dmp said:
When you look at how much value a unit of money loses at 2-3% inflation per year over a person's lifetime, it is pretty significant. Why is this "healthy for the economy"? It's actually healthy for government debt, since the value of the debt, if held in the government's currency, is reduced in value. Economists also believe that 2-3% inflation leads people to spend more, and they think that is healthy for the economy. I wonder if less reckless spending and consumption might actually be better for the economy.
There are many examples of currencies that have been ruined by inflation and hyperinflation, due to government's printing money. Can you name a single currency that has been ruined by deflation (i.e. the currency gaining in value)? I don't know of a single one.
That's the point - money loses value over time, so people with money have an incentive to invest, or spend it.
Money is supposed to circulate.
Not a single currency was ruined by regular 2-3% inflation
Hyperinflation is another story - this happens when government tries to fill the holes in the budget by printing money on massive scale, Zimbabwe style. This is actually why most governments can not print money (the central bank does).
But this just shows that you can't create wealth out of thin air, kind of what bitcoin does at this moment.
There is a negative relation between inflation and unemployment (called Phillips-curve). Like you said - inflation means more spending = more work = more jobs. Overspending is bad, but 2-3% leads to a normal amount of spending, from the economic point of view.
Money loses value over time, but it's not that bad - because the prices and wages grow along with it (indexation). Wages haven't grown proportionately in the last decades, but there are other reasons for that.
Government also pays interest to its debt, so in this sense it gains nothing from the inflation.
Deflation is actually very bad. An example: Japanese lost decade.
When money gains value faster than most investment assets, there is no point in investing your money and you are less likely to spend it, and the economy stagnates. It can lead to deflationary spiral - basically central bank can not inject more money into the circulation to decrease deflation, because nobody wants to buy government bonds at this point, because the return rate is lower then just cash. People start hoarding money, increasing the value of money even further. But nobody wants to spend or invest it.
This is called 'liquidity trap'.
Just to prove my point - would you use Bitcoins right now, to build a company that actually creates wealth, jobs etc? Probably not, because it has much higher return rate than any durable investment you can think of. People are hoarding bitcoins at this point - and the price reflects that: high price with steady supply means a lot of people want to buy it, and very few want to sell it.
Good currency should have a balance between buyers/sellers, which would lead to a steady currency rate + some inflation to stimulate the economy.
I'm not saying the current monetary system is perfect, but bitcoin would be much worse. The world economy would collapse in a matter of days.
