Originally Posted by
IlPrincipeBrutto
Here's how some people seems to see it: P = M / S
where P is prices, M is the total quantity of money, and S is the total amount of stuff (including services and labour) that you can buy with M.
It follows that for these people the increase in prices can be expressed like this: dP = (M + dM) / (S + dS).
In their view of the world, if M grows too fast compared to S, that is, the total money supply grows too fast compared to the supply of goods, then P increases, and that's inflation. And because there is no theoretical limit to dM, but there is a practical limit to dS, there is no theoretical limit to inflation.
This theoretical possibility disturbs some people so much, they they think the supply of money should be limited, if not fixed altogether. Their ideal world is one where dM is very small; ideally, zero (as in a Bitcoin world).
Now, what does that mean?
If dM is zero, when S increases, prices will go down. That is, in any limited-money economy that produces more stuff, or hires more people, or both, S will increase; but because the mass of money available for S cannot change, prices will, on average, go down.
This is deflation; and if inflation is bad, deflation must be good, right? Well, permanent deflation means that prices will tend to zero; so will profits, and salaries. And if salaries and profits go down, servicing any sort of debt becomes harder and harder.
So, a deflationary world, is a world where it's better not to have any debt. But if there is no debt, there can't be any credit, by definition. A deflationary world is a world where there is no use for your savings, assuming you have some; you can't lend your money to anyone (remember, debt is bad and nobody wants it), so the only use for your savings is more consumption. Which means, by definition, no investments.
One of the alternatives is a world where dM is zero, but prices still raise a bit. The only way this can happen is for S to decrease. This means an economy that produces less stuff, or has more jobless, or both. Or, an economy with simply fewer people. You can't have an expanding, growing economy with a limited, fixed supply of money.
The last alternative is a completely static economy, where dS is zero as well, and prices remain at their level forever.
Bitcoin is a Malthusian's dream.
IPB