[centimeter]

> there is a tension between store of value and medium of exchange

This tension only exists under Keynesian reasoning. It goes away when you use a theory that does a better job handling equilibria.

The Keynesian claim is that if you have a deflationary medium of exchange, people won’t spend it. This isn’t actually true - the end result of a predictable deflationary asset (e.g. something with a fixed or essentially fixed supply) is similar to the situation we have now, but more efficient. Instead of having, say, 10% of your money in cash and 90% in spoos to avoid getting screwed by inflation, you can just keep 100% of your money in cash. You will have the same exposure to global capital growth, people too poor to have a brokerage account will have exposure to growth as well, and you don’t have to deal with converting between spoos and cash when you spend money.

[technotony]

It's less that they won't spend it, and more they won't invest it. As you point out if you can get exposure to global capital growth by keeping your money in cash you will do that. This starves the world of risk capital being invested in new projects, the net benefit of which is responsible for capital growth. So nobody invests and technological progress drives to a halt (well maybe governments invest in military technology ands whatso but net investment in risky tech drops).

[ZoomZoomZoom]

Why wouldn't they invest if potential profitability of investment was higher than that of not spending their money?

The problem is, the poor have almost no access and no knowledge of the savings instruments other than cash, so that means that in some way inflation forcibly drains their money to risk investment.

[dpatru]

I think your assertion that inflation (money printing) is necessary for inflation is wrong and certainly not obvious. Investment necessarily comes from savings. One must not eat some of this year’s corn so as to have next year’s seed. Whether state-forced savings through inflationary bank loans is better than voluntary private savings should be answerable by studying history. Was there better investment historically in countries where the state devalued money in favor of banks, or in countries where money was not devalued?

[pjc50]

> One must not eat some of this year’s corn so as to have next year’s seed

Corn is a productive asset that generates more corn. Money is not, in and of itself, a productive asset. One of the essential insights of Keynes was that it was possible for real productive capacity (machinery and labour etc) to be idle simply due to lack of liquid money to flow through the system. This was why consumer credit was so crucial to kickstarting modern consumerist economies: like Ford paying workers so they could afford the products, injecting credit allowed consumers to buy items creating jobs to make products, which jobs then allowed consumers to pay off the loans.

"Shortage of specie" has been a real economic problem at times; e.g. https://www.cambridge.org/core/journals/journal-of-economic-...

[deevolution]

A deflationary money would incentivize more careful investment and consumption, rather than rampant malinvestment and wasteful consumption which is detrimental to our health and our environment.

[splintercell]

But here's the issue in Keynesian thinking, all savings is investment, it's investment in money. Like any investment, it has a return (which comes from the increased value of money), and risk (if instead of increase value, the value of money is decreased).

[Enginerrrd]

Yes, but hiding your money in the mattress doesn't create jobs, businesses, innovation, etc. I fail to see the "issue in Keynesian thinking" you're talking about.

[splintercell]

It does. When you hide money under your mattress this is equivalent of you giving your money to all the US dollar investors out there in proportion to the amount of investment they're making.

So let's just say if there is a small economy where there are only two investors you and Elon Musk, and you decide to skip investing in any business and hide money under the mattress, then this is equivalent of you giving the money to Elon Musk to invest in his business. How? Because now you're not competing him for raw materials, labor and capital.

Then when he built self-driving cars and economic growth happens because of this productive activity, when you take your money out of your mattress it is now worth more , and I'm presuming no new dollars were produced and this time.

You can see the effect if a major stockholder of a company decides to not participate in the functioning of the company, this in effect is equivalent of him lending his stocks to the other stockholders. This does not mean that somehow the company is working at a reduced power.

[Enginerrrd]

Ah ok I see your angle now, but I think there's a critical flaw.

Your investment into the general market is really only the amount of interest earned on deflation of that amount.

Compare this with investing the whole amount into a local bakery. The utility difference is dramatic.

[splintercell]

> Your investment into the general market is really only the amount of interest earned on deflation of that amount.

Your investment is the whole amount which would have purchased the 3 components of production (land/labor/capital), because the price of all these goods have fallen, which have allowed other entrepreneurs to buy them for their own investment.

What you're saying is like telling people who invest in index funds only that their investment is only the interest on the yearly return they get from the fund.

[centimeter]

> Compare this with investing the whole amount into a local bakery. The utility difference is dramatic.

