I have an hypothesis that the same could happen with deflationary cryptocurrencies if they become used widely enough in financial institutions that central banks decide they should tie part of the monetary system to them.
If the world transitions to cryptocurrencies whose supply is unmanaged or fixed, that will not be possible and presumably will be stuck during financial crises.
You might want to add to your reading list the history of the Roman empire.
Inflation rate higher than the deposit interest rate (negative real interest rate) is causes the wealth transfer.
"Savers", in reality, lenders have always had a way out in this situation: investing.
As in every investment boom, there are Ponzi schemes and during this one it happens to be Bitcoin.
Prices are a function of money supply and velocity. Inflation can rage while no money is printed because velocity surges. Just as deflation can fester while central banks print as velocity toys with absolute zero.
What are some good examples of this? Historically it seems to me like major inflation issues usually coincide with an expanding money supply, not the other way around
I think the difference is Japan is a a country with all its needs met. People already had enough money to spend on basic needs (unlike post WW1 Germany or Zimbabwe recently) so additional money didn't change that but there was a housing bubble.
You want a little bit anyway. Simplistically, if all you have in your economy is 10 dollars and 10 hamburgers, then hamburgers will probably be worth something like a dollar each. If you go to 20 hamburgers but stay at 10 dollars, now hamburgers are worth $0.50, which is great for dollar holders, not so great for hamburger makers. A healthy economy, however, is not one in which actors are incentivized to hoard currency. You want economic actors to be incentivized to produce goods and services. If you grow to 20 dollars and 20 hamburgers, that is price neutral, but you don't really want price neutrality. You want it to be more lucrative to produce goods and services than to hoard currency.
There is some valid concern that this can harm retired savers, but we developed a solution to that a long time ago that doesn't require deflationary currencies. We split ownership shares of the companies that produce goods and services and trade them publicly so people can get a cut of the wealth growth without needing to become producers themselves. Retirees can own appreciating assets by buying stock in companies that make stuff, rather than holding their life savings as cash under a mattress.
[1] https://lazardfreresgestion-tribune.fr/wp-content/uploads/20...
Suppose the government prints one dollar and shortly thereafter everyone goes bankrupt and collapses the money multiplier. This will definitely result in net deflation.
OK, that's extreme, but it should prove a point in extremis. But it is possible that the government could print money and suddenly people stop... paying off their debts, or something. Maybe they start thinking that dollar-denominated-capitalism is pointless because it's all cronies that get it anyways, and just exit the economy. Or like, screwing the poor through inflation triggers some sort of revolution and all the banks selectively are levelled by anarchist activists.
So "printing money" could definitely cause deflation in some scenarios. You probably don't want to be participating in an economy that takes that turn.
Literally the only way to increase the money supply is increasing the underlying assets' value overall.
It's because people are somehow led into believing that the government can arbitrarily print money, everything that's normal seems like mental gymnastics.
If I have $10 and you have $10, and then someone prints $10 and gives it to you. You went from having the same purchasing power as me to double mine, without any change to the available goods and services.
> lenders have always had a way out in this situation: investing
Yeah, that's why we're investing in a fairer monetary system, where this power to create money arbitrarily doesn't exist.
My point is that equity: public or private, has always been an alternative everytime lending money isn't worth the while.
Bitcoin brought nothing to the table.
When people specify Bitcoin or Gold as a particularly good "hedge for inflation" they betray the fact that they failed Macroeconomics 101.
Everything that isn't the currency is a "hedge for inflation".
Edit: I'd argue this is because it has better monetary properties than the alternatives.
A basket of consumer goods and services is a nonsensical way to hedge monetary inflation under anything but the most extreme conditions, since those things should be getting cheaper as production processes/technology/understanding of the world improve.
Also, I don't really care what the price of a "general basket of goods and services" is (whatever that means). I care about the prices of the specific things that I want now or will want in the future.
Edit: And I would say my personal CPI seems to track money supply inflation pretty closely.
