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Comment by jwallaceparker | Hacker News Reader

> why buy something today if it will be cheaper tomorrow?

Because you want it today.

The "fear of deflation" argument is now pervasive among monetary theorists. The argument goes that if people know that prices will fall, they will indefinitely delay all economic activity.

This ignores the time preference aspect of economic decision making. For example, I will buy my cup of coffee today rather than wait a day or week to save 1% because I WANT IT TODAY.

We've seen periods of significant economic growth coupled with falling prices.

Before going fiat, we had slowly falling prices in our nation's period of largest economic growth, the late 1800's.

"Wholesale prices dropped 47 percent from 1879 to 1900 and economic growth averaged nearly four percent per year." - Ron Paul

http://dailyreckoning.com/the-mythical-merits-of-paper-money...

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> The argument goes that if people know that prices will fall, they will indefinitely delay all economic activity.

No, it doesn't. It goes if people know that the future purchasing power of currency will increase, they will shift more investment to currency itself and invest less in things like real estate improvements, businesses, etc. -- and that investments in the latter have a multiplier effect and whereas money invested in the currency itself does not, such that, ceteris paribus, shifting to deflationary currency would reduce the overall level of economic activity.

It is not that people would direct defer economic activity, and even less that they would defer all such activity.

> We've seen periods of significant economic growth coupled with falling prices.

And we've seen periods of stunning economic collapse tied to deflation. But individual examples without considering other contributing factors and underlying processes and incentives aren't particularly useful.

F.A. Hayek thoroughly demolished the Keynesian anti-deflation argument in the 30s in his critique of "The Paradox of Savings"

http://mises.org/daily/2804

I am not an economist, but I thought that both Austrians and Keynsians agree that fiat currency with steady, moderate inflation will increase economic activity versus a steady deflationary currency.

The disagreement is whether or not artificially generating economic activity by inducing inflation is a good thing or a bad thing.

The Austrians think that the increased economic activity consists largely of malinvestments due to artificially cheap credit, which will cause a short-term boom, followed by a subsequent crash.

The Keynsian view is that you can ease out of the boom without a crash, and that the markets will take too long to equilibrate without such an artificial increase in monetary supply ("In the long term, we're all dead").

I am also not an economist, but I'd like to frame your Austrian/Keynesian comparison with another one:

Underinvestment (Austrian): There is less investment due to risk being less preferable to steady savings. Example: I won't risk 1 million dollars today on a risky investment if my 1 million dollars next year will be worth more.

Overinvestment (Keynesian): These is over investment due to inflation outpacing savings. People are forced to invest in risky ventures, as at least there is a chance you can earn money as opposed to losing money over time. Example: I risk my 1 million dollars today on a risky (subjective, I'm referring to -10% to 10% gains) investment and if not, will definitely lose 5 percent of that money.

I'd love to hear your thoughts on the matter. Personally, I see strengths in both styles of economic policy, but believe that in our current economical climate, we are overinvesting and through central planning, mis-investing by stimulating the top echelon of investors who simply buy property (real estate asset prices go up), businesses (mergers & acquisitions), and commodities that hold their value. Look at the rise in value of fine art over the last 6 years. These to me, are signs of a bubble.

Another argument from the Austrian school is that even if a theoretical impartial Keynsian could manage the economy better than the free-market, the reality is that such an impartial entity doesn't exist, and the more centralized the power over the economy is, the more prone it is to corruption.

That is to say the wealthy will ensure that the central banks make policy decisions that benefit them at the expense of others.

Your analogy is flawed and completely unrealistic. BitCoin's fluctuations are insane, we're talking about ~ 15 times compared to last year. Would you seriously use a bitcoin to buy a cup of coffee today ?

I don't use Bitcoin at all.

I'm just talking about the general idea of inflation.

I'm not arguing the merits of Bitcoin.

Right, "Price Stability" is a different thing with real merits.

What's your opinion on inflation as an economic driver? I'm also a fan of deflation (as I want to save my money) but the Federal Reserve and other central banks (Japan being a notable example) are advocating for higher inflation, which begs another question:

Are they right and both deflation and inflation can supply economic growth? If so, does that mean another factor is the main proponent for growth?

