If your cash is increasing in value (because of deflation), then it's a smarter financial move to stuff cash under a mattress than to spend or invest it. This is why most economists think 1-5% inflation is about the sweet spot.
When you spend money on some good or service it is because you expect to receive some benefit from the use of that good or service, and you value more that benefit than the money you spent on it. If you delay buying some good or service, because you expect it to become cheaper later on, then you are also depriving yourself of the benefit you expect from it. So, in a deflationary environment, you'll only delay buying something if you think that the money that you save is worth more than what you're losing from not enjoying the benefits of that product for that amount of time.
You need to eat to stay alive, and staying alive is more important to you than saving money, so food purchases won't be delayed very long. You don't need to play video games to stay alive, so you can wait for a couple of years to buy a video game when it becomes cheaper; some people do it to save money while other people decide that they prefer to pay more and be able to play that new video game right away (some even pay a premium if it is sold out, even though they know they could pay regular price by waiting a few days).
Plus, since my money is constantly increasing in value, I can buy something "useless" every month and still have the same amount of money. Inflationary money I stick in deposits so I loose a little less than usual, deflationary - I spend.
I think you got the idea confused and/or backwards.
You don't have to buy useless things in a deflationary economy. By not spending, you have more buying power for when you do decide to spend (holding all other variables constant, which isn't real-world truth). Thus, inaction is more profitable than "useless" actions/goods/services.
In an inflationary economy, you stick money into deposits (instead of under your mattress) because you lose less that way. These deposits are used by banks to fund loans. These deposits probably guarantee a very low but fixed interest rate (such as 0.1%), which makes a tiny dent in how much you lose due to inflation. They also make the bank lots of profit when they do well and are insured against you losing any money (except by inflation, of course) as long as your deposits total <$100k.
I decide to spend right now (by donating, buying domain names, etc.) because I know I'll get it back relatively soon. The numbers in my account don't help me in any way; they don't make my life better. Why should I not spend? Oh, and I don't care about profitability directly - I care about living a happy life.
P.S. The deposit interest rates are around 5.5% actually.
Something is very wrong in economics. Falling prices increase the standard of living and spread prosperity. This is what built America. I can't help but think this is a con game being played on us when people call it "deflation." If they had advised Henry Ford, he wouldn't increased wages to his employees and dropped the price of his car. There are also many unexpected events that would make you spend money: Pregnancy, illness, a Shiny New Thing, etc. Amazon would have kept its cloud services prices high too. I lived through the stagflation of the 1970s. There is no way in hell people can ever convince me inflation is a good thing.
There is no way in hell people can ever convince me inflation is a good thing.
I believe this sentence.
The big problem with Bitcoin's finite money supply is that it encourages people to sit out. If there are 1000 people and someone has WLOG 1/1000th of the wealth, if they sit things out and come back 100 years later, there's no reason to think they should still have 1/1000th of the society's wealth at that point. More people were born, more resources were mined, more buildings were built, more technologies were developed -- and that person had nothing to do with it. I can see why he would wish he could still claim 1/1000th of society's wealth, but what's the incentive for all the other people to agree to this? The hope that they can be the ones to sit things out and freeride next time?
I think you're only looking from a consumer perspective, not a business perspective. What is my incentive to start a business when it's constantly a race to the bottom? Furthermore, why invest in a business? It'd be stupid to put $1000 in an investment when the spending power of that money will only increase over time, and you'll never get your money back.
No, I don't think you'll find many economists who like deflation. It doesn't spread prosperity, it spreads laziness.
Then explain to me why Bezos has no problem constantly cutting prices for his cloud services. Why Jobs priced the iPad at $499 for the base model when even he acknowledged the buzz was $999 -- and he might have even gotten that.
>>>It'd be stupid to put $1000 in an investment when the spending power of that money will only increase over time, and you'll never get your money back.
How do you know you'll never get it back? The entire point of investing is to make money faster than via labor or interest or prices artificially increasing (a bubble).
