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I hate to be a cynic, but I disagree with many of the points put forth in this article, points that are critical to supporting its thesis. I list some disagreem

I hate to be a cynic, but I disagree with many of the points put forth in this article, points that are critical to supporting its thesis. I list some disagreements below. >Then you have what we’re seeing in America, which is the long, slow erosion of wealth and savings through a steady stream of monetary inflation. Inflation does not reduce wealth. Inflation reduces the value of money. All real goods and services are worth what they're worth, regardless of the stick used to measure them. Inflation only changes the nominal measure of wealth, not wealth itself! Furthermore, economists generally regard a small amount of inflation as better than a small amount of deflation. First, inflation helps keep prices and salaries less sticky, by constantly devaluing them. Second, inflation helps keep the banking system working (I believe). If nominal interest rates ever go negative, people will withdraw deposits from banks and just hold cash (which always has a nominal interest rate of 0%). >Not only does inflation slowly eat away at individual wealth, but it also disincentivizes savings. How does inflation disincentivize savings? Assuming that nominal interest rates are constant, then yes, inflation leads to lower savings. But when inflation is high, nominal rates are high, and when inflation is low, nominal rates are low. The relationship is not clear. Also, remember that S=I, savings=investment. A common misconception is that savings is putting cash aside for the future, whereas investment is spending cash on the future. However, they are actually the same thing. Read more about why savings=investment here: http://www.themoneyillusion.com/?p=12617 http://www.themoneyillusion.com/?p=12617 >One Bitcoin user created an exchange which completely solved the problem of violence in the drug trade. This user also allegedly hired a hitman to murder someone. >Governments try to control currencies. With all that power, shouldn’t they seek to learn as much about them as possible? Why would anyone attempt to kneecap thousands of unpaid, volunteer experimenters, who are constantly sharing with the world what we’re learning about how money works? It’s very odd. I think the US Government is concerned with people breaking its laws. In this case, illegally buying drugs and illegally not paying taxes. It sounds like a reasonable concern to me, though I admit I'm not well informed and I welcome additional comments. --- One big downside of a "free" currency is that there are no restorative forces to keep its value constant. A huge advantage of having the US government behind the dollar is that the US can control the value of the dollar. Most of the value here comes, paradoxically, not from controlling the dollar but in markets believing that the US can control the dollar. Those market expectations then themselves keep the value of the dollar mostly constant. Having a currency with a predictable and constant value is hugely important for trade. For this reason, I can't imagine Bitcoin ever succeeding on a large scale for a long time.

xenophanes 13y ago
> Inflation does not reduce wealth. Inflation (a jargon word that basically means printing money) transfers money from savers to debtors. This is destructive. It's destructive because the amount of money the government will print is not fully predictable, so it creates financial risks for people who plan ahead. It's destructive because the new money enters the economy unevenly -- and basically unpredictably and unfairly, not efficiently. It's also destructive because it discourages savings and capital accumulation, which are important to wealth creation. So inflation does reduce wealth, overall.
- chii 13y ago
  > So inflation does reduce wealth, overall. i totally agree with all your points, except inflation doesn't reduce wealth (the same amount of goods and services are produced regardless of inflation), it redistributes wealth from those who cannot hedge against inflation (usually those who don't have lots of money), to those who can. While nominal interest rates _might_ somewhat match inflation, in practicality, having an account with a bank that you need for day to day means you don't get much interest (often there are rules like "withdraw once, and lose the monthly interest"). Sure, when you are rich and have an investment account paying 10% pa, then it somewhat balances inflation. I want to know what the major cause of inflation is - i suspect it is a result of fractional reserve banking.
  - xenophanes 13y ago
    When you take money away from someone who was saving to build a factory, so his factory is not built, then the factory doesn't produce anything, so wealth is lost. Moving money around disruptively (via inflation or other methods) makes it harder to do economic planning and successfully do large wealth creating projects. So it does mess up wealth creation. You say you agree with my points but you are disagreeing. Hopefully this clarifies. A major cause of inflation is printing money. Fractional reserve banking is basically the same thing as loans. It increases the amount of money that exists only if you ignore the amount of debt that exists. If you subtract people's debt when considering how much money they have, like you should, then nothing actually happens to the money supply. (In practice, banking is complicated by factors like FDIC insurance. But the basic idea of borrowing money then loaning out the borrowed money, while it does come with some issues, doesn't cause inflation because loaning neither creates nor consumes money, it balances out (unless you selectively ignore half of what's happening))

xenophanes 13y ago

> Inflation does not reduce wealth. Inflation (a jargon word that basically means printing money) transfers money from savers to debtors. This is destructive. It's destructive because the amount of money the government will print is not fully predictable, so it creates financial risks for people who plan ahead. It's destructive because the new money enters the economy unevenly -- and basically unpredictably and unfairly, not efficiently. It's also destructive because it discourages savings and capital accumulation, which are important to wealth creation. So inflation does reduce wealth, overall.

chii 13y ago
> So inflation does reduce wealth, overall. i totally agree with all your points, except inflation doesn't reduce wealth (the same amount of goods and services are produced regardless of inflation), it redistributes wealth from those who cannot hedge against inflation (usually those who don't have lots of money), to those who can. While nominal interest rates _might_ somewhat match inflation, in practicality, having an account with a bank that you need for day to day means you don't get much interest (often there are rules like "withdraw once, and lose the monthly interest"). Sure, when you are rich and have an investment account paying 10% pa, then it somewhat balances inflation. I want to know what the major cause of inflation is - i suspect it is a result of fractional reserve banking.
- xenophanes 13y ago
  When you take money away from someone who was saving to build a factory, so his factory is not built, then the factory doesn't produce anything, so wealth is lost. Moving money around disruptively (via inflation or other methods) makes it harder to do economic planning and successfully do large wealth creating projects. So it does mess up wealth creation. You say you agree with my points but you are disagreeing. Hopefully this clarifies. A major cause of inflation is printing money. Fractional reserve banking is basically the same thing as loans. It increases the amount of money that exists only if you ignore the amount of debt that exists. If you subtract people's debt when considering how much money they have, like you should, then nothing actually happens to the money supply. (In practice, banking is complicated by factors like FDIC insurance. But the basic idea of borrowing money then loaning out the borrowed money, while it does come with some issues, doesn't cause inflation because loaning neither creates nor consumes money, it balances out (unless you selectively ignore half of what's happening))