The real problem is that men, elves and dwarves have to compete with cheap magical products made across the oceans by pokémon laborers. Small hobbit farms are being forced out by necromancers that have magically modified seeds with high yields, but which also make Middle Earthers perpetually hungry. So there is deflation in the cost of magical items and enchanted food, but inflation in the cost of locally-grown foodstuffs. 

Wow, Doc. Who knew there were so many lurkers of a particular ilk just waiting to pounce on a post about economics. Interesting.

The concept you allude to...which people do have a hard time wrapping their minds around...is dynamic balance. Balance is neither this, nor that, but a balance between.

These guys prefer to think of a static, reified economy in which certain "entities"...in this case, inflation...are "bad"...and others are "good."

I haven't read Tolkien, but perhaps the fantasy-oriented mind is particularly susceptible to this sort of thinking.

The strange thing about BitCoin or Bitcoin or bitcoin is that its value has gyrated wildly. Were the dollar to oscillate this quickly, we'd see panic.

As long as it's a potential store of wild value, no one will spend it (why would they?) And if they don't spend it, it's not a currency. But as soon as it's used as a currency, it starts to act just like all the other currencies out there.

For example, if you sell something for $1 of BitCoin and it suddenly races to a value of $495, you're in heaven. The buyer, however, is in hell. And your turn is coming up soon.

We seem to be in a perpetual search for something we can call "real money," as opposed to "fiat money." Something that's real and not just...paper.

But the truth is, ALL money is fiat money. Gold has no value except that with which we endow it (apart from its use in manufacturing and teeth filling). Gold is just a metal found in the ground, and there's a certain, limited, but as-yet-unknown amount of it. It's shiny and heavy and malleable. Period.

Ask anyone how much an ounce of gold is worth, and he has to answer in terms of a fiat currency. "It's worth $1,200." The fiat currency is just as much the store of value in this example as the gold. Its reputation as a stable store of value or a stable standard of exchange is also belied by gold's tendency to go up and down in value ...by a lot...and often quickly.

Moreover, gold has no inherent hedge against inflation. If we used gold instead of the so-called fiat currencies, then we'd see prices like: "Leg of lamb/1 oz. gold." When legs of lamb went to 2 oz. of gold...or when you could buy only half a leg of lamb for 1 oz. of gold, you'd have inflation.

Moreover, you'd have the weird situation in which a manufacturing material, gold, was priced in terms of itself. How could you even price the amount of gold that goes into a filling? What would you say? The price of a filling is 1/100th of a leg of lamb?

Bubbles, Banks And Bitcoin - Forbes: 

 

Currencies have three functions: store of value, medium of exchange and accounting unit. At the moment, Bitcoin is principally a store of value. I disagree with those who think that Bitcoin cannot be a store of value because it has nothing physical backing it. Anything that is intrinsically scarce and doesn’t decay can be a store of value. Bitcoin, consisting as it does of digital information with a hard limit on the number of units that can be created, certainly meets these criteria. The deliberate scarcity of Bitcoin makes it good for people who want to invest in it as a store of value, because (bubbles aside)  it will appreciate over time, so they will get richer simply by hanging on to it. But it makes it much less satisfactory as a medium of exchange. When money is deliberately kept scarce in order to preserve the value of money savings over time, the general price level in the economy tends to fall, which is deflation. As Haruhiko Kuroda, governor of the central bank of Japan, explains, deflationary economies tend to stagnate, because people defer spending decisions in the expectation that prices will continue to fall. For the economy to grow, people have to spend, which is more likely if they expect prices to rise in the future – obviously we don’t want them rising too much, but a little bit of inflation does keep the economy moving. A safe asset which gradually appreciates, so makes a good long-term investment, is not a good medium of exchange. The design of Bitcoin therefore makes it more suitable as an investment rather than a medium of exchange.

 

However, the problem with non-monetary stores of value  is liquidity. If you can’t sell investments when you want to, they aren’t much use – after all, the very fact that they don’t decay means you can’t eat them.  And since Bitcoin’s popularity is at least in part due to people’s suspicion of state-guaranteed money, forcing people to realize their investments in state-guaranteed money rather defeats the  object. So it is necessary for Bitcoin also to be a  medium of exchange. If Bitcoin can readily be used to make purchases, bypassing state money, then its liquidity is assured. This is why it is promoted as a currency rather than as an investment.

