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Having a limited supply of money encourages hoarding. Hoarding does not an economy make. Bitcoin would fail there too.

mahouse 11y ago
Isn't the amount of money with real currencies also supposed to be limited? (I'm not the kind of person to complain about being downvoted, because I literally don't care, but I'd like to know what's wrong in what I said. I always thought printing money is something no sane government would do.)
- roywiggins 11y ago
  Not since the US left the gold standard, no. Plus fractional-reserve banking, and the amount of money in the world economy is always increasing.
- Nursie 11y ago
  Ideally the value of currency should map to a fairly consistent value. If 1 unit buys a loaf of bread today, it's probably for the best it maps to one loaf of bread tomorrow. If the amount of currency is fixed, but the economy grows, then the bread becomes cheaper. This has multiple effects, but one is to value work yesterday more than work today (work today will be compensated more poorly). Another is that it favours people who hold currency already over those that are actually producing useful economic output right now. So in a growing economy, the currency supply probably should increase. It's arguable that tilting things the other way - favouring work today over work yesterday (or ten years ago) and favouring economic activity over holding cash - is desirable, so most developed economies aim for low but positive inflation. This is my very simplistic understanding of why completely limited currencies are not a great plan.
oppositelock 11y ago
A currency which gains value encourages holding it, agreed, however, there are opposing economic forces at play as well. First, the marginal utility of additional units drops for the hoarders, and marginal utility is a well established economic fact. Second is the time preference of goods. People's lives are finite and they don't want money for money's sake, they want to exchange it for useful things. If you're really hungry, you will buy your sandwich today, not tomorrow even if it's going to be cheaper. Real world examples are electronics and the price of oil. Electronics get better and cheaper with time, and yet, people still buy today. Oil has depreciated hugely in the last months, and yet, people are buying gasoline and heating oil right now, even though signs point to it being even cheaper. Taken together, you have the desire to hoard counterbalanced by these two factors, which creates a balance of hoarding and spending. This does an economy make.
- sebastos 11y ago
  I think the point is that it lives on a spectrum. If inflation was so bad that your savings would be worthless tomorrow, you would run out and buy as many materials goods and services as possible. If you knew that tomorrow it would reach 10 times its current value, you might go hungry for a day to cash in on that. In either case, you're obfuscating the consumer's real demand due to 2nd order speculation. Using some particular good as a unit of account fundamentally introduces a distortion into the way that people elect to spend / save. And many people have different takeaways from this fact. If you're a goldbug or a Bitcoin enthusiast, you think that inflationary pressure is evil and deflationary pressure is good. If you're really into Keynesianism, you might think that consumption is good and saving is counterproductive. If you're the Federal Reserve, you think there is a right amount of spending that expert economists should target by tinkering with the money supply. For anyone interested, I personally think the real answer is to look for ways to design a system that removes the distortion entirely by introducing a currency that cannot be held. In other words, a financial system in which the unit of account, the grease in the gears of the economy, only exists in the brief context of a transaction. The actual holding of wealth would all be done using electronic "shares" of real material goods, sort of like what you're buying at a commodities exchange. In this world, people's personal savings would be electronic, hyper-diversified stock portfolios. The "currency" of this system, if you could even call it that, simply acts as a yardstick for understanding relative costs, rather than needing to understand the N^2 different exchange rates of a typical barter system. You would hold micro shares in thousands of different products thanks to automatic software tools that blended expedience with your desire to personally elect what goods you wanted a long position on. In this way, the appreciation / depreciation of your personal savings would rely quite transparently on current values of the goods it represented. Crucially, removing this layer of abstraction would make it much harder for your fortune to evaporate purely on perception of value (see: Zimbabwe) since you would never give it away for less than what the underlying goods were worth to you personally.
someguydave 11y ago
So an economy requires money in unlimited supply? That seems like dubious sophistry.
- dragontamer 11y ago
  Well, the Fed's approach is a flexible supply. You change the supply of money based on economic factors (that no one agrees upon true, but flexibility is the key)
- Udik 11y ago
  I'm not an economist, but I suppose that yes, in a sense it's true. An economy requires the value of money to be stable or very slowly decreasing in time. To obtain this, the amount of money in circulation must roughly match the amount of wealth. Since wealth is usually increasing, so has to be the total amount of money for its value to remain stable.
  - someguydave 11y ago
    It just strikes me as silly that an economy "requires" an infinite supply of money. I realize this is a commonly held belief, but I think it is wrong.
    - hderms 11y ago
      If you want an economy that encourages investment and trade then you want people to have some inherent motivation to spend money rather than hold on to it. The easiest way to do this is by introducing small amounts of inflation. At the very least we know that more people are being produced in the world, and people desire money, so merely by the practice of reproduction we are creating more demand for the same amount of money over time.
      - someguydave 11y ago
        It's a nice story, but it's unconvincing. I would agree that a fixed supply of money might become more valuable as human population increases. But I'm utterly unconvinced that 'prices can only increase' for the economy to work. For example, in electronics prices for hardware have generally fallen in nominal and real terms and yet it's still a pretty big industry.
dmichulke 11y ago
Well, others call it saving and in the old times, when money was scarce, it was actually a prerequisite for giving out loans.

