Deflationary money is a Good Thing

Deflationary money is a Good Thing

Original Postby ajtowns

Posted on: August 24, 2022 16:14 UTC

Investment strategies can be categorized into two primary types: passive and active.

Passive investment involves acquiring assets without active management or significant involvement, such as storing cash, purchasing land for no immediate use, keeping gold in a vault, owning shares without participating in the company's operations, or entrusting money to banks for lending. Conversely, active investment requires direct engagement, like developing purchased land, managing rental properties, influencing company decisions as a significant shareholder, or providing hands-on support to borrowers as an angel investor.

The blog post emphasizes that while passive investment might seem appealing due to its hands-off nature, it presents several issues detrimental to society. One major challenge is the principal/agent problem, where hired agents (e.g., rental agents, CEOs) may not align with the asset owner's interest in maximizing the asset's value. This misalignment often results in underutilized assets, such as undeveloped properties or commodities sitting unused in storage.

Furthermore, if passive investors were to withdraw from the market, the demand and prices for assets could decrease, leading to more affordable housing and business opportunities. However, the reason passive investing persists is due to currency devaluation over time, which makes holding assets more attractive than holding cash, despite potential price drops in the future.

The discussion also delves into the concept of deflationary currencies like Bitcoin, suggesting that they may not be as problematic as once thought. Active investment remains beneficial even in a deflationary environment because it generates profit through asset development and utilization. Nevertheless, there are concerns regarding predictable economic behavior with such currencies, particularly in consumer confidence shifts, which could destabilize both consumer goods prices and the labor market.

The article proposes that central banks could play a role in stabilizing economies by potentially issuing an inflationary currency backed by a deflationary one, such as Bitcoin. This would involve setting exchange rates and pricing wages and goods in fiat currency but paying them in Bitcoin. This theoretical system could help manage economic fluctuations by adjusting exchange rates to reflect collective bargaining outcomes between businesses, workers, and consumers. While this approach could mitigate recessions and provide equitable impact during economic adjustments, its practical implementation and potential complex outcomes remain uncertain.