[chad_oliver]

I agree with the majority of your post, but I'm not convinced that inflation should be included in your list of bad things ("do you want inflation, meddling, and regulation?"). A moderate amount of inflation is a very good thing, and this isn't really even open to debate among economists. Its importance has been empirically and theoretically proven many times.

Inflation is important because economics is all about creating incentives. We have property rights because it gives people an incentive to work hard and takes risks. We have patents because they give people an incentive to explain how their invention works. We have a market economy because it means that if a company wants to gain market share, it has to create value for the consumer. In the same way, central banks try to maintain low levels of inflation (~3%) because it encourages people to invest their money in profitable ventures, rather than just leaving it under the mattress. Investment is the way wealth is created, so it should be pretty obvious that deflation is bad for the economy.

Notice that I'm talking about the economic health of the country, not the individual citizen. If you're only concerned about immediate short term benefits, you should push for zero taxes, high deflation, and the gold standard. But that's penny wise and pound foolish. You're shooting yourself in the foot. Better by far is to support actions which improve the economy, because a rising tide lifts all boats.

[stretchwithme]

Inflation is not essential.

If people hide their money under mattresses, all that means is that they aren't competing to buy the available goods. Inputs for other ventures are cheaper.

If the government weren't trying to re-inflate the asset bubble with cheap money, ventures that make more sense would be flourishing instead.

Resources are not infinite. When someone accepts a piece of paper and just holds on to it instead of immediately consuming what he could buy, the resources are available for other things.

And when there are more people deferring their consumption, its cheaper to borrow money/resources and cheaper to grow new industries.

Countries don't become rich and powerful by consuming everything as soon as they get it. They do it by growing their industries.

[seanmcdirmid]

> If people hide their money under mattresses, all that means is that they aren't competing to buy the available goods.

That is called "deflation." They tried it in Japan, it didn't work.

> If the government weren't trying to re-inflate the asset bubble with cheap money, ventures that make more sense would be flourishing instead.

Inflation and cheap money/asset bubbles are completely orthogonal. If anything, inflation should increase interest rates, not lower them.

> Resources are not infinite. When someone accepts a piece of paper and just holds on to it instead of immediately consuming what he could buy, the resources are available for other things.

Resources are also for the most part either perishable or they depreciate. At the very least, resources must be expended (warehousing) while unused resources are stored for later use. Ideally, resources are used closed to when they are produced. Otherwise, value is lost in some manner.

> And when there are more people deferring their consumption, its cheaper to borrow money/resources and cheaper to grow new industries.

Why grow your industry when the consumers have deferred their consumption? Once more people have deferred consumption, the economy and industry will shrink, not grow.

> Countries don't become rich and powerful by consuming everything as soon as they get it. They do it by growing their industries.

They do it by doing both. I live in a country with high industrial output (aimed at export) but little consumption in comparison (people save too much + high income disparity), its a trap that the Chinese government is desperately trying to get out of. If Chinese don't consume, the gov has little choice but to buy treasuries (as upposed to investing in more unused infrastructure/ghost cities/industrial output), and they are losing money on those t-bills.

[splintercell]

> They tried it in Japan, it didn't work.

There's a big difference between "trying to make it happen" and "happened despite of them trying to not happen".

Deflation/Inflation works fine when governments aren't involved. Point being that if market can predict the inflation and deflation then every contract will account for that. No business will fail because of deflation, because they will purposefully account for the deflation in their economic calculation when they pay the workers and raw materials.

In simple words, when government isn't causing deflation, at the start of deflation the wages always falls faster than the prices of consumer goods which always clears the market(which is when the rate of fall of consumer goods prices equals the rate of fall of wages).

When government is trying to meddle with the money supply, it disrupts the economic calculation of the market which prevents the market from clearing in time and from real wages to rise up.

[seanmcdirmid]

Deflation doesn't work period: in the face of falling prices, people will save rather than spend, leading to a vicious cycle. No serious economist would claim otherwise. Deflation wasn't created by the Japanese government; they just didn't do enough to fight it, thinking austerity with its personal sacrifice was the right way to a healthy economy. They were wrong in a big way.

Economies must be managed. Arguing whether Bitcoin is better than USD is vacuous: one is just a crypto currency, the other represents the entire US economy and all the movements that go along with that. Someone has to meddle to keep the system working, if its not the government, it would some rich guys in a smokey back room doing it.

[ekianjo]

> Economies must be managed.

Mouhahaha. I give you back your line. They tried it in Japan, Europe, US, Russia, and almost everywhere else and it didn't work. Countless countries sinking in huge public debt, that's hardly a way you build up a strong argument against Free Markets. Free markets and Free economy don't exist anywhere at the moment, period. What you see as a failure is centralized-economic policies at work, with more or less degree of economic freedom depending on where you live. But don't kid yourself : as long as the money supply is controlled (and this is effectively the case when you have a central bank), you are not in a Free Economy anymore.

