[josephlord]

Deflation is a disaster for anyone with debts as the value of them grows rather than being inflated away. So while it may be OK in the bit coin world (as I don't believe there are any significant bit coin denominated debts) deflation would cause massive economic contraction in the real world as debts would grow reducing spending and there is reason to believe it would not converge rapidly to an equilibrium (certainly not one that people would like).

http://www.debtdeflation.com/blogs http://www.complexity.org.au/ci/vol06/keen/keen.html

[Tycho]

Wouldn't this be compensated for by lower rates for lending?

[josephlord]

Interest probably wouldn't fall below zero. Also no incentive to lend money rather than hold so not so much incentive to offer good rates anyway.

Savings rates might well go negative though.

Steve Keen as linked to is well worth a read rather than my first approximation guesses.

[Tycho]

Doesn't inflation just encourage a different type of hoarding (ie. in physical assets like real estate or gold)?

[josephlord]

Well when you buy real assets someone is selling and they are left with inflating cash they need to spend on something.

If someone is investing in productive assets (companies, rentable property) for their sustained revenue potential that isn't a bad thing. Spending on goods and services will add demand to the economy and money will circulate.

There is also more reason to borrow in an inflating economy which adds money and demand to the economy. Obviously borrowing can get too high and needs moderation if bubbles are to be avoided but gentle adjustment is needed to prevent massive swings in aggregate demand.

Also I'm not arguing for high inflation just that even a couple of percent deflation could be really bad.

[Tycho]

Ok. Thanks. One more question.

Isn't there some circular logic at play when you say that deflation would cause people to simply hold onto cash rather than invest in productive enterprises. Because if nobody invests in productive assets, then there will be no more goods entering the economy, therefore there will be no deflation of the currency to worry about in the first place...

[yxhuvud]

There are very low incentives to investing when the markets are shrinking, and even less to employ people. Now, tell me why lower rates are usually considered a good thing for business?