Bitcoin Forum

Why are Keynesians always wrong about economics?

The Bitcoin supply has only been inflating at consistently lower rates (e.g., ⅟ₙ₊₁ after 𝑛 blocks when the Bitcoin block reward was fifty bitcoins), so a progressive reduction in spending would seem to be expected under the economic theory.

The theory applies to monetary systems (macro) not some small gambling party.

Krugman was saying Bitcoin could NEVER work as a monetary system because it's designed to be deflationary.  I.e.  People would hoard instead of spend

Krugman was saying Bitcoin could NEVER work as a monetary system because it's designed to be deflationary.  I.e.  People would hoard instead of spend

This is why gold never worked as a monetary system either  :D
Great insight !

. . .

It inflates initially; however, that inflation decreases to nothing over time (and, in fact, “becomes” deflation as the rate whereat coins are lost or made “unspendable” overtakes their production).

This is why gold never worked as a monetary system either  :D
Great insight !

Keynesians are wrong in many respects, but they are a great theory if you are a state: it gives you the excuse to get more and more your hands on everything, and to spend more than you can.  Who wouldn't be seduced by the prospect that spending like crazy is a good thing ?

Yes, exactly like gold.

My comment was ironic, because gold was the universal money for about 5000 years, until it was taken over by fiat, which was initially a gold scam.

The Bitcoin supply has only been inflating at consistently lower rates (e.g., ⅟ₙ₊₁ after 𝑛 blocks when the Bitcoin block reward was fifty bitcoins), so a progressive reduction in spending would seem to be expected under the economic theory.

But it is currently inflating more than the dollar and yet spending has not increased.

Can Keynesians ever be right or has there been any instance throughout history where they have been right? Other than 600 years ago when tulips happened. Once.

It's you who don't understand the concept.  It applies to macro level not some little private speculators plaything.


Spending hasn't increased because it's used to speculate.  The holder are treating it as a commodity not a currency.  Also it's a private outside money.

But it is currently inflating more than the dollar and yet spending has not increased.

Can Keynesians ever be right or has there been any instance throughout history where they have been right? Other than 600 years ago when tulips happened. Once.

⅟ₙ > ⅟ₙ₊ₘ ⇔ 𝑛 + 𝑚 > 𝑛

I see, so it is a concept that is useful for talking among college professors and politicians but not useful in the real world. Understood.

Spending and inflation/deflation aren't really related to each other, the only reason spending would increase because of inflation would be if people are being forced to spend because their wealth is being destroyed which is what inflation actually does, especially hyperiflation and that is exactly what is happening to paper currency.

Whenever I get any paper money of my own I can tell you I immediately dump mine for Bitcoin just because I know every second I hold the stuff it's getting devalued and if I want to have some kind of long term purchasing power I need to get rid of it. The only time I use paper is in order to pay someone else who only takes that or for bills etc. that need to be paid.

In a world where the things we need and use go bad, sharing comes naturally. The hoarder ends up sitting alone atop a pile of stale bread, rusty tools, and spoiled fruit, and no one wants to help him, for he has helped no one. Money today, however, is not like bread, fruit, or indeed any natural object. It is the lone exception to nature’s law of return, the law of life, death, and rebirth, which says that all things ultimately return to their source. Money does not decay over time, but in its abstraction from physicality, it remains changeless or even grows with time, exponentially, thanks to the power of interest.

Yeah, making a hypothetical statement doesn't mean it's correct, we've heard this argument a thousand times, you're also forgetting the fact that inflation is simply going to force people to work for longer and for less pay because everything becomes so expensive. Also, if deflationary currencies are so horrible and bad, why were they used for so long? Why is it that inflationary currencies have only recently come into existence and been used widely?

Hmmm doesn't seem to me like you're really going to bother answering the question but what the hell I'll ask anyway.

Yeah, making a hypothetical statement doesn't mean it's correct, we've heard this argument a thousand times, you're also forgetting the fact that inflation is simply going to force people to work for longer and for less pay because everything becomes so expensive. Also, if deflationary currencies are so horrible and bad, why were they used for so long? Why is it that inflationary currencies have only recently come into existence and been used widely?

Hmmm doesn't seem to me like you're really going to bother answering the question but what the hell I'll ask anyway.

Keynes is the troll of economic theorists used by universities and interested parties to add theoretical justification for their parasitism.

Keynes was probably terrible at saving money. Marx was for a fact. I think Keynes appeals to people who are suseptible for lazy quick fixes in general. We live in a different world now as well and so I think something as simple as "save money for future consumption and investment" is a principle we all need to adhere to a lot more now. Society might grind along at a slower pace, but it will probably have to since things are growing in complexity globally.

Managing a global economy is a much larger pipe dream than managing farmers in Siberia was during the Soviet regime. So much more impossible. Governments and citizens alike will have to become more coherent going forward if anything is going to get done.

Keynes is the troll of economic theorists used by universities and interested parties to add theoretical justification for their parasitism.

