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> What makes you think deflation would be bad? Literally economics 101. Investment grinds to a halt and progress along with it.

snikeris 8y ago
Does investment really grind to a halt though? I'm thinking people would just demand a higher return on their investments before they parted with their cash. Recently, many countries had negative interest rates. So I suppose people were being incentivized to find "investments" that would return 0% on their money. Was that a good thing? Also, inflation means everyone needs to be investors or the money they worked hard for evaporates. Why should we force Joe Sixpack into being an investor for the good of the economy? He should be able to focus on earning money from his trade without having to worry about investing due to inflation being forced upon him.
- mundo 8y ago
  > Does investment really grind to a halt though? Well, it's discouraged, but yes, basically. Under inflation, you need to invest money just to stay even. The lower inflation is, the less urgent the need to invest. With deflation, you're somewhat incentivized not to lend. A fixed money supply guarantees deflation, so yes, this would significantly reduce lending and the economic growth that lending stimulates. > Also, inflation means everyone needs to be investors or the money they worked hard for evaporates. Why should we force Joe Sixpack into being an investor for the good of the economy? If Joe Sixpack lives paycheck-to-paycheck he can ignore inflation entirely, it doesn't affect him a whit. Once he gets some savings, if he doesn't like risk he can buy bonds or something and continue ignoring inflation. But since you brought it up and since this seems to be a point of confusion for a lot of people, yes, let's see how a fixed money supply would affect Joe Sixpack. If the government stops printing money, we are guaranteed to get deflation any time the GDP grows, right? With money supply held constant, "The US currency deflated by 2% last year" is equivalent to saying "The US GDP grew by 2% last year." And what makes the GDP grow? Joe Sixpack and his friends, out there mining ore or building furniture or otherwise increasing the amount of value in the world. 2% deflation also means that anyone with savings sees the buying power of their savings increase by 2%. If Scrooge McDuck has $5M in his mattress, his inflation-adjusted net worth increased by $100,000. He can retire and spend the rest of his life living very comfortably on the equivalent of $90k/year, and despite him doing no work, despite him incurring no financial risk, somehow every year he'll get a little wealthier. How is that possible? Who's paying for his life of luxury? Joe Sixpack. Deflation is quite literally a tax by capital on labor. As long as the GDP is increasing, arguing for deflation is tantamount to saying, "I think some of that GDP growth created by workers should go to anyone with money." AFAIK this is universally understood to be a Bad Thing (tm) by virtually everyone.
  - ric2b 8y ago
    > If Scrooge McDuck has $5M in his mattress, his inflation-adjusted net worth increased by $100,000. He can retire and spend the rest of his life living very comfortably on the equivalent of $90k/year, and despite him doing no work, despite him incurring no financial risk, somehow every year he'll get a little wealthier. He'll have to part with some of his wealth whenever buying something, and eventually it will still run out. It's not a stock that produces dividends, you have to spend the principal to take advantage of the value growth. Think of it as owning a $5M home that you have to sell a part of each time you buy something, even though the house increases in value. > How is that possible? Who's paying for his life of luxury? Joe Sixpack. Deflation is quite literally a tax by capital on labor. Joe Sixpack's salary would increase in value by default. As in, by default salaries would track GDP growth, how does that look like a tax to you? Companies will have to actively tell people "we're going to reduce your salary", which helps workers in the negotiation. > How is that possible? Who's paying for his life of luxury? Joe Sixpack. Or whoever is after the currency, just like whoever wants to buy a house pays for equity value growth. > "I think some of that GDP growth created by workers should go to anyone with money." AFAIK this is universally understood to be a Bad Thing (tm) by virtually everyone. As opposed to "I think some of that GDP growth created by workers should go to banks so that they can charge interest on everyone else and make easy profits."
mr_spothawk 8y ago
I keep reading that "economics isn't a science"
- jonknee 8y ago
  And it doesn't take a scientist to realize that when things will be cheaper tomorrow people tend to avoid making purchases today. (Think back to when home prices were crashing, there wasn't exactly a rush of people to buy homes that were declining in value.)
  - mkirklions 8y ago
    But what if you need to eat food? Or pay your mortgage? How will you pay for things if you dont spend Bitcoin?
    - jonknee 8y ago
      Yes, essential spending would happen. But why upgrade your car, or go out to eat, or go on a vacation, or all the other non-essential spending that powers our economy? Even a very small change in these behaviors has huge effects because one person's spending is another person's income.
      - mkirklions 8y ago
        > why upgrade your car, or go out to eat, or go on a vacation, or all the other non-essential spending that powers our economy? I find 0 of those good. Upgrading your car when you dont need to is wreckless spending. Maybe the Economy changes to become more conservative and less environmentally damaging. Going out to eat + vacations are unnecessary expenses. And btw, I completely doubt people are going to stop doing those 3.
        jonknee 8y ago
        Consumer spending is what keeps everyone employed. Even in Silicon Valley because who do you think is buying all the ads? > Upgrading your car when you dont need to is wreckless spending. But that's what creates the used car market, which is much bigger than the new car market. When people stop buying new cars it means tons of layoffs, which means tons of reduced spending by all the previously employed auto workers, which means more businesses lay people off, etc etc.
mkirklions 8y ago
>economics 101 I wouldnt use an entry level economics class to judge technology that eliminates risk of government hyperinflation and lowers/eliminates cost of transactions. The economic benefits of free/low cost transactions and money that can be saved/spent rather than invested may have its own benefits.
- jonknee 8y ago
  > I wouldnt use an entry level economics class to judge technology that eliminates risk of government hyperinflation and lowers/eliminates cost of transactions. I didn't, the question was "What makes you think deflation would be bad?". That is entry level economics and has nothing to do with technology.
maehwasu 8y ago
Very true. Now do the inefficient capital allocations caused by inflationary monetary environments.
jpadkins 8y ago
I have taken econ 101, this wasn't covered. Deflation via credit default has shown to be harmful to wider economy 2x times in US history (monetary shocks). I am not aware of any conclusive study that a deflationary currency is bad for investment and progress. The easy counterpoint is Gold, which is often deflationary (when economic growth outpaces gold mining). We have had 10k years of investment that have shown your basic statement is false (deflationary currency causes investment to grind to a halt). Inflationary fiat or credit based currency is a relatively new invention (1972 in the US). I have not seen any serious analysis showing that real investment has radically improved since going off the gold standard. Real investment has been growing for decades as real wealth increases, inflationary currency hasn't changed that very much AFAIK.
- nerfhammer 8y ago
  > Inflationary fiat or credit based currency is a relatively new invention (1972 in the US) The dollar has been fiat since the 1930s. The gold standard from 1933-1972 was essentially in name only.
  - jpadkins 8y ago
    https://en.wikipedia.org/wiki/Bretton_Woods_system https://en.wikipedia.org/wiki/Bretton_Woods_system 45-72 was bretton woods era which was still fixed price to gold. It was only after 1972 that the value was allowed to be free floating, not tied to an amount of gold https://en.wikipedia.org/wiki/Nixon_shock https://en.wikipedia.org/wiki/Nixon_shock
    - jonknee 8y ago
      Did you miss the "essentially in name only" part? It was fixed to gold, but they also fixed the price of gold by outlawing [1] people from owning it! When they wanted to deflate the USD they just raised the price of gold [2]. It was a crude fiat system. [1] https://en.wikipedia.org/wiki/Executive_Order_6102 https://en.wikipedia.org/wiki/Executive_Order_6102 [2] https://en.wikipedia.org/wiki/Gold_Reserve_Act https://en.wikipedia.org/wiki/Gold_Reserve_Act

