I think a little bit of inflation is necessary
If there was a fixed supply of money, when the population and economy grows prices would need to decrease. Salaries would too. Imagine trying to explain that to the average person in the street or unions. It’s just not going to happen
So if I have a great idea, convince a bank to give me a loan, that lowered the value of everyone’s money?
Inflation lowers the value of money, but increasing monetary supply does not necessary imply increasing inflation. (And the economic consensus is that some – low – inflation is a good thing)
The catch is, the money doesn’t flow automatically and immediately in all corners of the economy (Cantillon effect). The speed of the flow depends on a country’s percieved financial stability.
Possibly, in order to combat deflation. So this “nominal” inflation would not result in rising prices, it would keep prices stable. Deflation can be caused by growing population, but also by technological progress. You could design a cryptocurrency which would have a fixed inflation like 2% per year, infinitely.
I think people could adapt to constant deflation. For many people there would be no need to lower their salaries, as their skill and experience usually grows at a greater rate. The reduction in salary would mostly happen in later age.
Yes, at least until you’ve paid it off. But as long as the interest rate and the total value of loans is stable (old ones are paid off, new ones are issued), then the value of money remains constant. But if the central bank lowers the interest rate, then the banks issue extra loans, and these loans decrease the purchasing power of existing money. “Stimulating” the economy by turning cash into trash, so that people get rid of it faster.
Yes, they say that 2% inflation is good, because otherwise people would hold on to money (if simply holding money makes you richer). I’m not convinced. And it’s not the consensus, it’s just the mainstream. But maintaining inflation, like I stated above, is a hidden wealth tax on the holders of money.
Yes, inflation is not proportional. Some things are more affected, others can even at the same time experience deflation. But I don’t know to connect this fact to the idea of a fixed-supply (crypto)currency.
That’s the new-ish bogus definition of inflation. Inflation used to mean “increase money supply”. Prices going up or down is a separate concept.
I agree. Inflation (as in the increase of money supply) with quantitative easing reduces interest rates, thus keeps otherwise insolvent companies going. Money builds things in the way that it incentivizes value creation, where money represents value.
I don’t agree that inflation and fractional reserve systems are needed or a good thing for humanity.
If the currency is backed by a scarce commodity, you would still have some inflation as the commodity can be dug out of the ground or recycled, which limits the deflationary* effects of innovation (relative value of that commodity rises with deflation*, incentivizing more mining). Without a fractional reserve system, lending would be backed by savings, interest rates would be at such a level that only businesses that will provide enough value (money) in the foreseeable future would be able to borrow. This would likely result in slower but more sustainable growth and more prosperity. Maybe we wouldn’t have Netflix (yet?) but also hypothetically we could afford to go to the Cinema more often? Innovation would still happen.
*deflation as in prices going down, not what I would call deflation
Stagnant wages would be buying you more things year after year instead of less. Salaries would likely drop slower than prices, because employers would basically have to initiate salary negotiations and risk having people leave.
For millennia, civilizations in different parts of the world independently moved towards Gold and/or Silver as the scarce commodity of choice. I don’t think cryptocurrencies are superior. You can still effectively “seize” them if all FIAT off- and on-ramps require KYC/AML. The outputs can be tracked on the chain for at least Bitcoin, which means it is not fungible, there’s tainted coins that you can’t sell on Coinbase. Some US based miners even started to stop processing transactions on-chain for those, whether that will gain traction or not is another story …
Also if they bust your door open to seize your Gold, they might also get your Ledger PIN at gunpoint. Of course there’s other cryptocurrencies such as Monero that are not trackable as of now (whether the cryptography can not be broken in the future remains to be seen) but they are also listed on less exchanges for that reason and might be banned by governments. You could still use them, but would you risk being caught and going to prison?
There’s some interesting stats here: https://wtfhappenedin1971.com
I agree that we’re better off than in 1971, it’s just impossible to say whether or not we would be better or worse off without inflating the currency at this rate. Things would be different.
I don’t think this would be a problem. With centrally-controlled interest rates the central bank decides what is the “fair” borrowing rate. So maybe before you could lend your capital to a business at 10% interest. But the central bank steps in and says now you get 1%. So, yeah, good businesses, but especially bad ones, can keep borrowing and continue their activity. If a good business promised 20% annual return, it would still be able to remain profitable using loans with 10% interest. A bad business that only generates 2% would not. So I think the best business ideas would still attract capital, it’s the mediocre/uncertain ones that would struggle and for sure the ones bleeding money would go bankrupt much sooner.
Yes, that’s why my idea of a successful crypto switch would be one that would not need these on/off ramps. A failed economy with a failed currency could see people spontaneously starting to use a crypto as settlement. I buy groceries from a local farmer, I pay him in crypto. He can use it to buy bread from the bakery. The baker can then pay a hairdresser. And so on. That’s a system where the government has no way to look into your finance, no way to tax your income. It can only introduce a per capita tax or try to chase these illegal entrepreneurs. But good luck with increasing law enforcement if you have nothing to pay your policemen with.
I’m really bullish on Monero, because it’s a truly fungible currency with no tainted coins.
Not in a black-mirror kind of World, with high surveillance and also not in an economy that is working well. This is not a solution that would be applicable for current day Switzerland. But if I lived in a failed corrupt state, that had no money and no real law enforcement, and I had no real savings of my own, then how big would the risk be to start transacting with crypto?