Keynes was probably terrible at saving money. Marx was for a fact. I think Keynes appeals to people who are suseptible for lazy quick fixes in general. We live in a different world now as well and so I think something as simple as "save money for future consumption and investment" is a principle we all need to adhere to a lot more now. Society might grind along at a slower pace, but it will probably have to since things are growing in complexity globally.

Managing a global economy is a much larger pipe dream than managing farmers in Siberia was during the Soviet regime. So much more impossible. Governments and citizens alike will have to become more coherent going forward if anything is going to get done.

The point is that Marxism and anarchism are built up on entirely different principles, in spite of the fact that both come into the arena of the struggle under the flag of socialism. The cornerstone of anarchism is the individual, whose emancipation, according to its tenets, is the principal condition for the emancipation of the masses, the collective body. According to the tenets of anarchism, the emancipation of the masses is impossible until the individual is emancipated. Accordingly, its slogan is: "Everything for the individual." The cornerstone of Marxism, however, is the masses, whose emancipation, according to its tenets, is the principal condition for the emancipation of the individual. That is to say, according to the tenets of Marxism, the emancipation of the individual is impossible until the masses are emancipated. Accordingly, its slogan is: "Everything for the masses."

Clearly, we have here two principles, one negating the other, and not merely disagreements on tactics.

Keynes is the troll of economic theorists used by universities and interested parties to add theoretical justification for their parasitism.

Keynes was probably terrible at saving money. Marx was for a fact. I think Keynes appeals to people who are suseptible for lazy quick fixes in general. We live in a different world now as well and so I think something as simple as "save money for future consumption and investment" is a principle we all need to adhere to a lot more now. Society might grind along at a slower pace, but it will probably have to since things are growing in complexity globally.

Managing a global economy is a much larger pipe dream than managing farmers in Siberia was during the Soviet regime. So much more impossible. Governments and citizens alike will have to become more coherent going forward if anything is going to get done.

As the price was rising, all of the Keynesians kept harping about how nobody would spend bitcoins because they would want to wait to spend later when the price is higher, never spending their money.

And yet, for the past year the price has been going down, high inflation, a Keynesian dream. And yet, the spending did not skyrocket.

Why are Keynesians always wrong about economics?

Keynesianism has nothing to mean to BTC price

Please give example of when deflationary money has been used for a long time.  And gold is not an example.  Gold was used for coinage but the money is not denominated in gold but instead whatever the Kings money was

A general decline in prices, often caused by a reduction in the supply of money or credit.

Gold is an example and the example, you're just choosing to ignore it or don't know what deflation and inflation actually is, the state always chose gold in the end, one perfect example was the byzantine empire having a gold coin minted and they lasted for almost 1000 years, even in the U.S and the UK silver was used as a currency for quite some time but was replaced by paper because it wasn't as easy to for the state to control the currency supply.

Amazes me how blatantly people choose to ignore historical fact when it doesn't fit into their political agendas, go and fucking learn what deflation and inflation actually is instead of just dismissing people who know more than you.

http://en.wikipedia.org/wiki/Byzantine_coinage

Oh and here's a definition of deflation for people willing to read since I know you won't bother looking it up.

http://www.investopedia.com/terms/d/deflation.asp


I highlighted the important bit for you.

This one line is exactly what deflation is but the rest is pretty much the kind of neo-keynesian crap you're trying to peddle, precious metals are precious, very rare. So that is why everything becomes far cheaper in that currency as opposed to paper which is printed in ridiculous amounts, it is also why cryptocurrencies are worth much more than the dollar.

Inflation and deflation are almost always a result of changes in the money supply, there are of course normal trading patterns that happen because of regular trading but these always get exaggerated if it's someone messing with how much currency is in circuation. A perfect recent example would be the situation with mt.gox and butterfly labs, you also have silkroad online, those are all cases where a large amount of currency has exited circulation or been dumped onto the markets at once and that is what causes such dramatic changes in prices and also peoples spending habits, the inflation is scaring the crap out of everyone and causing everyone to dump their paper for something of value.

Tell that to the Keynes mouthpiece, Paul Krugman.

This is wrong.  You Need to read Graebers History of Money

In modern times gold was reserve money and mainly used for international trade but inside the nation, money was largely credit money.  Credit money and metal money have always coexisted.  Gold itself wasn't the money it's the coins with stamp of the king on it.  In essence money has always been a creature of law whenever there is a state

Please give example of when deflationary money has been used for a long time.  And gold is not an example.  Gold was used for coinage but the money is not denominated in gold but instead whatever the Kings money was

Maybe you need to read von Mises "the theory of money and credit" ?


Do you know where "dollar" comes from ?  It's a mass unit of gold.

Edit: I'm wrong, it was an amount of silver: 24 grams.

von Mises?  Hahaha.  Is that a joke?  Nobody in economics takes him seriously

So is sterling pound.  So what?  What does that prove?  That Silver was used for coins once?  You think you can walk into a shop in London back the old days and pay with a silver dollar?  The money aspect doesn't come from the metal it comes from the authority of the issuer

From 1785 until 1861, in the relatively early years of the country, the US based their financial structure on currency that utilized gold and silver. Instead of the paper that is used today, coins made of pure gold and silver were traded in the free market. If it was not for financial crises in 1857, it is more than likely that this system would have endured for much longer than it did.

