But for whom are they problems? People who are trying to get by in life or rich people looking to get richer?

Regular people invest when investing makes sense, when the creation of a thing like a restaurant or a farm or what have you has significant value in and of itself. NOT because they value money, and the value of their money will decrease if they don't invest

Having the power to control inflation to force people to invest is tantamount to setting their mattresses on fire to get them out of bed in the morning so they'll go to work. People will get out of bed--and invest--when it's right for them, and they don't need people like you to goad them into it.

Deflation hurts anyone who has a mortgage or any other kind of debt. Theoretically it rewards savers, but if prices are falling then wages then to do so as well, consumption and production go into a downward spiral.

Anyone who thinks defaltion is a good idea is essentially thinking that their small cash pile will magically grow to be worth more without them doing anything, which seems enormously attractive because it's a) easy and b) there isn't any of that unpleasant risk that comes with investment, and which makes it so hard to decide what to invest in. So everyone who has money stuffs it under the metaphorical mattress, and people who don't have any can't get any because the supply of credit has vanished. Economic growth slows way down.

Deflation is terrible. Who would buy a computer today when one twice as good can be had for the same price in less than two years?

That's not deflation, that's a drop in real cost, which is only created by investment.

Under deflation the same computer would cost half as much 2 years later, and you would only have half as much income to spend on it.

How do you distinguish the two in general? If over some period of time technological improvements reduce the cost of almost all goods (and also therefor the value of the human labor involved in the more traditional ways of producing the goods), what has happened is just drops in real cost, but it has also decreased people's income and probably created unemployment. If we calculate deflation using a basket of goods and don't print exponential amounts of money, it also caused deflation.

Purchasing power parity. You're conflating a drop in the factor of human labor with a drop in the vlaue of that labor, but they're not the same thing. For example it may take me only 1 hour to do in Excel what would take me 3 hours to do with pen and paper, but the value of an hour of my work has not dropped; it's probably risen due to the greater complexity of accounting tasks I can perform and my increased technical knowledge. I spend 3x less time on each client, but I can handle 3x more clients. My wafes ought to stay the same in real terms, or even rise depending on how well I can operate Excel. Your cost to get your books done may have fallen in real terms thanks to my doing it faster with Excel, but my hourly rate has not.

Under deflation, though, everyone has less money so I have to keep cutting my rate to stay competitive. Now even though I'm more productive I'm getting a lower return on my productivity. Arguably,this is a problem currently facing much of the labor force in the US.

It's terrible from the producer's point of view, which is why there are so few participants in the chip market. The thing is, technology is not the whole economy, and is far from being there for many years to come (ie Star Trek type replicators).

Any economic situation can be good for individuals who are positioned to take advantage of it, but in macro you need to consider the economy as a whole, through to food and extractive industries etc.

> But for whom are they problems? People who are trying to get by in life or rich people looking to get richer?

The Great Depression was pretty bad for people trying to get by in life, no?

The Dust Bowl was what hurt people. The deflation of the Great Depression was not what hurt people.

Don't buy into the propaganda. Bank runs only happen in fractional reserve systems, which central banking facilitates and encourages.

Deflation isn't bad either, it encourages saving, which rather than living paycheck to paycheck as most do today.

Deflation encourages hoarding, and results in inescapable debt slavery for anyone who doesn't have a surplus. Falling prices cause producers to exit the market, leading to shortages.

Your solution to the problem of inflation is the abolition of credit.

It should be noted that Bitcoin doesn't prevent fractional reserve banking; the currency is fairly irrelevant, as long as your depositors and regulations allow you to only keep a percentage of the deposits with immediate liquidity.

Heavens forbid a normal person ever be able to take out credit or anything. (Hint: Without fractional reserve banking credit would get VERY expensive).

Deflation rewards people with surplus income, which has little effect on those living paycheck-to-paycheck. The two bottom quintiles in the US do not have the ability to save; they won't magically start saving just because inflation goes away.

If inflation encourages those with surplus income to make riskier investments, and riskier investments benefit those living paycheck-to-paycheck (say by increasing demand for their labor) then inflation is to the benefit of those living paycheck to paycheck.

On the other hand, the upper-middle-class to wealthy do benefit from deflation, since they have excess income. If inflation doesn't benefit the less well off, then perhaps there is little reason to punish the wealthy with inflation. Those that would save more in a deflationary economy are already saving though.

Yes, because the "Centralized Bank" in 1929 caused the bank runs.

Oh wait, centralized banking didn't exist back then? Fractional Reserve Systems didn't happen back then? And yet you have a decade of the greatest bank-runs of US History?

And ever since the fractional reserve system was invented, there hasn't been a national-scale bank run in the US for nearly 100 years?

You might want to check your dates. From wikipedia[1]:

"The Federal Reserve System (also known as the Federal Reserve, and informally as the Fed) is the central banking system of the United States. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, largely in response to a series of financial panics, particularly a severe panic in 1907."

[1] http://en.wikipedia.org/wiki/Federal_Reserve_System

The Federal Reserve came into existence in 1913, and fractional reserve banking was absolutely being practiced in 1929.

