Nobel Prize winner F.A Hayek, who also famously predicted the denationalization of money in the 1970s[1], provided the excellent counterargument to this in the debate with the proto-Keynesians back in the 30s concerning stable supply money vs. inflationary money:
Hayek was later interviewed in the 70s and said he was mystified when Keynes was promoted to godhood upon his death. He claimed the debate had not yet finished.
There's a reason the experts sided with Keynes as you mention (or others like Milton Friedman). Flaws were found in Hayek's reasoning that made his models simply fail to add up.
The linked article doesn't address the effects of deflationary currency at all, it describes the notion of including capital in the description of economies.
It criticizes the statement by Keynes that savings leads to depression due to underconsumption and thus there must be regularly monetary stimulus, meaning expansion of government borrowing and hence, the money supply. Hayek was a proponent of the gold standard and fixed money supply at this time and the Keynesians promoted fiat money and a flexible money supply and monetary policy.
I'm not familiar with Hayek, so you may need to fill in gaps where I may have them, but the argument in the article (as I understand) specifically establishes the context where savings are presumed invested into capital. How I understand deflationary currency is that investments are not incentivized, and would therefore not lead to the situation as described in the article.
Investment is naturally incentivized because the only reason capital is created is to lower the cost of production. If you build a factory, or invest in a machine to make things and it costs the same to manufacture those things in the factory or with the machine as it would to manufacture them by hand, why did you even build the factory in the first place? The inputs used to construct the factory would be better used for other things and thus the business loss from building a useless factory or unnecessary piece of equipment is the economically efficient because it is a misuse of labor and material inputs.
We are not talking about deflationary money either. We are talking about stable money supply, which is what Bitcoin is.
A couple things. Your first statement appears to be circular, it doesn't answer the question of why an entity would want to invest their money on an uncertain venture when it would just be worth more doing nothing with it. Secondly, I'm not sure what the rest of the first paragraph is in aid of, it seems like you're stating that capital is useful which I don't think was ever in question.
Sure, the article never mentioned anything about deflationary currency, but you were responding to a comment that a deflationary currency would have issues that you seemed to respond in opposition to. If you don't have a stance on deflationary currency, what is your argument for or against?
On that note, I believe that bitcoin fits the definition of a deflationary currency, and having looked up 'stable' money supply haven't found a consensus on what that means. Could you explain how you define that?
> it doesn't answer the question of why an entity would want to invest their money on an uncertain venture when it would just be worth more doing nothing with it.
Simple, because the investment would return more than the natural rate of deflation alone would.
On its face that would appear to be a bald assertion. Investments inherently contain risk which would dissuade potential investors if they have a stable source of growth. Investments would have to have very high upside to be worth a stable but lower rate of deflation. Secondly, I'm not sure how you can be certain that investment returns, without regard for risks, could be higher than the deflation rate.
> Investments inherently contain risk which would dissuade potential investors if they have a stable source of growth.
Stable sources of growth have existed for decades but somehow most investors aren't just going all in on those. That's because investors care more about good risk-adjusted returns than lame guaranteed returns.
>Investments would have to have very high upside to be worth a stable but lower rate of deflation.
Investments with risk-adjusted nominal returns above 0% are worth it if the currency is deflationary: even if the investment only has a nominal 1%/year return and the currency deflates at 2%/year, that's a 3%/year real return. So it's still better than just holding the currency, even though the nominal return is lower than the deflation rate.
> Secondly, I'm not sure how you can be certain that investment returns, without regard for risks, could be higher than the deflation rate.
Returns on most investments aren't certain in an inflationary environment either, so I'm not sure what's your point.
To your third point, investments in an inflationary environment are necessary because otherwise people would _lose_ money by doing nothing with it. It's better to risk for some return, than lose it by doing nothing. That's what separates it from an deflationary environment in that people gain more money by doing nothing with it. They don't need to incur risk to gain more.
This leads to your first 2 points, where people might still want to invest to get a potential higher return than the base deflation rate, investments would drop compared to an inflationary environment. In the inflationary environment investments are necessary to prevent the loss of value, whereas it isn't in a deflationary one.
There is a group that hijacked the name for their own prize, whom the Nobel committee has no contact with. They are, of course, economists, so any merit in their prize is only as much as economists' at large.
That argument isn't true. Deflationary currency can destabilize governments, not the economy. Econonomies fail because they're run by incompetent governments, who spend more than they can afford.
Bitcoin is not guaranteed to be deflationary. It's deflationary when the economy is growing. It's inflationary when the economy is shrinking. Deflation will slow down economy, and inflation will accelerate economy. It's a stable self-correcting system, which would correct itself to match the average economic growth globally.
Bitcoin is guaranteed to be deflationary as long as there’s a finite limit – if nothing else, lost keys would reduce the total over time.
More importantly, the people hawking it _really_ want it to be deflationary because that effectively makes them landed gentry getting richer without any effort on their part. After a decade of that being integral to the sales pitch I would be extremely surprised to see any major holder support breaking the deflationary model.
No currency is guaranteed to be deflationary. You may guarantee that the currency supply will behave in a certain way (although even that is debatable), buy you cannot guarantee that the price level in terms of such a currency will continuously fall.