Executive Order 6102 is a case that many mistake as being the Gold Standard itself. In 1933, Franklin D. Roosevelt enacted Executive Order 6102, which stated that citizens were not to own their own stock piles of monetary gold. All gold was to be turned into the government, with the owners receiving $20.67 per ounce in compensation. The primary outcome of this event was a sharp increase in the price of gold, as it would rise to $35 per ounce shortly thereafter.

It's not about his "authority", but about his arguments.
I guess that Nobel Prize Hayek is also not taken seriously then ?


Of course gold and silver was used as money ! 

The "authority" you talk about was just a certification of the amount and purity of the coins.

http://www.jmbullion.com/guide/history/

Like I said money, comes from the authority of the state not the metal used to make coins.  There's only been brief periods in History like the Free Banking Period where we had wide spread use of private money.  Most of the time money has been a creature of law

No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.

Money doesn't come from the authority of the state, but the state wants to limit the use of money on its territory to the legally allowed tender in order to be able to control and profit from it (mainly through seigniorage).

The authority of the state was "used" some times to "certify" the metallic contents of the coins (as were some *private* certifications like the Joachimsthaler).  It turns out that states often scammed people with fake certifications, while private certifications were usually more trustworthy.

The best proof of the error in your proposition is that most state fiat money has been (fakely because the states scam people) backed by metallic amounts for a long time.   If it were true that it was the state's authority that was solely sufficient to give value to state-controlled money, then non-backed fiat money would have been the norm.  After all, the state's authority wouldn't need any backing-up by any metallic or whatever commodity according to your claims.  Pieces of paper with a stamp from the state would do.

It took more than a century to get loose from metal-backed fiat money (and from the moment it did, fiat money plummeted in value like a stone).

Fiat money has been possible because of a century-long scam, where people were made to believe that they were *actually* handling a state-certified amount of metal with the fiat.  When the habit of not handling the physical value carrier which was the metal was so generalized, and people got used to pay with pieces of state-stamped paper (believing it was worth metal), only then the state scam of fiat money could be carried through.

So much for "state authority gives value".

The historical dollar was the Spanish dollar which was nothing else but a calibrated piece of silver, to be identical to the very trustworthy Joachimsthaler pieces of silver:

http://en.wikipedia.org/wiki/Spanish_dollar

The first US dollar was supposed to be a state-issued equivalent of the Spanish piece of silver.

http://en.wikipedia.org/wiki/History_of_the_United_States_dollar

The continental currency, which was an attempt at "fiat" which was not backed but "declared equivalent" to a piece of silver (which is by itself ridiculous) failed miserably.

The US money was saved for a while with the Contract Clause, allowing only gold and silver as legal tender.
http://en.wikipedia.org/wiki/Contract_Clause


I could go on...

Nothing you wrote supports the argument opposing the charts list view of money.  Furthermore, your arguments are childish and emotional so it's not worth my time to debate you.

Many commodities or materials have been used as money such as rice, stones, shells, etc.  The common link is that the state decreed these things to be money not the market.  Money has always been a credit system. 

John Maynard Keynes, the most famous economist of the twentieth century, observed in his Treatise on Money that coinage seemed to hold no charm for some of the societies of the ancient world, and held out the following suggestion:

    The stamping of pieces of metal with a trade mark was just a piece of local vanity, patriotism, or advertisement with no far-reaching importance. It is a practice which has never caught on in some important commercial areas…. The Semitic races, whose instincts are keenest for the essential qualities of money, have never paid much attention to the deceptive signatures of mints, which content the financial amateurs of the North, and have cared only for the touch and weight of the metal. It was not necessary, therefore, that talents or shekels should be minted.

That's a way of saying that you've lost the argument I guess :-)

What I've shown you is some examples where states *used* the fact that precious metals were generally seen as value-carriers to base their state-decreed money on.  There were two simple ways to do that:
- make coins of the precious metal, of which the denomination corresponded in fact to the amount of metal (such as the Joachimsthaler, and the Spanish dollar).  The state stamp then simply certified the veracity of the amount and kind of metal.
- give out paper bills that are exchangeable for the precious metal (or at least are decreed to be potentially exchangeable).

MOST of the monetary history consists of *this* kind of state money.  As such, the state doesn't "impose value by authority" but *uses* market-determined value to base its state-based money on.

My argument was simple and straight-forward: if it were true that money got its value *solely* from the authority of the state (which is your statement) then no state would have gone through the difficulty of issuing money which is based upon precious metals.  They could have issued money by printing paper.   But historically, that didn't happen.  I was going to write, that never happened, but I'm in fact not sure that it didn't happen anywhere.

