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> Nobody really knows how this ends, good or bad.

Efficient market theory is based on the fact that when you leave people to their own devices, they tend to do a far better job and be better off than if you try to help them. Basically everyone agrees on that.

So why do we accept efficient market theory for basically everything, yet when it comes to currency someone has decided that we need elaborate schemes of variable government decreed micromanagement in order for things to work?

In terms of keeping things simple and letting the market decide, the perfect currency would be global, unable to be printed or manipulated, of a fixed amount, so that external interference is impossible, and people knew exactly what they were dealing with at all times. The closest we have is gold (and maybe bitcoin).

>yet when it comes to currency someone has decided that we need elaborate schemes

Money is a commodity, and the demand for it changes over time. Do you really believe that we should have the same "amount" in circulation as we did 200 years ago?

>unable to be printed or manipulated

Think of money as a concept. It's a means to perform financial transactions, nothing more. My ability to perform such transactions shouldn't be constrained because we haven't "cut down enough trees make paper", or "dug enough metal out of the ground" or "solved enough mathematical puzzles".

Take land - demand for it changes over time, the exact same amount is in circulation as there was 200 years ago, the value goes up as population increases and it becomes more scarce, why can't money be the same?

>Take land - demand for it changes over time, the exact same amount is in circulation as there was 200 years ago, the value goes up as population increases and it becomes more scarce

Why is that a good system? Why should people who happened to be here before our time have an inherent economic advantage by owning land? Wouldn't the world be a better place if we could cheaply create all the land we wanted?

The world is not fair, period. You can't expect individuals to work their asses off to strive for something better for themselves and their children, only to turn around and complain that their children suddenly have "inherent economic advantage"... followed by a swift call to somehow "fix" that so that everyone is equal all over again.

Oh yes, of course. Some individuals did some rather bad, questionable things to get an advantage in this world. But until you can prove that all "well-off" individuals did that, you have no moral ground to stand on.

>But until you can prove that all "well-off" individuals did that, you have no moral ground to stand on.

I have no idea what you're talking about.

Are you telling me that if we had the technological wherewithal to "create land" at will, you wouldn't use it? That you'd recommend we continue to deal with land scarcity? If not, why would you recommend those same actions when it comes to money?

>"I have no idea what you're talking about."

Ask me which parts you're confused about.

>"Are you telling me that if we had the technological wherewithal to "create land" at will, you wouldn't use it?"

See, land is not the same as money when discussing inflation. But most of my comment was directly discussing plain money-printing or inflation, not land-creation. And if you really must know: if we had some magical-fairy-powers to create a physical resource out of thin nothing (with no cost/effort), then I think land ownership would be the last thing we'd have to worry about. You've effectively created a post-scarcity economy.

>"If not, why would you recommend those same actions when it comes to money?"

Please re-read my initial comment. Your entire argument rested on individuals having an unfair advantage simply because they were "be there before" us. And I basically told you that you'd be stealing from honest, hard-working peoples' children by devaluing the value of their possessions.

>"My ability to perform such transactions shouldn't be constrained because we haven't "cut down enough trees make paper", or "dug enough metal out of the ground" or "solved enough mathematical puzzles"."

Why would it? You simple sub-divide each unit until you have the necessary precision (this works for physical currency, too). I'm really curious why you think a lack of growth in the money supply would hinder you from making a transaction?

Really, government-mandated inflation is nothing more than obfuscated stealing (or wealth transfer). Think about it: If it were simply a matter of "we need more physical(or virtual) money in circulation so that the transactions will flow" then the logical (and fair) solution to that would be to simply apportion some sort of "income" to each individual based on their current capital. But that's not how they designed it, and based on that, it shouldn't surprise anyone that there are many out there who feel that inflation is unfair to a large majority of people.

Everything you said is true, but I don't find the points terribly practical.

1) I seriously doubt investors will prefer to hold US dollars for meager deflation gains instead of investing in other financial assets projecting far greater return (stocks, bonds, real estate, etc).

2) Wages are sticky. Yes, 20 years of deflation would send wages down. I don't think a short period of deflation would do too much.

3) See my comment below. I printed an abridged version of it here:

When I'm on a fixed income, I don't care much about the value of my money that's going toward paying down debts. I care about the value of the money I have left over.

