He's just begging the question. That a fixed currency supply creates deflation is not a new insight. The idea that this causes 'hoarding' is highly questionable. Prices in consumer electronics fall significantly every year. Does this cause people to hold onto their money instead of buying computers, tvs, and iphones? Of course not. Why would other types of goods be any different? People still need what they need and want what they want and are going to buy those things regardless of what relative prices will be in the future. The difference with a stable currency supply is savers and fixed income earners wouldn't have their purchasing power sucked away from them year after year--on the contrary, they'd become continually wealthier as the economy grows around them.
That's not exactly an apples-to-apples comparison. But, to answer your question, "Does this cause people to hold onto their money instead of buying computers, tvs, and iphones?" The answer is yes (with qualifiers). Many late adopters are late adopters because they are holding out for a cheaper price for those goods. From personal experience, I've done this very thing (waiting for prices to come down on a TV before I bought it). I put that money into something with a higher return for the time being.
But, the reason that's not exactly a fair comparison is that the currency itself (in this case, USD) was not deflating. Ergo, my "hoarding" was actually putting it into something with a better return for the time being, which was available because the currency was stable. If the best return I could get was holding on to my money (instead of putting it in some sort of investment vehicle), then that would be deflation.
"The answer is yes (with qualifiers). Many late adopters are late adopters because they are holding out for a cheaper price for those goods. From personal experience, I've done this very thing (waiting for prices to come down on a TV before I bought it). I put that money into something with a higher return for the time being."
But you could have kept waiting and prices would have kept falling. Eventually you spent your money anyway. This seems to indicate that it wasn't the situation of falling prices that prevented you from buying a TV, since that never changed, but some external factor.
"But, the reason that's not exactly a fair comparison is that the currency itself (in this case, USD) was not deflating. Ergo, my "hoarding" was actually putting it into something with a better return for the time being, which was available because the currency was stable. If the best return I could get was holding on to my money (instead of putting it in some sort of investment vehicle), then that would be deflation."
The currency was deflating relative to TVs. Holding cash does provide a better return than holding a TV. The value of a TV depreciates much faster than cash. That's the point--why would anyone ever buy a TV when if they just held onto their money for a month they could always get a better TV for the same amount? Since TV prices are always falling, this question reduces to: why would anyone ever buy a TV? The answer is pretty simple--people want TVs. At some point if they want one, they're just going to buy one regardless of what the prices are doing, just like you did. So where's the problem?
But you could have kept waiting and prices would have kept falling. Eventually you spent your money anyway. This seems to indicate that it wasn't the situation of falling prices that prevented you from buying a TV, since that never changed, but some external factor.
Prices don't fall linearly, in many cases, but hit a floor representing the cost of manufacturing and distribution. Then, different brands have different price decay curves. Finally, the price decay of a given good has to be offset against the buyer's utility function. In practice, I don't sit there and calculate everything out; I start with a budget and a list of manufacturers I prefer, and then look for the best products that fit within those constraints.
People who want TVs (or who want to replace their current TVs) will buy one eventually. But if you’re in the TV-manufacturing business, there’s a big difference between a world in which the average TV gets replaced every three years and a world in which it gets replaced every four years.
Why do people line up for things like day-after-Thanksgiving sales? Because they know that the retailer is offering someting they want that will become more expensive later. So yeah, people who want TVs, and who think that TVs are about to become more expensive, will hurry up to get TVs, while those who think that TVs are about to become cheaper will put off their purchases.
In countries that have hyperinflation, you see extreme cases of this: middle-class consumers spend their paychecks as soon as the money is deposited, because they’d rather have anything on hand than cash in the bank.
"There's a difference between some goods -- electronics -- getting cheaper every year and all goods getting cheaper every year."
Which is what exactly? People buy electronics even though they get cheaper every year but they wouldn't buy Xs if they got cheaper every year? Can you give me an example of some Xs?