If you're going to act all exasperated about something, at least get your facts right.

Fractional reserve banking dates back to at least the 1600s, practiced by goldsmiths in a time when currencies where privately issued.

Living paycheck to paycheck is not the converse of saving.

When I save money, I invest it in productive enterprise. Thus, I have less in my checking account. You could even consider (gasp) that I'm living pay check to pay check!

Without a central regulatory authority, what would prevent any private bank from lending out all its deposits? Nothing. And in fact fractional reserve banking predates the modern central banks by hundreds of years, and is one of the economic risks that central banks exist to manage.

>Damn right it's a feature. Otherwise there'd be no incentive to invest, people would just hoard assets instead of putting them to productive use.

So? Why should they put it to "productive use"? Who deems what use is better than another?

It's not, but what: the financial market provides a mechanism for people to choose between asset classes with varying risks and rates of return. Bond issuers offer notes that pay out at a premium to the interest rate over a fixed period, stocks are issued with the possibility of a dividend or appreciation in value.

Didn't you notice what happened during the recent financial crisis? Capital markets dried up, credit was unavailable to many small and mid-size businesses, and many of them shut down for lack of cash flow during a period of limited demand, rather than any fundamental flaw in their business organization.

One could argue that the fundamental flaw in their business organization was a reliance on credit in order to survive. It's a different way of thinking about the world to be sure, but that doesn't mean it's wrong.

Ultimately I don't really like living in a society that has so little slack in it. I'd prefer (not that anyone gives a shit what I prefer) one where most businesses have large equities built into them rather than debts. A business which owns outright the building it occupies is more likely to weather a storm than one which rents or is still paying a mortgage on. That's because it can afford to accept lower yields (not paying an extra $X per month in rent-equivalent to the owners/investors/etc) in the short term for the benefit of still being around.

Slack isn't efficient on any time scale that economists or MBAs care about but over 50 years I think it's quite a good idea. I'd rather own a business which lasts 50 years even if 10 of those 50 years don't pay the kinds of returns I'd like than one which makes better returns for 12 years and then folds.

The thing is that many businesses are cyclical by necessity - agriculture being the most obvious example, but cycles of various kinds pervade business just as they natural systems like wildlife populations and so forth.

If most businesses had large equities rather than debts, you'd have a significant opportunity cost. It's not a matter of what MBAs care about (often not what economists care about), but one of what could have been achieved with money that was otherwise sitting idle. The approach you describe often leads to zombie companies that are not actually productive but are able to cannibalize their own assets while making it difficult for more efficient producers to enter the market.

Maybe or maybe not. It depends on what you're trying to optimize for. One man's opportunity cost is another man's ability to weather a funding crisis that eliminates his competitors and provides him with a large opportunity once the business cycle is back on the upswing.

Equity means having control over your destiny, debt means the bankers decide your fate. Choose accordingly.

With words like "invest" and "hoard", you're using language that short-circuits critical thinking. Surely, for example, you agree that not all investments are good? But "invest" has an undeniable positive connotation, so in order not to prejudge the outcome let's replace "invest" with "spend". Then, instead of the inflammatory word "hoard", let's use the word "save".

With this neutral terminology, we're now ready for some actual thought. We can recast the claim as follows: currency dilution is good because it encourages spending and discourages saving. There's no doubt about the factual claim—dilution does indeed encourage spending and discourage saving). But why is saving bad and spending good? This is an ethical judgment that depends on your particular set of values, but it is undeniable that currency dilution transfers purchasing power from savers to spenders. In particular, it's mathematically equivalent to combining a perfectly hard currency with forced confiscation (from savers) and transfer (to spenders), i.e., organized theft. Thus, from an ethical point of view, there is a strong reason not to give dilution the benefit of the doubt.

Regarding the so-called "gold standard", the historical evidence is not nearly as clear-cut as you've been led to believe. Though flawed in many ways, What Has Government Done to Our Money? by Murray Rothbard is a good place to start: http://mises.org/money.asp

I picked my terms carefully. Investment and spending are absolutely not the same; investments can certainly go bad (although even bad investments generate some economic activity), just as spending can be misappropriated. But the main difference is that while you may get some utility from spending, you do not anticipate any kind of future return.

As for saving and hoarding, those are not the same either. If someone saves they typically do so via a savings account or a CD at an institution engaged in fractional lending but (within the US and within limits) a government backstop to prevent loss of savings. Hoarding is putting your money under the mattress where it's absolutely not doing anything.

The fact that your argument requires redefining basic economic terms should be a clue that there is something terribly wrong with your priors.

I looked into it, and you're right; I was sloppy in my terminology, and will be more careful in the future. I appreciate the correction.

In this light, let's consider four activities: spending, investing, saving, and hoarding. Currency dilution encourages the first two and discourages the second two. It also systematically transfers purchasing power from savers/hoarders to spenders/investors. Can you build a case that the benefit from dilution outweighs the costs? Dilution certainly encourages "economic activity" (for certain values of "activity"), which you seem to regard as axiomatically good. What is your justification for this?