Quote from: Betwrong on September 21, 2015, 12:06:34 PM

Just yesterday I had a conversation with a person who studied economy and finances at a University. He said that any Economic system to work propoerly needs some inflation. Since Bitcoin is a deflationary currency by design he said there's no way Bitcoin would replace all the money in the world.

Good topic. The modern monetary and financial systems are so baked into the heads of mainstream economists that they can't seem to envision a profoundly different and better world.

You have to ask why inflation is "necessary." It's considered necessary because, otherwise, people would hoard money and drive prices and demand down until most people are unemployed.

But this entire narrative is based on the modern inequality and fragile demand (that is, a huge portion of economic activity being based directly or indirectly on serving the whims of the rich and moderately rich) that were created by centrally planned money in the first place.

With the central planning at the heart of the modern system, the elites use state power to prop up the values of the financial assets issued by states and banks. This is really designed to give unearned power and wealth to the elites who issue these assets, but has the side effect that investors don't always trust the values of the assets, since they know the values are artificial. If some event makes investors think the authorities are losing control, they will liquidate their assets and the economy will suffer. Inflation is one of the many ways to nudge investors into staying invested in risky assets.

In a truly free market, lack of demand (deflation) is naturally self limiting. As savers get older, richer, and prices get lower, at some point, it will make sense to consume. Consumption will then drive investment. The problem is that the modern economy is so addicted to asset inflation that it can't afford to wait for this process to take effect.

The economy needs inflation in the same way that a sick person needs to sleep 20 hours a day. Better to cure the disease.