If houses got cheaper every year, very few people would want to buy them, and people stuck with mortgages would have a powerful incentive to walk away from them. If cars got cheaper every year, then people would put off buying new cars for longer. If gold got cheaper every year, then a lot of gold coins would be dumped on the market.
If everything got cheaper every year, then people with money in the bank (or under the mattress) have an incentive to reduce how much money they spend, in general. This would lead to factories reducing their production and laying off employees, giving the remaining employees an even more powerful incentive to hang onto their savings.
The flaw in your argument is that currency is subjected to demand pressures as well. How so? When demand for housing, food, electronics is high, then it automatically implies demand for currency is low. That is another way of saying people are willing to give up currency for real goods; which is another way of saying people are putting less value on the currency over physical goods; which means the barter power of the currency is decreasing; which means lower buying power with respect to the currency. That is key point. This means that there is rise in prices (without monetary intervention) when there is preference to own goods. And we all want goods and services in the end game. But this rise in prices do not spiral out of control because there is demand for currency as well - which really is demand for time preference, that being the choice to consume later on. We also know the demand for time preference is not unlimited because ultimately have to consume to make good of the money. Therefore, with greater population, comes with greater demand for money, but also comes with greater demands for owning/consuming goods. So that is why price levels will not absolutely decline over time because money supply is fixed. In fact, history proves this point -- look at the USA data in pre-federal reserve era.
> This would lead to factories reducing their production and laying off employees
Trade imbalances resulting from an economy run on bitcoins would also decimate most domestic production, so sethg's statement is doubly true. It's the same reason you hear members of congress railing against China's currency peg that artificially deflates the yuan; it makes Chinese exports cheaper to the rest of the world.
A deflated Yuan allows you to buy more Chinese goods for the same USD[1]. Regarding the second half of your question, you must look at the supply of the currency versus the demand for that currency. It's common for governments to intervene in foreign exchange markets as a means to an end. This makes it a difficult market to invest in, as artificial forces can move the market. Just because there might be a fundamental economic reason for the Yen to appreciate, that doesn't mean the Japanese (or some other) government won't intervene in order to improve their trade balance.
The mechanism that the Chinese government uses to keep the Yuan pegged to the USD, is the purchase of U.S. treasuries[2].
I actually do postpone electronics purchases because of falling prices. Electronics have low resale value and resale/upgrade is time-consuming. I tend to just wait for a price drop and then buy last year's best thing, rather than worry about having the fastest computer on the block.
If it's for work and there's some measurable benefit to the latest and greatest (rather than just showing off), that's different. But as a matter of habit, I only build a new PC once every 3 years; for about the same amount of cash, I get a roughly 400% speed boost.
Electronics don't get cheaper every year because the dollar strengthens. They get cheaper every year because the production process becomes more efficient.
Some things can't really get cheaper every year (without some exogenous shock) -- anything with really high fixed costs of production OR a requirement of some level of quality by purchasers.
For example, it takes a ton of land to grow corn. As the population grows, the demand for and value of land will rise. That means that for the farmer to keep growing corn on his land, instead of selling it or using it in a new profitable venture, the corn needs to be producing a higher level of income for him than it had previously when land was cheaper.
Similarly - grass fed beef is not going to get cheaper. In addition to land requirements, there is the quality requirement also. If someone demands higher quality food, higher standards need to be followed, higher quality inputs need to be used, and a third party needs to ensure that those requirements are being followed.
Houses are a one example. Suppose you're looking at buying a house that's $200k. Then assume that you live in a deflationary environment where all goods get cheaper every year, say by 10%. The immediate conclusion is that in 1 year, the house you want will cost $180k. If you can wait 2 years, $162k, and so on. So while you may eventually buy as the house still has utility, you are likely to delay the purchase as long as possible to avoid losing money to deflation.
(The opposite of this scenario is housing inflation, and causes people to buy houses sooner and for more money than they would ex-inflation. This makes some sense if the inflation continues as buyers expected.)
