Comment by mike_hearn | Hacker News Reader

Comment by mike_hearn | Hacker News Reader

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The overheads of the existing financial industry aren't really things for physical security at Fort Knox. They are:

• All the employees, regulators and effort put into the auditing and compliance needed to make fractional reserve lending slightly less risky

• The leakage and losses due to carding fraud which goes unfixed because banks have little incentive to fix it

• The mind-blowing resource misallocations that result from misguided but well intentioned economic interventions, like the Spanish housing estates that were built then knocked down without ever being occupied ...

and so on.

Yes, Bitcoin mining is pretty wasteful today. It's a misallocation of resources caused by monetary inflation - the fact that you get to print money by solving SHA256 preimage puzzles diverts lots of energy and effort into doing so even though it makes no real sense. But Satoshi knew inflation caused harmful resource misallocation which is why he scheduled it to halve every four years (some inflation at the start is needed to actually issue the currency into existence, of course).

Now think about the wastefulness of mining, but on a massively larger scale, and without any end in sight. That's other currencies.

I'm curious why you think inflation is harmful? Most (all?) economist think that slight inflation is beneficial.

Inflation is extremely harmful in the long term. Deflation is harmful in the short term. When you get a deflationary spiral, the shock to the economic system is sharp and sudden, and causes political/social unrest, economic upheaval, capital flight and sometimes horrendous wars.

Inflation on the other hand, in the long term, guarantees bifurcation of rich and poor (wealth disparity). The reason for this is fairly simple. The poor spend between 100 and 110 percent of their disposable income, and they spend it on consumption. The rich, on the other hand, invest at least 10 percent of their disposable income in some kind of asset, either fixed assets or financial assets. Assets can then be used as collateral against loans which are used to purchase more assets. Inflation erodes the real value of the loan i.e. the nominal principal of the loan does not inflate, but it's real value deflates with inflation. Thus, inflation is a virtuous circle of asset ownership, which gives access to credit, which both increases assets owned, and whose liability decreases with inflation.

To put it another way, never ending inflation is a transfer mechanism of wealth from the poor to the rich. Once the poor realise this, they demand a political solution. The political solution inevitably involves increasing taxes on the middle class (the rich don't pay taxes), to pay for social welfare programs (i.e. free money). In this way, inflation not only transfers wealth from the poor to the rich, it also indirectly destroys the middle class by crushing them with a punitive tax burden to placate the poor.

Intrest rates generally take into account inflation (the rate should be greater than anticipated inflation as part of risk) unless there is a consumption deficit (e.g. China can't use all the dollars it earns without overhearing their own economy so it lends them back to the US at a small loss; the US's role as debtor of last resort is what makes the dollar appealing as a reserve currency).

If you have savings and investments, inflation puts pressure on you to make them perform, otherwise you are losing money; it works like a capital tax in that regard. You just can't sit on it since money can't really be saved without someone else borrowing it (production and consumption have to even out at the end of the day!). So no, the rich don't really get richer off inflation. They aren't brorowing money from the poor at any rate.

I think I may have not been clear, or I am misinterpreting your post.

If you think of a person as having a balance sheet, with assets (property, shares, bonds, cash) and liabilities (loans), and a profit and loss of revenues (salary, dividends, coupons, rents, i.e cashflows) and expenses (food, shelter, clothing, transport, interest etc), then inflation:

* increases the value of your assets => asset prices rise with inflation

* decreases your liabilities => loan balances stay constant in nominal terms, but in real terms the liability is decreasing.

* increases your income => wages and salaries rise with inflation

* increases your expenses => the price of consumables increases with inflation.

So, ideally, in a high inflation environment, you want to hold as many assets as you can afford, levered as much as possible, with a high income, and low expenses.

So the rich purchase assets with debt. Inflation pushes the price of assets up, and the real value of the debt down. I agree that the assets you purchase should generate a cashflow to cover the financing drag. Inflation also increases dividends, rents and coupons.

Because the poor have expenses (outgoings) equal to or greater than income (wages, salary), price inflation erodes their disposable income, and price inflation is elastic, but wages are sticky, so the poor are always playing catchup, and in the interim, the rich are buying up their assets with cheap debt.

The poor have nothing to protect from inflation: they don't have significant savings, they spend their income the day/week/month that they get it. Their wages should go up to match inflation, and if they don't, its not really related to inflation itself but stingy bosses who aren't sharing increased prices (since given inflation, prices are supposed to rise, right?).

The rich are both lending and borrowing money; again, who do you think they are borrowing money from? Who are they buying the assets from? Again, it is not the poor, unless you are suggesting they are accumulating previously non-existing or non-utilized assets?

Stingy bosses has got nothing to do with it. Those who control the means of production can set their prices. The poor's only means of rising wages is through force (either government intervention or strike action). Any wage increase they receive is eaten by inflation. If prices started deflating, it is the poor who would immediately benefit and the rich would immediately be worse off. This is why the rich lobby politicians and academics to maintain inflation at any cost. Once prices start deflating, the immediate effect is relief for the poor and credit stress for the rich. The poor have no savings because they are inflated away. Look at the GINI index for the US and Japan during the "lost decades". In deflationary Japan, the index contracted (i.e. wealth disparity declined), in the inflationary US, it increased.

The rich are not borrowing from each other. Banks create money endogenously. They are buying existing assets from each other, and they are also buying new assets as they are created. Without inflation, asset purchases would look less attractive on a cash return basis, so inflation does serve that purpose. However, persistent inflation is forcing the market to be investors when they may want to save or spend.

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