions that produce inflation. It abolishes the advantage that inflation-based debt finance enjoys, at the margin, over savings-based equity finance. And it therefore decentralizes financial decision-making and makes banks, firms, and individuals more prudent and self-reliant than they would have been under inflation.

Deflation healthy sign that liberty is secure

…deflation eradicates the re-channeling of incomes that result from the monopoly privileges of central banks. It thus destroys the economic basis of the false elites and obliges them to become true elites rather quickly, or abdicate and make way for new entrepreneurs and other social leaders.[2:40]

Deflation puts a brake—at the very least a temporary brake—on the further concentration and consolidation of power in the hands of the federal government… It dampens the growth of the welfare state, if it does not lead to its outright implosion.

… deflation is at least potentially a great liberating force. It… brings the entire society back in touch with the real world, because it destroys the economic basis of the social engineers, spin doctors, and brain washers.

…if our purpose is… to restore… a free society, then deflation is the only acceptable monetary policy.[2:41]

  1. Selgin, George. Less than zero. The case for a falling price level in a growing economy. The Institute of Economic Affairs, 1997.
  2. Hülsmann, Jörg Guido. Deflation and liberty. Ludwig von Mises Institute, 2008.

Sticky prices are responses to customer friction

Sticky prices illustrated

Sticky prices illustrated [1]

Sticky prices delay price jumps hoping customers will be happier

“We can’t change prices biannually, it is not the culture here.”

“We said we weren’t going to raise prices that year and I believe that once you say that, you should stick with it.”

…if the costs are stable, then doubling the frequency of price changes… invites customers to complain, to demand discounts and rebates, and to ask to renegotiate.

…price rigidity was perceived by the company’s customers to be a sign of “customer orientation” and therefore a good thing.

…many customers were more positively disposed to do business with companies who only changed their prices according to a predictable time schedule. Indeed, price rigidity was a source of pride within a company because it indicated that one’s relationship with customers was more important than the “bottom line.”

“We will take it in the pants rather than pass it on down to our customers.”

Sticky prices delay price drops that might jump up again

One member of the sales force aptly described cutting prices as “feeding the animal.” Such a decision sets up a dangerous cycle: cutting prices in order to get business this period leads to a response by a competitor with a still lower price. This lower price puts return pressure on the firm to lower its prices again.

…both the sales force and customers would sometimes argue against a price decrease because it would make a price increase in later years more expensive because of the need to convince customers that prices should go up again. Thus any price change that does not make sense for the customer can cause customer antagonism.

Sticky prices eventually jump, and effort with customers jumps up

…“every time you have one of those price changes you have to go in there and you are opening a Pandora’s box.”

“It is getting to be a running joke that every December and January I am coming in with some [price] change… They will say things like: ‘Where does that come from?… The direction is not consistent… You change discounts… dramatically, we don’t know if you are committed to us or not.’”

“Pricing season around here lasts longer than the NFL.”

“All of these costs depend on the size of the price change.”

During the pricing season we studied, a major customer called a senior vice president to negotiate a new discount level. The senior vice president and his staff flew to meet with the customer, which took two days. The team then returned to headquarters to gather additional data about the customer, similar customers, the firm’s competitors, and the effect of the customer’s purchases on the firm’s revenue. The pricing team recalculated the effect of their price changes on that customer and similar customers. They met, suggested additional analysis, met again, and decided on what they wanted to offer at the next round of meetings with the customer. Then they planned a presentation for the customer. The team then flew back with three corporate people, an area manager, and the account manager for another two days.

New large accounts require even more effort.

Although the company carries only about 8,000 products and it changes the list prices of almost all of them each year, the actual number of price changes it undertakes each year is many times higher because of the individually negotiated prices, discounts, and rebates. Therefore, the actual number of price changes undertaken is quite large, in the range of 10,000–54,000 each year.

Sticky prices speed up when overall prices move more, because people adapt

“There was… a period of some rapid inflation back in the Carter years where we would barely get a price sheet printed and you would have to start working on another one, every 6 months or so.”

