[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?