> What's your opinion on inflation as an economic driver?

My opinion is that inflation does not drive economic growth.

> Are they right and both deflation and inflation can supply economic growth?

Neither one supplies economic growth.

> does that mean another factor is the main proponent for growth?

Increased productive capacity is the source of economic growth. Not the supply of currency.

Take a simple example.

Three people live on an island after a plane crash.

They fish, build huts, make tools. To facilitate exchange, they use paper money from the game Monopoly happened to survive among the wreckage.

One day a new box of Monopoly washes ashore, including a fresh supply of Monopoly money.

Their money supply has doubled.

Will they experience any economic growth? Clearly not.

The next day a power saw and generator wash ashore. They have new tools and increased productive capacity.

Will they experience any economic growth? Clearly they will.

Thank you very much for your response.

Furthering your point on neither deflation nor inflation driving economic growth but rather productivity increases, does that mean what the FED is doing through monetary policy zero sum?

I subscribe to a camp that believes that what the FED is doing through quantitative easing and zero percent interest rates, is actually harming the economy by sacrificing quality of life of persons without wealth (investments, property, assets) for gains for those that do (real estate bubble, stock market gains since 2008). Can this be true? Or am I looking at the situation too simplistically?

Regarding the topic at hand, do you believe that bitcoin's low cost of transmission and features such as escrow and consignment lend the commodity-currency true value (like gold's value being that you can wear it, use it for electrical equipment)? Or do you look at the protocol as having no intrinsic value (pure fiat)? -And do you think that that matters as a currency?

Many skeptics claim that a crypto currency backed by a mineral would be ideal, and that bitcoin's only value is in it's perceived worth. They also believe that this means it could be a big tulip party waiting to crash.

I'm not sure what to believe regarding bitcoin's future, as gold has had 4000+ years to earn it's place in the world. Thank you for your time.

> does that mean what the FED is doing through monetary policy zero sum?

It leads to malinvestment as you pointed out.

> Can this be true? Or am I looking at the situation too simplistically?

I agree. It's a wealth transfer.

> Or do you look at the protocol as having no intrinsic value (pure fiat)? And do you think that that matters as a currency?

I'm not a Bitcoin expert. Right now I see no value in it in the short term other than a speculative investment.

There is much political uncertainty surrounding it. It could go to zero in a day.

Like you say, gold has over 5000 years as a consistent store of value. Bitcoin is a few years old and wildly volatile.

Do I believe a crypto-currency with no real-world backing could thrive? Sure, someday.

Do I believe that crypto-currency will be Bitcoin? I have no clue.

You're missing the point. We all have to buy food today, but we have a choice on whether we use bitcoins or dollars to pay for it. If you believe that bitcoin will get more valuable with time, due to Bitcoin's deflationary design, it's always the rational choice to spend dollars rather than bitcoin.

I am well aware of "Gresham's law" that bad money drives out good.

I'm just referring to the idea of deflation in general and the fear mongering that happens around it.

I'm not talking about Bitcoin versus USD.

Well then maybe you should point that out in your initial comment.

I'm just referring to the idea of deflation in general and the fear mongering that happens around it.

You'll have to do a little better to support your claim that deflation can result in economic growth. One data point from a rather unique point in history isn't enough.

> Well then maybe you should point that out in your initial comment.

Okay I will next time!

> You'll have to do a little better to support your claim that deflation can result in economic growth. One data point from a rather unique point in history isn't enough.

This isn't my claim.

My claim is that economic growth comes from increased productive capacity and not from manipulation of the money supply (neither inflationary nor deflationary).

See my simple economic example elsewhere in the thread.

Your argument only holds if your time discounting factor is greater than the rate of deflation. In the case of Bitcoin this is clearly not the case since prices can double overnight, unless you're arguing that you're so adverse to waiting that you'd rather purchase something today than tomorrow at half price.

I'm just talking about deflation in general. Bitcoin is a new phenomenon but the 'fear of deflation' argument has been used by monetarists for decades.

Bitcoin is hardly viable as a unit of account at this point. It's a speculative investment at the moment.

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