[theseatoms]

> which creates an incentive to maintain currency under the mattress.

Continuing the thought experiment, consider what goods and services people would continue to spend money on, in spite of the expected increase in the value of money.

> Today, in most open economies, nobody controls the supply of money, ...

With all due respect, this is demonstrably false. The Federal Reserve and its member banks control the supply of money.

[AznHisoka]

"Continuing the thought experiment, consider what goods and services people would continue to spend money on, in spite of the expected increase in the value of money."

I love this comment. Everyone just blindly says "People will put money in their mattress. Economy will go down" and then it's case closed.. but then what happens next? They just won't buy food? water? won't go to the mall? They just stay at home and hunker down? They won't even be watching entertainment since they won't be paying for a Netflix subscription too, apparently.

[lmkg]

The proposition is not that people won't spend money. The proposition is that they won't invest the money that they're not spending. Keeping money under the mattress is not competing against groceries and Netflix, it's competing against government bonds and/or interest-bearing bank accounts.

[logicchains]

If people sudddenly hoard money, they're essentially reducing the supply of money, which means the value of money will go up (as there's less of it), effectively acting as a transfer of purchasing power to the people who are actually spending it at that time. Imagine for instance I do something that generates a lot of value (money), then burn that money (or hide it under my mattress 'til I die of old age). This essentially means I gave "value" to society for free, as I created "value" but did not consume any "value" in return, leaving that "value" I could have consumed with my money to be consumed by others.

[ucaetano]

Nope, the problem isn't people hoarding money, the problem is doing so outside of a banking system, where such money is put to work in investments.

If the economy is growing in the long term and the supply of money is constant, the value of money (vs. goods) will always increase, and everyone has an incentive to hold currency instead of investing in the economy.

The result is that you can't raise capital for a startup or for an infrastructure project.

[throwawaylolx]

This is not responding to GP's argument: the point is that "hoarders" implicitly provide capital for others by reducing the circulating supply.

[ucaetano]

Driving deflation isn't providing value.

The claim isn't even wrong, it doesn't make sense.

[luckydata]

It's not like it never happened before. Just read up on the great depression and you'll get an idea.

[ucaetano]

Deflation and deflationary episodes aren't the same as a deflationary currency.

[luckydata]

read up on the gold standard then.

[ucaetano]

Sight...seriously?

Gold wasn't a deflationary currency, not only that, the supply of gold increases over time, and some times suddenly such as when the Spanish empire started extracting gold and silver from the new world resulting in the Spanish Price Revolution.

Seriously, please go take some economics classes...

[kristjansson]

The deflationary argument is about a difference in degree, not in kind. A deflationary monetary regime does not stop all commerce, it just creates incentives to defer or forgo discretionary spending and investment. That, by traditional economic measures, is Bad.

[ucaetano]

I'm not talking about spending, I'm talking about savings, capital accumulation and re-investment. Your entire point (and your parent's) isn't even wrong.

And no, the federal reserve doesn't control the supply of money by any means.

It influences it, sure, but it doesn't control.

[ucaetano]

> Continuing the thought experiment, consider what goods and services people would continue to spend money on, in spite of the expected increase in the value of money.

Sorry, but you didn't understand how capital accumulation works.

People work and so on, get paid and so on. Then they spend part of it on their living expenses and save part of it (that's the domestic savings rate).

The money saved doesn't just sit under a mattress, it becomes the stock of capital in a country (plus and minus capital imports and exports and so on), which is then invested in projects (startups, infrastructure, etc.) that need capital.

Banks are the intermediaries in this market, taking capital from savers and providing investments and loans to projects that need capital. That's why so many emerging countries are desperate to get people into the banking system and to move their savings to the banks (the US did it by Executive Order 6102 for example).

Without this stock of capital, it is impossible to start a business, or to fund large infrastructure projects. It is a key and necessary component of a healthy economy.

And bitcoin kills it completely.

[logicchains]

>The money saved doesn't just sit under a mattress, it becomes the stock of capital in a country (plus and minus capital imports and exports and so on), which is then invested in projects (startups, infrastructure, etc.) that need capital.

Money doesn't become the stock of capital; money isn't capital. Money is a proxy for value. Capital is created by consuming less value than is produced, so the non-consumed value can be invested, which savings can achieve even if the money itself is not invested. This is because saving/hoarding essentially reduces the money supply, thus increasing the value of money - transferring purchasing power from the saver to people currently spending money. If I create x dollars of value, then burn the money I recieved in compensation, I've essentially gifted the value I produced to other currency holders, which they can consume or invest.

The US experienced deflation through much of the 19th century, yet saw higher growth rates then than in the 20th century. For instance, from https://www.investopedia.com/ask/answers/040715/were-there-a... (don't have time to find a more formal source): "The period between 1873 and 1879 saw prices drop by nearly 3% per year, yet real national product growth was almost 7% during the same time." And overall "the price level (the average of current prices across the entire spectrum of goods and services produced in the economy) was actually 50% higher in 1800 than it was in 1900." So clearly it's possible to have strong economic growth during deflationary times.

[ucaetano]

Money is a proxy for capital when used for productive ends. So, yes, savings generate stock of capital.