“The [price] increases we experienced during that [inflationary] time were very much largely driven by cost and our average costs were going up and we were trying to recoup that… [During] high-inflation period you could get away with the high price increases. I think there was expectations in the market place; our customers are saying ‘I am able to in ate my prices to the end user so I shouldn’t be surprised when my vendor raises their prices…’ The distributors could pass on their prices a lot of easier than they can now.”[2]

  1. Koning, JP. “Are prices getting less sticky?” 14 Oct. 2015, Accessed 13 May 2017.
  2. Zbaracki, Mark J., et al. “Managerial and customer costs of price adjustment: direct evidence from industrial markets.” Review of Economics and statistics2 (2004): 514-533s.

Money control by government people denies us money self-regulation by business people

US consumer price index 1800-2016 shows effect of money control by government people after 1913

US Consumer Price Index for 1800-2016,[1]
scaled so 1913 CPI = 100

Under private control between wars before 1913, prices fell; a dollar bought more. Under government control since 1913, prices shot upward; a dollar buys less.

Money control by government people is not natural

Money is a government monopoly.

If there is no incentive to please consumers, the products or services monopolies sell tend to be more expensive and of lower quality than would be the case under competition, where a number of firms are free to compete for the consumer’s business.

Natural rights theorists argue that individual rights are being violated if government, which is supposed to protect property and political rights, prevents individuals from entering a line of business.

Money is not a natural government monopoly. It came into existence spontaneously out of the market process. Gold and silver coins, and promises to pay in gold and silver, have served consumers well for hundreds of years. From 1839 until the advent of the Federal Reserve Bank in the United States in 1913, most money in circulation consisted of privately issued bank notes…

Money control by government people is unstable and does us outsized harm

“The economy has been much less stable since the establishment of the Fed restored a government monopoly in currency issuance. The wholesale price index in 1913 [the year the Federal Reserve Board came into existence] was 87 percent of what it had been 73 years earlier… By contrast, in the 73 years since the founding of the Fed, the wholesale price index has risen to 825 percent of its 1913 level.”

“What we should have learned is that monetary policy is much more likely to be a cause than a cure of depressions, because it is much easier, by giving in to the clamour for cheap money, to cause those misdirections of production that make a later reaction inevitable, than to assist the economy in extricating itself from the consequences of overdeveloping in particular directions. The past instability of the market economy is the consequence of the exclusion of the most important regulator of the market mechanism, money, from itself being regulated by the market process.

“Just as the absence of competition has prevented the monopolist supplier of money from being subject to a salutary discipline, the power over money has also relieved governments of the necessity to keep their expenditure within their revenue…There can be little doubt that the spectacular increase in government expenditure over the last 30 years, with governments in some Western countries claiming up to half or more of the national income for collective purposes, was made possible by government control of the issue of money.”

Government control over the money supply increases centralization, which tends to reduce individual freedom. Asserting economic control over the individual also runs the risk of political control, since economic and political freedom are intertwined.

Money control won’t be given up easily by Progressive government people

One way to minimize this excessive control over the individual is to prohibit government from controlling the money supply. “One of the most effective measures for protecting the freedom of the individual might indeed be to have constitutions prohibiting all peacetime restrictions on transactions in any kind of money or the precious metals.”

Unfortunately, constitutions have a tendency to get twisted beyond recognition by the courts, at least that has been the American experience, so having a constitutional provision is not a perfect solution either. But it is better than nothing.

The long-run solution seems to be to phase-out government money as private money takes its place. Once government money is abolished there will be less pressure to restore the government’s monopoly position.

Money control by business people would be self-regulated by producers and consumers

Initially, the introduction of private money would be slow. However, over time, the money that holds its value best would be preferred over money that depreciates in value — the exact reverse of Gresham’s Law, which holds that bad money drives good money out of circulation. Gresham’s Law only holds true when government sets fixed exchange rates between or among competing currencies.

