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Comment by strogonoff | Hacker News Reader

It is under-appreciated that inflation actually is desirable in a working economy.

Look at it this way. If your money (in money form) is worth less tomorrow than today, you are incentivised to spend it, thus fueling economic activity of all sorts (from going out and buying a drink to buying a car, traveling, investing). If your money is worth more tomorrow, then you are incentivised to tighten your belt and not spend for as long as you can. At scale, this negatively affects production, economic mobility, and so forth; the rich get richer and hoard the money. I do not believe any of today’s economies can be healthy and competitive (or even functional) with a deflationary currency.

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This argument falls apart when you consider technology though. And even daily essentials. No one would not buy food and water because they can get more in future. They need it now.

The same goes for technology. We all know next year’s iPhone will be better than this year but we still buy them…because we need them now.

I’d argue inflation’s incentives are worse - the constant need to invest/spend so that your money doesn’t lose value. It means money flows into anything and everything like zombie companies, over consumption, property. Those on the poorest end are just trapped because as soon as they get any money it starts depreciating.

> We all know next year’s iPhone will be better than this year but we still buy them

Next year’s iPhone will not only be better, but also (even with the same price tag) cost more, inflation-adjusted. That factors into the decision to buy now.

> I’d argue inflation’s incentives are worse - the constant need to invest/spend so that your money doesn’t lose value.

It is a problem when it is at extreme, like in unstable countries where money can be a liability to unhealthy degree. However, I’d argue it should be a liability to a smaller degree.

What you highlight is the ever-present conflict between personal benefit and societal benefit. Obviously for an individual it is more preferable that the value of their money increases; I would never argue that. However, for society as a whole it is more preferable if the value of money decreases at a stable rate.

Perhaps this is why all major economies settled on the idea that an amount inflation is crucial to have.

I do not buy into the idea that “everyone did it then it must have been a good idea”.

We’ve already seen the negative side of fiat currencies in how they eventually collapse (Zimbabwe, Venezuela, Argentina) and even in more developed countries wages have not kept up with inflation. Money is trending to zero People are trending to destitution.

We saw it recently in the UK - where public sector workers were not given pay rises because the government argued it would fuel inflation. So how does that even make sense.

Let’s continue this discussion when you show me a successful economy with a deflationary currency.

The only reason you can provide examples of failed states with inflationary currencies is because all currencies are inflationary. This is not a coincidence, perhaps because deflation does not correlate with things going well. For some famous examples of deflations, read on The Great Depression in US and Lost Decades in Japan.

More and more people claim this system of stimulated growth is actually wrong and the root cause for global warming.

Sources who claims this, and details as to how?

I disagree that it is the cause.

The mechanism does not distinguish between “bad economic activity” and “good economic activity”. I.e., the same mechanism applies to positive progress (carbon dioxide sequestration, more expensive technology and techniques reducing environmental impact, etc.), it just requires proper incentive alignment and accounting for bad faith actors via regulation.

A deflationary system with limited supply makes kings and ultimately defeats itself, as your money is decreasingly evidence of your effort and work and increasingly evidence of you having held to it for a while. (It is also a quality of the current system, but less so, and it should be even less so, not more so.)

The US currencies were either literal precious metals, or gold-backed and/or silver-backed, throughout the 19th century until the Great Depression, except for a couple of brief suspensions. Consequently the average rate of inflation was zero. That was the period that it went from a fractious group of rebel colonies to the center of world economic development. So, while I'm sympathetic to the idea that a fiat currency with a predictable inflation rate might stimulate the economy, I think you are making an unjustifiably strong case for it.

Britain coming off the gold standard made the pound more competitive. Prior to that, when pound was backed by metals, they increasingly suffered high unemployment, runs on gold and everything.

In the US it was nothing good either after a few years since WWI: manufacturing fell, unemployment rose[0], etc. I guess it did not help that Britain ended the gold standard which helped their exports, and US adopted protectionist policy which tanked its trade. I don’t need to retell this all but basically the depression ended with the US abandoning the gold standard and entering controlled inflation.

Perhaps the reason for these rosy takes on deflationary currencies in the US is that not many people are still alive who lived through the depression…

By the way, the US did suspend the gold standard during WWI. Why, you ask? Well, it so happened that some debt was due, plus people from across the pond were selling stocks in US companies, and so what happens at that point (when you don’t have much monetary control) is ships full of US gold floating off into the misty ocean.

Correct me if I am wrong, of course.

[0] “Did you know that every 1% the unemployment goes up, 40 000 people die?” — The Big Short.

As far as I know, you're right about those historical facts, but both of us can see only a small part of the picture. There are hundreds or thousands of countries in the world over eight thousand years since money was invented, and we've discussed a 225-year period in two of them. That doesn't seem like good justification for strong generalizations.

If you know a historical example of a successful deflationary currency…

>> If your money is worth more tomorrow, then you are incentivised to tighten your belt and not spend for as long as you can. At scale, this negatively affects production, economic mobility, and so forth

By your logic, bonds are bad for the economy.

Care to write more than a sentence and explain your logic?

When you invest in bonds, they are worth more tomorrow than they are today. So you would have the same incentive to put off spending as long as you could as you would owning a deflationary currency. If that is bad for the economy when you're holding a deflationary currency, it should be bad for the economy when you're holding an appreciating asset.

I don’t think bonds are currency. You buy bonds, you spend money, now your money is doing something in the economy as opposed to if you just held on to it.

> the rich get richer and hoard the money

Well thankfully we're safe from that!

Definitely, if anything we need more of it, right?

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