Say I earn $1000 a month. $600 goes to loans. $400 is left over to spend on food. With deflation, sure, that $600 is really worth more than otherwise. But it's a sunk cost to me. That $400 is what matters to me, as a consumer, and with deflation, it buys me more food.

I appreciate your points, but I still think deflation fears are overblown.

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EDIT: to comment on your last remark about proving the unfavorable effects of money-printing...I don't need to run tests. I have history. Money printing is the genesis of hyperinflation, a well-documented historical phenomenon.

http://en.wikipedia.org/wiki/Hyperinflation

Printing paper money to monetize debts NEVER ends well. Show me a case in which it does, and I'll award you a paper Nobel Prize.

>I seriously doubt investors will prefer to hold US dollars

Well, with all due respect, what you doubt doesn't really matter. We're watching it happen. Why would I buy bonds with a negative real yield when I can hold appreciating dollars risk free? Again, this concerns the system as a whole. Don't underestimate how important the V in MV = PT is.

>Wages are sticky.

Right. So people get fired to bring costs down, instead of everyone taking a little less.

>When I'm on a fixed income,

If you're on a fixed income with no debt, then you love deflation. Your dollars buy more goods.

>Money printing is the genesis of hyperinflation

Excess money printing is the genesis of hyperinflation. So, again, the problem is determining where that "excess" line is. One indicator of that is rising prices, which we don't see.

Are you calling for hyperinflation? If so, when?

> Why would I buy bonds with a negative real yield when I can hold appreciating dollars risk free?

You're right, so let me back up my position from a market-based perspective: security. That's why negative yields can exist in the first place.

An appreciating dollar doesn't matter if the dollar can't be trusted.

> So people get fired to bring costs down, instead of everyone taking a little less.

Fair point. Like I said, this is a longer-term issue with deflation. Remember, the economy moves in 3-5 year cycles. Nothing lasts forever, neither inflation nor deflation.

> If you're on a fixed income with no debt, then you love deflation.

Even if you have debt, I argue you'd still love deflation, as illustrated in my last comment.

> One indicator of that is rising prices, which we don't see.

O RLY? Do you pay for food, energy, and...stuff, in general? Are prices going up, or are they going down? Gas is down for now, but it'll be right back up in no time.

Don't look at the official numbers. They changed the method of calculating inflation to make it seem lower. Look at reality.

And remember, this increase in prices is happening IN SPITE of gains in productivity (which is deflationary).

Look, I agree "excessive" isn't easy to define on the topic of money-printing. As you said, there's no model to tell us what's right or wrong.

But I don't know how it can be considered appropriate to create money out of thin air to fund the vast majority of your obligations (well over 50% of US debt is monetized). The economic benefits that have been proposed as a result of this policy haven't appeared. Yet they keep pushing forward with more and more.

It just isn't right. That might sound like a weak statement, but take it as a statement grounded in the unflappable strength of morality.

>Don't look at the official numbers. They changed the method of calculating inflation to make it seem lower. Look at reality

They change the method, then retroactively recalculate the values, because our basket of consumed goods changes over time.

The way the CPI numbers are calculated are free for anyone to look at, and they closely match the Billion Price Project. There is no conspiracy.

>The economic benefits that have been proposed as a result of this policy haven't appeared

I'm not sure how you can say that. If you ask me, the policy has been successful, despite massive political pushback. Again, that's the tough part of economics; it's very hard to separate all the conflating effects of a specific policy.

Deflation seem good (stuff I buy is cheaper!) but the problem is psychological. Say deflation is 10% one year. Everything you buy goes down in cost which is good. However, if you're on salary, then from your employers perspective you are now 10% overpaid (assuming you were previously paid the market wage). In years with inflation, businesses can give raises across the board, but rarely would a business cut all their employees pay by 10%. It would be bad for morale. Instead they lay off 10% of the workforce. People aren't willing to accept pay cuts in times of deflation as easily as a yearly pay increase.

> It would be bad for morale [for a] business [to] cut all their employees pay by 10%.

