The Fed argument

3 posts

Broseph
1. Nothing
2. As more computational power is added to the node, the difficulty of creating new coins increases
3. 10,000 computers would be a little more than a drop in the bucket at this point, but that's about it.
Theo
Inflation = cheap credit = easy business growth. Deflation = expensive credit = difficult business growth. Or so the original legend goes, I find it quite believable. Not to mention extra risks of investing deflated currencies, mentioned before.

How about T-bills? Or derivatives? Or M-2, M-3, etc. Would these also have to be backed up commodities? How about fractional reserve?

Not quite. I was talking of underconsumption, not lack of consumption at all. Besides computers dropping in price, money itself is dropping in value too. Not to say, that it happens as fast, but the trend is not so evident for consumer.

Nobody secures the value of stocks, bonds, commodities, etc. Even T-bills and money itself are subjected to loss of value. Its everything either inflating, or being prone to risks. A state secured money, that is deflating overtime, would be pretty much one of the safest investments in itself.

That is also true, that is why I spoke of underconsumption, not total lack of consumption.

But not so true with regards to investment, since you forgot to account for risks. Business is risky. Keeping money, that you already have, is riskless.
Broseph
Yes, and the business cycle.

T-bill is just a loan given to the government. What backs it is the government's promise to pay it back. Just like when someone owes money on a credit card. Those other things are measures of money. This has nothing to do with fractional nor full reserve banking. All commodity backed money implies is "I can get X amount of commodity Z for Y dollars" and that's it. Banks and people do their best to keep this promise. Breaking a promise like this would make people want to use other competing currencies with better reputations and backing.

"Underconsumption" -> more accumulated goods and more savings of durable goods and commodities -> more investment into production and more hiring of labor -> more products and services available for even lower prices.

I don't see a problem with this. The underconsumption only lasts as long as the market clears excesses and rebuilds savings. Things continue generally normally after that (barring more inflation or extreme circumstances).

What happens when the deflationary spiral ends? Is it permanently reduced consumption, or does the increased productive capacity of the economy (as a result of better economic coordination and more capital investment over time) cause there to be more consumed in the long run? There are some good slides on this page that animate this:

http://www.auburn.edu/~garriro/tam.htm (notably this ppt on slide 7: http://www.auburn.edu/~garriro/cbm.ppt )

Yes, it would be safe. It would also provide less return than giving up the liquidity and giving someone else liquidity, which allows you to earn interest. Some people will want to earn more, and investments would be the way to do it.

I see consumerism, lack or restraints on government spending and susceptibility of markets to shocks as well as rising consumer and producer prices as problems. I'll take "underconsumption" over those things. Especially if it includes falling prices (which spurs buying)

True to an extent. It can also drop in value. Deflation would just be the norm in a money-market system. Also, investing provides higher returns than holding. To argue the opposite would be to say that investment was never made and everyone just hoarded cash when there was 1% or more deflation.