The idea that when purchasing power increases people spend absolutely nothing is the basis if this rationalization for inflation, and it isn’t supported by logic or experience.
They actually spend more and more productively, because instead of barely getting by they are able to accumulate capital and start businesses.
It's easy to see logically if we flip the relationship. If house prices are steadily increasing (equivalent to inflation, where my purchasing power is decreasing), I want to convert my money into a house as quickly as possible. If house prices are decreasing (equivalent to deflation, where my purchasing power is increasing), I want to hold off as long as possible.
In recent experience, the rapid deflation of bitcoin has coincided with its identity pivot from medium of exchange to store of value - because why would you spend an appreciating asset?
That's not to mention the other side of the coin that deflation is necessarily accompanied by decreases in nominal income (because all the products you sell are cheaper in dollar terms, by definition) and nominal salaries.
And as coliveira stated, the economy depends on spending - and that applies just as much to an open free market economy. To suggest that the desire to want people to spend is somehow a feature unique to planned or state-run economies is nonsense.
Sounds good to me, if you don‘t buy the house because your money is not devalued consistently. House buyers might actually get more use out of it than holding their money, instead of just (or in part) buying it for monetary reasons
If the value of houses keeps going up and up at some point it becomes profitable to build more houses. It's just a matter of getting rid of stupid laws that prevent economic actors from doing so.
If the value of houses goes down over time then people will stop building houses. Housing can easily last decades or centuries if done properly. By the time the problem grows to become unsurmountable you might find that all the construction workers and companies are gone. That's what happened with the nuclear industry. You run a plant for 50 years until people retire all at once then you suddenly have to train thousands of new workers since you failed to maintain the industry.
This is a fundamental problem with providing food. Most food has to be eaten within weeks after the harvest. This means that you must ensure that at all times there are people farming for food. It's not possible to save it for decades or at least people don't want to eat 10 year old food (there are companies that specialize in prepper food). So ultimately, you need to keep the farms going all the time. How can you tell them to keep going if the price of food is going down... forever?
I'm on board with your socialist sensibilities when it comes to housing - but when the same effect is occurring throughout the entire economy the result is a depression.
Surely with a deflationary currency, interest rates would need to be significantly higher, making it harder to borrow the capital you need to start a business.
As someone with capital the expected rate of return will have to be high to make it worth lending rather than just holding on to it in a deflationary situation.
The opposite actually. The Real interest rate is the nominal rate minus inflation. So negative inflation of, say, 2% pa, effectively adds 2% of real interest to any loan, since 100k of principal today will be worth ~111k in 5 years’ time. In response lenders and central banks are likely to decrease interest rates as, firstly, the money is appreciating in real terms anyway and, secondly, the appreciating value of money makes it harder for debtors to repay debt, so people won’t be able to afford high interest loans. Compare that with high inflation periods where repaying the principal gets easier, since the 100k you borrowed five years ago is only worth ~90k in today’s money (with 2% inflation).
A lot of western economies experienced the inflation side of the equation in recent history - see the 70s/80s in the us, when both the inflation rate and interest rate were very high. In reality the Real interest rate is generally less variable than either inflation or nominal rates.
I'm obviously no expert, but I don't think it'd make sense for the real interest rate being higher under deflation to factor into anyones decisions about whether to make loans available, so the supply of loans would be lower.
Keeping the money in a hole in the ground gets you that return without taking on any risk, so when you're considering whether to invest your money in a potentially risky venture, you aren't going to care about the appreciation of money over the term of the loan.
My perspective is that if you want a return you consider the expected excess return over the risk-free return, and think about how much you're paying for that. Deflation increases the risk-free return you're comparing all investment opportunities with, so the number of opportunities with excess returns will diminish as that rate increases.
The availability of credit is a separate question from the interest rate, and may indeed fall.
Rising real interest rates directly impact borrowers and their ability to borrow, as their debt burden increases without any changes to interest rates. Borrowers are therefore both less likely and less able to borrow. Lenders may simultaneously decide not to lend. Japan is a good case study and has suffered from both phenomena. But interest rates in Japan are very low and fell substantially as soon as the economy got stuck in a deflation rut:
The charts below are illustrative if you set them both from 1979 to now:
Thanks, this is very interesting, and certainly gives me something to think about. Is the causation the right way round though (i.e. that the deflation has caused low interest rates)?
Could it be rather that because of the deflationary situation, the government tries to stimulate the economy with cheap money, and without that action, the natural rates of interest would be set by supply and demand and would be much higher?
I think you’re right on the supply side of the equation, that the profit motive applies upward pressure. But the constraint is on the demand side - if I increase or even maintain my interest rate, the number of borrowers that are able to service the loan drops and the amount of bad debt increases. That’s in addition to the general disincentive to bring forward spending caused by deflation, which has already reduced the pool of borrowers. If I lower my interest rate I’m making less money but still taking on the same risk (if I calibrated my reduction in the rate to that effect). I might then mitigate the risk by tightening my lending requirements. Or I can choose to just stop lending. The result is a simultaneous drop in interest rates and in available credit. The central bank can try to boost lending by dropping its interest rates. When rates get near or below zero things get weird.
Yes and no. Higher savings would also mean more capital to load from. Expected return on investment would be higher, which is probably just a good thing. Lots of non-profitable companies today can keep surviving without doing any real good due to money being cheap.
Those savings would be distributed, and difficult to access, especially if they are primarily relying on deflation to increase their value.
Saying that the expected return would be higher is just the other side of saying it would be harder to find capital to start businesses.
> Lots of non-profitable companies today can keep surviving without doing any real good due to money being cheap.
This seems like a huge topic on its own. If there's an 'ideal' availability of money to ensure that companies are providing value, just switching to a supply limited currency is extremely unlikely to luck into selecting the right value. In fact, because it makes it harder to adjust things it makes it pretty much a certainty that at least at some point the wrong value will be selected.
>The idea that when purchasing power increases people spend absolutely nothing is the basis if this rationalization for inflation, and it isn’t supported by logic or experience.
That's not necessary. Simply reducing spending to the bare minimum possible is enough. Humans don't need that much to survive.
>They actually spend more and more productively, because instead of barely getting by they are able to accumulate capital and start businesses.
Well, first of all, why would you start a business if your money works for you? It would be a waste of money. Secondly, if everyone is starting their businesses instead of buying things then who is going to buy the things those businesses provide? Nobody? Isn't an oversupply of goods just going to drive prices even lower, causing companies to close down? Would you really risk starting a company when you know that in the future your potential income will be even lower than today?
Here's a video of Ray Dalio explaining inflation-deflation and some other basic economic principles. The process explained in the video is the reason why you can never have a real economy running on Bitcoin.
Deflation of a currency only increases the purchasing power of people who already hold that currency. If they start a business, they'll only be able to earn revenue solving the problems of other bitcoin holders.
They actually spend more and more productively, because instead of barely getting by they are able to accumulate capital and start businesses.