[dllthomas]

"I don't see how it can encourage investment if inflation punishes savers. Savers are at the source of investment. If nobody saves where do you borrow money for your startup?"

You're conflating all saving. Stashing money under my mattress (or in a vault) is not a source of investment. Saving is investment only if investing is how you save - investing is currently how you save partly because cash holdings lose value.

"Yeah, you are right, that worked pretty well for the US industry in the past 30 years to have a galoping inflation. Look where your industries went."

1) Inflation has not been "galloping" over most of the past 30 years. 2) I certainly don't assert that high levels of inflation are a good thing - low, controlled, stable, present seems to give the best results. 3) Nonetheless, yes, look where our industries went: mostly to countries with weaker currencies and more inflation.

[ekianjo]

I'm not sure where you get the illusion that we do not have a galloping inflation. See the gold price vs USD :

http://goldprice.org/charts/history/gold_all_data_o_usd.png

And no, there has not been a "run for Gold" or things like that, Gold is not used as a currency anywhere a demand is still relatively low and stable.

So that gives you a sense of how much inflation you have been getting over the years. It's certainly faster than the official numbers. And anyone who has lived through the past 30 years should know very well that you could buy more commodities with a single dollar in the 80s than you can buy nowadays with the same amount.

Regarding savings -> you know most people do not get paid directly in cash, right? Most if not not all employers require de facto a bank account in order to pay salaries (we are not in the 60s anymore) and most of the savings go and stay there when you work. These savings become funds that the bank can use to emit loans and different financial services to private companies.

[gnaritas]

The price of gold is not a measure of inflation.

Banks don't get most of the money they loan from deposits, they create it from fractional reserve banking via the money multiplier.

Continual low inflation is good for the economy, it encourages spending and investment and discourages hoarding cash. The purpose of money is not as a store of value, but as an enabler of economic exchange. If you want to store value, invest in assets of some sort. Money is not meant for saving, people with money know this, it's why they don't keep their fortunes liquid.

[ekianjo]

> they create it from fractional reserve banking via the money multiplier.

Yes, but they need cash in the first place in order to use the "multiplier" defined by regulators. They cannot create money ad vitam eternam without cash deposits. When there is a crisis, a bank low on real cash value will go bankrupt very easily. Have you already forgotten?

[gnaritas]

Was there a point in stating the obvious?

[ekianjo]

You tell me. By the way, you still have not explained why a zero inflation is not preferable to some low inflation. You said:

"it encourages spending and investment and discourages hoarding cash."

But inflation discourages savings (as I said, critical for the banking system, and therfore impacting investment), and hoarding cash would be anyway discouraged in case you have zero inflation, because you would be able to place your money in portfolio to gain more than 0 on yearly returns (dividends at least). So there would be no net return in hoarding cash. Or are you saying you need inflation to have growth ? In that case you would be mistaken, there was ample growth even when the markets were following the Gold standards...

So I am not really sure where you come from to recommend "low inflation". Besides, who can ensure the inflation remains low, and who can control that there is no dumping of cash on the market when there is a central bank in charge, serving the current political agenda ?

Again, what's good with Bitcoin and Gold is that they are both neutral and relatively free of political control (well, at least for Bitcoin).

[dllthomas]

Don't conflate "zero growth of the money supply" with "zero inflation". Unless the population and amount of goods and services produced stays constant, these two won't correspond. With zero growth of the money supply, a growing population with a growing economy will experience deflation, which is what worries me.

[gnaritas]

It really seems to me you haven't studied economics at all. Zero inflation/deflation would be great, but it's simply not achievable in practice, the economy is not fixed in size. To maintain zero inflation/deflation would require the money supply to fluctuate at exactly the same rate as the wealth in the economy it represents, can't be done.

Inflation is not a measure of just the money supply, it's a measure of the size of the money supply to the size of wealth in the market, fixing the size of the money does not fix the size of the wealth it represents.

