> Deflation for a primary store of value in an economy is definitely a bad thing
How can having your assets increase in value be harmful? Traders already account for many stock variables, why would deflation be any different?
> and think about what that would mean - the bank pays you to borrow money from it.
Oh no, not that :P
> "when something goes wrong, it will die"
Sort of like hyper inflation?
> they don't understand that the value of money is a product of supply and demand
They also understand when supply is in control by a few bankers, so is the demand. Who do you trust to ensure supply isn't ramped up: your friendly banker, or math? This isn't hypothetical either http://en.wikipedia.org/wiki/Hyperinflation
Suppose you need capital to commence on some enterprise. You'd like to borrow against and/or sell a share of future income. How can you convince a bank[1] to give you money, if the bank's money is already producing a healthy return just sitting in the bank's vault?
In an inflationary scenario, money is declining in value. People with a lot of it are actively looking for ways to put it to work, otherwise they'll end up poorer. But if the money is not losing value over time, and is in fact appreciating, what incentive do they have to put their capital to work? They need much larger returns on investment to make up for the loss of their existing risk-free return.
[1] For bank, read anyone who could lend to or finance you.
> How can you convince a bank[1] to give you money, if the bank's money is already producing a healthy return just sitting in the bank's vault?
Why do people invest in stocks when they can play it safe in a bond market? They have a different appetite for risk.
I do see your point, a constantly inflating money supply encourages people to invest. The flip side to that is, are the investments worth it? Inflation is an artificial incentive to invest, which some believe is the cause of bubbles. Remember all those stupid investments in the dot-com bubble? Some believe it's because money was too cheap.
I think this is obvious -- a bank will lend you money if you can offer returns in excess of the risk-free rate of return, balanced by the perceived risk and collateral for the loan.
Similarly, an individual will deposit money in a bank rather than keep it under their mattress only if the bank offers returns in excess of what it gets sitting in the mattress.
Since at the moment there is no FBDIC, as an individual you must also balance the risk of depositing in the bank against the return they offer.
But in a hyper-deflationary environment, which seems bound to happen with a currency with a fixed supply in a growing economy, almost no investment could provide returns in excess of the risk-free rate.
"How can having your assets increase in value be harmful?"
Ponder the implications of bread jumping to an effective price of $25 a loaf. That can and has happened in deflationary collapses, as the reserve fraction jumps toward 100% (due to credit panic).
By assets increasing in value I was referring to currency, not the cost of commodities.
In your story, I would attribute the $25 a loaf bread to the credit panic, not the resultant of a consumers increase in purchasing power -- such as the expected deflation in BitCoins.
How can having your assets increase in value be harmful? Traders already account for many stock variables, why would deflation be any different?
> and think about what that would mean - the bank pays you to borrow money from it.
Oh no, not that :P
> "when something goes wrong, it will die"
Sort of like hyper inflation?
> they don't understand that the value of money is a product of supply and demand
They also understand when supply is in control by a few bankers, so is the demand. Who do you trust to ensure supply isn't ramped up: your friendly banker, or math? This isn't hypothetical either http://en.wikipedia.org/wiki/Hyperinflation