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As a counterpoint, you should consider Hayek's critique of the Paradox of Savings: https://mises.org/library/hayek-paradox-saving https://mises.org/library/hay

As a counterpoint, you should consider Hayek's critique of the Paradox of Savings: https://mises.org/library/hayek-paradox-saving https://mises.org/library/hayek-paradox-saving The "deflation makes people not spend" is a hand-wavy argument. There is zero empirical evidence for it.

sanswork 11y ago
You could just read any Bitcoin forum where everyone is 'hodling' because they expect their coins to be worth $100000 each soon.
- narrator 11y ago
  This is more an example of Gresham's law than anything else.
danieltillett 11y ago
It is not so much that it stops people from spending - it is that it makes the real interest rate high relative to the nominal and so discourages borrowing. Actually with negative interest rates proving possible (almost nobody thought they were a few years ago) if you had a deflationary currency you could always use negative interest rates to control demand. I am sure some smart economist has looked into this.
- narrator 11y ago
  When the real interest rate is high, business retained earnings are more valuable. Thus, economic power is transferred from lending institutions to profitable corporations. Who do you think does a better job investing?
  - danieltillett 11y ago
    Well the theory of a bank is to act as an efficient mechanism to transfer capital from businesses and consumers with excess capital to those with a need for more capital. Of course in practice banks have got pretty good at capturing almost all the value out of this process. Business should not really be in the business of retaining earnings. If it was not for tax reasons it would be best to return any excess funds to the shareholders and raise new capital when needed.
    - narrator 11y ago
      This would be fine and good, except banks create money when they lend through the money multiplier effect.
      - danieltillett 11y ago
        Yes but returning capital to shareholders would have the same effect too.

sanswork 11y ago

You could just read any Bitcoin forum where everyone is 'hodling' because they expect their coins to be worth $100000 each soon.

narrator 11y ago
This is more an example of Gresham's law than anything else.

danieltillett 11y ago

It is not so much that it stops people from spending - it is that it makes the real interest rate high relative to the nominal and so discourages borrowing. Actually with negative interest rates proving possible (almost nobody thought they were a few years ago) if you had a deflationary currency you could always use negative interest rates to control demand. I am sure some smart economist has looked into this.

narrator 11y ago
When the real interest rate is high, business retained earnings are more valuable. Thus, economic power is transferred from lending institutions to profitable corporations. Who do you think does a better job investing?
- danieltillett 11y ago
  Well the theory of a bank is to act as an efficient mechanism to transfer capital from businesses and consumers with excess capital to those with a need for more capital. Of course in practice banks have got pretty good at capturing almost all the value out of this process. Business should not really be in the business of retaining earnings. If it was not for tax reasons it would be best to return any excess funds to the shareholders and raise new capital when needed.
  - narrator 11y ago
    This would be fine and good, except banks create money when they lend through the money multiplier effect.
    - danieltillett 11y ago
      Yes but returning capital to shareholders would have the same effect too.