An economy is defined as the flow of goods and services. Currency is the medium through which goods and services flow. Deflation encourages people to not spend their money. Not spending money means goods and services don't flow, means an economy collapses.
That bitcoin / crypto people keep harping that deflation is a good thing proves to me that these people know nothing about economics and should never be trusted as such.
They're desperately seeking a store of value (which isn’t wealth; it’s only wealth if productive or others need it and will trade something for it) that can't be devalued by humans, with expected results (value is constantly changing and subjective). As you mention, it shows a lack of economic understanding.
People having savings is a sign of a healthy economy. With savings there are more people that have an opportunity to invest. Investment provides real growth.
A significant portion of our economy is reliant on discretionary spending, and when discretionary spending drops we usually end up in recessions, as companies that rely on that spending start layoffs.
Oh the horrors! Maybe people will not spend their money on stupid shit, they might conserve instead of destroy the environment. Maybe the middle class wont be forced into participating in the casino-for-privileged-mbas that is the stock market. Maybe we will stop having a siphon that steals the labor value from the lower class and drops it on the doorstep of the rich.
That's because "since WWII, one country has come close to having both a depression and a deflation: Japan in the late 1990s" [1]. The source of policymakers' hesitance with deflation "seems to stem from the experience of the Great Depression, in which deflation and depression appear to have been tightly linked."
We have limited data suggesting moderate deflation is any more damaging than moderate inflation. We have better-tested tools for fighting inflation. But with negative interest rates and QE (implying the existence of its inverse, i.e. the central bank selling short), deflation is less scary.
The problem with Bitcoin is its fixed supply. Bitcoin would not produce steady deflation. It is inherently volatile, as the bullwhip effect of the credit system is left unmoderated. The failures of fixed-supply currencies are documented beyond the domain of "opinion or ideology," e.g. in studies around currency substitution [2].
[1] https://www.nber.org/system/files/working_papers/w10268/w102...
You don't need data to understand how people would simply stop working and wait for their cash to appreciate as they do nothing.
Except you can't consume or eat cash and also life is short and tomorrow is not guaranteed so when you decide that it's time want to spend it you'd not be better off in any way even after deflationary appreciation because everybody had the same brilliant idea and the huge mass of people stopping working caused a collapse in raw output of products and services.
Part of me wishes this actually happens, because those who operate countercyclically and keep working when everybody stops to sit on their couch hoping for deflation to make them rich, would eventually make a fortune when sanity comes back and people realize they can't eat the zeros and ones in their bank account.
You do need data to confirm how these people affect the economy in aggregate. Based on our current evidence, when there is a steep supply curve, deflation is fine [1]. (People hoarding money and delaying consumption and production doesn't change output because (a) there is excess demand and (b) production is constrained by non-price factors.)
[1] https://www.nber.org/system/files/working_papers/w10329/w103...
Where is this excess supply at? Have you seen gas prices? Are you aware that the US had to use oil reserves from the strategic reservoir for the first time in decades?
Europe is looking at legal measures to shrink its energy consumption such as regulating thermostats in public offices, schools and universities!
OPEC is also using this as an opportunity to shore up its state balance sheets after COVID, they will come through but not before they waste even more time to make sure they milk the West up to the very last politically acceptable petrodollar
This isn’t what a steep supply curve means. And I wasn’t claiming we are currently in a steep supply curve environment (though we are seeing evidence of it).
They did not “have to” release oil from the strategic reserve, they chose to.
Or maybe you're saying that any period of deflation will inevitably be followed by a period of inflation, as production collapses due to the deflation? And you also think that people (other than you) won't realize that, and so behave as if the deflation is permanent, causing the problem?
It seems to me that as long as the deflation is less than the natural real interest rate (so nominal interest rates are still positive) there is no problem of this sort. It's no more a worry than thinking that anyone with a bit of money in the bank will decide to just live off the interest rather than work. There are such people, but most working-age people either don't have enough money for that, or want to work anyway.
The usual argument against deflation involves supposedly "sticky" wages that don't adjust downwards fast enough. Maybe that's the case, but it depends on particular social factors (eg, embarrassment at getting a pay cut).
