| > It's absolutely logical that people WILL spend less if they know the money will be worth more next year. That's not the problem. The problem is that it causes currency to become an investment vehicle. If the expectation is that the currency will be worth 5% more next year than this year then everyone with an investment with <5% returns will sell it and hold currency instead. Then you get two big problems. First, it screws up your economy, because people can hoard currency instead of investing in economically productive activity. Which means higher interest rates, which makes it harder to start a business. Second, it causes high volatility in currency prices, because most of the currency is held by speculators. We have seen this with Bitcoin already. This is a problem for people using the currency as a medium of exchange because you can lose your entire margin and then some if the value of the currency can change by a double digit percentage in the short time that you're holding it. And this is what causes the deflationary spiral on the upswing -- which is really an investment bubble that causes yet more problems when it pops. > World history regarding the price of gold. Gold hasn't really ever been primarily a currency. It has always had several competitors as a medium of exchange (silver, jewels, wheat, pelts, barter), fractional-reserve banking has existed for hundreds of years, and it has a built-in hedge because the more expensive it becomes anywhere the more incentive there is to mine more of it or import it from other countries. As a result its price has almost always been determined more by its value as a commodity than its use as a currency. If it was otherwise then the price stability against other commodities is not what we would see. Imagine there was only one ounce of gold in the world but only two tailors used it to alternate buying suits from each other. If you want to allow there to be another two tailors doing the same thing somewhere else then either you need another ounce of gold for them to use (increase the money supply) or the price of a suit has to come down so each pair of tailors only needs half an ounce of gold (deflation). |