Quote from: Zapffe on March 24, 2014, 02:06:57 PM

Quote from: Peter R on March 24, 2014, 01:53:13 PM

Presently, we operate under a myth that mild inflation is a positive. We believe that the mild deflation that a fixed supply currency would entail (once adoption equilibrium had been achieved) would be a bad thing and lead to decreased wealth in the aggregate.

I disagree:

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Quote from: Peter R on March 20, 2014, 03:59:18 PM

The quantity theory of money states that

   M V = P Q, (1)

where M = money supply, V = money velocity, P = price level, Q = real output (goods, service, etc). I think the vast majority of economists agree with this equation, although their opinion may differ on how it should be used.

It is common to associate a growing economy with growing real output, Q (i.e., more goods being produced, more services being used, etc.). If you re-arrange Eq. (1) to solve for real output, Q, you get

   Q = M V / P .

So real output, Q, can grow three different ways (or more properly, it has 3 degrees of freedom):

   1. Money supply, M, can increase (what you said).
   2. Money velocity, V, can increase (e.g., an increase in the rate that bitcoin-days are destroyed)
   3. Price level, P, can decrease (the feared deflationary spiral).

What I wrote above can be understood as fact. Now let's talk mythology. (Myths can be useful as they align peoples' views, permitting communication from a common frame of reference. However, it is important to question from time-to-time whether our shared myths are still useful).

Presently, we operate under a myth that "deflation is bad." This means that if we want to increase real output, Q, we must rule out Option #3:

   1. Money supply, M, can increase.
   2. Money velocity, V, can increase.
   ~~3. Price level, P, can decrease.~~ NOT ALLOWED DUE TO OUR SHARED MYTHS

According to our mythology, we must choose #1 or #2. So the Fed lowers interest rates to encourage spending (increase V) and buys assets to increase its balance sheet (increase M).

I would argue that focusing on #1 and #2 tend to increase output, but the increase is mostly garbage output, not real and useful output. Manipulating #1 and #2 cause us to exploit our natural resources at a faster rate but provides less real and useful output than if the economy was left to its own devices, also leaving less resources available for our children. But this is a subject for another longer post.

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Stable inflation didn't cause the financial problems that we see in US. The problem is not in the school of thought, but in lose management principles and corruption. Greenspan was the one who started promoting that everyone should just trust the private sector of finance, without any regulation or supervision. And he was the one who promoted the idea that the private sector of finance should have safety-nets for all the risks it took. These management principles created a careless environment, where certain privileged people could only win even if they lost. And all of course at the expense of everyone else.

It's funny to read some of the posts here, who are anti-Fed and pro-ultra liberal at the same time. The ultra liberal principles allowed all the crooks to leech on everyone else, because there were no rules why they shouldn't do this. This is the same reason that has ruined any trust towards the bitcoin market system. Most of the community were sheep who thought that the free market will take care of everything, just so they could justify their passiveness. But the free market can't handle corruption, and if there isn't enough supervision and regulations then you can be sure that crooks will exploit the free market in their favor.

Peter,

It may be that under historic conditions, deflation does tend to be bad. Though, I wonder conditions have changed sufficiently to mitigate its historical "badness". Specifically, I wonder if being able to price goods in real-time helps mitigate deflation's badness. Is it possible to assess the extent to which the inability to price in real-time affected historical cases of depression from deflation? Just thinking out loud here.