Nobody is surprised that Mr. Scoresby was fast on this (#1474104).

I got about halfway in before life pulled me away... but alas I am back, and my god is it worth reading

It's all the things that matter:

• what's wrong with traditional/mainstream economics
• what return means, conceptually and real-economy speaking (yes, that kind of real: #737272)
• what money actually does (=coordinating consumption and production decisions)
• ...and what's wrong with the fear of deflation ("apoplithorismosphobia," ay-pope-lit-horris-mos-foe-be-ah — yeah, it's a real thing; … look it up: https://cdn.mises.org/qjae6/_4/_2.pdf)

Stunned, speechless. And honestly, the two hours or whatever I spend with this essay meaningfully moved the needle on why I think bitcoin is so important. (The last ~12 months have delivered a lot of question marks... financialization, price collapse, quantum nonsense, BIP-110 retards, etc etc). Thank god we're back to the Bitcoin is Venice educational stage.

Thank yous, Allen and Sacha.Thank yous, Allen and Sacha.

"In a society that values reality over accounting tricks, the number should go down. And if your money is honest, it will.""In a society that values reality over accounting tricks, the number should go down. And if your money is honest, it will."

The theme of in-/deflation is a typical bell-curve meme… the mainstream, tradfi peeps think inflation good, deflation civilizational collapse — whereas the 80-IQ Bitcoin types land in the correct camp (deflation good, inflation evil) but seeing them formulating the hows and whys for it is enough for the rest of us to lose braincells.

Alas, I guess I'm elevating myself to the high-IQ camp... Humble, I know. (I've been a Mises fellow, and I have an Oxford degree, and I edited Broken Money... that good enough, credentialist twats?!). Also, don't trust me; read Allen Farrington and Sacha Meyers, who are certainly there…

long-term price deflation is not an exogenous malady emanating from vibey “sentiments.” It is an endogenous process of human progress.

That’s where most normal (noneconomists) land when they’ve thought about this for a moment. Actually, prices down equal good for everyone; you gotta go through an econ degree to unlearn that basic (and I’d say accurate!) observation. #1471628

The authors walk us through the origin of central bankers’ inflation target — trivial, uninteresting… but also: not that many people know how unscientifically and let’s-just-try-and-see-what-sticks the 2%-inflation approach was. There are ways to economically and rigorously defend positive inflation rates, but the consensus monetary econ view is that Friedman was correct: the optimal rate of inflation is negative (to compensate for the loss of interest from holding cash). Nobody cared, tho; money printer go brrr...

Monetary inflation is an act of the state: the deliberate expansion of the money supply.
Price inflation is the consequence: the inevitable fever that follows the infection.

There is no “general price,” only opportunity costs and individuals making choices based on their own subjective valuations across an unfathomable and ever-changing range of options. To claim that this aggregate can be managed through central planning is to suffer from a profound case of physics envy, despotism, or both

I think the even funnier version of that is the price tags in stores… aren’t what economists think of prices, but merely bids repeatedly rejected by consumers choosing (at the margin…) not to accept.

100% here, excellent summary:

Good and bad deflation can be difficult to distinguish, but they are not the same animal. One is the dividend of competence; the other is the penance of hubris.

The central problem is not that prices fall because people can make things more efficiently, but that indebtedness and institutional rigidities are dangerous in a downturn.

Here’s an interesting distinction, very Farrington-like:

"Profit is a number. Returns are a relationship between money and time. An entrepreneur does not merely want to make money. She wants to make money relative to the capital committed.""Profit is a number. Returns are a relationship between money and time. An entrepreneur does not merely want to make money. She wants to make money relative to the capital committed."

When you hold money, you are holding what can be thought of as a claim on the future output of the economic network in which the money is used

This is a LITTLE poorly put (“can be thought of” is sufficiently hedgy), since markets require two to tango… nobody is obliged to give up anything to you simply because you have money; they usually want to, because we’re peaceful, trading, cooperating peeps (#780358) and it's in our interest to engage in mutually beneficial exchanges, but it’s not right to say “claim on” — and you can see this clearly in demonetization events (renewed bills, India, Brazil, Zimbabwe or any hyperinflation ever): you hold a piece of paper with numbers on it, what “claim” do you have on society’s output when/after the event hits? If you come into my house and offer my fiat for my organs and I say no, what claim do you have? If you, high as a kite and drunk as a madman, come into my liquor store and want alcohol in exchange for fiat, I can refuse you. If you're ugly, or gay, or black, or old (...jooooooking!), and I don't want to trade with you, what good is your "money"?

= of course, then you just go down the street to my competitor and I lose out on business so why would I do it??

This intellectual extension is pretty neat, and goes back to the key (Austrian!) marginalist insight of roundaboutness (#1470120)

we see that “per unit of time” is just as important as “per unit of committed capital”: per unit of committed capital because money is homogeneous and liquid, whereas productive assets are heterogeneous and illiquid; per unit of time because the process of transformation not only takes time but commits the capital provider to an extended period of heterogeneous exposure. To reiterate, then, producers care about profit per unit of committed capital per unit of time: returns.

This framing also reminds us that the whole dynamic depends on consumption being sustainable. Nobody’s time preference is zero, and returns require profit. Investment can be funded by savings, but savings cannot be drawn down forever. Savings exist only where positive returns are not wholly consumed. So there is always a balance between what is consumed and what is saved. If we only consume, we never invest, and productive assets depreciate away. If we only save and never consume—not even necessities—then producers have no signal as to what should be produced and consumers starve. Anything short of universal self-starvation kicks the reinvestment engine into motion and improves living standards through deflation.

