Like I said, you can have an inflationary/deflationary money supply and have the price of goods still go in either direction in the markets of those goods. I was very specific to say monetary inflation/deflation so as not to get that confused with price inflation/deflation (ie, CPI).
I see what you mean. Economists usually refer to "monetary inflation/deflation" as the "money supply" (and specifically M1 or M2 as measured at different points) to avoid confusion with inflation, which is defined as an increase in the average price of a large selection of goods over time.
You are correct that there are lots of factors disconnecting changes in money supply from changes in the inflation rate, which is why money supply has gone up so fast in recent decades without an equal-sized spike in inflation. For example, a lot of the dollars that have been produced ended up being exchanged for products from Asian manufacturers, who then put the dollars into US treasuries. It makes one wonder what would have happened if the money supply had been inflexible, such as if we were on a gold standard or if the design of our currency prohibited expansion of the money supply.
"The Great Depression was not caused by deflation." ... The great market crash of the stock market in 1929 was absolutely not caused by deflation unless you're going to ignore everything that led up to that point in time. As I mentioned in my post there were a lot of interventions throughout the entire Great Depression and many of them did more harm than good. Deflation during that time period (a period where interest rates also dropped) did not help things either. What do you expect to happen after a massive stock market speculative bubble bursts and then in an attempt to correct that a massive contraction in the money supply takes place?
If you want to say deflation was a way-down-the-line effect of a speculative bubble bursting, and not something that caused stock market losses to morph into the GD, the question remains: what did the stock market crash that involved a tiny minority of people who were invested in stocks at the time have to do with the price a farmer in Indiana could get for their corn, or a manufacturing plant's ability to borrow money for an expansion, or a small hometown bank's ability to write mortgages, or average wages across an entire country of mostly non-investors? How did some wealthy speculators in New York City losing some money lead to formerly profitable businesses shutting down and consumers clamping down on all spending? What does the price of shares in the stock market have to do with aggregate demand?
We could go back to first causes and debate preceding conditions that were established a century earlier, the gold standard, etc. but the stock market crash of October '29 would have been shrugged off and forgotten about by most people had it not affected the real economy. Once deflation was allowed to take hold - for all the government policy mistakes you cited - that's what turned a stock market correction into a GD. The money supply was allowed to contract and deflation took hold.
We had an almost identical setup to 1929 in 2008/09, the government responded in the exact opposite way, and as a result we look back on those days as a buying opportunity, not a generational disaster. In 1987, the stock market crashed 22.6% in one day, compared to the 23% loss on 10/28/29 and 10/29/29 combined. Somehow these massive losses did not lead to a 2nd GD, at a time when a much larger percentage of Americans were exposed to the markets. Government actions to prop up banks and prevent deflation had a lot to do with that.
I'd say bursting bubbles can start a process of money supply contraction, but as long as government can expand the supply of money in response, it turns out all right. It turned out all right in 2020, 2009, 1987, and previous 25%+ corrections for exactly this reason. Few people have ever heard of the Kennedy Slide of 1962, for example. But as the GD started the government could not / would not expand money supply, and allowed a deflationary spiral to occur.
I am arguing that the Great Depression was not caused by deflation and also that deflation is not inherently a bad thing (like so many today make it out to be).
Don't take my word for it that deflation demolishes economies. Here are a wide range of legitimate sources describing the problem more succinctly than I can. All these diverse sources agree with the consensus in economics that deflation is some bad juju:
https://www.economicshelp.org/blog/978/economics/definition-of-deflation/https://www.cbsnews.com/news/explainer-why-is-deflation-so-harmful/https://www.frbsf.org/education/publications/doctor-econ/2003/may/deflation-risks/https://www.investopedia.com/articles/personal-finance/030915/why-deflation-bad-economy.aspPeople's houses lost value because no buyers could get a mortgage, a situation that would repeat in 2008.
Not true. People's houses lost value because the prices of their homes were massively over-valued. Again, another case of a massive speculative bubble. The fact that people couldn't get a mortgage is quite literally the opposite of what happened. Everyone was given a mortgage. A bubble like that will eventually pop which is then what results in the pricing crash of houses.
Were home values in a massive speculative bubble in 1929? Did they go back into a speculative bubble when they recovered in 1940 and continued zooming up from there?
If home values in 2007 were a speculative bubble, were they a speculative bubble again in 2012 when prices returned to their 2007 levels and continued zooming up from there?
Another view of a deflationary economy:
"Between 1929 and 1933, construction of residential property fell 95 percent. Repair expenditures decreased from $50 million to $500,000. In 1932 between 250–275,000 people lost their homes to foreclosure. In comparison, 68,000 homes suffered foreclosure in 1926. By 1933 foreclosures reached the appalling rate of more than a thousand each day. Housing values dropped by approximately 35 percent. A house, worth $6,000 before the Depression, was worth approximately $3,900 in 1932. " Source:
https://www.encyclopedia.com/education/news-and-education-magazines/housing-1929-1941When I was younger I spent some time with people who lived through times of 2% deflation.
Where was this?
Again, in all of your conjured scenarios you give, it seems like you always are looking at things from a consumer that perpetually decides to never buy anything and sells all of their belongings and I refuse to believe that would ever take place in a stable economy and I can't think of any historical examples of that. And if prices do fall because of a lack of demand because consumers are expecting further price drops, what about sellers? Wouldn't sellers drop prices quicker in an attempt to sell before their competitors. Why wouldn't consumers meet them to market under such a case? If a death spiral were to actually happen, why wouldn't wages follow?
