Talking about deflation, not only a lot of modern economists, but also many crypto folks, use it as a definitive argument against the possibility for Bitcoin to ever reach a global money status. The argument behind is that money supply needs to expand (inflate) so people would spend it. If it deflated and money rose in value, people would just hoard money with the expectation of cheaper prices. Without spending the production of goods and services goes down. Sounds plausible when you frame it like that.
Except it's bullshit. Though it is very cleverly framed bullshit where the flaws lie in the details and assumptions that are not specified.
The most classical arguments against deflation (also the gold standard) is the Great Depression in the US.
So, I thought I'd take a closer look at it, and show why it lacks the validity to argue against Bitcoin's deflationary nature – which it technically isn't, because inflation will cap at 0%, however in practice it'll be deflationary because some bitcoin has and will be lost due to losing private keys.
First, let's define deflation:
Deflation is the general decline of the price level of goods and services. Deflation is usually associated with a contraction in the supply of money and credit, but prices can also fall due to increased productivity and technological improvements.
This is what investopedia gives. Though I think it makes more sense to look at it just as
The contraction of money supply.
The first detail never mentioned, is that the great depression took place in debt based money. So it equates debt-based money to non-debt based money, furthermore assuming that deflation is bad also in non-debt based monetary system, like Bitcoin.
Now with the deflation of Great Depression, it is never mentioned that it was caused by excessive inflation which was in 20% range for three years from 1917 to 1920. So if you held cash during that period, you lost more than half of your purchasing power. Maybe the reason why people didn't spend during the Great Depression could have something to do with that: people's savings got rekt. High inflation, destroy savings. No savings, no spending. And the reverse: Low inflation, accumulation of capital. More capital, more investing. More investing, more production and more wealth and more spending when people can afford it.
That's capitalism 101 for you.
Basically what started the inflation originally was the shenanigans that banks played by issuing more claim notes for their gold than what they had. Oh, by the way, banks used to be a service to store gold, nothing else. At some point it became legal for banks to abstain from their liabilities – in other words: take part for legalized theft and not give the gold back to their clients. Well, obviously, because they had less gold than what all the notes add up! Then this whole scheme was taken further with the foundation of Federal Reserve central bank which was just another shenanigan to unlock the ability for more inflation to allow more government spending in a way that would keep the house of cards enact.
I wonder why the economists never mention that inflation as the cause of the Great Depression. Oh, maybe it's because the economist eat from the... you guessed right – hand of the government. You certainly don't bark at the hand that feeds you. This is also why they came up with the brain fart as an afterthought that "you need inflation so that people would invest it instead of hoarding it".
Yeah well, if the money and savings wasn't inflated away, people could accumulate more and more capital across time and feel secure "gambling" with some of their money knowing they can maintain their standard of living despite the investment not yielding anything.
"But if money was deflationary, people would not borrow and lend money, because borrowers loan would increase in value." Well, loans wouldn't be necessary in a savings and hard money economy. And investors could get a cut of a business instead of interest for their loan. Or at the very least loans would be very risky, as they should, which would force the loans to be used for productive businesses, unlike today, where as long as business grows in nominal terms, it seems like a good investment even if it's growing less than inflation – which equals to capital destruction and decreased standard of living in the long run.
Does inflation really drive innovation?
A quick google for the most important inventions during the last 1000 years when using the improvement of the standard of living as the prime criteria, most inventions were made in the late 19th century, and none after
the 1970s when pure fiat standard initiated.
On another list there are 101 "world changing" inventions from the last 100 years, 50 years of which is pure fiat standard. Only 27 items from the list were invented in 1971 or later which leaves 73 from 1922 to 1971.
Yeah, you could argue that the importance of innovation is only seen in hindsight. Or that innovation is slowing because we're just reaching some kind of a sloping down of a logistical curve. Sure, you could say that.
However, as a case study, let's look at the airplane invented by the Wright brothers. They were bicycle mechanics who tinkered with flying on their free time. Bicycle mechanics who didn't even finish high school. Would they had the resources to tinker if their money was constantly devalued by inflation? It certainly would've been harder. Internal combustion engine evolved in a similar fashion, I'm pretty sure. But one of the most influential inventions was born by bicycle mechanics during the gold standard, it is a much different story than what the necessary process for innovation today is.
Conclusion
So the whole argument that deflation is bad is like saying that burning alive is bad after having jumped into a volcano. Yeah, it is bad, but you also could've just like not jump into the volcano in the first place. Maybe? Who could've thought.
On the long run, hard money leads to capital accumulation and more investment and spending over time. Not tomorrow, maybe not even the next week, but over years and decades. You may argue the opposite, but what you should keep in mind, is that the biggest beneficiaries of inflationary monetary policy are the governments and government bureaucrats. So, they might have incentive to enforce the status quo which allows their existence. Something to consider.