It's just as likely, and in fact far more likely as the economy would radically slow as the velocity of money slows. As a consequence, unemployment would increase, fewer taxes would be paid (shrinking safety net, crumbling infrastructure, etc) and people would run out of cash, thereby increasing the likelihood of being unable to meet current expenses.
Slight inflation is good and keeps the economy healthy.
A healthy economy is an economy which produces goods and services that people need and are able to buy. Although a high velocity of money might be an indicator of a healthy economy, it doesn't mean that using tricks like inflation to increase the velocity of money will produce a healthier economy. Inflation is an incentive to spend your money on stuff you don't really need, that might give the illusion of a healthy economy but you're just killing savings (which are the best safety net there is) and inducing a misallocation of productive resources.
> Inflation is an incentive to spend your money on stuff you don't really need
Most of the purchases we make are not to satisfy core needs, but wants. You buy slightly more expensive delicious foods instead of cheaper boring foods. You strive to live in a decent environment rather than a mud hut because the former is more pleasant than the latter. You buy things or experiences that are unnecessary to survival, but bring some form of happiness. (Research, has, however shown that buying experiences leads to greater happiness than buying tangible goods!) The list goes on. We do this in part because because we have dopamine. Eliminate dopamine and we not only struggle to feel pleasure, but our brains also stop functioning properly.
Nobody ever says it, but inflation is really a good thing because of the way our brains are wired up.
> you're just killing savings (which are the best safety net there is)
Some savings are good to smooth out the bumps in the road, but when people save too aggressively people reduce their spending and the economy also slows. When the economy slows, you're more likely to find yourself out of work and having to use those savings so you don't end up living in that mud hut!
> and inducing a misallocation of productive resources
When savings go up there is more capital to invest in new ventures, interest rates go down (more money chasing investment opportunities) and it signals the markets that it is a good time to take risks. When savings go down, interest rates go up and it signals the markets that it is a bad time to take risks. Inflation distorts those signals and makes people take risks when there aren't enough savings to justify those risks. High risks and low savings are a recipe for disaster.
Generally, when people are socking money away their savings account, or reducing their spending in some way, it means they're trying to expose themselves to less risk because they're worried about the future. People who are worried about the future don't start investing until their confidence has been bolstered by something. Excessive savings on their own don't lead to investment, they lead to deflation and economic decline.
The solution to this is to meddle with interest rates or policy.
You are right that a reduction in spending/increase in savings (whatever their form) does tend to correlate with interest rates decreasing, and vice versa, but this is a deliberate decision to speed the velocity of money up again before longer-term damage happens. It's not a long-term solution. Interest rates are in many way a fiscal ballast to keep the economy properly weighted.
The trouble with Bitcoin is it's inherently deflationary. Meddling with interest rates doesn't work if your currency is Bitcoin. You also can't have a healthy amount of inflation to keep the economy growing. If Bitcoin did become a de facto currency, we'd be poorer both economically and intellectually. The latter I believe because there would be less "excess" to spend on scientific research, as typically happens in periods of economic slowdown.
Historically the best time to make an investment or start a business is in lean times (depressions are good!), but people aren't generally that rational. The value of something (currency included) is typically driven by emotions. This is why what people feel about something is everything, from a product you're selling to your currency.
A few hours ago I thought Bitcoin was awesome and a good thing, but after thinking it through and arguing this point I'm convinced it's a bad thing and will lead to a longer-term harm if it is widely adopted and begins to replace traditional currencies.
>>>Generally, when people are socking money away their savings account, or reducing their spending in some way, it means they're trying to expose themselves to less risk because they're worried about the future.
No. That is totally against the American tradition of consumer banking (at least until 1970s stagflation) as well as the way banking has been practiced in Japan. "Save it for a rainy day" didn't come from nowhere. It's what most Americans used to practice. And in Japan they are exhorted to bank as a national good to fund loans to companies. A lack of confidence in the future -- incomes remaining the same -- would empty banks of deposits.
