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I'm not saying that Friedman is right but this is a thorny issue in economics: Inflation is always and everywhere a monetary phenomenon. —Milton Friedman

by Bootvis 13y ago

I'm not saying that Friedman is right but this is a thorny issue in economics: Inflation is always and everywhere a monetary phenomenon. —Milton Friedman, 1963

drcube 13y ago
Sure, it's a monetary phenomenon, but that doesn't mean it always comes from monetary policy. In fact, the big reason monetary policy exists is to control inflation. Without monetary policy, inflation and deflation depend solely on the production of the economy compared to the relatively fixed supply of money. Which is what will happen if bitcoin takes off. Growing economy + fixed money supply = deflation. So the GP was wrong when he said there can be no inflation by definition once all the bitcoins have been mined and the supply is fixed. Deflation (negative inflation) is pretty much guaranteed with a fixed money supply. There's more stuff to buy with the same amount of money, so things will cost less. Consistent deflation will be very upsetting for the status quo. I'm not saying it's a good thing or a bad thing, but when the incentives shift towards keeping your money in a shoebox, and against using banks, taking or giving out loans, investing and spending, that's going to be a huge change.
- Bootvis 13y ago
  However, with Bitcoin the percentage claim on the total economy is constant. So, in a sense, the real price of all consumer goods also remains constant. In this view there is no inflation or deflation and inflation indeed is a purely monetary phenomenon. What is correct view? I don't know, the only thing I remember about the monetary economics class I took, is that the professor and I didn't agree. About what I don't know. I do know that these are interesting times for him and colleagues. When/if Bitcoin stabilizes they can study the effect of monetary policy, the PPP, etc. I almost want to become one.
  - maaku 13y ago
    > So, in a sense, the real price of all consumer goods also remains constant. No, you're ignoring GDP growth. As the bitcoin economy grows (more goods and services available), the share of the pie 1 bitcoin represents correspondingly grows. This results in decreasing prices, i.e. price deflation.
    - scotty79 13y ago
      That's right. Government through banks has to issue new money just to keep up and keep prices of consumer goods fairly constant and prevent deflation which is considered bad because last few times people tended to stuff cash in mattresses then and there was not enough physical cash left on the market to facilitate the trades. Also deflation increases tendency of consumers to save what they earned and noone in America wants that.

by Bootvis 13y ago

I'm not saying that Friedman is right but this is a thorny issue in economics: Inflation is always and everywhere a monetary phenomenon. —Milton Friedman, 1963

drcube 13y ago

Sure, it's a monetary phenomenon, but that doesn't mean it always comes from monetary policy. In fact, the big reason monetary policy exists is to control inflation. Without monetary policy, inflation and deflation depend solely on the production of the economy compared to the relatively fixed supply of money. Which is what will happen if bitcoin takes off. Growing economy + fixed money supply = deflation. So the GP was wrong when he said there can be no inflation by definition once all the bitcoins have been mined and the supply is fixed. Deflation (negative inflation) is pretty much guaranteed with a fixed money supply. There's more stuff to buy with the same amount of money, so things will cost less. Consistent deflation will be very upsetting for the status quo. I'm not saying it's a good thing or a bad thing, but when the incentives shift towards keeping your money in a shoebox, and against using banks, taking or giving out loans, investing and spending, that's going to be a huge change.

Bootvis 13y ago
However, with Bitcoin the percentage claim on the total economy is constant. So, in a sense, the real price of all consumer goods also remains constant. In this view there is no inflation or deflation and inflation indeed is a purely monetary phenomenon. What is correct view? I don't know, the only thing I remember about the monetary economics class I took, is that the professor and I didn't agree. About what I don't know. I do know that these are interesting times for him and colleagues. When/if Bitcoin stabilizes they can study the effect of monetary policy, the PPP, etc. I almost want to become one.
- maaku 13y ago
  > So, in a sense, the real price of all consumer goods also remains constant. No, you're ignoring GDP growth. As the bitcoin economy grows (more goods and services available), the share of the pie 1 bitcoin represents correspondingly grows. This results in decreasing prices, i.e. price deflation.
  - scotty79 13y ago
    That's right. Government through banks has to issue new money just to keep up and keep prices of consumer goods fairly constant and prevent deflation which is considered bad because last few times people tended to stuff cash in mattresses then and there was not enough physical cash left on the market to facilitate the trades. Also deflation increases tendency of consumers to save what they earned and noone in America wants that.