 

But it is really not a viable alternative to state-guaranteed money. It is only accepted in payment for goods and services because it can be converted to state-guaranteed money – and in that respect it is exactly like all other forms of private sector money. Furthermore, because it is not denominated in dollars, its value in relation to the dollar fluctuates. At the moment it is doing rather well, but like all investments its value can fall as well as rise. Volatility in a medium of exchange is a threat to economic and financial stability, which is why central banks intervene if exchange rates become too volatile. But Bitcoin doesn’t have a central bank smoothing out exchange rate variations. Yes, it has a great payments network, far better than its rival Paypal (which really needs to get its act together). But having a great payments network doesn’t make it a good currency.

 

But crypto-currencies like Bitcoin and its rivals are also addressing a different – and much more interesting – need than “we don’t trust government”.  There really is a shortage of state-guaranteed money as a medium of exchange. This is partly because of the sheer quantity of goods & services now being produced, many of them in digital form, and partly because the banks/state combination isn’t meeting the need. If the banks/state money-creating machine can’t or won’t increase the supply of money enough to meet demand, then other parts of the private sector will create alternatives.

I will have to watch the movie.  My college kids went to see it in costume and got there to late for a seat.  Later a friend gave them a pirated copy of both parts in a gift exchange at a steam punk group.  They just told me the dragon who was sleeping on the gold was awesome.

You are right inflation is too low and Wall Street and 1 % benefits from it. 

DC v MOFO: Let's see if we can sort it out.

Let's start with a few quotes from DC to see if we can get clear what he's saying and what he's not saying:

DC's argument:

"We generally talk about inflation as pure economic evil, something that could never possibly be too low. But it is."

"Inflation is bad when it gets too high, but that doesn't make a modest amount of inflation bad."

"Some of the people warning against any inflation under any circumstances either should know better or actually do."

Basically, DC is arguing against people who say that inflation is always bad and that any inflation is bad. He admits that inflation can be bad when it's "too high"; it's not always a good thing. But some inflation can be a good thing.

This is so, he argues, because inflation incentivizes people to engage in economic activity, i.e., investment, to outrun inflation. If you just sit on your money, its value decays. So some inflation should lead to more investment, more hiring, more spending. It should be good for the poor (just to anticipate Mofo a bit) because more hiring is good for people who most need to be hired, i.e., the poor.

Deflation is the opposite. As prices drop, the value of your dollar grows. Why buy soap today when it will be cheaper tomorrow and your dollar will go further. Again, to anticipate Mofo a bit, this should be good for the poor and probably is as far as it goes. But it probably doesn't go very far because the poor don't have a lot of money to sit on one way or another. A $5 bill can only go so far under any circumstances, and once it's spent, it's spent.

The poor, it would seem, need income more than they need a strong dollar. If inflation leads to (or is concommitant to) greater economic activity--more hiring and more income--that would seem to be the better bet. Yes, every dollar is worth less, but at least you have some dollars coming in regularly.

DC doesn't really prove this case; I think he'd need a whole passel of numbers to prove it. But he does say somewhat convincingly: We've had relatively low inflation for a long time now, and, self-evidently, it hasn't done much for the economy. Or wages, as both DC and Mofo would agree. IOW, he's primarily arguing against those who say that low inflation is a magic elixir that will get the economy humming (probably in combination with austerity, though he doesn't mention this).

MOFO's argument:

Mofo is a bit harder to pin down. He shifts his ground a bit. He starts by looking at the macro picture (i.e., inflation is not capable of "turning our economy around). But then later he shifts to argue that inflation is bad for the poor or "the common man." The common man may or may not be poor, but let's leave that aside.

For the macro argument, he starts off saying to DC, "You are assuming that inflation (whether it be 1.5% or 3% or something else) is capable of 'turning our economy around.' Id say a big part of the resistance to inflation is the belief that higher inflation wont really help us, and i have to say, that is not entirely unfounded."

Here, Mofo asserts that DC is claiming that any level of inflation from low to high is capable of "turning the economy around." Unfortunately, DC isn't claiming this. It is fair to say DC is claiming that some amount of inflation is good for the economy. And he's arguing this against those who say that any inflation is always bad.

Though Mofo claims that he's agnostic as to the impact of inflation, this isn't really so. The common man's resistance to inflation is not "entirely unfounded," he says. Well, what is it founded on? Apparently, the tautological claim that inflation reduces the value of every dollar you own. But this says nothing about whether this reduction is good or bad for promoting economic activity.

At a certain point, Mofo says that DC could be right or he could be wrong, but he hasn't proven anything either way. I agree: DC would need some data in his argument to go for a proof. Then again, DC isn't claiming to prove anything. He's setting out an argument, and thus far, Mofo hasn't countered it very convincingly.