No. You're completely wrong and I'm starting to conclude that you're taking what's right, inverting it, and writing it as a comment.
The consumer confidence index is a measure of savings and spending. The more confident consumers are, the more people are spending and the less they're saving, and vice versa. This isn't an American thing.
What people have been taught and what people actually do are two different things.
If your money appreciates in value just by sitting there, why invest? It's the ultimate argument against investing. Take the sure thing, especially in a rough economy.
Similarly, you know how we always hear that people put out of work by new technology should move up the value chain? Where they gonna move to if people aren't buying things? Wants as opposed to needs are the sign of economic progress.
Savings only decrease in value when they're not exposed to some risk. Cash in a safe is going to devalue at the rate of inflation because it's exposed to (almost) no risk. Cash in a savings account is exposed to minimal risk and (at least in the UK and NL) can see interest rates at about the same rate as inflation. The more risk the capital is exposed to, the greater the return.
It's new. If it does become our nouveau de facto global currency, it will first become an intermediary for traditional currencies to facilitate transactions. Buyers will exchange their dollars and euros for Bitcoins, and sellers will largely exchange their Bitcoins back pounds and krona (or whatever).
However, the more people accept Bitcoin, the more people can spend it. There will be a network effect. Eventually, if this pattern holds, the food producers will start to accept it and that's where the "trouble" occurs.
In theory, if people perceive the stability, utility, and value of Bitcoin to be greater than a traditional currency, and it starts to replace that traditional currency, the traditional currency will collapse, hyperinflation will occur, and there will be a period of pain. The late majority and laggards will lose a lot of money, and the early adopters and early majority will gain. There will simply be a redistribution based on tolerance for risk and foresight. At this stage the value of Bitcoin will soar.
Frankly, I wouldn't be surprised if governments did their best to make it illegal. Governments don't entertain competition because their role is to maintain the stability of the status quo, which is fair. We all enjoy living in a degree of stability, as opposed to a Hobbesian state of nature.
First of all, Krugman is a hack. Regardless of which system of economics you subscribe to.
Second, and more importantly, the idea that deflation is a bad thing because it encourages saving (derisively called hoarding) is not at all accepted by Austrian economics.
Rather, saving is actually a Good Thing because savings is the source of investment.
An excessive increase in savings causes a reduction in spending which causes the economy to slow which causes people to use their savings.
Savings aren't really an investment, or at least not a very good one. The utility of savings is to smooth out changes in expenditures in relation to income. Some savings are good as a cushion to protect against temporary declines in income, in the same way body fat was a good way for our ancestors to maintain their energy expenditures when their food intake was insufficient (in the short term).
Savings aren't an investment because the return they're expected to yield is not greater than inflation. This is why someone says they "invested" in something that should ordinarily be considered an expense, you know they're making bad financial decisions.
"Hoarding" and "Investing" are usefully different (if informal) terms, because they distinguish between very different uses of capital.
"Hoarding" consists of putting all one's assets into extremely conservative classes (gold, cash, vast parcels of real estate in the middle of nowhere) or otherwise removing it from the economy (a yacht that's never rented out and rarely used), thereby depriving useful capital from the economy (e.g., perhaps the "saver" is too lazy or stupid to do anything profitable with the land they own, and they are just holding it as an inflation hedge; or perhaps the yacht is only important as a symbol of status).
"Investing" means making one's capital available to others in exchange for a return and thereby supporting economic exchange and development.
In a finite world, "hoarding" increases one's relative wealth (the multiple by which one is wealthier than, say, the median person) at the expense of most everyone else. "Investing" increases wealth overall, but in doing so decreases one's relative wealth.
Any idiot can hoard; and if an individual cannot invest in order to reliably earn a return that beats 1-5% inflation, it's a wonder they have the money at all in the first place.