And of course Deflation in Japan was a direct consequence of the Japanese government actions. Deflation wouldn't occur constantly for x years if there was no policy behind it to sustain it. And you will find many other particularities of Japan markets to be strongly linked to governments policies and disruption in different fields (there was an article on Japan housing on HN a couple of days ago, explaining why housing was so different in Japan... again nothing to do with Free Markets at work).

[seanmcdirmid]

> Free markets and Free economy don't exist anywhere at the moment, period.

Right. They haven't existed since the neolithic revolution when we moved from being hunter gatherers to farming and living in cities.

> And of course Deflation in Japan was a direct consequence of the Japanese government actions.

Wow, that is some truthiness there. From [1]

> Deflation started in the early 1990s. The Bank of Japan and the government tried to eliminate it by reducing interest rates and 'quantitative easing', but did not create a sustained increase in broad money and deflation persisted. In July 2006, the zero-rate policy was ended.

So wait...the government was trying to get rid of deflation, but you claimed they were the ones causing it? WTF?

Reasons

* Tight monetary conditions. The Bank of Japan kept monetary policy loose only when inflation was below zero, tightening whenever deflation ends.

* Unfavorable demographics. Japan has an aging population (22.6% over age 65) that is not growing and will soon start a long decline. The Japanese death rate recently exceeded its birth rate.

* Fallen asset prices. In the case of Japan asset price deflation was a mean reversion or correction back to the price level that prevailed before the asset bubble.

* Insolvent companies: Banks lent to companies and individuals that invested in real estate. When real estate values dropped, these loans could not be paid.

* Fear of insolvent banks: Japanese people are afraid that banks will collapse so they prefer to buy (United States or Japanese) Treasury bonds instead of saving their money in a bank account.

* Imported deflation: Japan imports Chinese and other countries' inexpensive consumable goods (due to lower wages and fast growth in those countries) and inexpensive raw materials

Here is the only point (an explicitly libercrazian one) that supports your position:

* Stimulus Spending: According to both Austrian and Monetarist economic theory, Keynesian 'stimulus' spending actually has a depressing effect.

[1] http://en.wikipedia.org/wiki/Deflation#In_Japan

[stretchwithme]

Austerity? Japan has been running huge deficits.

Austerity is where you leave within your means. When you do it by choice, you're in control. When you are forced to do it because you've been borrowing and spending everything as soon as you get it, it can be a disaster.

Its not frugality that's bad. Reckless behavior that destroys investment in future productivity - that's what's bad.

To verify this, save as much as you can for a decade. Note that you have money to buy what bankrupt individuals must sell at a loss. You are better off BECAUSE of your austerity.

There is no reason to believe that economics works ass backwards for a group than it does for the individuals in the group.

Economics is fractal. Prosperous individuals make a prosperous country and a more prosperous world. Pursuing poverty never will.

[jaekwon]

This thread inspired me to write my thoughts down: http://jaekwon.wordpress.com/2013/12/02/the-supernova-theory...

[seanmcdirmid]

I think many are putting too much stake in Bitcoin being a currency and not enough in the economy that goes behind the currency; the two are not independent at all.

With USD, you can save/lend it easily (the US government is a very strong debtor of last resort) and likewise borrow through it, oil is traded in it, and so on. Monetary policy is more about ensuring some adequate level of inflation (to push for consumption or effectively invested) + popping any asset bubbles that appear (b/c people are imperfect).

With bitcoin, you get none of that, and given the libertarian bent of the users, nothing centralized will likely arise. So the question is: are individuals good at managing an economy for the collective good? Or will they just look out for their own needs and will it implode in a classic prisoner's dilemma?

[atmosx]

I also believe that a currency must be inflationary for all the good known reasons but every time I think of BTC being inflationary I realize that Satoshi didn't really had a choice.

Why on earth you would buy an unknown inflationary currency? I mean, it would NEVER take off, except for illegal markets where use the privacy offered by a crypto-currency.

But look where we are now? Silk Road gone (well almost) but BTC unaffected and sky-rocketed. You would never have attracted that capital if you haven't a deflationary currency. Actually, by all means it's an asset.

[lingben]

You've got it wrong. If Satoshi's purpose was to get people to pile in after him/them, it had to be deflationary. Mission accomplished. Bitcoin isn't a run of the mill ponzi scheme, it is a very new take on it. But it is still essentially front-running and hoping and planning that lemmings follow you to push up the price so you can then unload.

[chad_oliver]

You have a very good point, and I hadn't considered that aspect. However, if people defer their consumption, surely they'll also have less need to spend money, and thus less incentive to perform economically productive activities in order to earn money to spend? I'm sure people will be quite happy in the short term, but over longer periods (decades) there will be much less effort (not necessarily money) invested in economic activity.

[sliverstorm]

Yup, that's basically the problem with deflation. It stagnates the economy, and it is self-reinforcing. Called a deflationary spiral.

[seanmcdirmid]

Deflation is the easiest way to turn a recession into a depression.