This scenario is different from single goods getting cheaper every year in that when the prices of all goods are going down, it's very clear that the value of money is also going down. Deflation slows spending primarily via expectation of future deflation, so across-the-board price declines will have more impact transmitting deflation expectations than mixed signals (electronics down, oil up).
Electronics are a special market. I think people have in general come to accept and understand that the money they lose in buying electronics now, instead of later, is small compared to the utility they get now.
It also helps that constant development and improvements keeps the decline in pricing small. An iPod today, while much more impressive, I believe still has a similar price to 10 years ago.
I've never seen convincing evidence that inflation is a good thing (to be honest I haven't spent my life searching for it).
It is however pretty easy to see why inflation is good for people in power, in particular governments; it's a hidden tax. And yes it does encourage people to spend, in fact it encourages people to borrow and then spend. Even borrow so much that it crashes the system.
So as far as I'm concerned the fixed money supply is about the only good property of Bitcoin. Other than that it's a ponzi scheme and it's a lot more cumbersome than electronically traded gold.
A slow, predictable devaluation in the currency encourages individuals not to store large amounts of value in the currency. It doesn't simply encourage people to spend; it also encourages people to allow better-positioned entities to allocate capital, which is why new business ventures don't need to go door-to-door to fund new factories. Individuals are crappy at allocating capital, because they have small amounts of it and are too busy mastering Dentistry or Architecture to build expertise in risk management.
Unsustainable debt is an orthogonal issue. We've encouraged unsustainable debt not by allowing our currency to inflate, but by failing to regulate lenders and by offering them incentives to ignore risk management.
Again, though: this "is a little inflation good, and is a little deflation bad?" thing is a fake controversy that dignifies Bitcoin. Bitcoin isn't a currency; it's a gambling game powered by a distributed transaction system that may or may not on any day function well enough for two parties to exchange dollars for off-label hosting services without either one losing their shirt.
One could make a case that moderate inflation isn't a bad thing. Inflation generally happens when the economy is producing close to its capacity (think of a factory working overtime to meet a lot of demand - at some point they make the same amount of money in fewer hours simply by raising their prices). This means that you'd also expect pretty decent employment, etc. You certainly don't want runaway inflation, but a healthy economy would have some.
Electronics are not commodities -- you get value out their use. Electronic devices would have to fall in price enough to exceed the value of having and using the device.
If you look at people's behavior with a commodity like gasoline, you'll see similar behavior. When prices go up, people will "top off" their cars more frequently. When prices are falling, people tend to go further between fill-ups.
People definitely do that with electronics too. As prices have dropped, people are upgrading their computers or buying their first more often. I'd wager the rate of consumption has been directly proportional to the rate of price drop for electronics. Of course, we are unlikely to see computer prices rise anytime soon.
"Electronics are not commodities -- you get value out their use. Electronic devices would have to fall in price enough to exceed the value of having and using the device."
So how much would computers have to fall in price every year before people stopped buying them?
The number depends on your cost structure. I can tell you that where I worked, we traditionally planned on keeping most servers in service for 40-72 months.
When Nehalem processors came out, the economics shifted, and there was a financial case for retiring devices at 24-36 months and consolidating them into virtual machine clusters.
Without that consolidation opportunity, we probably would have extended the lifecycle of our server longer to preserve cash in 2009.
The idea that this causes 'hoarding' is highly questionable.
It can cause hoarding. It's not a given. But it can get into a downward spiral.
Does this cause people to hold onto their money instead of buying computers, tvs, and iphones? Of course not.
Are you sure? No one would argue that all people would stop buying all consumer electronics, the question is: what would sales be like with stable prices? I don't know how to answer it but I don't know how you can say for sure that sales are not lower than they would be with stable prices. Or rather, I am sure it is possible to construct models to try to understand the relation but I am doubtful that you have done so or have a particular model in mind. Please correct me if I am wrong.