Isn't the amount of money with real currencies also supposed to be limited? (I'm not the kind of person to complain about being downvoted, because I literally don't care, but I'd like to know what's wrong in what I said. I always thought printing money is something no sane government would do.)

roywiggins 11y ago
Not since the US left the gold standard, no. Plus fractional-reserve banking, and the amount of money in the world economy is always increasing.
Nursie 11y ago
Ideally the value of currency should map to a fairly consistent value. If 1 unit buys a loaf of bread today, it's probably for the best it maps to one loaf of bread tomorrow. If the amount of currency is fixed, but the economy grows, then the bread becomes cheaper. This has multiple effects, but one is to value work yesterday more than work today (work today will be compensated more poorly). Another is that it favours people who hold currency already over those that are actually producing useful economic output right now. So in a growing economy, the currency supply probably should increase. It's arguable that tilting things the other way - favouring work today over work yesterday (or ten years ago) and favouring economic activity over holding cash - is desirable, so most developed economies aim for low but positive inflation. This is my very simplistic understanding of why completely limited currencies are not a great plan.

oppositelock 11y ago

A currency which gains value encourages holding it, agreed, however, there are opposing economic forces at play as well. First, the marginal utility of additional units drops for the hoarders, and marginal utility is a well established economic fact. Second is the time preference of goods. People's lives are finite and they don't want money for money's sake, they want to exchange it for useful things. If you're really hungry, you will buy your sandwich today, not tomorrow even if it's going to be cheaper. Real world examples are electronics and the price of oil. Electronics get better and cheaper with time, and yet, people still buy today. Oil has depreciated hugely in the last months, and yet, people are buying gasoline and heating oil right now, even though signs point to it being even cheaper. Taken together, you have the desire to hoard counterbalanced by these two factors, which creates a balance of hoarding and spending. This does an economy make.

sebastos 11y ago
I think the point is that it lives on a spectrum. If inflation was so bad that your savings would be worthless tomorrow, you would run out and buy as many materials goods and services as possible. If you knew that tomorrow it would reach 10 times its current value, you might go hungry for a day to cash in on that. In either case, you're obfuscating the consumer's real demand due to 2nd order speculation. Using some particular good as a unit of account fundamentally introduces a distortion into the way that people elect to spend / save. And many people have different takeaways from this fact. If you're a goldbug or a Bitcoin enthusiast, you think that inflationary pressure is evil and deflationary pressure is good. If you're really into Keynesianism, you might think that consumption is good and saving is counterproductive. If you're the Federal Reserve, you think there is a right amount of spending that expert economists should target by tinkering with the money supply. For anyone interested, I personally think the real answer is to look for ways to design a system that removes the distortion entirely by introducing a currency that cannot be held. In other words, a financial system in which the unit of account, the grease in the gears of the economy, only exists in the brief context of a transaction. The actual holding of wealth would all be done using electronic "shares" of real material goods, sort of like what you're buying at a commodities exchange. In this world, people's personal savings would be electronic, hyper-diversified stock portfolios. The "currency" of this system, if you could even call it that, simply acts as a yardstick for understanding relative costs, rather than needing to understand the N^2 different exchange rates of a typical barter system. You would hold micro shares in thousands of different products thanks to automatic software tools that blended expedience with your desire to personally elect what goods you wanted a long position on. In this way, the appreciation / depreciation of your personal savings would rely quite transparently on current values of the goods it represented. Crucially, removing this layer of abstraction would make it much harder for your fortune to evaporate purely on perception of value (see: Zimbabwe) since you would never give it away for less than what the underlying goods were worth to you personally.

someguydave 11y ago

So an economy requires money in unlimited supply? That seems like dubious sophistry.

dragontamer 11y ago
Well, the Fed's approach is a flexible supply. You change the supply of money based on economic factors (that no one agrees upon true, but flexibility is the key)
Udik 11y ago
I'm not an economist, but I suppose that yes, in a sense it's true. An economy requires the value of money to be stable or very slowly decreasing in time. To obtain this, the amount of money in circulation must roughly match the amount of wealth. Since wealth is usually increasing, so has to be the total amount of money for its value to remain stable.
- someguydave 11y ago
  It just strikes me as silly that an economy "requires" an infinite supply of money. I realize this is a commonly held belief, but I think it is wrong.
  - hderms 11y ago
    If you want an economy that encourages investment and trade then you want people to have some inherent motivation to spend money rather than hold on to it. The easiest way to do this is by introducing small amounts of inflation. At the very least we know that more people are being produced in the world, and people desire money, so merely by the practice of reproduction we are creating more demand for the same amount of money over time.
    - someguydave 11y ago
      It's a nice story, but it's unconvincing. I would agree that a fixed supply of money might become more valuable as human population increases. But I'm utterly unconvinced that 'prices can only increase' for the economy to work. For example, in electronics prices for hardware have generally fallen in nominal and real terms and yet it's still a pretty big industry.

dmichulke 11y ago

Well, others call it saving and in the old times, when money was scarce, it was actually a prerequisite for giving out loans.