[Lerc]

I know the arguments that say inflation is required to encourage people to usefully apply their money, but I haven't seen enough to convince me that this is true.

Part of the difficulty I have with accepting the "inflation is good" argument is that I can see how economic policies result in inflation and it strikes me as a survival trait amongst economists to declare a consequence of their advice as a positive event.

Bitcoin may be an interesting test of that hypothesis.

It wouldn't be the first time that the consensus of an entire field was wrong prior to a significant counterexample appearing.

[nhaehnle]

It's not so much that inflation is good (though it does tend to be as long as it's, say, single digit), it's that a fixed money supply is really, really bad.

Unfortunately, the type of people for whom a fixed money supply is an article of faith don't even see the distinction. They basically argue as if the definition of inflation were an increase in the money supply, which just doesn't make sense.

If you want to get an idea for why a fixed money supply is bad, a good exercise is to look at the actual money supply data on a daily basis. You'll see that it fluctuates quite strongly in certain rhythms, especially weekly and monthly. This is clearly related to thinks like paydays, and it reflects the fact that flexible finance allows the economy to function more efficiently. With a fixed money supply, this would not be possible.

Another, perhaps even stronger, point is that the monetarist experiment of the 1970s and 80s failed badly, in the following sense. The attempt to control the money supply by central banks resulted in wildly fluctuating short-term interest rates, which made it very difficult for the real economy to plan properly, leading to inefficiencies. As a result, central banks gave up targeting the money supply as a policy variable; they now target the interest rate as a policy variable, and allow the money supply to grow and shrink as needed to hit the interest rate target.

So, in this sense, Bitcoin is simply not needed as a test of a hypothesis, because the test has already happened!

It is only the (sometimes genuine, sometimes willful) ignorance of a small group of quasi-religiously motivated people that makes it look as if a test were still needed.

In a way, this is a fight between two systems: A decentralized, market-based systems, where money is created and destroyed decentrally, mostly by financial institutions on the one side; and on the other side, a system where the money supply is controlled by a central entity (either the central bank or, in Bitcoin's case, the Bitcoin developers).

It really shouldn't be surprising that centralized decision-making can be much worse.

[kaonashi]

It's not so much that inflation is good, than deflation is really bad. Deflation manifests as unemployment and idle resources, and created a vicious cycle.