This was in the United States, based on conversations I had with numerous family members, neighbors, and acquaintances that lived through the GD. They all told me the same story, which agreed with the accounts in history and economics textbooks I would read later. There are documentaries, statistics, contemporary accounts, etc. and everything tells the same story. The effects of deflation during the GD are not fake news or spin, it was well documented, and led to an economic consensus that deflation is public enemy #1.
Yes, people were selling all their belongings, refusing to buy things they wanted no matter how cheap these things got, putting cardboard in their shoes when the soles wore through, and yes, wages were falling at the same time. That's the consistent story told by the statistics, the textbooks, the economists, and the survivors.
If a bitcoin economy consists of consumers, producers, and sellers, then investing in a business will still yield favorable returns denominated in that bitcoin. If investing is still taking place, then future productivity gains are still to be had. If future productivity gains can still exist then receiving a loan denominated in bitcoin could still fuel that expansion.
At the end of the day, if I am looking to buy a $20,000 car, I'm probably not going to hold off on that purchase just because I think I might be able to get it next year for $19,600 instead.
On a supply-demand curve, each incremental price increase reduces the number of buyers. The marginal buyer is the one who is barely willing to buy at $X, and will walk away from the deal at $X+$1. So yes, some percentage of people will keep their beater car for another year if car prices are falling, or even if they are not rising. Car dealerships spend billions of dollars yelling in ads about how there is a temporary "liquidation event" to convince people that prices have fallen and will likely be higher in the future if they "miss out on these deals". They're going after marginal consumers who are very much on the fence.
When we flip this logic around in a deflationary economy, and consumers start to expect that prices will be lower the longer they wait, then there's a lot less incentive to buy today. Consumers are essentially getting paid for delaying their purchase. Marginal buyers will continue driving their beater car for another few months or make repair-instead-of-replace decisions in exchange for future savings. Some people who want a car will essentially be paid to go without for some period of time. The longer they hold out, the lower the price gets.
The spiral happens when consumers' wages start falling at the same time (recall that every one of our expenses is someone else's revenue). Suddenly, consumers lost as much purchasing power as they were going to save on the new car. The absolute worst thing they could do in this situation is to buy the car, which is depreciating more rapidly than usual, and try to pay for it with their future wages, which are decreasing. The optimal strategy in an deflationary economy is to not buy, because you'll soon need your falling wages for rent, bills, and other prices that are contractually set or don't immediately fall with deflation.
The point about bitcoin is that it isn't linked to debt as much as fiat monetary policy is. Debt is what largely fuels monetary policy today. Whether it is bonds, QE buybacks, reserve requirements, etc. These are all debt related instruments in tuning what the overall monetary policy is. That wouldn't necessarily be the case in a bitcoin economy. A bitcoin economy would largely decouple money and debt and so you'd have a much more temperate economic climate. Instead of massive amounts of debt fueling economic expansion and then experiencing the resulting bubble burst, you'd have debt allocated only where necessary and saving money would become much more normal. ...
But even in a bitcoin economy there are no certainties. You could still have massive amounts of credit expansion. Especially if a majority of people hold bitcoin with custodians and those custodians loan with fractional reserves. The benefits of bitcoin provide no guarantees there. Governments could still practice quantitative easing during economic turmoil, but that QE would need to be funded through taxation rather than money printing which could be politically difficult. It could certainly play a role as a check on government spending.
I think in a bitcoin economy, if one could ever exist, there's no technical reason other than deflation why banks couldn't continue to make loans, stocks couldn't continue to be bought on margin, governments couldn't go into debt, and speculative bubbles couldn't form.
Even today in the dollar economy, a fixed number of dollars (e.g. your paycheck) is counted as an asset both by you and by the person who borrowed money from your bank to start a business (the same money that was your paycheck) and purchased a bunch of inventory from another business (whose assets track back to your paycheck) which becomes another person's paycheck. The average speed at which dollars are being transacted in this way is referred to as monetary velocity, and velocity is a key component of inflation/deflation. Faster velocity = consumers are desperate to get goods and services, so growth and inflation occur. Slower velocity = consumers are desperate to hoard cash, so economic decline and disinflation occur.
In today's dollar economy, it would be very easy to curtail lending if we wanted to. The government can raise bank reserve requirements, remove dollars from the economy through asset sales, raise interest rates, raise margin requirements, raise the requirements for subsidized mortgages, change the tax deductibility of interest, or increase bank regulation. The issue is that we the voters don't want to curtail lending (or cut government spending) because these actions reduce economic growth and raise unemployment. Switching to bitcoin wouldn't give us any new tools and if a deleveraged economy was the goal we aren't using the tools we have. In a crisis, funding QE with taxes would be an expansionary act paid for with a contractionary act.
I had these exact same discussions with gold bugs ten years ago. They often advocate a return to the gold standard like we had during the GD to reduce distortions in the economy that they attributed to government money-printing. In their minds, a fixed supply of money in the world would lead to 0% inflation but somehow not ever tip into deflation, would force the government to balance its budget (a policy voters have been rejecting for decades), and not result in any other distortions such as a large % of GDP being allocated to extracting the last bits of gold from the Earth's crust.
Oh, and in that scenario of course the collector coins they bought from people running Fox News commercials would be each be worth millions. When asked how they would handle the GD, their responses were right out of Herbert Hoover and Andrew Mellon's playbook. When I'd point this out, they'd wave away the critique and say this time would be different because GOLD. Um... maybe the consensus of tens of thousands of economists, investors, and business people is wrong or maybe goldbugs got conned by crackpot social media theories, information bubble hype, and marketing.