snikeris 8y ago

Does investment really grind to a halt though? I'm thinking people would just demand a higher return on their investments before they parted with their cash. Recently, many countries had negative interest rates. So I suppose people were being incentivized to find "investments" that would return 0% on their money. Was that a good thing? Also, inflation means everyone needs to be investors or the money they worked hard for evaporates. Why should we force Joe Sixpack into being an investor for the good of the economy? He should be able to focus on earning money from his trade without having to worry about investing due to inflation being forced upon him.

mundo 8y ago
> Does investment really grind to a halt though? Well, it's discouraged, but yes, basically. Under inflation, you need to invest money just to stay even. The lower inflation is, the less urgent the need to invest. With deflation, you're somewhat incentivized not to lend. A fixed money supply guarantees deflation, so yes, this would significantly reduce lending and the economic growth that lending stimulates. > Also, inflation means everyone needs to be investors or the money they worked hard for evaporates. Why should we force Joe Sixpack into being an investor for the good of the economy? If Joe Sixpack lives paycheck-to-paycheck he can ignore inflation entirely, it doesn't affect him a whit. Once he gets some savings, if he doesn't like risk he can buy bonds or something and continue ignoring inflation. But since you brought it up and since this seems to be a point of confusion for a lot of people, yes, let's see how a fixed money supply would affect Joe Sixpack. If the government stops printing money, we are guaranteed to get deflation any time the GDP grows, right? With money supply held constant, "The US currency deflated by 2% last year" is equivalent to saying "The US GDP grew by 2% last year." And what makes the GDP grow? Joe Sixpack and his friends, out there mining ore or building furniture or otherwise increasing the amount of value in the world. 2% deflation also means that anyone with savings sees the buying power of their savings increase by 2%. If Scrooge McDuck has $5M in his mattress, his inflation-adjusted net worth increased by $100,000. He can retire and spend the rest of his life living very comfortably on the equivalent of $90k/year, and despite him doing no work, despite him incurring no financial risk, somehow every year he'll get a little wealthier. How is that possible? Who's paying for his life of luxury? Joe Sixpack. Deflation is quite literally a tax by capital on labor. As long as the GDP is increasing, arguing for deflation is tantamount to saying, "I think some of that GDP growth created by workers should go to anyone with money." AFAIK this is universally understood to be a Bad Thing (tm) by virtually everyone.
- ric2b 8y ago
  > If Scrooge McDuck has $5M in his mattress, his inflation-adjusted net worth increased by $100,000. He can retire and spend the rest of his life living very comfortably on the equivalent of $90k/year, and despite him doing no work, despite him incurring no financial risk, somehow every year he'll get a little wealthier. He'll have to part with some of his wealth whenever buying something, and eventually it will still run out. It's not a stock that produces dividends, you have to spend the principal to take advantage of the value growth. Think of it as owning a $5M home that you have to sell a part of each time you buy something, even though the house increases in value. > How is that possible? Who's paying for his life of luxury? Joe Sixpack. Deflation is quite literally a tax by capital on labor. Joe Sixpack's salary would increase in value by default. As in, by default salaries would track GDP growth, how does that look like a tax to you? Companies will have to actively tell people "we're going to reduce your salary", which helps workers in the negotiation. > How is that possible? Who's paying for his life of luxury? Joe Sixpack. Or whoever is after the currency, just like whoever wants to buy a house pays for equity value growth. > "I think some of that GDP growth created by workers should go to anyone with money." AFAIK this is universally understood to be a Bad Thing (tm) by virtually everyone. As opposed to "I think some of that GDP growth created by workers should go to banks so that they can charge interest on everyone else and make easy profits."

