Price Deflation Discourage Investment?

[ShadowOfHarbringer]

So the answer is yes; price deflation discourages investment. But we must understand that it is more accurate to say that the inflation tax encourages investment, because the investment that would go on with a zero-inflation currency is the baseline.

I would say that currency inflation encourages both wise investments and stupid investments, while currency deflation encourages only smart investments.

With deflating currency it is not beneficial to take big risks while one can earn more with just keeping money in his socks.

The question is: is that good or bad ? I personally think it is good, because :

1. If people stop doing stupid investments, there will be less of poor people.
2. People will be able to get richer just by keeping money in a safe. So anybody can invest easily, poor & stupid people too.
3. Less stupid investments = less financial crisises.

So the conclusion is that difference between rich and poor will decrease. Everyone will get richer. Deflationary economy is IMHO much more stable than inflationary economy.

[asdf]

It's important to be clear whether we're talking about price deflation or monetary deflation. I think we can all agree that a stable supply (quantity) of money is economically ideal and under this environment, rising of falling prices are just a consequence of economic growth or contraction.

I think we also agree that manipulation of the supply of money, whether it be by governments or banks, creates a misallocation of resources which destabilizes the economy making us poorer.

[grondilu]

It's important to be clear whether we're talking about price deflation or monetary deflation. I think we can all agree that a stable supply (quantity) of money is economically ideal and under this environment, rising of falling prices are just a consequence of economic growth or contraction.

I think we also agree that manipulation of the supply of money, whether it be by governments or banks, creates a misallocation of resources which destabilizes the economy making us poorer.

I'm not sure about the first paragraph, but I perfectly agree with the second.

PS.  Personnaly I don't know if stable money supply is "economically ideal".  I don't know if anybody knows that.  This should be driven by market forces.  Nobody is more cleaver than the market.

[kiba]

It's important to be clear whether we're talking about price deflation or monetary deflation. I think we can all agree that a stable supply (quantity) of money is economically ideal and under this environment, rising of falling prices are just a consequence of economic growth or contraction.

I think we also agree that manipulation of the supply of money, whether it be by governments or banks, creates a misallocation of resources which destabilizes the economy making us poorer.

I'm not sure about the first paragraph, but I perfectly agree with the second.

I don't think there's anything economically ideal about a stable supply of money. I think people are happy with the ability to predict the growth of the money supply.

[MoonShadow]

It's important to be clear whether we're talking about price deflation or monetary deflation. I think we can all agree that a stable supply (quantity) of money is economically ideal and under this environment, rising of falling prices are just a consequence of economic growth or contraction.

I think we also agree that manipulation of the supply of money, whether it be by governments or banks, creates a misallocation of resources which destabilizes the economy making us poorer.

I'm not sure about the first paragraph, but I perfectly agree with the second.

I don't think there's anything economically ideal about a stable supply of money. I think people are happy with the ability to predict the growth of the money supply.

A stable monetary unit is ideal because it is perfectly predictable.  A gently inflating or deflating currency is no harm, so long as the trend is predictable.  The more predictable that it is, the better for the long term.  The true irony of this discussion is that this has little to do with Bitcoin.  The monetary base of Bitcoin at any particular time in the future is highly predictable, but the base isn't stable yet.  I believe that it's still inflating at about 60% APR at this moment, give or take.  It will approach 'stable' about 2012, and by 2015 will be at least as stable as any fiat currency on Earth, but that is not so today.

[db]

In practice, predictable inflation is also hurtful because it is not evenly spread. The people with the printing press get all the new money.

[davout]

well, to me, as long as the mining is not a monopoly it's cool

[theymos]

Generating is just like buying bitcoins, except you pay with electricity and time.

[MoonShadow]

In practice, predictable inflation is also hurtful because it is not evenly spread. The people with the printing press get all the new money.

That's only true if there is a practical monopoly on printing, which is the case for every fiat currency in the world.  In the case of Bitcoin, this is not so.  It may, or may not, be profitable for you to generate depending upon your specific situation; but you could do so at a loss if the goal was to undermine a major player attempting to overtake the network.  The same problem would have occured with gold or silver, if one particular entity had monopoly control over a majority of the mines in the world; which actually happened for a short time when Spain had control of central America and the Phillipino mines.

[grondilu]

In practice, predictable inflation is also hurtful because it is not evenly spread. The people with the printing press get all the new money.

+1

And it's not just rethoric.  I used to work in a bank and the director told me once how important it is to stay "near the tap".

[ShadowOfHarbringer]

In practice, predictable inflation is also hurtful because it is not evenly spread. The people with the printing press get all the new money.

+1
And it's not just rethoric.  I used to work in a bank and the director told me once how important it is to stay "near the tap".

Today banks print (actually produce digital "numbers") money too. It is called "fractional reserve system".