He then goes off on an anti-Fed tangent and claims, incorrectly, that DC is claiming that "inflation should be the rule, unquestioned and unchanging." But DC is not doing this at all.

At this point, Mofo directs his argument to the poor and asks how DC knows that inflation "wont simply further impoverish those who don't have inflation adjusted assets and income (like, for example, poor people)?"

The problem with this tack, IMO, is that increasing incomes are generally part and parcel of inflation. The 1970s stagflation is not a good counter example because it was caused by an outside shock, i.e., the oil embargo. One would think that something like the Fed would come in handy as a stabilizer when an exogenous event like this throws the economy for a loop. I believe Brad de Long has written that during the 1970s stagflation, the Fed didn't see it as its job to control inflation.

At one point, Mofo calls foul when CD brings in interest rates. But interest rates and inflation are often tied. (Interest rates are the price of money.) The late 1970s was a good example of this. And good Austrians and Gold Bugs of all sorts are constantly predicting (like the good pre-mils they are) the "imminent" arrival of those evil twins, high inflation and high interest rates.

(One error I believe Mofo makes is in saying or implying that the stagflation of the 1970s meant lower wages. The data don't seem to support this. Wages kept going up, though employment took a hit in the mid-1970s. IOW, he confuses wage increases with employment rates.)

Mofo next brings up grandma who has to risk her money on investments to beat inflation. But the reason she has to do this is inflation and interest rates are too low now. IOW, we have relatively low inflation now AND we have pitifully low rates on treasurys, CDs, and savings accounts--under 1%. We don't have high inflation and low interests; just the opposite. It is the current low inflation and rates that are forcing grandma to invest in riskier equities. A bit higher inflation would probably give her a better return on her savings.

Mofo then asks:

"And how exactly do you imagine that wage earners are helped by inflation?  If their wages remain static, then they lose out.  If their wages grow based on inflation, then they at best gain or lose nothing.  If their wages are growing faster than inflation, then how does an inflationary environment help them?"

This question should allow DC to branch out into new territory, something Mofo objects to later on when he argues that DC needs to stick to his inflation knitting.

But what strikes me is Mofo's last question here. The answer would seem to be that if a person's wages are outpacing inflation...then the benefit is their wages are growing fast, so fast, in fact, they're outpacing inflation. What's bad about this?

Mofo's final statement is this:

"I strongly disagree that inflation is good for the working class. You are making way too much out of the debt reduction aspect of inflation and virtually ignoring all the serious downsides. The thing is, most working class (and working poor) dont have inflation adjusted incomes. At best they get a periodic increase that is sold to them as a pay raise but doesnt even keep pace with inflation. Try this, next time you are talking with someone who you imagine would be helped by inflation ask them how much their pay has gone up in the last 5 years or so. Compare that to the stated rate of inflation and i think you will find that most of them are slowly losing out to inflation."

The problem here is that the working poor ARE often straddled with debt. So any easing of this burden is good for them. Second, any pay raise helps some, even if it doesn't keep pace with inflation. But third, and most important, there's no reason why an increase in inflation can't be accompanied by an increase in wages. Mofo assumes this can't and won't be done, and maybe it won't be--but there's nothing necessary about this relationship, AFAIK. And inflation doesn't impose this necessity on the "wage creators."

In fact, the only connection between rising wages and inflation that I know of is that increasing wages tend to increase inflation (assuming the economy is at full capacity). So IF we have increasing inflation we NECESSARILY have increasing wages, and one of the best ways to create inflation is to increase wages. More dollars chasing relatively fewer goods.

What we've seen for the last 30 or so years, since Reagan killed off inflation, are stagnant wages AND relatively low inflation. Though DC doesn't mention this, it would seem to be a pretty good bit of evidence in support of his thesis, i.e., that inflation can be "too low" and that low inflation does not help the poor or working poor.

Submitted for your perusal:

The Fed’s Lopsided Inflation Target

Vox article, The case for 4% inflation

PDF of Ball's full essay, The case for 4% inflation

ABSTRACT Many central banks target an inflation rate near two percent. This essay argues that policymakers would do better to target four percent inflation. A four percent target would ease the constraints on monetary policy arising from the zero bound on interest rates, with the result that economic downturns would be less severe. This benefit would come at minimal cost, because four percent inflation does not harm an economy significantly.

An informative interview of Ben Bernanke by Brookings touches on the primary topics of this thread, inflation and unemployment, mostly in second half. For those interested:

Bernanke on Crisis: We Did the Right Thing, I Hope: Video - Bloomberg