It is true that *today* fiat money is exactly that.  But fiat money usually (again, I was going to write always, but there may be exceptions) started out as precious-metal backed money and derived its value from the precious metal value that was of course solely given by the market.  It is after a century of "scam" that fiat lost his link to precious metals.  In many cases, the states intervened to FORBID other money.  The USA went as far as to forbid the holding of monetary gold !

But be careful to what I'm saying: I'm talking about the *historical* path, the one you claimed was mostly or always state-authority based.

I'm NOT saying that money HAS TO BE precious-metal based.  It doesn't have to.  State authority CAN introduce pure fiat money.  Only, I'm not aware of any fiat money that was historically issued that way (historically is "more than a century ago").  I'm not excluding that there were examples.  But all examples I know of, have an initial link to precious metals.

In fact, state money can indeed be issued, and can have value.  The state simply has to guarantee scarcity of the money.  Then it can, or cannot, be adopted by the market.   If moreover, the state makes laws that make it difficult or illegal to use free market money, such as precious metals, this can kick in the speculative cycle which turns an asset into money.  


I think you should get your historical facts right before claiming such statements.

BTW, here's an interesting piece of the Great Keynes himself about money:

http://encyclopedia-of-money.blogspot.fr/2012/10/phoenician-weight-standard.html

The simple reason is they used metals because it had the properties they needed.  But the money aspect came from the Kings issuance so he can collect taxes.  Kings use gold for coins so gold became a valuable commodity.  

Keynes is wrong about this one.

Before money existed people used credit.  Then they used tokens.  Coins just happen to be a shiny metal token. Just read Graebers book on 5000 years of debt.  

Your understanding is based on outdated knowledge.  It came from economists making assumptions without empirical evidence.  Graeber is an anthropologist and his theories come from archeological records not assumptions

I guess this is why paper is expensive these days :-)
Taxes were very often collected not as money, but as commodities.  1/10 of the harvest and things like that.


Keynes was wrong, von Mises was wrong, Hayek was wrong, Rothbard was wrong, but one contested book writer is of course right :-)


You have to understand that debt and money are two different concepts.  Thinking they are the same is a fundamental error in reasoning.  
The fact that debt existed (which is most probably right, I have never studied that, but it sounds perfectly reasonable) is no proof that money rose from debt.


Sure :-)

But OK, if I have time I will give it a read.

The point is however, that in "international" trade, the concept of "IOU" doesn't mean much.  IOU is perfect in tight social circles.  Social control balances informal IOU.  But if you come with a ship full of amphora of wine for more than 1000 miles, you don't care about any IOU from the guy buying the wine.  You'll maybe never see him or his countrymen again.  You want something in return that is also accepted by people that have nothing to do with the countrymen of the wine merchant.  So his country, his king, his state, you don't care about.  You want something of value independent of that king and country, that you can trade for something in *your* country.  An IOU from a distant king and country, your fellow countrymen don't care about !

Im not saying money and debt are the same thing.  I'm saying that money system arose out of credit systems.  Economies only need a ledger to keep track of what anyone owes to anyone else.  Early societies operated on gift economies.  Barter was something that happened with outside tribes akin to international trade.

But within the tribe they could just remember who owed who something using a ledger like system.  If tribes got too big to keep track of IOUs then token money would be the technological breakthrough.   When there were rulers/ kings, the king collected taxes so whatever the medium the taxes were that's what's people used as money.

I agree that in the past gold solved the problem of international trade because there was a global market for gold.  So holding gold you could always find a buyer somewhere.

Keynes is wrong in that quote about kings put their faces on coin for vanity.  Perhaps it's part of the reason but not the primary one.  The main reason is so people knew it came from the Kings mint.  However, Keynes was no gold bug.  Quite the opposite.  I really don't know why you posted that quote from Keynes

I don't even remember what your argument is.  You think money needs to be commodity to work?  Or do you think that economies don't run on credit?

Because this historical vision is the standard vision in economy.  So even if you put von Mises and Hayek on doubt, even Keynes, who is all in for state control and state money and so on, acknowledges this vision, it is a proof that this is not the product of an "emotional mind".  It is standard economic theory. 

https://en.wikipedia.org/wiki/Debt:_The_First_5000_Years

Graeber lays out the historical development of the idea of debt starting from the first recorded debt systems, in the Sumer civilization around 3500 BC. In this early form of borrowing and lending, farmers would often become so mired in debt that their children would be forced into debt peonage. Kings periodically canceled all debts. In ancient Israel, the resulting amnesty came to be known as the Law of Jubilee.

The author claims that debt and credit historically appeared before money, which itself appeared before barter. This is the opposite of the narrative given in standard economics texts dating back to Adam Smith. To support this, he cites numerous historical, ethnographic and archaeological studies. He also claims that the standard economics texts cite no evidence for suggesting that money came before barter, credit and debt, and he has seen no credible reports suggesting such.

The primary theme of the book is that excessive popular indebtedness has sometimes led to unrest, insurrection, and revolt.

