It's so funny that people think that deflationary makes something a bad currency. On the other hand an inflationary currency inherently steals from the poor and gives to the rich. I'd call that a "bad" currency. Inflationary currencies are also perfect for speculative investment. Imagine starting up a 3x leveraged ETF with the underlying debt instrument denominated in bitcoin. Of course with an inflationary currency, the real value of that underlying debt will go down, (and usually, the interest rates stay low), which makes institutionalized risky plays possible.
How so?
The poor have nothing, in fact what they usually have is debt. Inflation makes that shrink over time.
And yes, inflationary currencies encourage investment, as you can#'t make gains just by sitting on the medium of exchange.
Failing to see why these are bad.
So instead they speculate on assets like commodities and energy (excluded from core inflation) and real-estate. How is that any better?
> And yes, inflationary currencies encourage investment
You can't encourage investment without encouraging savings. What you end up with is too much money going after too few assets. This is why interest rates are so important. Too high and the market bubbles, too low and the market tanks.
For inflationary currencies, you have a group of dudes who declare what the rate should be. That to me is the weakest part of this whole scheme.
Instead of a council of wizards declaring the interest rate, market money works more like a feedback loop - with the rates being set by supply and demand.
The best part of market money is, instead of banks being allowed to loan out printed money - loans have to come from people who save and defer consumption.
I am not rich by any stretch but I am not poor either. Probably I would fall into middle class (if middle class still exists as it's been disappearing). Inflation is really harming me and people like me.
Basically what inflationary currency does is it forces frugal people who would otherwise not go into debt to take loans anyways as they realize that saving is a lose lose idea right now. Better to take a mortgage or two and let inflation slowly erase value of your debt.
Looking at the last 25(ish) years of UK data the base rates have tended to be above inflation, until the 2008 crisis.
But yes, inflation will slowly devalue your debt if the debt is a static amount, borrowing can be a good driver of growth, when managed well. And sitting on piles of currency is not good either - the currency is a medium of exchange, not a store of value, it's better to encourage the economy by encouraging investment over hoarding.
Further, deflationary currency values work yesterday over work today, helping people lock in value and higher wealth purely by being older entrants into the market.
Just seems to me that as a saver I never get a break in this economic system. I feel pressure to go into debt and take some crazy loans just not to be left behind.
I think my work experience is quite short though, just 6 years or so. Over longer period of time, since economy moves in cycles, there will be a cycle with higher interest rates (like 5-10 percent) which will again be good for savers. Waiting for this cycle to arrive :)
I recall the same complaints about low interest rates back in 2012, but the returns from, for example, the Vanguard LifeStrategy 80% Equity over the last 5 years were 16.07%, 9.16%, 8.00%, 10.84%, 17.04%. A bit better than a savings account. Of course, when there's another market crash the value will drop, but there you go.
Plenty of countries have lived through double-digit inflation. The real issue there is not so much savings as wages: inflation means needing to renegotiate wages more often. This caused a lot of the UK's labour unrest in the 70s, for example, or the problems of Brazil leading to the "Real".
Also people keep thinking inflation is purely due to money supply and forgetting that eventually you have to exchange money for goods and services at some kind of price level.
But I was making an argument about why inflationary currency might not be great for everybody. It's definitely not a win win. Inflationary currency helps some people but also harms other people, deflationary currency would just switch groups that are being advantaged/disadvantaged.
The post you replied to asked about the returns on a tracker fund as compared to inflation, as that's generally the way to make relatively safe, modest interest on money at the moment. Investing, rather than saving.
The poor are hurt by inflation because their wages are more severely devalued by real value loss. If you're spending most of your wages on day to day expenses, the effect on "margin of survival" from a small devaluation is hugely magnified relative to if you're spending very few of your wages on day to day expenses. I suggest you work through some math on the back of an envelope to really understand this effect. An easy case: Let's say you are barely scraping by, spending nearly 98% of your wages on expenses and there's 3% inflation. What happens next? What happens if you spent 20% of your wages on expenses in the same scenario?
The common retort is that "wages catch up to inflation" but that's nonsense. The whole premise of inflation being used to stimulate jobs is that it devalues the real cost of employment: you can't have your cake and eat it too.
Finally, "encourage investment" well if you think that every investment is wise that is reasonable. However, inflation pushes people into investment. So what that effectively means is that cost of the risky business behavior of the top classes is socialized. You could also see it as 'encouraging consumption', which if you believe in conservation as a moral good, is antithetical.
The wage thing is a red herring, and has effects regardless of the currency model.
i.e. it's not a property of the money.
A cynic would argue that the policy works because a good way to enforce employment is by forcing people to stay afloat.
[0] https://krugman.blogs.nytimes.com/2010/02/13/the-case-for-hi...
The value as a currency is what would give them existential staying power.
The USD is not hugely valuable because it's backed by US treasuries - it's valuable because it's extremely liquid and can be used ubiquitously.
BTC etc. bubbles may not 'pop' like tulips, because there are a) institutional holders of major blocks that can do things to keep the price up, b) speculative holders have no need to liquidate and I think will want to 'hold' so as to avoid losses and c) there is a small 'actual' area wherein BTC is a currency, which is the black market. There is, globally enough of a 'general black market' to create some demand for BTC as a currency.
I think those 3 things combined means that it's possible BTC can hold it's 'paper value' for quite a long time.
Two other existential factors:
1) The BTC mania has yet to truly hit mainstream, and it's making it's way globally.
2) The press is still piling on the hyper. A lot of bloggers have positions in BTC they do not disclose.
But it's all ridiculous and fake speculation.
Jaimie Dimon is technically correct, this BTC 'makes no sense' - but if enough people believe in it enough, then it will exist.
Not quite ...
Gold is a 5000 year old convention - across cultures, languages, geographies and epochs.
BTC is a few years old, and nobody really cares about it that much.
Yes - they are essentially 'conventions', but they're so different in that regard they are hardly comparable.
It has (artificial) scarcity.
I think you'd have to be very ... optimistic to view BTC as a long term hedge like gold right now.
There is no reason to think bitcoin is a good long term hedge.
By your logic anything could be a hedge in future. Which is strictly speaking true, but not very useful.
You may wish to consider the ~25% drop we've seen in the last couple of weeks when deciding on how well bitcoin holds its value through the ages...
anything could not be a hedge. It needs to be liquid, transferable, international, etc. etc. bitcoin is on the way there. I am not saying it will supplant gold, I am saying it could. that probability is certainly not zero.
That doesn't mean I think they're a reliable investment or comparable to gold, just that in hindsight I could have been very rich by for a few bucks back then.
Ah well.
Gold and BTC are not nearly the same thing.
How so?
BTC will eventually become a fiscal straight jacket. It may take quite a while to take effect, but is inevitable and the more BTC become integrated into the economy, the more eventual pain it will cause down the line.
Good argument. But people will slowly realize that, to introduce good innovations in new blockchains, they should be setup as side-chains, to not create inflation in the crypto world.
It's a funny thing to watch.
Given the bubble, I kinda wish I was brave enough to speculate. But I can't even bring myself to buy a lottery ticket. My loss.
Edit: fine, amend what I said to be "the vast majority of current cryptocurrencies with high market caps are deflationary". Most usage of cryptocurrencies today is in "investment", not monetary exchange.