But people rarely do that because historically, it has been inefficient. With the increase of technology it may become less so, but for now most people store their money in a bank. The bank only pays a return on that money because they make investments with your money and they pay you a very small piece of their profits in return.
Right, but I'm not appealing to historicism. People use banks because banks have a monopoly on fractional reserve banking. Individuals can't loan out at 10 times reserves. When they do, they become Bernie Madoff. When the bank does it, it is legal tender. Counterfeiting is legal if you have a badge.
That is a big reason why people use banks for investment returns and not strictly for warehousing as they did prior to the 20th century.
I have always found that I make better investment decisions with my money than the banks do, which is why I try not to "save" too much currency (as you would have us do) and rather invest that currency (which you seem to think is harmful) in order to realize far greater returns on my money. Any I'm not a speculator either.
Both of your bracketed claims are untrue and a little belligerent.
I would not have people "save too much". The market driven interest rate communicates to market actors when to save, and when to spend. Interest rates are prices. The entire notion of too much or too little is something you introduced to this discussion, not me. I don't even believe in ideas like too much or too little. The market will decide.
I don't see invest as harmful either. It is necessary. In order to have capital accumulated for investment, we need interest rates to communicate what the supply of loanable funds are to entrepreneurs and investors. High rates tell investors to save more, and entrepreneurs to slow down (high debt service costs), low rates tell investors to save less and for entrepreneurs to start developing capital (borrowing is cheap because it is plentiful). The market is a self-correcting mechanism.
You're assuming the two options are a fiat currency or a barter economy. You should know better than that.
Not at all. I am talking about barter, and an economy with a medium of exchange. Whether that medium is fiat or not is irrelevant that point.
No, they will do even better. They will invest that money into capital projects (thus producing, rather than saving), or other less liquid capital investments whose nominal prices will increase as inflation rises thereby not eroding their actual value.
Right but those capital projects can only be completed if there is enough capital in the economy to finish the project. Under inflation, investment always outpaces production, and there is a bust, when the projects that cannot be finished, run out of capital. You've got to remember, inflation doesn't just encourage people to invest, it encourages them to consume, and that consumption, is what might otherwise have been reserved as savings for future investment.
This is starting to get into more complicated concepts like time preference which is why I asked you to watch the video, because the presentation there is pretty good about covering all of this broadly. I simply don't have the time or skills to convey it all in a forum thread on a working day.
Again, you are assuming the only alternative to a fiat currency is a barter system and we know that isn't true.
Already addressed.
You may not want it to be your position, and I respect that. But calling for an increase in cash savings at the expense of capital investments by individuals has that effect. You're simply giving all of the cash to the banks and telling them to invest it as they see fit.
Not at all. I believe you have misunderstood my position. I am calling for an increase in savings because a path of debt based consumption is not sustainable and can have catastrophic social consequences (see Hitler picture). I am also saying that inflation makes it undesirable to save in cash, which is why inflation is bad.
We should be willing to save in cash, and should save in cash because it is a medium of exchange, and if we took the "avoid cash" idea to its absurd conclusion, we would be forced back into a barter society. Cash is a very important capital good. It is the common store of economic value in the economy (necessary for complex trades) and it is a measuring stick of value from one transaction to another. If the value of a dollar or euro fluctuates daily within their own respective economies, it becomes very hard to make sound economic judgments, as the value scale is constantly changing.
It's like trying to build a treehouse using a measuring tape for dimensions, and each day you work on the project, the measuring tape gets longer and the gaps between the inches becomes greater. Several days in, you are going to be short materials from your earlier plans, because nothing is long enough to match your plan.
Not to mention, fluctuating cash values, retards the utility of using cash as the important good it is, forcing people to make investment decisions they might not otherwise make, which further distorts the economy. Suddenly when people should be holding cash, they get stuck into an overpriced house, that when the market collapses, they cannot liquidate back for the same value they invested.
And lastly by distorting the value of the currency through inflation, that creates uncertainty, and markets, entrepreneurs and investors don't like uncertainty. Massive uncertainty is bad for business. Investors and entrepreneurs like to take informed risks, not wild chances. The former is investing, the latter is gambling.
That's ridiculous. When prices are deflating, there is no incentive to invest in any thing of real value, since you would do better to simply wait. The longer you wait, the more purchasing power your cash has. Thus, deflation has a negative impact on economic growth, and rewards people for saving currency (which is worthless, since it fiat), and punishes people for investing and taking on capital intensive projects that would produce value.
Marginal utility undermines this premise. Generally, each additional unit of a good provides diminishing returns, and so as more savings are accumulated, there is less incentive to save and more incentive to do something consumptive with each additional unit of cash.
Also, interest rates come into play. As the stock of savings increases, the interest rate falls to reflect that savings are no longer scarce. So the incentive to save in cash diminishes naturally. Basic supply + demand. It's not profitable to save in excess where the interest rate is free.
It most certainly does operate under different rules. It's a whole different monster, maybe that's why we're in disagreement because most of what you're saying would be true under a sound money system.
It operates differently under the same rules. The debate between us is an understanding of what the rules are. There is no debate that fiat money and sound money are different animals.