I do not agree that the utility difference is dramatic. The utility difference is closely proportional to the difference on expected returns.

[realcr]

I really enjoyed reading this.

[splintercell]

Lol, I should tell you about my thought experiment of capitalist society of perfect inequality (or how it would be an amazing place to live).

[centimeter]

Hiding money in the mattress has no net effect on the number of jobs or businesses or innovation. I used to have the same reservations as you - the problem is that I was stuck on a local Keynesian/“Newtonian” view of the problem which makes it hard to predict equilibrium states. You need to switch to a “Lagrangian” view where you don’t have to manually step through all the decomposed effects of a marginal change in the money supply. A key realization is that humanity’s labor capacity at any instant is 100% independent of the number of dollars.

[bildung]

You just redefined what the word "investment" means, this is not a proper argument. Investment is relatively well-defined in ecomomics, see here for an introduction: https://en.wikipedia.org/wiki/Investment_(macroeconomics)

[splintercell]

If you're going to be so specific about the meaning of the term investment than this is equivalent of saying that when you hide money under the mattress it is not outside the mattress.

His point was that when money is hidden under the mattress it is not serving an important function which would be if it wasn't under the mattress. I disagreed with that and explained how it worked.

[bildung]

I'm not trying to be pedantic, but saving and investments are two distinct activities with distinct economical outcomes. Fruitfully discussing economics on the internet is hard enough as is, deviating from standard meanings of core terms isn't exactly helpful.

[splintercell]

Yes and I understand, my point is that savings and investment aren't really qualitatively different activities. Savings are investment in money, and 'Investment' is investment in non-money goods.

[centimeter]

This line of argument also suffers from the Keynesian tendency to view money as a kind of physical constraint.

The global capital market is a continuous auction process to allocate the world’s collective productive output at any given time.

Inflationary money: people have to place meaningless low-information randomized “bids” (buying spoos) to protect their assets from inflation. This crowds out high-information directed bids.

Deflationary money: people without an edge simply refrain from placing “bids” (by saving cash) and each unit of money that does get spent on bids has more power to influence the allocation of capital.

In the end, I expect it to come out in the wash. You might actually see more capital invested in stuff like R&D because you have less money blindly pumping up entrenched large-cap valuations through spoos. That depends on how good of a job fundamental analysis funds are doing in today’s world.

[jonahbenton]

Thank you, agree with that, and actually was not suggesting to stick with medium of exchange for technical considerations. More about product focus. The BTC people have the asset/inflation hedge thing nailed. Leave them to it. Disentangle the things that are money.

Here, prices in the offset ecosystem are going to float because goods are exposed to/sources from the actual money ecosystem. There will be aspects of inflation, both colloquial and technical. It doesn't sound like they understand the claim anyway. Just let it go. Focus on liquidity, fraud, utilization, ergonomics. Get trains riding on those payment rails.

[centimeter]

If there’s no compensating benefit that necessarily requires inflation, why would I (as a rational self-interested person) ever prefer to keep any of my holdings in an inflationary asset? If you can come up with a great inflationary payment system, someone should just copy it but make it deflationary, and it’s instantly better. (Unless there is actually some killer feature that requires inflation.)

[jonahbenton]

Well, I would argue credit is the compensating benefit- and killer feature- that historically goes hand in hand with inflation, and I would say it this way- credit is generally the mechanism by which assets are discovered and incorporated into the economy, thus "inflating" it (not the technical definition of inflation, of course) and benefitting all. Technical definitions of inflation are just various measures of changes of liquidity in the credit economy.

Whether a deflationary payment system is instantly better, for me, that's a philosophical argument, between liquidity and value.

Life is uncertain. Humans take risks, invest, speculate, even just work- they need liquidity to do so, and credit mechanisms and accounting provide a structured way to do so.

I am interested in what Offset discovers, and think there is new value to be discovered in keeping a (necessarily inflationary) credit system separated from the rest of the financial world.

Cheers.

[centimeter]

I think I need to clarify a bit - I'm distinguishing "endogenous" inflation (money printing) from "exogenous" inflation (credit), because credit has natural feedback mechanisms that make it less/not disruptive to pricing.

The presence of credit denominated in some asset does not make the asset "inflationary", even if the effective supply can fluctuate. You can certainly have credit (and concomitant liquidity benefits) in a deflationary asset - this kind of lending happens millions of times every day when people acquire locate for a short sale in the securities market.