I'm mean specifically hoarding the medium of exchange. Hoarding other liquid assets or canned food doesn't hurt the economy in any way.
Assuming the proportion of your income that you hoard is unchanged, absent transaction costs, the decision on what instrument to use for hoarding is irrelevant from aggregate point of view, as logically that which you do not hoard you need to spend and vice versa.
The hoarding rises the interest rate (because is not part on the supply of savings in the financial market) and also makes prices drop.
The more money is hoarded, the less money is left for exchange.
This kind of price deflation (and credit/debt deflation too, just excluding "growth deflation") hurts the economy because it hurts merchants, investors (well any borrower in general) and destroys the credit/debt, thus destroying the financial market. It destroys businesses that would be profitable otherwise and that springs unemployment no matter how predictable the deflationary bust is. Give me a business plan that takes into accounts for example, 20% predictable price deflation.
This is simply wrong. For my paper on Bitcoin economics (to be published soon), I did a simulation of business plan profitability in a falling price level, and even at 50% price deflation (i.e. halving of prices within a year) the simulated merchant was still profitable. While he only had a 0.11% RoI, he obviously had more than double the capital at the end of the year. And this is with legal tender laws being a different currency and after taxation. The other merchant which was using legal trender for trades had higher nominal RoI, but less capital at the end of the year. They both were using the same markup (i.e. selling and buying at the same market price).
As one of the papers I mentioned earlier explains (the one at mises.cz by Krupa), the point is that a businessman's income needs to be higher than his costs. As long as he predicts the price development correctly, he can make a profit irrespective of which direction the prices go.
Your merchant must have a small stock to not go bankrupt with 50% deflation. The bigger his stock, the more he losses daily due to the falling prices. And your merchants are not using borrowed money. What interest rate do you use for the stable prices case and what rate for the 50% deflation rate?
What's wrong with my
bakery example?
It was you who bring the term "shortage of money", not me. That's kind of Keynesian. It's not about quantity, what's important is velocity.
I disagree again. Velocity is just an abstract concept, from a point of view of an individual, it is unobservable. Either an individual has enough money or doesn't. The "shortage of money" I was referring to is simply a temporary imbalance between demand and supply.
It is a lack of demand caused by money that doesn't move. By hoarding you cause a lack in demand. You gave something but refuse to take something from the supply as compensation, there's lots of wares waiting for you in the market but you make the wares wait and rust. Unemployment is just labor (another ware) perishing in the market. You can define velocity very accurately. I don't get your point about it being an abstract concept. What changes that?
I've agreed that runaway deflation (in abscence of intervention) won't take long to disappear, but that doesn't make it less destructive.
But if the money supply is inelastic, than the only thing that can cause this are changes in demand. If this has a detrimental effect on some businesses, that's simply an accurate response to the demand of the consumers. It's what the customer's want. That's the purpose of all human action, to satisfy consumption.
Deflation reinforces itself until it disappears. Changes in demand should be from certain products to other products. Not from certain real products to money, that is, to nothing real. If demand changes from existing to not existing, that lack of demand hurts the economy. If the demand changes from one place to another, it only makes the economy change responding to the new wants as you describe.
So do you agree that businesses would accept other monies to keep on selling?
I'm not against future markets but they're not the panacea. Will they make hyperinflation less harmful too?
I think it is possible that disruptions can increase acceptance of other currencies. I noticed, for example, that various alternative systems, like the Wörgl Schilling, the WIR, the Greek TEM and so on seem to popup during economic crises. However, since I tend towards the Austrian explanation about the sources of crises (elastic money supply), I am not sure this would be the case in a system with an inelastic supply.
If you don't accept that with deflation (without demurrage) there will be less trade and businesses will make few sales paid for in the deflating currency, my question is not that relevant. At least I think you can agree with me that borrowers would prefer a non-deflating currency for their loans, right? Investment can still happen in other currencies giving them a competitive advantage over the deflating money, contributing to the disappearance of that deflation.
The point still is that with a free monetary market deflation is not really dangerous for the economy as a whole. That happens with monopoly money deflation.