[brc]

Yes, but fiat currencies are designed to lose value over time, which makes it difficult for people to save effectively. Governments and large banks get the newly-inflated money first, which gives them first bite at the existing value of money with money essentially made from nothing.

Encouraging people to spend money for the sake of it sounds like a good idea when people have created the concept of 'hoarding' - which is just saving with a scary name. But future productivity has to come through capital appreciation, which has to come through saving. By working against this, wrong investment choices are made because the time horizon is altered.

The concept of fiat currencies in terms of being able to expand the money supply is superior to having a fixed money supply, but the way in which it is implemented works directly against capital formation and feeds directly into misdirected investment and speculation by allowing money creation to run ahead of sensible investment. As aptly experience by the excessive amounts of capital diverted into residential real estate, caused by excessive amounts of new money. Without the easy money, the level of investment in real estate would have been much lower, and the subsequent crash much less destructive.

Fiat currencies have been around for 250 years or so, and not one single one of them have survived that long.

[Patient0]

"Encouraging people to spend money for the sake of it sounds like a good idea when people have created the concept of 'hoarding' - which is just saving with a scary name."

But to be clear: there's a fundamental difference between "saving" and "investment".

1. Saving/Hoarding: Keeping money/cash under the mattress - nobody else has the ability to "spend" the money in the mean time. Also called "sinking funds" by Keynes. This is money kept in a bank deposit. The important point is that you can, at any time, choose to "stop saving" the money and spend it. i.e. you keep the right to spend the money at any time. Nobody else can make use of it. It effectively is out of circulation until you choose to spend it.

2. Investment: Lending the money to someone else for a fixed term - you can't ask for the money back before the end of the fixed term. They can spend it on goods/services for that period of time after which they have to pay it back. The money stays "in circulation".

Absent fractional reserve banking, #2 is the only thing that can actually generate a real return. i.e. real, profitable, economic activity that makes people better off. Without FRB, a checking account cannot pay interest, because #1 cannot be used in any risk-free way to generate value.

For economic productivity, #2 is a good thing, #1 is a bad thing. The fact that everyone is trying to do #1 right now with US dollars and the like is what is considered to be the source of our current economic malaise (according to the economists that I agree with anyway). Fractional reserve banking, QE and the like to some extent lets money that is in category #1 be used for "economic good" in category #2 - effectively fooling the hoarders into "investing" their money.

Of course, bitcoin doesn't have fractional reserve banking - and pretty much by design seems to make it impossible for things in category 1 to be used as category 2. This is why the "hoarding" of bitcoins is considered to be deflationary.

[brc]

>Saving/Hoarding: Keeping money/cash under the mattress - nobody else has the ability to "spend" the money in the mean time. Also called "sinking funds" by Keynes. This is money kept in a bank deposit. The important point is that you can, at any time, choose to "stop saving" the money and spend it. i.e. you keep the right to spend the money at any time. Nobody else can make use of it. It effectively is out of circulation until you choose to spend it.

One of the big problem with Keynes.

Money stuffed in a mattress = hoarding.

Money in a bank deposit = still in circulation, able to be lent by the bank.

There is a massive difference. Other people can make use of funds deposited in accounts. This is why banks take in deposits, to lend it out at a higher rate and pocket the spread.

I would also quibble with your definition of investment. Investment should be classified as spending in the expectation of a financial return (ie, not the joy of owning a new shirt, but actual cash returned on cash outlaid). You can say 'a fixed term' but that is a nebulous concept. 24 hours is a fixed term, so is a week, so is a year, so is 30 years. Lending someone money overnight so they can arbitrage some goods by moving them physically from one location to another one is just as much investment as sinking the money into a toll road for 50 years. The definition has to be on the intention rather than the time horizon, otherwise you're just being arbitrary to support an argument.

>(according to the economists that I agree with anyway)

Highly likely you agree with Krugman. I think he speaks out of his hat. We'll leave it at that.

[Patient0]

> There is a massive difference. Other people can make use of funds deposited in accounts. This is why banks take in deposits, to lend it out at a higher rate and pocket the spread."

Only because of fractional reserve banking. Absent fractional reserve banking, if I 'lend' something to another party but reserve the right to demand it back at any time, then there is simply no way that they can "use" what I have lent them. They can't use the money while still honouring my right to demand the money back at any time.

So "money" which can be demanded back at any time has he same status as money kept under the mattress - it can't be profitably "used" by anyone.

The important point about "investment" is that the money trully is "tied up" - if only for a day. The shorter the term, the more like "cash" it is.

> Highly likely you agree with Krugman. I think he speaks out of his hat. We'll leave it at that.

You're right I do agree with Krugman (for the most part). I've been reading his blog since 2007 and you know what, he's been right in his predictions pretty much the whole time!

If you think Krugman is speaking out of his hat, who do you recommend instead?