The difference with a stable currency supply is savers and fixed income earners wouldn't have their purchasing power sucked away from them year after year--on the contrary, they'd become continually wealthier as the economy grows around them.
Generally inflation is priced into interest rates. If you look at countries with much higher inflation they tend to have much higher basic interest rates.
Krugman's arguments in the post are pretty brief, he's just stating his opinion and not conducting a thorough examination. Likewise, I don't find your arguments very persuasive but that doesn't mean that you are wrong and he is right.
"People still need what they need and want what they want and are going to buy those things regardless of what relative prices will be in the future."
What about "investors" instead of "consumers"? Right now an investor simply makes a choice between losing money by sitting on it (through increased supply ... printing money leads to inflation) or investing. If the money supply were fixed would that not make it more attractive to investors to sit on assets?
Prices decrease under a stable money supply because the economy grows. Goods and services are being produced more efficiently and are therefore more plentiful relative to the same quantity of money and therefore cheaper. Growth in the value of money will simply reflect baseline growth in the value of the economy as a whole. There are still much higher returns available to investors who are willing to take greater risks--no external motivation is necessary. Monetary expansion doesn't alter this basic relationship, it just ruins the currency as a reliable store of value.
Fair enough, but I think most economists would agree that we shouldn't be trying to make savers and fixed-income earners wealthy in the first place. We should make it economically advantageous for the people with money saved up to invest it into the economy.
I've always been suspicious of this "spending is better than saving" mantra. I'm sure it's better in some situations, but I don't think it's better in general.
The point of an economy is not to spend money, it's to create more wealth for more people by allocating resources efficiently. If someone "hoards" money, and prices are stable, that person is effectively staying out of the resource-allocation business. It doesn't mean that there are fewer resources to allocate, it just means that other people are doing the allocating (even though those people collectively have less money because of "hoarders", prices are lower because of them, too).
You can make an argument that everyone needs to take part in efficiently allocating resources, and that makes a lot of sense. But to say that buying a bunch of consumer junk is a good way to do that is ridiculous (and bad for the environment).
A middle ground is to buy the things you need, a few things you want, and make conservative investments. That allows most individuals to mostly stay out of the resource allocation business, but still enjoy the benefits.
In fact it's not a question of being in the game or out of the game, just a question of time preference. The sole purpose of accumulating money is to eventually spend it. Maybe it will be spent tomorrow, maybe by future generations, but it will eventually contribute to the economy and allocation of resources on whatever schedule and for whatever purpose the owners of the money deem best given their unique situations. The argument in support of inflation is that it's somehow preferable, in the vast general case, for people to spend their money sooner rather than later, and worth using force to accomplish this. It's as presumptuous and arrogant as it is arbitrary, an essentially totalitarian position.
You don't need to take away people's purchasing power to encourage them to invest. If an economy is growing, there will always be higher returns in investment than in holding cash. Monetary expansion encourages unsustainable consumption and debt accumulation. Why is this preferable to saving? When people save, they don't do it with the intention of one day dumping the money in a lake. They are still going to use the money, just on a longer time scale for a better-considered purpose.
I don't want to take away people's purchasing power now, I want to sap away their purchasing power over time. If I do that I encourage them to take their money and invest it into a factory producing widgets instead of squirreling it away into a bank. Inflating the value of money gives an unfair advantage to people who use their money to improve the world by producing things. Being in debt sounds like an OK trade to me so long as it's not pathological.
I don't agree. The falling prices are holing me and many other frugale people back from buying electronics frequently. The reason people buy new electronics so often, is because there is so much improvement and innovation.
In economic speak, he's saying he'd be less willing to defer the utility of purchasing electronics if they increased in price every year.
Currently, you can invest your money elsewhere at the opportunity cost of foregoing the utility of whatever gadget it is that you want to buy until the utility of said gadget is worth to you what its price is.