He argues that credit systems originally developed as means of account long before the advent of coinage, which appeared around 600 BC. Credit can still be seen operating in non-monetary economies. Barter, on the other hand, seems primarily to have been used for limited exchanges between different societies that had infrequent contact and often were in a context of ritualized warfare.

Graeber suggests that economic life originally related to social currencies. These were closely related to routine non-market interactions within a community. This created an "everyday communism" based on mutual expectations and responsibilities among individuals. This type of economy is contrasted with exchange based on formal equality and reciprocity (but not necessarily leading to market relations) and hierarchy. The hierarchies in turn tended to institutionalize inequalities in customs and castes.

The great Axial Age civilizations (800–200 BC) began to use coins to quantify the economic values of portions of what Graeber calls "human economies". Graeber says these civilizations held a radically different conception of debt and social relations. These were based on the radical incalculability of human life and the constant creation and recreation of social bonds through gifts, marriages, and general sociability. The author postulates the growth of a "military–coinage–slave complex" around this time. These were enforced by mercenary armies that looted cities and cut human beings from their social context to work as slaves in Greece, Rome, and elsewhere. The extreme violence of the period marked by the rise of great empires in China, India, and the Mediterranean was, in this way, connected with the advent of large-scale slavery and the use of coins to pay soldiers. This was combined with obligations to pay taxes in currency: The obligation to pay taxes with money required people to engage in monetary transactions, often with very disadvantageous terms of trade. This typically increased debt and slavery.

At this time, great religions also spread, and the general questions of philosophical inquiry emerged on world history. These included discussions of debt and its relation to ethics (e.g., Plato's Republic).

When the great empires in Rome and India collapsed, the resulting checkerboard of small kingdoms and republics saw the gradual decline in standing armies and cities. This included the creation of hierarchical caste systems, the retreat of gold and silver to the temples and the abolition of slavery. Although hard currency was no longer used in everyday life, its use as a unit of account and credit continued in medieval Europe. Graeber insists that people in the Middle Ages in Europe continued to use the concept of money, even thought they no longer had the physical symbols. This contradicts the popular claims of economists that the Middle Ages saw the economy "revert to barter". During the Middle Ages more sophisticated financial instruments appeared. These included promissory notes and paper money (in China, where the empire managed to survive the collapse observed elsewhere), letters of credit, and cheques (in the Islamic world).[2]

Standard economic vision does NOT claim (on the contrary) that money came before barter.  On the contrary.  Standard economic vision makes precious goods with a monetary function emerge FROM barter.  
Of course debt is also very old.  

As you say, in your quote: money emerges essentially in international trade, because there, honouring debt cannot be enforced, trust is absent and you need to have something you expect to be of value.

The Egyptians already used gold bars in the same way as the Sumerians used silver bars for international trade.  *that* is a monetary function that has nothing to do with IOU or with debt.  We are 3000 years BC here.

No that has nothing to do with debt and I never claimed it did.  My argument is this; if first gold was only accessible to the rich and kings. Then coinage came later when the king needed something to pay his armies.  In order for the farmers to accept the soldiers gold coins as payment, the king could just demand taxes in gold coins.  So it follows that the state didn't choose gold coins because there was already a market there.  The state created a market by issuing gold coins and demanding taxes be paid with the same coin

Now then my question to you: why would the state make its own life difficult, and issue a fiat money with a hard-to-obtain metal of which its own supply was limited ?  Why not just issue copper coins ?  Or paper banknotes ?  (like now ?)
Because if gold didn't have any mercantile value except for a few jewel makers and if gold wasn't seen as something with a monetary function at all, why go through the hassle to make golden coins and limit yourself in your abilities to issue them ?
If the value of the fiat money came from the tax collection, then ANY fiat would have been good enough.  Papyrus "banknotes" would do.  Why would they use gold and silver and make their own way of doing difficult ?  And why was gold and silver used by so many states ?
After all, if it was just a matter of issuing a state-specific token which gets value from tax collection, how could it turn out that:
- most if not all states chose gold and silver ?
- most if not all coined pieces of money had an AMOUNT OF GOLD OR SILVER that corresponded to their value ?
- the exchange rates of coins between different coins is determined by their alloy composition ? (in other words, the value carriers are the metals themselves, and not the stamps).

No, the theory that fiat money was issued first, got its value from tax collection, and that kings happened to have gold lying around, and decided to make their fiat money out of gold, and that it was THIS that started giving value to gold seems to me untenable.

https://en.wikipedia.org/wiki/History_of_money

Anatolian obsidian as a raw material for stone-age tools was distributed as early as 12,000 B.C., with organized trade occurring in the 9th millennium.(Cauvin;Chataigner 1998)[10] In Sardinia, one of the four main sites for sourcing the material deposits of obsidian within the Mediterranean, trade in this was replaced in the 3rd millennium by trade in copper and silver.[11][12][13][14]

As early as 9000 BC both grain and cattle were used as money or as barter (Davies) (the first grain remains found, considered to be evidence of pre-agricultural practice date to 17,000 BC).[15][16][17] The importance of grain with respect to the value of money is inherent in language where the term for a small quantity of gold was "grain of gold".[18][19]

I don't know why they didn't use paper at the time.  Probably because printing presses weren't invented till a much later time.  No you misunderstand, I didn't say coinage gave value to gold.  I said coinage transformed gold from commodity to money.  Coinage allowed gold to evolve from a bartering commodity to become a money commodity.  But money existed before coinage.  Both commodity money (grains) and credit money (IOUs)

Money gets its monetary value by the demand for it for monetary usage.  It can already have other value for consumption usage or for capital usage, but if it is also used as a monetary asset, there's an extra demand for it, and hence extra price.

