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Stable money does not make much sense. First, what does stable money mean. Most people would agree what they mean is that if $5 today gets you a loaf of bread,

Stable money does not make much sense. First, what does stable money mean. Most people would agree what they mean is that if $5 today gets you a loaf of bread, that $5 will buy you a loaf of bread a year or so from now as well. Let’s say you have a closed economic system which only produces bread, has 10 producers, and $100 in total. Those 10 producers create 20 loaves of bread, so a loaf of bread is $5. But what happens if they are hit by a meteor and 5 of the producers die. Now you still have $100 but only 10 loaves can be produced. So what would it mean to keep the price of money stable? If you still force a loaf of bread to be $5, after the first 10 loaves are bought, you’re out of loaves ans the remaining $50 have effectively inflated away to be worthless. Instability of currencies, therefore, is a natural consequence of imbalances between the supply of money and the production of goods and services. The US has actually done a tremendous job keeping the USD fairly stable, by printing more money to account for growing economic output (due to a variety of reasons, technology being one of them). That being said, there is always a bias towards low inflation as opposed to low deflation, because deflation can be an economy killer. If the value of cash increases with time (in other words, if $5 today buys you 1 loaf of bread, it will get you 2 loaves of bread a year from now), then the risk adjusted returns from any investment needs to be that much greater for an investor to invest. Even a small percent or 2 of deflation can have an oversized effect that would lead to a significantly smaller economy.

tofukid 5y ago
Investment returns are affected the same by inflationary or deflationary purchasing power. 2% inflation means returns must be above 2% to be profitable, and 2% deflation would mean returns need to be above 2% to beat risk free return. It’s the same either way, except in the inflationary environment savers are punished, and asset prices are inflated by forcing savers to invest.
- addicted 5y ago
  Investment returns are indeed affected by the same forces. And you want investments to be deflationary because you want their value to increase with time. But here’s the thing. Those are Investments. The point of currency is not to be an investment. If it was an investment it wouldn’t serve its goal as currency. The point of currency is to facilitate quick and easy exchanges of services and goods. And a deflationary currency pretty much becomes an investment and so loses its purpose as a currency. That’s exactly what’s happening to the likes of Bitcoin. They are almost entirelt investments and not currency anymore thanks to its deflationary (and volatile) nature. Also, “savers” are not being penalized. People who are hoarding currency, ie, the unit of exchange, are being penalized. They can very well go ahead and save their money in actual investments, as opposed to in a token of exchange. If a country ran a deflationary currency, it would slow down the economy significantly, which would put inflationary pressure on the currency. It’s not even clear to me how you would maintain a deflationary currency without periodically taking people’s dollars and destroying them (unless we fall into a paradoxical situation where making economic activity harder helps increase the amount of economic activity...there mah actually be some areas where this works, such as Veblen goods, where a “deflationary” currency might work).
  - tofukid 5y ago
    “And a deflationary currency pretty much becomes an investment and so loses its purpose as a currency. That’s exactly what’s happening to the likes of Bitcoin.” Is it? It’s not like merchants across the economy were going to accept Bitcoin, but decided to hold onto it instead. Nor was the economy using Bitcoin to trade goods and people started hoarding Bitcoin instead. “If a country ran a deflationary currency, it would slow down the economy significantly” The US experienced GDP growth during many years of price deflation and a dollar backed by gold during the 1800s and after the Great Depression. The economy grew a lot through periods of volatile consumer prices (high price or inflation or deflation) for over a century. The historical record does not seem to me to support a link between deflationary prices and lack of economic growth. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2580289 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2580289 Also, “savers” are not being penalized. People who are hoarding currency, ie, the unit of exchange, are being penalized.” Call it whatever you want, money losing purchasing power over time means it cannot be used as a vehicle for real savings. “Hoarding money” as you call it is a requisite for investment. Investment cannot occur without deferring consumption. All investment must come from saving wealth from consumption. When currency is inflationary it drives real savings towards other assets, like stocks, real estate, etc., and this effect strengthens the more inflationary the currency. It creates a situation like the one we have now, where investment in stocks is not about capitalizing entrepreneurial ventures, but parking savings to avoid debasement. Buying up property and stocks to preserve capital is not investment in the sense that capital is being used to increase production of things consumers want or need (real investment), but to avoid loss.

tofukid 5y ago

Investment returns are affected the same by inflationary or deflationary purchasing power. 2% inflation means returns must be above 2% to be profitable, and 2% deflation would mean returns need to be above 2% to beat risk free return. It’s the same either way, except in the inflationary environment savers are punished, and asset prices are inflated by forcing savers to invest.

addicted 5y ago
Investment returns are indeed affected by the same forces. And you want investments to be deflationary because you want their value to increase with time. But here’s the thing. Those are Investments. The point of currency is not to be an investment. If it was an investment it wouldn’t serve its goal as currency. The point of currency is to facilitate quick and easy exchanges of services and goods. And a deflationary currency pretty much becomes an investment and so loses its purpose as a currency. That’s exactly what’s happening to the likes of Bitcoin. They are almost entirelt investments and not currency anymore thanks to its deflationary (and volatile) nature. Also, “savers” are not being penalized. People who are hoarding currency, ie, the unit of exchange, are being penalized. They can very well go ahead and save their money in actual investments, as opposed to in a token of exchange. If a country ran a deflationary currency, it would slow down the economy significantly, which would put inflationary pressure on the currency. It’s not even clear to me how you would maintain a deflationary currency without periodically taking people’s dollars and destroying them (unless we fall into a paradoxical situation where making economic activity harder helps increase the amount of economic activity...there mah actually be some areas where this works, such as Veblen goods, where a “deflationary” currency might work).
- tofukid 5y ago
  “And a deflationary currency pretty much becomes an investment and so loses its purpose as a currency. That’s exactly what’s happening to the likes of Bitcoin.” Is it? It’s not like merchants across the economy were going to accept Bitcoin, but decided to hold onto it instead. Nor was the economy using Bitcoin to trade goods and people started hoarding Bitcoin instead. “If a country ran a deflationary currency, it would slow down the economy significantly” The US experienced GDP growth during many years of price deflation and a dollar backed by gold during the 1800s and after the Great Depression. The economy grew a lot through periods of volatile consumer prices (high price or inflation or deflation) for over a century. The historical record does not seem to me to support a link between deflationary prices and lack of economic growth. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2580289 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2580289 Also, “savers” are not being penalized. People who are hoarding currency, ie, the unit of exchange, are being penalized.” Call it whatever you want, money losing purchasing power over time means it cannot be used as a vehicle for real savings. “Hoarding money” as you call it is a requisite for investment. Investment cannot occur without deferring consumption. All investment must come from saving wealth from consumption. When currency is inflationary it drives real savings towards other assets, like stocks, real estate, etc., and this effect strengthens the more inflationary the currency. It creates a situation like the one we have now, where investment in stocks is not about capitalizing entrepreneurial ventures, but parking savings to avoid debasement. Buying up property and stocks to preserve capital is not investment in the sense that capital is being used to increase production of things consumers want or need (real investment), but to avoid loss.