Thus, money would act just like other goods and services. Consumers would shop for the brand that best serves their needs. They would prefer stable currencies to unstable ones, and the market would weed out the bad from the good.[2]

  1. Consumer Price Index (Estimate), Accessed 25 Mar. 2017.
  2. McGee, Robert W. “The Case for Privatizing Money.The Asian Economic Review 30.2 (Aug. 1988): 258-273.

Control stability is affected most by control valve stiction

Cascade control of an exothermic chemical reactor, illustrating control valves that affect control stability

Cascade control of an exothermic chemical reactor [1]

Control stability is affected most by control valves

While the sensors of the process variables are the eyes, and the controller the brain, the final control element represents the hands of the control loop.

The final control element will influence the stability of a loop more than all the other control elements combined.

Control valves are the most common type of final control elements… What… is a control valve? The distinction between automated and control valves is the ability of the latter to modulate or assume an infinite number of throttling travel positions during normal control service.[2]

Control stability is at risk from safety and environmental protection that’s provided by sealing control valve stems with “packing”

Configuration of a pneumatic spring-diaphragm sliding-stem control valve, illustrating packing that affects control stability

Configuration of a pneumatic spring-diaphragm sliding-stem control valve [3]

Packing is a sealing system which normally consists of a deformable material… in the form of solid or split rings contained in a packing box. Packing material is compressed to provide an effective pressure seal between the fluid in the valve body and the outside atmosphere.

Common Packing Problems

  1. Desire to use just one packing material throughout a plant. The material of choice is normally graphite ribbon packing… Friction increases by magnitudes of 2-5 times.
  2. Overtightening, which leads to reduced life and high friction.
  3. Corrosion. primarily of the valve stem. The corrosion destroys the stem finish, which in turn destroys the packing from the inside towards the outside.
  4. Under-tightening, which normally comes with normal in-service wear, and regular/routine maintenance does not include retightening the packing’s force-loading mechanism. Under-tightening will lead to leakage, which if not corrected immediately, will lead to a complete packing failure rather quickly.[4]

Control stability is disrupted when a control valve has sticky stem packing – “stiction”

Level loop limit cycles due to static friction stick-jump, which illustrate that control valve stiction affects control stability

Closed loop behavior of a self-regulating level loop in presence of stiction or static friction stick-jump… …a level loop limit cycles due to stiction and the stem jumps to a new position once the controller overcomes the stiction…[5]

Friction is a force that tends to oppose the relative motion between two surfaces that are in contact.

… it usually takes more force to get an element to break out of its static condition and begin moving, whereas less force is usually required to keep it moving.

Static friction is the force that must be overcome before there is any relative motion between the two surfaces. Stick/slip or “stiction” are colloquial terms that are often used to describe static friction. Static friction is one of the major causes of dead band in a valve assembly. Dead band is the range through which an input signal can be varied, upon reversal of direction, without an observable change in the output signal.

Process disturbances… typically… are continually stopping and reversing direction. This means that the control elements also must continually follow this same stop-and-reverse-direction pattern. Every time the control element has to stop, static friction can become a factor.[6]

  1. Edgar, Thomas F., et al. “Process Control.” Perry’s chemical engineers’ handbook. 8th edition, edited by Don W. Green, McGraw-Hill, 2008, pp. 8-1 – 8-96; p. 8-24.
  2. Baumann, Hans. “Your best bet in control valves.InTech 56.7 (July 2009): 35.
  3. Fang, Lei, et al. “A semi-physical model for pneumatic control valves.” Nonlinear Dynamics 85.3 (2016): 1735-1748.
  4. Basic operation and function of control valves. Cashco, 2010, p. 56.
  5. Srinivasan, Ranganathan, et al. “Issues in modeling stiction in process control valves.” 2008 American Control Conference. IEEE, 2008.
  6. Jury, Floyd D. Control valve impact on loop performance. Technical monograph 49. Emerson Process Management, 2008.