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It's because at the micro level, investments can be sub-optimal when they could be replaced by better more productive investments. At the aggregate level, the

It's because at the micro level, investments can be sub-optimal when they could be replaced by better more productive investments. At the aggregate level, the alternative to investment is just economic inactivity. At this level, turning investment into fiat means stopping economic value creation and preventing economy value retention. Unless you really believe that the unemployed would be destroying more than 100% of the value of the investment they need to work, it's an incorrect assumption. I think the erroneous assumption that Austrians make is that they think investments are not worth it in the private markets if they have negative returns. That is incorrect, stores of value can be useful as long as they retain part of their value, that is unless their returns are above -100%. You don't throw out a bag of apple because one of them may rot early. Idle fiat has a return of -100% to the aggregate economy over the time that it is made idle. On the aggregate, it's just paper it doesn't actually carry value forward. It is a claim on value created by others who have not promised to create anything. If you had instead invested the money into stock or a bond, something that enables production, even if you would only have generated -50% returns, you would have added much more value to the aggregate than if the savings would have been kept as idle fiat reserves. It is crucial that fiat does not price good short term investments out of the market every time the risk adjusted market rates go below -2%. -2% can be an artificially high rate that puts the private market in a gridlock. Negative returns may well be the natural state for stores of value. Before financial systems existed, almost all investments, had negative returns if you didn’t put work and energy into them. The only way you had to store value was to accumulate stuff, buildings or land. All options either had high maintenance costs, were subject to risk of damage from natural causes and theft, were very volatile or required hard labor to get production out of. Even in societies with good financial systems, getting risk free, hassle free, positive real returns has been difficult for most of history. This probably reflects the laws of thermodynamics that tell us that things tend to decay without work and energy put into them. The 20th century was probably the most notable exception. Because of unprecedented demographic and technological growth, positive risk free returns were easy to find. This however, may not continue forever, particularly amidst a aging and retiring population. Money should not be made an artificial government backstop for stores of value as this destroys the total amount of real wealth in the economy and replaces it with pieces of paper or numbers in accounts. The saving vehicle of last resort should be for people to stockpile stuff they will need in the future (which incidentally creates job because this stuff needs to be produced) not accumulation of fiat.

marcosdumay 11y ago
Sorry, but you stated the inexistence of bad investments on aggregate, and you support that extraordinary claim with a rant about stores of value? Anyway, that rant makes no sense. You can't just informally move from real and nominal values at will, as you can't claim that in a population, if everybody lose any amount less than 100% of their wealth, everybody would get richer. Or better, well, you can claim it, you just can not make it real.
- BenoitEssiambre 11y ago
  Bad investment compared to what? Idle excess fiat is worth about -100% to the aggregate economy over the time it is kept idle. Manipulating it so that it stores value for an individual at a real rate of -2% when private market stores of value's risk adjusted real returns are lower than that is a market distortion that transforms people's savings into a huge loss to the economy. I am the one being meticulous about the implications of real vs nominal. In particular I am saying that people's saving should be tied to something real by making sure they end up in something backed by real economic activity like stocks, bonds, actual stuff or credible promises of production of actual stuff. You on the other hand don't seem to see the different implications between fiat stores of value and real value tied to production and production capacity. You have no problem if people's savings end up as purely nominal idle fiat without any real intrinsic value tied to them, if people's savings accumulate as pure government created claims on production from other people who have not promised to fulfill those claims.
- BenoitEssiambre 11y ago
  I like to make simplified agrarian economy metaphors: Say you had an isolated farming village where people wanted to save to be able to eat in the winter. It is important that farmers invest their profits into additional production to have something to eat in the winter, even if, because of perdition, the stored crops are only worth 90% of the initial investment required to produce them. Otherwise, if they instead mandate their government to create a currency that keeps 98% if its real value when other forms of savings available don't, most farmers are going to work, trade part of the crop they don't want to eat to diversify their diet and keep their cash profits to be able to buy something to eat in the winter. They will not produce a crop to store for the winter since it would only return -10% and their central banks promised to keep money at -2% real value. However, now comes winter and all farmers have cash but few have anything to sell because they didn't reinvest their cash in the production of a stored crop for the winter! It's going to be difficult for the government to control inflation in such conditions because there will be too few goods for the amount of money people will want to spend. If the government manages to control inflation it will be by depressing the nominal value of the crops of the few farmers who did invest and save a crop for the winter. The central bank might do this by giving high enough interests payment on cash to prevent people from wanting to spend it immediately. In any case, people won't eat much during the winter. This could all have been prevented if the central bank had kept money devaluating sufficiently and farmers would not have kept their savings as cash but would have reinvested them into an extra crop for the winter and have continued to trade during the winter. What you call allowing "malinvestment", I call allowing sufficient production or production capacity to fill the needs of the future even if the returns are quite negative on this production. Note that there are parallels with farmers saving for the winter and a baby boom saving in preparation for retiring and stopping to work.

marcosdumay 11y ago

Sorry, but you stated the inexistence of bad investments on aggregate, and you support that extraordinary claim with a rant about stores of value? Anyway, that rant makes no sense. You can't just informally move from real and nominal values at will, as you can't claim that in a population, if everybody lose any amount less than 100% of their wealth, everybody would get richer. Or better, well, you can claim it, you just can not make it real.

BenoitEssiambre 11y ago
Bad investment compared to what? Idle excess fiat is worth about -100% to the aggregate economy over the time it is kept idle. Manipulating it so that it stores value for an individual at a real rate of -2% when private market stores of value's risk adjusted real returns are lower than that is a market distortion that transforms people's savings into a huge loss to the economy. I am the one being meticulous about the implications of real vs nominal. In particular I am saying that people's saving should be tied to something real by making sure they end up in something backed by real economic activity like stocks, bonds, actual stuff or credible promises of production of actual stuff. You on the other hand don't seem to see the different implications between fiat stores of value and real value tied to production and production capacity. You have no problem if people's savings end up as purely nominal idle fiat without any real intrinsic value tied to them, if people's savings accumulate as pure government created claims on production from other people who have not promised to fulfill those claims.
BenoitEssiambre 11y ago
I like to make simplified agrarian economy metaphors: Say you had an isolated farming village where people wanted to save to be able to eat in the winter. It is important that farmers invest their profits into additional production to have something to eat in the winter, even if, because of perdition, the stored crops are only worth 90% of the initial investment required to produce them. Otherwise, if they instead mandate their government to create a currency that keeps 98% if its real value when other forms of savings available don't, most farmers are going to work, trade part of the crop they don't want to eat to diversify their diet and keep their cash profits to be able to buy something to eat in the winter. They will not produce a crop to store for the winter since it would only return -10% and their central banks promised to keep money at -2% real value. However, now comes winter and all farmers have cash but few have anything to sell because they didn't reinvest their cash in the production of a stored crop for the winter! It's going to be difficult for the government to control inflation in such conditions because there will be too few goods for the amount of money people will want to spend. If the government manages to control inflation it will be by depressing the nominal value of the crops of the few farmers who did invest and save a crop for the winter. The central bank might do this by giving high enough interests payment on cash to prevent people from wanting to spend it immediately. In any case, people won't eat much during the winter. This could all have been prevented if the central bank had kept money devaluating sufficiently and farmers would not have kept their savings as cash but would have reinvested them into an extra crop for the winter and have continued to trade during the winter. What you call allowing "malinvestment", I call allowing sufficient production or production capacity to fill the needs of the future even if the returns are quite negative on this production. Note that there are parallels with farmers saving for the winter and a baby boom saving in preparation for retiring and stopping to work.