Good nuanced take Erik. Balaji raised another point: modern technology amplifies panic and herd behavior. This in turn precipitates loss of confidence effects.
In this light, it is useful to run a scenario: when large holders of US long term treasuries and US government guaranteed mortgage-backed bonds start to sell their holdings because they believe they will be sitting on permanent losses. What happens to the equity of banks, insurance companies and pension funds ? What happens to institutions or sectors that rely on these financial institutions? What happens to real estate valuations and what effects do they have on consumption and investment?
The abandonment of the US reserve currency status may happen relatively quickly because of large scale loss of confidence. Gold as an easy alternative for other central banks and for large financial institutions is freely available and can become an alternative reserve currency quickly. All that is needed is the beginning of a collective shift in belief that gold is more trustworthy than the US government/Fed.
Balaji lost me when he said we'd all become seasteaders and land won't matter for the rule of law anymore. This seems to pile on to his growing cognitive disconnect with reality.
my main area of disagreement is we need 2-3% inflation or that is even a good thing
Long version :
if we optimize for increasing not growing - revenue right now - not over the long term then we are likely indifferent to the longevity and fragility of the capital stock that generates that revenue. A short lived capital stock will manifest in accelerated depreciation and a Fragile capital structure will incur an undue in interest charge. Both depreciation and interest will affect (accounting) profits, and both depreciating real assets and increased leverage will affect (accounting and real) capital value, but nether will affect revenue. Unsurprisingly, thisna precisely what degenerate fiat finance optimizes for and encourages.
The second is that the proper distinction between money and capital provides
clear means of dispelling a common yet silly trope regarding the supposed
"danger" of "deflationary" currency. Never mind that deflation is the natural result of the capital accumulation that follows technological progress, the trope foes as follows: Capital accumulation itself will grind to a halt because savers will get their return purely from saving and won't need to invest.
There are two dire flaws in this illogical complaint. The first is a clear ignorance of what "returns" are and where they come from. If there is no capital accumulation then savers will clearly not get a return solely from saving. We go into much more detail on this point in the following chapter, The Capital Strip Mine," but deflation is not a metaphysical constant, it is the result of human action and decision-making. In particular, the lowering of prices is a decision made by a merchant who has decreased her own costs or increased the longevity
of her capital base such that lowering her prices will be effective in attracting customers from competitors and will actually boost her profits and returns. The ability to lower costs likely derives from technological progress or novelty in business design - both forms of capital formation that require crystallizing money from savers in illiquid and uncertain forms.
The second is that money is the right to dictate what capital is formed, but it is not itself capital. We are honestly not entirely sure what the objectors even think they mean in making this objection, but it may be something along the lines of: If everybody merely saves rather than invests, then all that capital is wasted.
This is absurd. "Capital" will reflect as much time as people collectively are willing to devote to deferred rather than immediate consumption; to crystallizing uncertain effort in illiquid form rather than cashing in on the efforts of others right now. Money merely bids for this time and directs it to one end or another, but it cannot be "wasted" by not being spent; it is not capital. There is no such thing as "hoarding" except in the minds of degenerate fiat economists attempting moralize their own predilection for appropriation.
TLDR: provided money supply is constant, if you have no productivity gains your purchasing power doesn’t automatically increase. deflation isn’t a naturally occurring phenomenon. for example the iPhone is deflationary (for the same price you get more and more features each year). However no one is saving their cash for 10 years to buy the iphone 20 while forgoing a phone in the meantime. If a product offers value you need you’ll buy it even if it gets cheaper over time. Inflation 2-3% only fuels mindless consumerism and capital misallocation
Good nuanced take Erik. Balaji raised another point: modern technology amplifies panic and herd behavior. This in turn precipitates loss of confidence effects.
In this light, it is useful to run a scenario: when large holders of US long term treasuries and US government guaranteed mortgage-backed bonds start to sell their holdings because they believe they will be sitting on permanent losses. What happens to the equity of banks, insurance companies and pension funds ? What happens to institutions or sectors that rely on these financial institutions? What happens to real estate valuations and what effects do they have on consumption and investment?
The abandonment of the US reserve currency status may happen relatively quickly because of large scale loss of confidence. Gold as an easy alternative for other central banks and for large financial institutions is freely available and can become an alternative reserve currency quickly. All that is needed is the beginning of a collective shift in belief that gold is more trustworthy than the US government/Fed.
Balaji lost me when he said we'd all become seasteaders and land won't matter for the rule of law anymore. This seems to pile on to his growing cognitive disconnect with reality.
my main area of disagreement is we need 2-3% inflation or that is even a good thing
Long version :
if we optimize for increasing not growing - revenue right now - not over the long term then we are likely indifferent to the longevity and fragility of the capital stock that generates that revenue. A short lived capital stock will manifest in accelerated depreciation and a Fragile capital structure will incur an undue in interest charge. Both depreciation and interest will affect (accounting) profits, and both depreciating real assets and increased leverage will affect (accounting and real) capital value, but nether will affect revenue. Unsurprisingly, thisna precisely what degenerate fiat finance optimizes for and encourages.
The second is that the proper distinction between money and capital provides
clear means of dispelling a common yet silly trope regarding the supposed
"danger" of "deflationary" currency. Never mind that deflation is the natural result of the capital accumulation that follows technological progress, the trope foes as follows: Capital accumulation itself will grind to a halt because savers will get their return purely from saving and won't need to invest.
There are two dire flaws in this illogical complaint. The first is a clear ignorance of what "returns" are and where they come from. If there is no capital accumulation then savers will clearly not get a return solely from saving. We go into much more detail on this point in the following chapter, The Capital Strip Mine," but deflation is not a metaphysical constant, it is the result of human action and decision-making. In particular, the lowering of prices is a decision made by a merchant who has decreased her own costs or increased the longevity
of her capital base such that lowering her prices will be effective in attracting customers from competitors and will actually boost her profits and returns. The ability to lower costs likely derives from technological progress or novelty in business design - both forms of capital formation that require crystallizing money from savers in illiquid and uncertain forms.
The second is that money is the right to dictate what capital is formed, but it is not itself capital. We are honestly not entirely sure what the objectors even think they mean in making this objection, but it may be something along the lines of: If everybody merely saves rather than invests, then all that capital is wasted.
This is absurd. "Capital" will reflect as much time as people collectively are willing to devote to deferred rather than immediate consumption; to crystallizing uncertain effort in illiquid form rather than cashing in on the efforts of others right now. Money merely bids for this time and directs it to one end or another, but it cannot be "wasted" by not being spent; it is not capital. There is no such thing as "hoarding" except in the minds of degenerate fiat economists attempting moralize their own predilection for appropriation.
TLDR: provided money supply is constant, if you have no productivity gains your purchasing power doesn’t automatically increase. deflation isn’t a naturally occurring phenomenon. for example the iPhone is deflationary (for the same price you get more and more features each year). However no one is saving their cash for 10 years to buy the iphone 20 while forgoing a phone in the meantime. If a product offers value you need you’ll buy it even if it gets cheaper over time. Inflation 2-3% only fuels mindless consumerism and capital misallocation