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But money has some transaction value that makes it more valuable than zero interest bonds, so this situation could not be an equilibrium. The equilibrium price

But money has some transaction value that makes it more valuable than zero interest bonds, so this situation could not be an equilibrium. The equilibrium price would be set by the demand for money-as-currency. But in the limit of instantaneous (electronic) settling of payments, this demand premium converges on zero, with the only residual demand being for money-as-store-of-value. The purchasing power of hard money increases with time only to the extent that reality changes, i.e., for the same reason that each year you can buy more CPU cycles per inflation-adjusted dollar. And it's exactly as "deflationary" as the falling price of CPU cycles. This is perceived to be a problem only because of a double meaning of the word deflation: a contraction in the money supply causes a potentially harmful general drop in prices, whereas increased productivity causes a beneficial increase in the purchasing power of money. Those who fear the latter need to explain why it's bad that, e.g., smartphones keep getting better and cheaper every year. Unfortunately, the usual strategy is to describe both kinds of price decreases as "deflationary", point out that deflation has historically been harmful, and then conclude that hard money must be harmful as well. That this logic is applied to hard money and not to smartphones is most parsimoniously explained by the political incentives that led to the abandonment of hard money in the first place, together with the associated displacement of descriptive "political economy" by prescriptive economics.

JesperRavn 11y ago
The equilibrium price would be set by the demand for money-as-currency. But in the limit of instantaneous (electronic) settling of payments, this demand premium converges on zero, with the only residual demand being for money-as-store-of-value. Let's start with the empirical evidence. Velocity of money has not grown much at all, over the last 50 years[0]. Surely if the issue was mainly technological, then technological changes up till now would have resulted in a bigger change in velocity. The alternate explanation is that the transaction value of money is driven by other kinds of economic frictions, in particular agency problems. Although it's not very popular, Holmstrom and Tirole have some theoretical work on the relationship between collateral, liquidity and agency problems. But the general idea is quite intuitive: any contract, whether debt or equity, changes the incentives of the counterparty and results in moral hazard. This places a limit on how much we can rely on credit instead of money. That this logic is applied to hard money and not to smartphones is most parsimoniously explained by the political incentives that led to the abandonment of hard money in the first place, Given the above, do you still think that the you know the simple obvious truth and that mainstream economics has ignored it out of willful blindness? Does your parsimonious explanation apply to me? [0] https://en.wikipedia.org/wiki/Velocity_of_money#/media/File:M2VelocityEMratioUS052009.png https://en.wikipedia.org/wiki/Velocity_of_money#/media/File:...

JesperRavn 11y ago

The equilibrium price would be set by the demand for money-as-currency. But in the limit of instantaneous (electronic) settling of payments, this demand premium converges on zero, with the only residual demand being for money-as-store-of-value. Let's start with the empirical evidence. Velocity of money has not grown much at all, over the last 50 years[0]. Surely if the issue was mainly technological, then technological changes up till now would have resulted in a bigger change in velocity. The alternate explanation is that the transaction value of money is driven by other kinds of economic frictions, in particular agency problems. Although it's not very popular, Holmstrom and Tirole have some theoretical work on the relationship between collateral, liquidity and agency problems. But the general idea is quite intuitive: any contract, whether debt or equity, changes the incentives of the counterparty and results in moral hazard. This places a limit on how much we can rely on credit instead of money. That this logic is applied to hard money and not to smartphones is most parsimoniously explained by the political incentives that led to the abandonment of hard money in the first place, Given the above, do you still think that the you know the simple obvious truth and that mainstream economics has ignored it out of willful blindness? Does your parsimonious explanation apply to me? [0] https://en.wikipedia.org/wiki/Velocity_of_money#/media/File:M2VelocityEMratioUS052009.png https://en.wikipedia.org/wiki/Velocity_of_money#/media/File:...