Interesting charts indeed, but in many of them you can’t really see that something started in 1971. Either it was 10 years earlier, or 10 years later, or has been exponentially growing for the whole period. So in this regard, these charts will just confirm some biases you might have.
The disconnection between median wage and GDP is an interesting one. You would intentionally think that a median worker should have a constant contribution to his country’s GDP. But it’s no mystery that economic activity has become less labor-intensive and more capital intensive. You need technology and machines. If you’re using licensed technology and expensive machines in your work, you will for sure get paid much less than the added value you produce, but it has to be like this, because your boss has purchased these so that you can work more efficiently.
I wouldn’t call it bogus, that’s the generally accepted definition in economics (and general language). Inflation usually refers to price inflation rather than monetary inflation (dictionaries and wikipedia at least backs this up).
And I would say most people outside of economics would care about the former rather than the latter, personally I don’t care about the monetary supply but I care about my purchasing power.
Long term inflation is said to be due to how much in sync the monetary supply is with economic growth, if the economy shrinks inflation can happen even if the monetary supply is constant (example: post black death in Europe).
It think it’s a language issue.
In German there are distinct words for both concepts: Inflation = money supply inflation, Teuerung = price inflation.
In English, French and probably other languages, “inflation” is ambiguous.
If we are in the “hyperbicoinization” phase, meaning bitcoin is now the world unit of measure and a medium of exchange, I could see a few things happening.
If you want to buy a house, you will still need someone to lend you the money so the difference might be marginal. The main difference I can think of is that you will have access to a decentralized “co-op” public bank in which many people lend/borrow to spread out the risk. How is it different than a regular bank? Because it is public and decentralized, you won’t have your bank buying junk bonds and whatnot behind your back. And because bitcoin is a cross-boarder currency, you won’t be limited by your government policy and actions at a national level.
Also, because we will be in a deflationary economy linked to bitcoin monetary policy, we will incentive to save rather than go into debt. You are incentivized to manage your debt and pay it off quicker because bitcoin is a deflationary asset.
Overall, more power in the community, less debt, less greedy banks and governments. From a centralized economy manipulated by the few to one based on sound money principles and mathematics.
If bitcoin becomes the unit of measure, we could still have inflationary fiat currencies alongside it. This way you will use your salary to save in btc and fiat currencies to encourage consumers to spend and lenders to lend.
The reality is that we don’t really have any history of deflationary currency systems to base a theory on (Japan deflation was a mix of sociodemography/increase production), so your guess is as good as mine.
Lastly, if bitcoin becomes the world’s dominant currency, it will be by voluntary social decree as you cannot force people to put their money on the bitcoin network. And this on its own is an interesting theory to think about.
Really interesting link.
The US had to devalue against gold in 1971 because they had run up unserviceable debt as a result of following redistributive “left” policies for decades. Soon after this they swung in reaction to “right” policies. Then on top printing money / low interest interest benefits the wealthy not the poor
Here is an article touching on this
USD was also unpegged vs gold in 1933
But clearly there would be no inflation without increased money supply. Growing population, growing capital, improving technology, they all have a deflationary effect. What I’d like to know is how fair it is to raise the money supply and how much money is being “stolen” through it.
If you look at it from an international perspective, the dollar was the world reserve but still tied to gold. So it was screwed as it could not expand the monetary supply to match the growing economy (Europe was reconstructing post war). As long as people (e.g. European countries) were happy with dollar that was fine, but when a few countries started to ask for gold, it broke (and bretton-woods with it).
The black death is an example (economy shrinks, amount of money stays the same, wage/price increases)
That’s a moment in time when one of the factors ”growing population, growing capital, improving technology” was suddenly severely reduced. You had the same amount of money to divide between smaller population. That’s an interesting point, I guess. Aging nations could also suffer from this phenomenon.
A situation where population and capital is drastically reduced is also war. Did we see some inflation after ww1 / ww2?
Probably not since those wars are incredibly expensive (a lot of money was spent just fighting, not growing the economy).
(So at least in gold term things were the same, but in money term it likely was, hard to differentiate the cause between extra spending and reduced economic growth tho)
Just a few examples: Germany and Austria during, but mostly, after WWI. US during and after WWII. Mediterranean countries after WWII.
What is your logic here? When money is spent, it does not disappear, it just changes owner. Moreover, when you use up a lot of resources, their supply drops so they become more expensive.
Economists and central bankers started adopting that definition a couple of decades ago (presumably because it suits them, “prices have not gone up, so there is no inflation and we can print more money”).
In essence its Keynesian economics vs. the Austrian School of economics.
Quantity theory of money - Wikipedia predates Keynesian economics. And that’s the consensus on long term inflation (Keynesian view afaik disagrees for short term inflation).
(And my impression is that both Austrian and Keynesian schools were around the same time, there isn’t one predating the other)
Also let’s at least acknowledge mainstream vs. heterodox theories (e.g. mainstream economics vs. austrian school).
At least personally especially in fields where I don’t consider myself an expert, I’d require extraordinary arguments to switch to an heterodox viewpoint.
Great so we’re reinventing banking from a few centuries ago. Can we fast forward a bit to benefit from all the knowledge we acquired to stabilize the system?
How will your “public bank” assess quality of loans? Will there be AI on blockchain? If there’s a dip in trust, how will a liquidity crisis (run) be avoided? (loans are long term, deposits are short term).
Why is that good? Debt and equity is what made all civilization successful.