And critically:

Contrary to fiat economist logic, there is no such actual thing as a demand curve sitting out there in the world. There is only the producer’s intuition about how consumers will respond.
Fiat economists, seduced by the quantifiability of profit, mistake the existence of a theoretical maximum for the existence of a method to find it.

@SimpleStacker might spin this differently, but the core idea here is that quantifiability/mathematizing these timeless economic insights hurled economics down the wrong path for a century or so (#1470476).

Consider the supposed problem in the abstract. If you are hungry, and you know apples will be 2 percent cheaper next year, will you wait a year? Of course not, because you would die, and you would prefer not to die.

Dr. Guido Hülsmann, Mises’ biographer and an amazing economist in his own right (#860406) used to call this “the constraint of the stomach”; that always made me chuckle:

This is interesting,

Even if people quite literally stuffed money under the mattress, that would still benefit society. Holding money for longer simply means elongating the average holding period of money. People are storing more of their labor in the monetary system. That raises the value of money relative to goods and services and therefore lowers prices for everyone else. Under a hard monetary system, people are rewarded for participating in the system.

Reason is that even pretty hardcore free-market economists answer this with “oh, there’s an increase in money demand…

Demand for money is a person’s subjective desire to hold a given amount of wealth in liquid monetary form at the implicit opportunity cost of buying anything else.

…then the free market should supply more.” That’s a common, well-trodden position — but a misunderstanding that money, while an economic good, is not like every odd commodity (where that mean-reverting, supply-inducing price shock indeed does take place). Yes, it is how gold operated, and no it’s not necessary (or beneficial) for a monetary system to do so when instead relative prices can (=better suited to) do the job.

Put differently, it’s also a vote-of-no-confidence in the goods currently available for consumption, telling entrepreneurs and Steve Jobs-like dreamers to unleash the creative minds and try to lure all that cash sitting on the sidelines out from their hides.

Where does this return-focus and non-apoplithorismosphobia lead us?Where does this return-focus and non-apoplithorismosphobia lead us?

Farrington and Meyers give us an incredibly succinct aggregate view and why, precisely, prices in a competitive market fall:

The fiat mindset encourages people to imagine that lower prices mean less economic activity. This is a silly result of static analysis. Lower prices are only possible because either more output is being produced with the same inputs or the same output is being produced with fewer inputs. This takes us back to Jevons.

(It’s funny how the same themes come back to you over and over… like, once you see something you start seeing it everywhere…)

when things become cheaper, they are used more, not less, because new applications become economically viable. Although it may seem intuitive, to fully understand the phenomenon, we need the machinery developed throughout this essay: innovation in pursuit of returns, producers lowering prices to capitalize on improved cost structures, and the downstream gains others enjoy from the resulting reduction in costs.

For some examples, the consumer-only perspective is enough: oil/gasoline prices. If you drop oil prices to one-tenth, consumers will fly and drive more (though not ten times more), maybe get a bigger, gas-guzzling car. But if the price of salt drops 90%, we’re gonna consume… about the same. No additional use for salt; saturation etc. Also depends a little on how saturated a use is (another insight of marginalism…): when you dropped the price of texting during the early 2000s, or the price of data in the 2010s, people ramped up their use — probably proportionately more than the drop in cost. If carriers were to do that today, well I might stream Netflix on my phone while waiting for a train or flight but there’s no reduction in cost that makes me 10x or 100x my data usage or text messaging.

Farrington and Meyers' point is wider: for the benefits to trickle everywhere, prices of production inputs have to fall such that it lowers the cost of production everywhere else, inducing/allowing higher returns throughout the economy. Lower prices are a bonanza to productive capacities in every other industry.

FINALLY: these dudes have a way with words, honestly.

It is to build less of civilization on fragile, maturity-mismatched nominal claims backed only by other liabilities rather than by real assets. Yet the standard policy response is to treat the collapse as proof that prices must always rise, and to justify permanent monetary debasement in order to prevent the next collapse, thereby laying the groundwork for a still larger one.

Pre-1971 money worked, so we needed very little and consistently little finance. But post-1971 money has been completely broken, and so we need ever-proliferating financial services just to make up for all the bullshit injected at the source.

This segment alone (brought up in comments to Scoresby’s post: #1474110) is worth a longer segment.

It’s precisely what’s so vicious about price distortions from fiat money… they mimic actual, well-functioning, proper market processes. The financial sector, too, provides real (not that kind of “real”; we have terminology problems in econ) mutually beneficial services… and there’s a case to be made that more interrelated economic activities, and a larger world market, and longer lives, all benefit the financial sector relative to the real (yes, that kind) economy. So this graph isn’t entirely off.

Point being: in the absence of good money, it’s impossible for us to tell the difference. As serious analysts we’re essentially left blind, because, just like Farrington and Meyers explained above about interest rates, there’s no way to determine what the correct size of the financial sector is… except by letting it develop fairly on sound monetary footing. How much debt should an economy carry? How many financial services should a household have?

“Stimulating the economy” is really just forcing people to act on false signals about how much consumption and investment anybody really wants—or forcing them to fear that the value of their savings will otherwise evaporate.

Yup, monetary misperception (#1407453).

TL;D-definitely-R:TL;D-definitely-R:

this is amazing: returns, not profit, indicate sustainable usage of capital goods; capital goods and consumption goods are mediated, in time, by interest rates; money is the economy-wide moderator, and messing with its properties (supply, usage) messes with the entire production structure and civilization.

Oh man, are we on the big topics tonight.