"Purchasing power" is exactly CPI inflation, not monetary inflation.
> And I would say my personal CPI seems to track money supply inflation pretty closely.
This I can buy. If the CPI figures are wrong, then we need to get ones that are right. But CPI inflation is still the one we actually care about.
Why should we not care about monetary inflation? Well, say the population doubles. Either the monetary supply has to double, or each dollar is worth twice as much. (In case you think "that sounds good": it stinks if, say, you owe a mortgage and each dollar you pay back is twice as valuable.)
Yes, I know that's not why the monetary supply inflated over the last 15 years. The point stands: CPI inflation is the one that actually affects us.
If your only purpose in life is to be a "consumer", sure. But changes in relative purchasing power between people also distort you're ability to affect the world. Increasing purchasing power of a bank or home owner relative to a saver through policy decisions increases their power to affect the world relative to the saver. This ability to arbitrarily choose winners and losers is not what you want in a monetary system IMO.
Edit: ability to affect the world as well as freedom to act, since you can substitute money for your own time.
No need for name calling.
Also, maybe try to form an actual coherent argument, rather than continuing to claim I don't know what I'm talking about.
- Medium of exchange: bad. Caps out at a few transactions per second, transaction cost go up massively when actually used.
- Unit of account: Terrible. Because of price volatility you denominate BTC in terms of USD - something priced in BTC has a different price depending on the minute you look at it
- Store of value: Hilariously terrible. Storing value has to do with *low price volatility* something which Bitcoin does not have. The average price might be up over time, but this is *speculation*, not storing value! If you store value you want as close to what you put in as possible, not more (or less).
People claiming Bitcoin is a "store of value" don't understand what the word "storing" means, nor the textbook definition.
- collectable -> It's cool, I want some.
- store of value -> it holds value better than any other money. (Bitcoin is here)
- medium of exchange -> People request it in exchange for goods and services because it holds its value over time.
- unit of account -> People denominate prices in it because it's a widely used medium of exchange.
Edit: My initial point was Bitcoin has properties that make it suitable for use as money: divisible, portable, easy to verify, doesn't degrade over time, etc.
"Imagine an isolated village where people farm for subsistence. This is a village disconnected from the world that has not had a currency up to now. People rely on barter instead. Every fall, villagers usually produce excess food to have something to eat in the winter, even if, the real returns on the investment is low. Because of spoilage, crops stored for the winter are only worth 90% of their usual real value. 10% rot away in storage. That is, these crops have a return of negative 10%.
One day, this village mandates its government to create a currency that always keeps 98% of its real value on a yearly basis (2% inflation) even during times when private savings assets can’t retain this much. The government puts money into circulation by buying part of farmer’s crop during the summer (civil servants have to to eat). Most farmers produce enough food for the summer, sell some of their crop and keep their money to be able to buy something to eat in the winter. They do not produce a crop to store for the winter since it would only return -10% on their initial investment and the central bank promised money would keep value at a rate of at least -2% (plus maybe a bit of interests).
What happens when winter comes? People have cash but few have anything to sell because they didn’t reinvest in the production of a crop to be stored!
In this situation, it’s going to be very difficult for the government to control inflation because there will be too few goods for the amount of money people will want to spend. If the government does manage to control inflation, it will be through high taxes or by depressing the nominal value of the crops of the few farmers who did store something for the winter. The central bank might do this by giving high enough interests payments on cash to prevent people from wanting to spend it immediately.
In any case, people won’t eat much during the winter because the food will simply not exist.
The point is, government money can easily jam markets and crowd out productive investment."
https://medium.com/@b.essiambre/the-world-deserves-a-pay-rai...
Turned out great for them. By all metrics they should be Western Europe level rich and yet many young kids find it more profitable to mine coins in runescape 12 hours a day rather than actually get a job, strange how that happens hey, if only they printed more Bolivar this all could have been avoided?