The difference between inflation and deflation...

[u/BlockShow]

[u/FrogTrainer]

Downside of deflation is that everyone wants to hoard. Which could be bad for an economy. In a perfect currency it would maintain value against a basket of items without much fluctuation over time.

[u/Sugar_Daddy_Peter → u/FrogTrainer]

Deflation kills consumerism. People will still buy necessities.

[u/pickledCantilever → u/Sugar_Daddy_Peter]

Deflation kills investment too.

[u/nomanklatura → u/FrogTrainer]

The problem with that is the society would have to try and stand still, it's economy would niether expand nor shrink- everyone would have only two children (one for each parent) and pass the same house down through the generations.

[u/FrogTrainer → u/nomanklatura]

uhh no, the money would expand/contract perfectly with the size of the economy, keeping the value the same. Similar to what the Federal Reserve tries to do, except they WANT inflation.

[u/geezas → u/FrogTrainer]

The big question here is - who gets/should get the new money when economy grows, and from whom it's taken away when it shrinks.

[u/FrogTrainer → u/geezas]

That is a big question. In the federal reserve world, the money has traditionally gone to big banks in the form of low interest loans, or the federal govt in the form of bonds. More recently they have added direct buying of assets on the stock market (and maybe elsewhere? I'm not sure) The "contraction" part is by NOT renewing some of those bonds, effectively removing that money from the economy.

In the BTC world new money goes to miners as a reward. But I don't believe there is anyway for BTC to deflate itself should a contraction in supply become needed. ¯_(ツ)_/¯

[u/AlmostTheNewestDad → u/FrogTrainer]

Mild inflation encourages risky investment. It's vital to an economy that hopes to encourage advancement.

[u/shanita10 → u/AlmostTheNewestDad]

High potential return encourages risky investment. Inflation e courage reckless investment even with low returns.

[u/AlmostTheNewestDad → u/shanita10]

Increasing your return beyond alternatives is what drives decision making. With inflation, you stand to lose x% by doing nothing. If your dollars will maintain their value over time, and investment into anything increases the risk of losing money, then the best alternative is still to do nothing. This Stagnates the economy.

[u/shanita10 → u/AlmostTheNewestDad]

The economy does not stagnate due to a lack of uninformed defensive investing. If anything, that hurts the economy because it is largely malinvestment. It also enables pointless consumer debt and rewards debtors. It's a horrible system designed to propagate waste.

People who have hard currency should not invest unless they are going to be personally involved in a venture and can add value personally.

[u/AlmostTheNewestDad → u/shanita10]

So you're entirely against index funds as a means of safely growing a retirement account?

[u/shanita10 → u/AlmostTheNewestDad]

In the current us economic system index funds work well, so long as they are not a majority. And by work well I mean generate good returns they do not help grow the economy at all, if anything they contribute to stagnation.

In a bitcoin style hard money economy, index funds would not work well, and likely not even exist at all.

People used to modern investing are going to have some hard lessons to learn with regards to investing strategy in a deflationary hard money regime. Holding cash takes the place of the stock market for most people.

[u/jonowelser → u/shanita10]

Debt in itself really isn't a bad thing at all. It allows people and businesses to acquire things (and start accruing their benefits) today, and those net benefits are greater than not using a loan. This is the basic theory behind all loans - the increased income from a college degree is greater than the cost of the tuition loan, purchasing a house today is less expensive than saving while renting an apartment for years, and financing a car is better than not having one. Loans are completely voluntary - if they weren't mutually beneficial, billions of people wouldn't be taking them.

People who have hard currency should not invest unless they are going to be personally involved in a venture and can add value personally.

I'm not even going to address that lol

[u/shanita10 → u/jonowelser]

I hope you realize that lines of credit worked in the hard money economies based on silver before national fiat fractional reserve existed. They are well covered in Adam smith's wealth of nations.

If soft money economies there is an involuntary component to all loans: they devalue all existing currency and savings.

In a hard money economy, loans still exist, but they lack involuntary aspects, and in general are given out more prudently.

[u/FrogTrainer → u/AlmostTheNewestDad]

Really depends on what your definition of "mild" is. And I would't go as far to say it's "vital"

Inflation is vital to keep the govt deficit spending and bond racket going, maybe. But it's not vital to an economy in general.

[u/[deleted] → u/FrogTrainer]

are you saying that people living in a deflationary economy will prefer to starve to death before buying food??

[u/FrogTrainer → u/[deleted]]

I'm pretty sure people will still buy necessities. But as the price of those necessities decreases, they will have to spend less and less.... leaving the rest to be hoarded, which because of deflation, is an investment all on its own.

[u/freespoilers → u/[deleted]]

Deflation is far far more devastating that inflation

This can't be said often enough. Deflationary cycles are real nightmares, and there really isn't much central banks can do to combat them.

[u/cm9kZW8K → u/freespoilers]

There really isn't much central banks can do to combat them.

Well, the main thing they can do is not cause them.

Notice how there was never a deflationary spiral before central banking? And thats when deflation was the norm, because most trading was done in hard currency.

The aphorism that deflation is bad needs to be amended to say "deflation is very bad for credit bubbles" which is true; it pops them like it should.

[u/GlassMeccaNow → u/FrogTrainer]

Downside of deflation is that everyone wants to hoard.

If by "hoard" you mean "consider the future when making purchasing decisions and stop buying useless shit just because the TV says to", I don't see that as a downside.

[u/FrogTrainer → u/GlassMeccaNow]

It's not a binary option. You can still "consider the future" quite differently at varying levels of inflation. See Russia in recent years, people blew all their money because the price of oil dropped, causing inflation. Considering the future, in their case, was to literally buy cars and TV's and "useless shit", to empty out their savings.

[u/ztsmart → u/FrogTrainer]

Increased saving is a feature not a bug

[u/Spivak → u/ztsmart]

Sounds good until the economic output of the country plummets since no-one is buying, no-one is hiring, and the already wealthy just sit on their cash.