If the ratio between "hoarding" and spending stays the same...
Yes, yes, of course. The deflationary bust starts with an increase in hoarding, not with constant hoarding.
The sequence of events is this:
1) Prosperity and capital accumulation drive capital yields (and thus interest) down.
2) Lower interest make savers stop lending and start hoarding
3) Hoarding causes deflation which causes more hoarding, debt destruction which cause more deflation...
4) A new price equilibrium is reached in which capital yields are high again (some destruction of capital may be needed for that to happen).
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.
The stock turnover is just a business decision like any other. I used similar numbers that I recall from textbooks during my studies, stock being 1/6th of annual sales. But I admit that might not be reflective of all businesses, my wife told me the company where she works has a stock 6 times the annual sales.
I see, you have taken it into account.
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?
If this was a real economy, then obviously the interest rate of the deflationary currency would be lower, reflecting the business profitability. The business profitability determines the interest rate, because that's when there's a balance between supply and demand.
By the way I wasn't using "stable prices", I compared a "deflationary" (50%) and an "inflationary" (3%) currency.
My point is that if the business is created with borrowed money and has to service a debt, it won't be profitable.
Say you have real interest 5%, then nominal interests would be...
With inflation 5 + 3 = 8%
With deflation ¿ 5 - 50 ? No, it must be a positive value, ¿1%?
I wouldn't have understood the issue before either, even though Krupa, deSoto and others described the theory. Only after doing my simulation I understood it. While you are correct that in a scenario with a falling price level the nominal profit is lower, but the real market value of the resulting capital is higher. Absent taxation under legal tender laws (and the business cycle), the interest rate would be expected to reflect that so that the decision for a loan would be indifferent to the currency, but with the combination of those two, I think it would penalise loans in the appreciating currency if it wasn't legal tender.
So the problem with my example is...
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.
Again, I believe you are mistaking first and second degree derivations. If the price level changes predictably (e.g. second degree derivation is zero), then there is no shift, i.e. the equilibrium stays the same.
Probably I didn't express it accurately, I was trying to explain why is wrong. But yes, the problems are only with increases in hoarding.
You can define velocity very accurately. I don't get your point about it being an abstract concept. What changes that?
You can define it, that's true, but velocity is not what influences the decisions of people.
...
For the consumer, velocity is irrelevant, he has no way of making a relationship to that concept.
Thank you for the velocity numbers, really interesting to know that LETS is faster.
It may be irrelevant for the consumer, but it isn't for the financial market and the economy as a whole.
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.
I agree that decisions should be based on connections between real products. But that does not mean that all businesses should survive. An economy where everything is booming is not necessarily a healthy economy. On the contrary, changes in the money supply alter the ratios between the prices of goods, and distort the price of capital, causing wealth increasing projects to appear unprofitable, and vice versa, wealth decreasing projects profitable.
You're basically arguing for a perpetual boom. But that's not possible, it requires an exponentially expanding money supply. Eventually, it will turn to bust. For example, some sudden event might trigger the reverse, or the capital would run out (and people start starving) or the production costs of money would fall below their market price.
No, no. I want a fixed money supply. But the demurrage will make velocity less variable. I expect it to suppress the monetary cycles that I believe were already common without FRB and gold. FRB and the elastic supply are the wrong fixes, but they were trying to fix something, precisely the cycles.
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.
I can only repeat that you're confusing first and second level derivations.
I don't see how you can conclude that from this sentence.
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.
In the absence of taxes and legal tender laws, the decision would be currency-indifferent, it would equilibrate at the same real interest rate.
Are you saying that would ask the same real interest rate for your freicoins that for your bitcoins?
That's a common dogma which comes from the time-preference theory of interest. But it is false, the basic interest is not independent from the type of money.