Yes but the only ultimate demand is the legal requirement to pay taxes.  Imagine a casino town where all the citizens just use casino chips to buy stuff because they know some there is always demand for these casino chips.  But if on the federal level the tax agency doesn't accept casino chips, they'd be forced to convert to the federal money.  Private money does exist but they rarely become the standard

Absolutely.  Taxes required in a certain asset is a strong incentive to create a demand for that asset as a monetary item, and hence to "kick in the monetary speculation cycle" for that asset as a monetary item (that is, to turn something into money).

After all, something is money because there is an "infinite Ponzi scheme" behind it:
you accept it in exchange for something of value, because you think that Joe will accept it in exchange for something of value because you think that Joe thinks that Bill wil accept it in exchange for something of value because you think that Joe thinks that Bill thinks that Jack will....

It is the "next fool" hypothesis (a real bubble or a Ponzi is based on a "greater fool" hypothesis).  In contrast to the "greater fool" hypothesis of which you end up running out of, the next fool hypothesis is indefinitely sustainable.  That's money.

Taxes are a strong way to make you believe that Joe, Bill and Jack will accept it, because you know they have an ENFORCED demand for it.

However, I'm not sure that taxes are the sole generator of demand for money.  After all, once the cycle is kicked in, the monetary usage is started, and unless a "better" kind of money comes along, I don't see why people should stop use it as money.

There is namely also the opposite.  The state collects taxes to be able to obtain (unless it is a very dictatorial state and can force you into slavery) stuff from people for the state to enjoy (after all, the state is for a part just the state to be able to profit from people's production).  Now, in as much as people would value their casino chips much more than the state issued fiat, you could imagine that the state cannot obtain much *value* for its collected taxes.  It depends how taxes are collected.
Imagine that the tax rate is 1/3.  That is, you (and everybody else) owe 1/3 of your value production to the state as a form of taxes.  You have to pay them into state money.  All the rest, you prefer to buy with chips - especially foreign stuff where people don't accept state money.
In principle, you could then trade stuff that is paid 1/3 in state money, and 2/3 in casino chips.
Now, if the state wants to BUY stuff at your place, you may require the state to pay you in casino chips for 2/3, otherwise you don't do the deal with the state.  But the state doesn't have any casino chips !
So the state is obliged to exchange state money for casino chips.  It has to exchange 2/3 of the collected taxes into casino chips (so only 1/2 of the original collected taxes go directly into buying stuff for the state to enjoy).  Otherwise it cannot buy your production (you refuse).

So in the end, the circulation of state money will carry 1/3 of the economic value, and the casino chips, the 2/3.

That would be the normal issue if the sole demand for state money is to satisfy the obliged tax paying duty in state money: the state money would then ONLY be used to pay taxes, and can then ONLY carry the value that is taken by taxes.

I like the next fool theory.  You should trademark that.

“[T]he ‘next fool’ hypothesis” (dinofelis) does not account for the use of money between particular trading partners. (E.g., two “market participants” could utilize a money with each other exclusively.)

It does.  Fool A, next fool B, next next fool A, next next next fool B....

I accept your token (money) because I think you will accept it back, and you accept it back because you think that after that, I will still accept it again from you because I think that after that, you will accept it back and so on.

That's why it is sustainable.  Greater fool doesn't work (or stops after 1 cycle if you're only 2):

Fool A -> greater fool B -> A is not greater greater fool, crash.

I am willing to get something because I think you are going to be willing to pay more for it because you will think that I will pay even more for it.... not !

The same reason flat-Earthers are always wrong about geography: because the theory is so thoroughly contradicted by the facts that only a fool or madman could believe it.

Your title does not flow naturally from the nomenclature. "Greater" is a reference to the degree whereto the market participant if "foolish" not their position in exchange relative to another. (They always follow immediately after.) Therefore, "same" is more appropriate, as is illustrated by the following hypothetical: "John balances otherwise nonequivalent exchanges of 'value' with a money when trading with Jane because he suspects she would do the same with him."

The theory applies to monetary systems (macro) not some small gambling party.

Krugman was saying Bitcoin could NEVER work as a monetary system because it's designed to be deflationary.  I.e.  People would hoard instead of spend

Well he is smart, but he is not smart enough to grok that a trade always have two sides, and if the deflationary trait of the money means less buying, then the inflationary money would mean less selling. Why sell now when you can get more money for the same thing next year?