Wealth expands and contracts constantly and if the supply of money doesn't change accordingly you get either inflation or deflation. Well it turns out that doesn't work so well, the economy reacts much better and quicker to inflation than to deflation because prices rise easier than they fall. While on the gold standard the swings in the market were wild and depressions happened often.

Fiat money fixed that by allowing the supply of money to be managed to match the need for money in the economy. Money is just a tool after all, it is not wealth, just a means of trading wealth. By continually slightly inflating the money supply, the natural swing from inflation to deflation was pushed over to the inflation side avoiding deflation and all its ills. Since fiat money took over the economy became much more stable and those cyclical depressions under gold became cyclical recessions. Inflationary policy with fiat money simply works better.

Inflation does not discourage saving, it discourages saving cash, big difference that you keep ignoring. Bitcoin is doomed as a currency for the same reason gold died, it's vulnerable to continual and inevitable deflationary pressure. Every sudden jump in real wealth in the market will force bit coin into a deflationary period; this is very bad. It dries up the money supply and encourages hoarding of the tool meant for exchanging. Money is not wealth, it is not meant for saving, it's meant for spending. Treating it like wealth, and hoarding it, reduces the supply that's necessary to keep liquidity in the market and forces traders to trade with lesser amounts forcing suppliers to reduce prices, aka deflation.

Those who ignore history are doomed to repeat it. If the money supply cannot be rapidly expanded to meet the needs of increased wealth being created in the market, then the currency will suffer deflation and fail as a currency. There a reason the nations of the world have moved to fiat currencies, they simply make better more functional currencies.

[dllthomas]

I looked at this in some depth a few months back and my conclusion was that the commodities which are up are up substantially over reported inflation primarily because of changes in supply and demand. I don't recall the details and do not have time right now to redo the analysis, but since my results match official results I think it's incumbent on you to make an actual case rather than relying on assertion.

[nunb]

The idea of "conflating all saving" is itself wrong.

Saving is a matter of time preference, specifically, preferring to consume in the future. That implies carrying forward surplus value from today to be spent tomorrow. Let's say you have a choice of how to go about it: G, or W.

Strategy G is to stash gold in a mattress. Strategy W is to buy stock of Webvan/Amazon.

Let X = present value to save T = timestamp at present d = value delta t = time delta

Now at time T+t you want to have X+d value where d=0 is okay, but (d < 0) is unacceptable.

Now the choice between G and W is as follows: W has to offer you a higher rate of return than merely holding the gold in strategy G.

Gold will increase in value (price) if more produce is offered in exchange at time T+t, assuming stock of gold is constant (which it is, to an approximation).

So what Webvan/Amazon must offer a rational investor is a better return than the rest of the aggregate efforts of human-kind. They must have high productivity.

This is precisely what makes capitalism and free-floating interest rates so efficient, capital is allocated to the most productive enterprises.

The ratio between spending preferences now and in the future determines the interest rate. A high interest rate implies that only higher-credit (in the sense of faith in their success) companies will get money.

The highly risky investments will simply not happen. There won't be any bubble mania.

In your conception, the idea that stashing gold is not productive is merely another way of saying "gold stashers don't fund Webvan" when looked at through this lens.

But it is good they don't! Everybody should have the right to sit on the side-lines and watch.

When the word "unproductive saving" and "hoarding" are used, they usually refer to this leave-me-alone strategy.

In periods of hard-money we saw great advancements in the standard of living of peoples around the world [ref Thiel?].

The free market always beats a planned economy. It doesn't matter if the planning is overt like the Soviet model or merely a plan to distort time preferences.

[grinnbearit]

> Now at time T+t you want to have X+d value where d=0 is okay, but (d < 0) is unacceptable. > ... a better return than the rest of the aggregate efforts of human-kind

If a venture produces a lower return than the rest of human kind, 'd' will be negative. Knowing whether d will be positive or negative let alone by how much is difficult.

> The highly risky investments will simply not happen. There won't be any bubble mania.

The high risk investments will absolutely happen but only if the rewards are commensurate. The issue with monetary policy is the skewing of risk/reward.