How do we square that with the unending flow of junk that is produced with obsolescence baked in and disposed of? How do we square "economic growth uber alles!" with the constant warnings of man-made climate change and our impending doom due to wasting our resources on cheap shit from China?
I would argue that the short-term time preference should balance the effects of inflation. I don't really care that a Lamborghini might cost half as much in 10 years. If I want to drive one TODAY bad enough, I will still buy it. If my umbrella has a hole in it and it's raining, if I want to be dry RIGHT NOW, I don't care that an umbrella is cheaper tomorrow.
I would also argue that technological improvement is inherently deflationary, and that technological improvement is all about resource efficiency: accomplishing the same work with a smaller expenditure of resources. Even if rising demand were to lead to higher equilibrium prices, we should be balancing the economy in such ways that prices still fall or at worst remain static, to reflect the diminishing resource requirements for a given unit/widget produced.
Many economies have collapsed or people have been severely harmed from runaway inflation. Even now in the US, the wealthy aren’t terribly affected by inflation, especially with home and stock prices rising more than enough to offset them, while the poor are increasingly struggling with currently no end in sight.
Perhaps a Bitcoin w/ 2% inflation would have been better than a deflationary one, but I still question whether the average person in the average country is better off with the risk that their government mismanages target inflation than with an algorithmic deflationary Bitcoin.
I also question whether Bitcoin being deflationary is really a bad thing when it’s also a store of wealth and not the only means of exchange in a country.
And the USA's economy was ruined in the 1930s by runaway deflation.
The poor don't like inflation _OR_ deflation. Both suck. The rich has the ability to move money around to maximize their gains in any situation, so the rich aren't really harmed by either.
False dichotomy. The last 50 years of monetary policy in developed countries show that you can have moderate inflation (yes, sometimes a bit too much, like now, but moderate overall) without hyperinflation.
America showed that you could have hundreds of years of stable democracy until a simple combination of cable news, Twitter and a narcissistic president almost led to a coup.
The Roman republic was stable for hundreds of years until it collapsed.
The Turkish lira has lost more than 97 per cent of its value against the US dollar since January 2021.
I agree with you that the 1950-2010 world order and U.S. monetary system was better than Bitcoin. Where we disagree I think, is with our confidence in the stability of human institutions and the likelihood that the world necessarily remains stable in that world order for the next 1,000.
How is that a store of wealth?
In recent history (say the past 50 years), how many countries have experienced serious inflation problems that were caused by orthodox, well-founded attempts to manage target inflation?
As far as I know, the answer is none. If you have a country where the leadership (usually dictatorial, autocratic, one-party or some variation thereon) has adopted policies that are already leading to economic disaster, then hyperinflation is something you tend to get along with - it's a symptom, not a cause.
Huh? What? Dow, Nasdaq and S&P all down over the past year. Is there a sector performing well atm?
Sounds good doesent it, saving is good.
But it also means the company selling that small car wont sell that car, meaning they wont produce as many, meaning they wont employ as many people.
Essentially demand would go down to only essentials, supply would follow, unemployment would skyrocket, total production would plummet.
You dont want the Japan example, then how about The Great Depression.
Inflation on the other hand encourages spending, increases total economic output and encourages investment.
A deflationary store of value is good, and an inflationary currency is good. The problem is that crypto is trying to be both, so its failing at both.
Maybe you should question your first principles more.
Both your run of the mill, deposit money in the bank which loans it out so all sorts of businesses can be built, and people can buy houses, cars, etc., and your more exotic VC and hedge fund investments.
“Most of the time, deflation is unambiguously a positive trend for the economy, but it can also under certain conditions occur along with a contraction in the economy.”
Now deflation caused by a deflationary currency is probably not unambiguously good in the same way as deflation caused by increased production.
But are there not any respectable economists who would argue that a deflationary currency might not be so bad?
The gold standard isn't a fixed-supply currency. Gold was mined throughout the nineteenth century, coïncidentally, at about the rate of economic growth. When growth kept going while mining stalled, a series of economic crises pushed developing nations away from the standard.