It's macro.  Has nothing to do with trading.

Deflationary prices cause people to put off spending.  Both consumers and business, so there is danger of deflationary spiral.  Rampant inflation is also not good but mild inflation provides enough incentive for spending which stimulate economic activity

Thats absurd, as I just explained. You have to think. You can not just listen to a bunch of people who talk each other up.

It inflates initially; however, that inflation decreases to nothing over time (and, in fact, “becomes” deflation as the rate whereat coins are lost or made “unspendable” overtakes their production).

Deflationary prices cause people to put off spending.  Both consumers and business, so there is danger of deflationary spiral.  Rampant inflation is also not good but mild inflation provides enough incentive for spending which stimulate economic activity

Mild deflation causes people to put off SOME spending, in the same way as mild inflation causes people to put off SOME saving.

If mild deflation causes a deflationary spiral, then mild inflation causes hyperinflation.  They are each others' dual.

Except we've never seen this case.  You are ignoring market psychology as determinant factor.  Things like sticky wages

Actually we do have seen this.  Computers !  Computers have been getting cheaper and cheaper the last 15 years.  According to Keynesian logic, nobody is going to buy computers, because next year you get not only a cheaper one, but also a more powerful one !

Turns out that the computer market is one in which the turn-over has been one of the highest.

We observe a similar behavior in cellular phones.  They get cheaper and cheaper (except for i-phones, which are transiting to a luxury item).  And the market explodes.

So no, lower prices in the future do not stop people from spending.

That has to do with scale and manufacturing within one industry as it goes from infancy to maturity not macro issues. 

Also your analysis is flawed.  Take Samsung for example.  Their top of the line model keeps increasing in price after each generation at the onset of release.  S5 at release costs more than S4, costs more than S3, etc.  It's just that they discount the previous generation after the initial R&D are recouped.  They depreciate the capex over the life cycle of product

If your proposition is that lower prices defer buying, he needs only one counterexample to negate it, and he has given it.

LOL no. Only if you don't understand macro principles.  Deflation is falling prices in aggregate not because of one sector.  You have to use CPI

Also I just made an example he he percieved the price is falling, yet in actuality they are not.

It's also easy to refute that notion.  If you are looking to buy an iPhone 5s and you know the price gets marked down in 6 months when iPhone 6 is released you might defer your purchase.  However this isn't the point

https://www.stlouisfed.org/On-The-Economy/2014/August/The-Gold-Standard-and-Price-Inflation

You haven't given any argument why it's different in macro. Your iPhone example would mean that iPhones wouldn't sell well because people defer their purchase because new models constantly come out. Yet iPhones sell extremely well.

The argument is that if something can be gotten cheaper a year later than right now, people tend to defer their purchase. This ignores the fact that having something right now is more useful than having something at a later date. Having a roof over your head tonight is more valuable than having a roof over your head next week. Having a new phone right now is apparently more valuable than having to deal with an older phone for another year to get the new phone at a lower price, or an even better one at the same price.

It may be true that some people might defer because of lowering prices, but this doesn't make it a spiral, because things that have practical utility are more valuable in the now than in the future. The cost of postponing must be lower than the profits of postponing.


What makes deflation dangerous in our current monetary fiat system has to do with the reason behind the deflation. That reason is usually an excess of debts causing liquidity problems, effectively a reduction of the money supply. Those in monetary debt are more likely to default in times of deflation, because their debts increase in value. If they default, their creditor (like a bank) has to write off that debt. If the collateral didn't cover the value of the debt, and if the creditor (bank) also has debts to others it might default itself, which may bring it's creditors in trouble as well. It can become a chain-reaction.

So deflation in a debt-based monetary system like we have right now is lethal to governments and banks due to all the debt, and thus lethal to the fiat currency. A reduction of prices in a fixed money supply system due to economic growth is a completely different thing, and is actually benign. The "deflation is bad because of hoarding" argument is bullshit. It only distracts from the real problem, the ever-increasing debt due to higher interest rates on debit than on credit.

http://object.cato.org/sites/cato.org/files/serials/files/cato-journal/2008/11/cj28n3-1.pdf

"The second type of deflation, however, is the result of positive
aggregate supply shocks that are not accommodated by an easing of
monetary policy. Such aggregate supply shocks are the result of pos-
itive innovations to productivity or factor input growth that lower per
unit costs of production and, in conjunction with competitive market
forces, create downward pressure on output prices. Unlike a collapse
in aggregate demand, positive aggregate supply shocks that are not
monetarily accommodated generate a benign form of deflation
where nominal spending is stable, because the decline in the price
level is accompanied by an increase in the actual and “natural” level
of output."


That article's point is that the gold standard isn't a good idea because it can be abolished or adjusted. Like fiat being "money created out of thin air" a gold-standard is a "promise out of thin air". It basically argues that you can trust neither government nor private central bank with control over your monetary system.

Anyway, I wasn't arguing for a gold-standard.

What makes deflation dangerous in our current monetary fiat system has to do with the reason behind the deflation.