mr_spothawk 8y ago

I keep reading that "economics isn't a science"

jonknee 8y ago
And it doesn't take a scientist to realize that when things will be cheaper tomorrow people tend to avoid making purchases today. (Think back to when home prices were crashing, there wasn't exactly a rush of people to buy homes that were declining in value.)
- mkirklions 8y ago
  But what if you need to eat food? Or pay your mortgage? How will you pay for things if you dont spend Bitcoin?
  - jonknee 8y ago
    Yes, essential spending would happen. But why upgrade your car, or go out to eat, or go on a vacation, or all the other non-essential spending that powers our economy? Even a very small change in these behaviors has huge effects because one person's spending is another person's income.
    - mkirklions 8y ago
      > why upgrade your car, or go out to eat, or go on a vacation, or all the other non-essential spending that powers our economy? I find 0 of those good. Upgrading your car when you dont need to is wreckless spending. Maybe the Economy changes to become more conservative and less environmentally damaging. Going out to eat + vacations are unnecessary expenses. And btw, I completely doubt people are going to stop doing those 3.
      - jonknee 8y ago
        Consumer spending is what keeps everyone employed. Even in Silicon Valley because who do you think is buying all the ads? > Upgrading your car when you dont need to is wreckless spending. But that's what creates the used car market, which is much bigger than the new car market. When people stop buying new cars it means tons of layoffs, which means tons of reduced spending by all the previously employed auto workers, which means more businesses lay people off, etc etc.

mkirklions 8y ago

>economics 101 I wouldnt use an entry level economics class to judge technology that eliminates risk of government hyperinflation and lowers/eliminates cost of transactions. The economic benefits of free/low cost transactions and money that can be saved/spent rather than invested may have its own benefits.

jonknee 8y ago
> I wouldnt use an entry level economics class to judge technology that eliminates risk of government hyperinflation and lowers/eliminates cost of transactions. I didn't, the question was "What makes you think deflation would be bad?". That is entry level economics and has nothing to do with technology.

maehwasu 8y ago

Very true. Now do the inefficient capital allocations caused by inflationary monetary environments.

jpadkins 8y ago

I have taken econ 101, this wasn't covered. Deflation via credit default has shown to be harmful to wider economy 2x times in US history (monetary shocks). I am not aware of any conclusive study that a deflationary currency is bad for investment and progress. The easy counterpoint is Gold, which is often deflationary (when economic growth outpaces gold mining). We have had 10k years of investment that have shown your basic statement is false (deflationary currency causes investment to grind to a halt). Inflationary fiat or credit based currency is a relatively new invention (1972 in the US). I have not seen any serious analysis showing that real investment has radically improved since going off the gold standard. Real investment has been growing for decades as real wealth increases, inflationary currency hasn't changed that very much AFAIK.

nerfhammer 8y ago
> Inflationary fiat or credit based currency is a relatively new invention (1972 in the US) The dollar has been fiat since the 1930s. The gold standard from 1933-1972 was essentially in name only.
- jpadkins 8y ago
  https://en.wikipedia.org/wiki/Bretton_Woods_system https://en.wikipedia.org/wiki/Bretton_Woods_system 45-72 was bretton woods era which was still fixed price to gold. It was only after 1972 that the value was allowed to be free floating, not tied to an amount of gold https://en.wikipedia.org/wiki/Nixon_shock https://en.wikipedia.org/wiki/Nixon_shock
  - jonknee 8y ago
    Did you miss the "essentially in name only" part? It was fixed to gold, but they also fixed the price of gold by outlawing [1] people from owning it! When they wanted to deflate the USD they just raised the price of gold [2]. It was a crude fiat system. [1] https://en.wikipedia.org/wiki/Executive_Order_6102 https://en.wikipedia.org/wiki/Executive_Order_6102 [2] https://en.wikipedia.org/wiki/Gold_Reserve_Act https://en.wikipedia.org/wiki/Gold_Reserve_Act