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A healthy economy is an economy which produces goods and services that people need and are able to buy. Although a high velocity of money might be an indicator

by magoghm 14y ago

A healthy economy is an economy which produces goods and services that people need and are able to buy. Although a high velocity of money might be an indicator of a healthy economy, it doesn't mean that using tricks like inflation to increase the velocity of money will produce a healthier economy. Inflation is an incentive to spend your money on stuff you don't really need, that might give the illusion of a healthy economy but you're just killing savings (which are the best safety net there is) and inducing a misallocation of productive resources.

kintamanimatt 14y ago
> Inflation is an incentive to spend your money on stuff you don't really need Most of the purchases we make are not to satisfy core needs, but wants. You buy slightly more expensive delicious foods instead of cheaper boring foods. You strive to live in a decent environment rather than a mud hut because the former is more pleasant than the latter. You buy things or experiences that are unnecessary to survival, but bring some form of happiness. (Research, has, however shown that buying experiences leads to greater happiness than buying tangible goods!) The list goes on. We do this in part because because we have dopamine. Eliminate dopamine and we not only struggle to feel pleasure, but our brains also stop functioning properly. Nobody ever says it, but inflation is really a good thing because of the way our brains are wired up. > you're just killing savings (which are the best safety net there is) Some savings are good to smooth out the bumps in the road, but when people save too aggressively people reduce their spending and the economy also slows. When the economy slows, you're more likely to find yourself out of work and having to use those savings so you don't end up living in that mud hut! > and inducing a misallocation of productive resources Your conclusion is a non sequitur.
- magoghm 14y ago
  When savings go up there is more capital to invest in new ventures, interest rates go down (more money chasing investment opportunities) and it signals the markets that it is a good time to take risks. When savings go down, interest rates go up and it signals the markets that it is a bad time to take risks. Inflation distorts those signals and makes people take risks when there aren't enough savings to justify those risks. High risks and low savings are a recipe for disaster.
  - jbooth 14y ago
    If your money appreciates in value just by sitting there, why invest? It's the ultimate argument against investing. Take the sure thing, especially in a rough economy. Similarly, you know how we always hear that people put out of work by new technology should move up the value chain? Where they gonna move to if people aren't buying things? Wants as opposed to needs are the sign of economic progress.
  - kintamanimatt 14y ago
    Generally, when people are socking money away their savings account, or reducing their spending in some way, it means they're trying to expose themselves to less risk because they're worried about the future. People who are worried about the future don't start investing until their confidence has been bolstered by something. Excessive savings on their own don't lead to investment, they lead to deflation and economic decline. The solution to this is to meddle with interest rates or policy. You are right that a reduction in spending/increase in savings (whatever their form) does tend to correlate with interest rates decreasing, and vice versa, but this is a deliberate decision to speed the velocity of money up again before longer-term damage happens. It's not a long-term solution. Interest rates are in many way a fiscal ballast to keep the economy properly weighted. The trouble with Bitcoin is it's inherently deflationary. Meddling with interest rates doesn't work if your currency is Bitcoin. You also can't have a healthy amount of inflation to keep the economy growing. If Bitcoin did become a de facto currency, we'd be poorer both economically and intellectually. The latter I believe because there would be less "excess" to spend on scientific research, as typically happens in periods of economic slowdown. Historically the best time to make an investment or start a business is in lean times (depressions are good!), but people aren't generally that rational. The value of something (currency included) is typically driven by emotions. This is why what people feel about something is everything, from a product you're selling to your currency. A few hours ago I thought Bitcoin was awesome and a good thing, but after thinking it through and arguing this point I'm convinced it's a bad thing and will lead to a longer-term harm if it is widely adopted and begins to replace traditional currencies.
    - mikecane 14y ago

by magoghm 14y ago

kintamanimatt 14y ago

> Inflation is an incentive to spend your money on stuff you don't really need Most of the purchases we make are not to satisfy core needs, but wants. You buy slightly more expensive delicious foods instead of cheaper boring foods. You strive to live in a decent environment rather than a mud hut because the former is more pleasant than the latter. You buy things or experiences that are unnecessary to survival, but bring some form of happiness. (Research, has, however shown that buying experiences leads to greater happiness than buying tangible goods!) The list goes on. We do this in part because because we have dopamine. Eliminate dopamine and we not only struggle to feel pleasure, but our brains also stop functioning properly. Nobody ever says it, but inflation is really a good thing because of the way our brains are wired up. > you're just killing savings (which are the best safety net there is) Some savings are good to smooth out the bumps in the road, but when people save too aggressively people reduce their spending and the economy also slows. When the economy slows, you're more likely to find yourself out of work and having to use those savings so you don't end up living in that mud hut! > and inducing a misallocation of productive resources Your conclusion is a non sequitur.

magoghm 14y ago
When savings go up there is more capital to invest in new ventures, interest rates go down (more money chasing investment opportunities) and it signals the markets that it is a good time to take risks. When savings go down, interest rates go up and it signals the markets that it is a bad time to take risks. Inflation distorts those signals and makes people take risks when there aren't enough savings to justify those risks. High risks and low savings are a recipe for disaster.
- jbooth 14y ago
  If your money appreciates in value just by sitting there, why invest? It's the ultimate argument against investing. Take the sure thing, especially in a rough economy. Similarly, you know how we always hear that people put out of work by new technology should move up the value chain? Where they gonna move to if people aren't buying things? Wants as opposed to needs are the sign of economic progress.
- kintamanimatt 14y ago
  Generally, when people are socking money away their savings account, or reducing their spending in some way, it means they're trying to expose themselves to less risk because they're worried about the future. People who are worried about the future don't start investing until their confidence has been bolstered by something. Excessive savings on their own don't lead to investment, they lead to deflation and economic decline. The solution to this is to meddle with interest rates or policy. You are right that a reduction in spending/increase in savings (whatever their form) does tend to correlate with interest rates decreasing, and vice versa, but this is a deliberate decision to speed the velocity of money up again before longer-term damage happens. It's not a long-term solution. Interest rates are in many way a fiscal ballast to keep the economy properly weighted. The trouble with Bitcoin is it's inherently deflationary. Meddling with interest rates doesn't work if your currency is Bitcoin. You also can't have a healthy amount of inflation to keep the economy growing. If Bitcoin did become a de facto currency, we'd be poorer both economically and intellectually. The latter I believe because there would be less "excess" to spend on scientific research, as typically happens in periods of economic slowdown. Historically the best time to make an investment or start a business is in lean times (depressions are good!), but people aren't generally that rational. The value of something (currency included) is typically driven by emotions. This is why what people feel about something is everything, from a product you're selling to your currency. A few hours ago I thought Bitcoin was awesome and a good thing, but after thinking it through and arguing this point I'm convinced it's a bad thing and will lead to a longer-term harm if it is widely adopted and begins to replace traditional currencies.
  - mikecane 14y ago