Those in monetary debt are more likely to default in times of deflation, because their debts increase in value. If they default, their creditor (like a bank) has to write off that debt. If the collateral didn't cover the value of the debt, and if the creditor (bank) also has debts to others it might default itself, which may bring it's creditors in trouble as well. It can become a chain-reaction.

I don't think Bitcoin has been around long enough for traditional economics or monetary theories to apply. The use, the price of bitcoin is so fresh and untested that none of it's history can be applied (yet) to it and arrive at conclusions that are generated using the same principles against the dollar or any other fiat currency.

But this won't happen for decades. If it turns out the Bitcoin can't handle deflation (the two terms are mixed in your post), by the time it would start inflating, it will already by dead.

2  :  a continuing rise in the general price level usually attributed to an increase in the volume of money and credit relative to available goods and services

2  :  a contraction in the volume of available money or credit that results in a general decline in prices

Nope.  Try to pay attention.  I wasn't trying to prove anything except how utterly ridiculous it is to cite a micro example to illustrate a macro principle.

. . .

So if this is an indication: 66% deflation in the biggest economic sector on earth for 4 decades while it is one of the most fertile sectors economically speaking, then you might start to get a small doubt that a mid deflation of a few percent per year will trigger a deflationary spiral, no ?

2  :  a contraction in the volume of available money or credit that results in a general decline in prices

(Red colorization mine.)

The supply of electronics was expanded.

The supply of electronics was expanded.

That is a fail definition if you are trying to defend the idea of deflationary spiral. A Keynesian would say that deflation is price decrease, and not a contraction of money supply. (which never ever happened)

That has nothing to do with it.  We are not looking at the electronics offer and demand.  We are looking at the supposed driving force behind a deflationary spiral if ever there would be a mild deflation: namely the idea that people will not spend NOW to buy something at price X if they simply have to wait for TOMORROW for it to be at price 0.95 X.

. . .

So, if food, and the biggest market in the world, consumer electronics, are not exhibiting the postulated general property of "if people know it's going to be cheaper tomorrow, they will hoard their money today" then the evident truth of that postulate may seriously be questioned.

And it is at the basis of the "deflationary spiral" theorem: "a bit of deflation will make some people postpone their spending to get things cheaper tomorrow, which will induce even more deflation, which will make more people postpone their spending, and so on, until everybody stops spending and waiting for better prices tomorrow"

. . .

1. By the very denotation of “deflation” (see my previous post) it does.

Money supply essentially never contracted in history. What happened is the decrease of prices.

A debt is profitable for its creditor. Ought one not pursue profit?

Wrong.  Keynes is not the prevalent "school" in academia.  Its probably neo classical

Keynes did public service and was an astute investor.  His theories comes from market experience and public service experience.  IOW "real life experience" not academic theories.  He only started to get popular again recently after the 2008 crash.  His main thing is using fiscal policy and focus on unemployment numbers

The govt has no reason to "save money"  when they can just "print money".  You are totally confusing household economics and macro and blaming everything on Keynes.  Since 80's there have been no Keynesian influence on policy.  It was more Friedman

Since 2008 Keynesians and central bankers have been salivating at being able to bring on more assets. We're in a pretty bad mess. I also recommend reading the Archonology series at runesoup.com. A little bit unrelated to the strictly economic discussion here, but the series talks about how City of London banking interests, IMF, etc. are able to rake in quite a lot more ownership over North America under the Bretton Woods system. Heavy reading so it might not be for everyone. I almost want to say that the Keynesian argument is usually pushed by globalists (and hence at universities more so, but unknowingly, by extension), but the picture is pretty complex if you zoom out far enough.

Who are these Keynesians and Central Bankers are you referring to?  Bernanke is more of a Friedmanite.  Certainly not the ECB or the IMF.  They were recommending austerity.

You must be talking about Krugman.  But He's just professor who has an op ed piece.  He has no influence over any policy.  And he's not mainstream he's on the left.

That runesoup site.  WTF?  It's a conspiracy theory site.

Interest rates on a range of debt — mostly government bonds from countries like Denmark, Switzerland, and Germany but also corporate bonds from Nestlé and, briefly, Shell — have gone negative. And not just negative in fancy inflation-adjusted terms like US government debt. It's just negative. As in you give the owner of a Nestlé bond 100 euros, and four years later Nestlé gives you back less than that.

In the free market, negative interest rate is impossible...but, what you normally think of as interest on a loan, is the general interest rate, plus risk, and something for the work of the bank. For lending to the bank (deposit), you get zero interest rate, zero risk cost (because the bank is safe by their definition) minus the cost of administration (it is always the bank who gets the cost covered, never you).

So what we can have in the free market, when interest and risk is zero, is the cost of administration, payable by you.

The negative rate that ECB is talking about, is the bank's deposits in the central bank, and that is not the free market, because the ECB by regulation decides what the banks have to deposit... at least to some degree.

No read the article again.  He cites some cases of corporate bonds a negative interest rate