The fixed currency supply guarantees it: unless the economy is shrinking at the same rate, each BTC becomes more valuable over time and that’d cause purchase prices for goods to trend lower.
This has been a key part of the sales pitch for a decade: buy now and it’ll be worth more later, guaranteed, but that’s not good for an economy since it heavily incentivizes holding onto anything you aren’t forced to spend. Since Bitcoin has no innate demand, that’s an especially dangerous cycle since almost everyone has alternatives.
So the only way bitcoin isn't deflationary is if demand for it continually goes down over time until it's irrelevant. If demand either goes up or stays the same, it will behave deflationary (wallets getting lost). This doesn't seem to be a good performance pattern for a currency.
You're right a fixed supply isn't enough to guarantee it, you still need productivity growth and technological progress, something we've had for a long time. Given enough growth a 50% crash is nothing.
There isn't monetary deflation in bitcoin (expect for lost coins).
As a global reserve currency, bitcoin would act as an "index fund of everything". Economy is expected to grow, but it's not guaranteed. Which means that there's always a non-zero risk associated to it. There's more risk on short time scales, and less risk on long time scales.
There will be if it's successful - 90% of the bitcoins ever mined have already been mined, for bitcoin to be useful at a long term world wide level it needs to store enough value even as the size of the world economy grows - if it can't them it will become a limit on economic growth much as gold became in the last century.
So because the number of bitcoin is fixed to remain relevant bitcoin will need to continually deflate (ie increase in value) so that there's enough to represent the size of the economy
>More importantly, the people hawking it _really_ want it to be deflationary because that effectively makes them landed gentry getting richer without any effort on their part.
Yeah it is basically people getting screwed by increased wealth inequality and then as a response they don't think of a way to build a system without losers, instead they join a system where the old dynamic makes them the winners. The only difference is that you start from a clean slate from 2008 onwards.
It would seem so, yes. But I disagree with the GP’s premise: claiming economies rise and fall based on monetary policy alone is like claiming the Roman empire fell because they debased their currency. It’s a contributory factor, but certainly not the only one.
We’d need to assess the merit of anarcho-capitalism vs collectivist democracy to understand whether disempowering governments would in fact decrease economic stability.
Yes there is a hole in the article. He didn't mention that Germany lost WW1. Every other nation suffered the same problems but they could get away from them without hyperinflation, Germany couldn't because increasing the monetary supply does not repair an economy.
If one were to completely oversimplify everything the roman empire fell into the "war + debasement" bucket though but it also had a lot of other problems. They were actively fighting a war which meant they couldn't control the influx of barbarian refugees (huns drove them out) at their border. They then committed a grave mistake. They deported all barbarians and killed those who stayed. Some barbarians gathered near the border and formed a big army which then proceeded to plunder Rome. The problems didn't start with money, they got worse because of money.
Governments that overspend or misallocate capital are a burden to the economy. With sound money, a badly managed country can go bankrupt because they can't print more money. It isn't the fault of the money, while this is the usual argument. It's just the nature of honest money.
So, it results in destabilizing governments that are overspending, but stabilizing those that are not.
You don't see the side-effects of destabilizing a government as potentially disastrous for an economy? Governments and economies can have many different forms, but there are clear cases where destabilizing one will destabilize the other and ultimately lead to mass suffering for a period of time. Imagine what would happen if a government in a place like the Middle East or parts of Africa collapsed. History has shown that a new government often doesn't rise up from the ashes without lots of tears and bloodshed. What do you think happens to people's standards of living? How much of their time and money do you think it will take just to get back what they used to have?
Allowing corrupt governments continue to steal the wealth of their citizens through printing money isn't a great alternative. At the end of the day people will use the money that works best for them if they have a choice.
>Allowing corrupt governments continue to steal the wealth of their citizens through printing money isn't a great alternative.
How many times does this get repeated? No money is being printed right now. No MMT is happening. No helicopter money is happening. Barely any Keynesian fiscal stimulus is happening (the US has stimulus checks but the EU doesn't and it's suffering for it) and the fiscal stimulus that is happening is financed via debt. No money is being printed right now.
The majority of money that the Fed creates is primarily issued via debt. The part that isn't is used to buy assets that are being put on a balance sheet and the sale of the assets will often remove more money from the economy than it added. QE does nothing but fill bank reserves so that banks lend out more money.
Yeah, and that's the problem. All the debt is basically money that is stolen from people's savings in the form of inflation.
"Financed with debt" that is never going to be paid back. You have to think who is doing the actual financing here, and why they aren't getting interest on their financing.
The world is much bigger than the US and Eurozone, maybe try travelling a bit once covid dies down.
Citizens of Turkey, Lebanon, Nigeria, Ethiopia, Zimbabwe, Argentina, Venezuela, Iran, Belarus, for example, all have their savings being stolen through inflation to greater or lesser extents.
Of course, but adopting another currency doesn't make a dysfunctional government any more functional. It's like fixing a wobbly table while your house is on fire... probably not the most pressing problem under the circumstances.
Technically it collapsed the moment land was forcibly repossessed because from that day on Zimbabwe could no longer feed itself. The government merely managed to survive longer than it should.
