Read on Twitter
Short thread on communication. Here is an example of how difficult it can be to communicate basic economic ideas (at least, for me, and on this platform, but I think this applies generally, excluding @MacRoweNick ). https://twitter.com/dandolfa/status/1328790728319913985
My comment was motivated by Bitcoin enthusiasts explaining why BTC is turning out not to be a good money. Evidently, it's because nobody wants to spend it--it's a deflationary currency--it's expected to incur capital gains.
This logic is incomplete, at best. In my tweet, I encouraged looking at things from the other side of the trade. The same logic implies that the merchant should be very eager to make a sale (lowering the price of his/her product) making every effort to acquire the precious BTC.
Many people took this to mean that I believe deflation stimulates economic activity. Look at the Depression! Look at Japan's "lost decade!" But this is not at all what I meant or even said for that matter. But I was also not as clear as I might have been.
When people make statements, or offer interpretations and views, they almost always rest these on some background knowledge that mostly remains hidden from the audience. This is largely unavoidable, esp. on a platform like this. We need to cut each other some slack.
In any case, back to the original tweet. I was implicitly assuming a stationary environment; one in which the rate of inflation/deflation remained steady and predictable. Theoretical Q is: would the *level* of economic activity be higher under (say) 2% inflation or 2% deflation?
For the case of zero-interest currency (like USD cash, or BTC), monetary theory says deflation will cause higher level of output. The logic is based on the Friedman rule. When money earns a "good" rate of return, the (level) demand for real money balances will be higher.
This part is consistent with Bitcoiners view that people want to hold on to a valuable currency. But the way this higher demand manifests itself (in theory) is through a *one-time* decrease in the price-level (one-time increase in the purchasing power).
The increase in purchasing power comes about because merchants are willing to hand over more goods to acquire the currency. Their attempt to do so will increase production. This is how deflation can (theoretically) increase the level of output in a steady-state.
It's another thing entirely, of course, to ask whether this is true in reality. As usual, it's very hard to test. But Friedman rule makes intuitive sense. Think of corporate cash managers where cash accounts earn (say) zero interest and inflation is high.
It makes sense to economize on cash holdings. In this world, a profitable but ephemeral investment opportunity may go unexploited b/c of lack of cash (and available credit lines). This would be less likely to happen if inflation was low--
--firms would be happy remain flush with cash in this case. Profitable spending opportunities can be exploited w/o regard to credit conditions. Surely, this must lead to greater production.
Hope this helps. Thanks to all for their comments.