[3pt14159]

Note that you are the one that calls my list bad, yet I specifically said that the uninformed should prefer this currency. Why should the uninformed prefer an inflationary currency? Because the uninformed are bad at accepting a decrease in demand of their market rate (their work performance would disproportionately decrease if given a 2% decrease in nominal wages).

With that aside, let me give cover my complex thoughts on inflation:

Sometimes it is possible to alter a function in such a way that the output is later maximized. Sometimes this is possible by essentially lying to people. When someone doesn't get a raise each month to make up for the expansion of the monetary supply he is effectively getting a pay cut, but he's been manipulated into not really noticing this. But markets are not fixed. Technology expands, populations expand, priorities shift (from religious worship to drugs or science, for example). At some point it is possible for a portion of the system to understand the manipulation and to maximize it for that portion's gain. Just as Keynes talked about priming a pump, imaging those that sell the primer. It is in their interest for the system to stutter so they make efforts to have it so fairly frequently. The secondary effects of this manipulation are malinvestments by those not party to the information about the cycle.

But even that has a secondary effect: The effect of some informed people taking actions to minimize the harm done to their own fortunes. They sidestep property and stock bubbles, but they still need to beat inflation.

Those informed people start talking about a replacement for the inflationary monetary system. They argue on the internet about crypto-currencies and they refine their ideas, and ultimately Bitcoin gets created. We are living in aftermath of centuries of Keynesian policy, this is PART of the long run to which Keynes is dead in. The part where something by design is (essentially) non-inflationary. Even gold had its risks (Fusion, for example) but while Bitcoin is free as in liberty it is also unforgiving of mistakes. That is why the uninformed shouldn't access it. Or at least not it directly. They should trust banks or become informed, because as it stands now they are not equipped to handle it.

Lastly, I reject the notion that inflation has proved useful for stabilizing the economy.

Fractional banking by its nature monetizes all assets (since most loans are secured, the 10x multiplication window is just a fancy way of "printing" money from the value of your house or factory). But the relative value between the underlying assets and the currency is in flux (or the futures market for the good would be 0, and the information already priced into the market) and in exchange for this freeing of capital and acceleration of gains to wise economic asset allocators, this temporal variance in asset value causes an increase of volatility in the financial system ESPECIALLY when the majority of its deposits are demand deposits since there is also system wide uncertainty in cash-on-hand.

It may be that the increase volatility and subsequent government action maximize technological, ecological, and industrial advancement by allocating assets into the hands of todays best and brightest; or it may be that the cost of management (inflation, regulation, deposit insurance, super insurance, asset backed derivatives, to big to fail bailouts) exceed the gains of a fractional reserve banking + inflationary monetary supply system, but we will not be able to tell by examining the data on inflation in economies where fractional reserve is a GIVEN.

[XorNot]

> When someone doesn't get a raise each month to make up for the expansion of the monetary supply he is effectively getting a pay cut, but he's been manipulated into not really noticing this.

You do realize that pretty much everyone understands this in some way? What do you think OWS was, in part, about? The middle-class of the US is well aware that their wages have decreased relative to productivity.

If deflation becomes the order of the day, every business lobby group will immediately switch their narrative to the importance of indexed-wages for all! (which they currently oppose) while all labor unions will switch to arguing a contract is a contract (which they definitely oppose - you can't sign away your rights, contract fairness etc.)

[afterstep13]

It's not entirely true that inflation effectively results in a pay cut.

It's true only if you are buying the exact same things today, that you were buying, say a decade ago. This is true for some things such as food, housing etc.

However for other things such as computers, gadgets, medicines, cars, etc. are much better today than they were before. For these things, you get much more for the same price(taking inflation into account).

For example, phones used to be only communication devices; but now they are also a camera, entertainment device and even a computer. Others, such as medicines, they have become cheaper and much more effective. In short, improvements in science and technology beat the effects of inflation.

In some markets it can actually cause a deflation. For example, computers used to cost thousands of dollars, but now you can buy a much better one for a few hundred bucks.

Inflation is bad, only when stuff that you buy doesn't improve over time.

Perhaps one could even show that inflation is somehow related to the introduction of newer and better products in the market. For example a new car, with a more fuel efficient engine, will likely cost more than the old ones. However I don't have enough evidence to justify this claim.

[parasubvert]

"We are living in aftermath of centuries of Keynesian policy, this is PART of the long run to which Keynes is dead in."

I don't know whether to laugh, or cry. Keynes was many things, but he was not a Time Lord.

We've been living with Keynesian policies for a tick under 70 years, which also has happened to correlate to the greatest wealth expansion in recorded history. It's a bit premature to point fingers as to why (or what has happened since the 1980's, which has caused middle class wages to stagnate).

Do keep in mind that Keynes was revolutionary because his ideas worked, even though they upended much of classical economics - they had (and continue to have) predictive power for how economies work, especially when interest rates are near-zero.