Pff, is that the issue? That's easy peasy, price people's salaries in terms of purchasing power. Or in terms of baskets of goods. Wow this is such an easy problem to solve. I could go on and on. I'm not even joking. Just use an indirection. Isn't that how we solve all problems in programming? It's certainly my favorite tool.

Show me the strictly paper money system which has lived 1000 years (or even 100!) and I'll stop believing that having the ability to debase a currency isn't a train wreck in slow motion. And when I say "strict" I mean it, so paper currencies which used to be convertable to gold or silver or whatever only start counting once convertability stopped.

Nothing in economics short of trivial tautologies can be proved or else economics would be just like physics and we'd understand it all already.

> Show me the strictly paper money system which has lived 1000 years (or even 100!)

http://en.wikipedia.org/wiki/Fiat_money

"The first use of fiat money was recorded in China around 1000 AD. Since then, it has been used continuously by various countries, concurrently with commodity currencies."

> ...or else economics would be just like physics and we'd understand it all already.

So you think physicists understand all about physics? I've got a bridge to sell you...

> "The first use of fiat money was recorded in China around 1000 AD. Since then, it has been used continuously by various countries, concurrently with commodity currencies."

Okay, so which country is that and from/to which dates? I see a generalized statement that it's been done but no specifics. You'll forgive me I hope if I'd like a little more information than "well this wikipedia article says..."

Let me clarify further that I'm not talking about paper money in general, but a particular paper money system. In other words, just because people have been trading paper for a thousand years doesn't mean it's been the same paper and that you could have successfully stored that value all the way from "back then" up until the current day, strictly in paper. Gold does that to some degree, though the exchange rate of gold to goods has varied pretty substantially historically. To my knowledge there's no paper which has held value for anywhere near as long.

Does my question make sense? Maybe the UK unhinged the Pound from silver in 1205 AD and it's been non-convertible since but it's held value so that would qualify (I know it's not true but it's an example).

> So you think physicists understand all about physics? I've got a bridge to sell you...

We understand physics well enough that we can build GPS which necessitates and understanding of relativity or else airplanes would be miles off of their autopilot at the end of a trans-oceanic flight.

But I'd love to be wrong, it'd be great if we knew things about economics to that level of precision. Life would be so much easier because then we could just DO THE RIGHT THING instead of arguing about it ENDLESSLY. As an engineer that holds tremendous appeal since the majority of the stuff I do has a spectrum of right answers and perhaps a few optimal answers and a spectrum of wrong answers.

I feel the level of maturity of economics is late stone age or early bronze age re: engineering. We've got some ideas about how things work and can even bend a few to our will but there's no precision calculation, just experts making gut calls.

>Life would be so much easier because then we could just DO THE RIGHT THING instead of arguing about it ENDLESSLY

Don't you think economists wish the same? It just isn't the way it works.

>We've got some ideas about how things work and can even bend a few to our will but there's no precision calculation, just experts making gut calls.

Absolutely true. Should we give up? Of course not.

> Absolutely true. Should we give up? Of course not.

It seems rather backwards to me to have historically well tested methods of storing value and to throw those at the wayside because we "know better" now. If you can't prove it's better, don't change it.

I realize that it's incredibly unlikely that we'd ever go back to a gold (or silver) standard but in my personal opinion the positive value that such a standard has far outweighs the negative. You may well disagree with me on the relative values of the benefits and downsides and that's OK. But it doesn't make me wrong either.

When so much of society values things differently (some people find Audi to be worth the money, others BMW, others Ford or Jag or whatever!) it's kind of crazy to assume that one person KNOWS that paper money is better.

Maybe a bunch of people would choose to transact in other currencies given the choice. A recent attempt was made to do so; the Federal government did not welcome the competition: http://en.wikipedia.org/wiki/Liberty_Dollar

>Show me the strictly paper money system which has lived 1000 years

So nothing can ever exist going forward that hasn't existed already in history?

>just like physics and we'd understand it all already.

You think we understand "all of physics"?

> So nothing can ever exist going forward that hasn't existed already in history?

Not at all. Just that new solutions to old problems probably aren't much better than the old solutions, and perhaps worse.

How much have forks evolved, or chairs? Money is an old problem and has very old and well worn solutions. Modernity has made fantastic technologies, I'm not sure that the money we have is a breakthrough.