How about a third alternative.

The money becomes meaningless – it is fiat (whim) rubbish, and people just do not use it any more.

It supports it every week – both in its specific policy advice and in its background assumptions.

This raises an important question.

I can understand why someone might read the Economist magazine – partly to know “what the enemy are thinking” partly to laugh at their absurdity (for example this week’s issue was dominated by a long attack on how big government is in France – without any suggestions on how to more France away from the “Social Justice”, “public services” position and actually reduce government spending, and the Economist magazine would promptly denouce anyone who tried to do that).

But why would anyone (of any point of view) actually BUY the Economist magazine?

And the US experience from 1860-1900 of prolonged solid growth in a deflationary environment nicely counters your anecdata. Furthermore, money in the mattress being worth more tomorrow than today may decrease the economic incentive to spend – or at least creates an incentive to delay purchases, but please, honor me with an explanation how it kills the incentive to invest? If money in the mattress brings me (with deflation), say, a 2% a year increase in purchasing power, and any investment project that brings a positive nominal return, the incentive to invest is still there – I’ll have more money, and it’s only gravy that it’s also worth more. With 2% inflation, I have an incentive to invest only in projects that offer a return of more than 2% (nominal). How exactly does this not imply MORE investment under deflation?

Inflation favors borrowers, and deflation favors saving and investment. You’d have to work hard to convince me that a switch to more investment-based growth from spending/borrowing-fueled growth is a bad thing.

One kind is what you get when you have a fixed quantity of currency and economic growth. Things get proportionally cheaper because we get richer. This happens anyway, regardless of what the currency does. I still buy computers, even knowing that a better one will be available for the same price in 6 months’ time. I doubt this should properly be called deflation, actually. Or at least we should not use the word deflation without specifying its cause.

I’ll probably do a longer post about deflation soon with some quotes from this discussion.

You ask “What I don’t see is how deflation, which increases the burden of the government’s debt, is supposed to ease the burden.” Which misses the point entirely. The burden isn’t supposed to be “eased” for anyone; the playing field should be level. You are correct that inflation eases the government’s burden, which simply means that the government has rigged the game by first requiring that we use only its own currency and then by systematically debasing it; it is stealing from all of us. With a fixed amount of currency it couldn’t do that. The small amount of deflation resulting from economic growth would simply be equivalent to additional interest on the debt, which could be adjusted for simply by reducing the nominal interest rate on the debt. And indeed, once it got used to the idea the market would so adjust. But the government couldn’t resort to theft by stealth to reduce its burden, and in my view that is a very good thing.

There may also be the issue of misunderstanding/misuse of the term ‘deflation’ that is at play here. If we go by strict semantics (which I always find a useful thought exercise), in order for there to be a deflation, something has to be first inflated. If my above shoe/jeans scenario took place in an environment where the currency was not being manipulated by fiat but rather represented real value in the eyes of all players in the economy – then, if after the transaction the money was suddenly manipulated, it would indeed cause a real transfer of wealth upon the repayment of the debt. However, if that same transaction (the debt incurment) took place in an environment with an already inflated currency, then it may stand to reason that at least one of the parties to the transaction was already either the beneficiary of such arbitrary transfer of wealth or the victim of such a transfer – both prior to said transaction (by virtue of previous transactions). IOW, the natural balance of the market was already distorted, and so the deflation that followed returned the market to its original balance.

Hope that makes sense.

The problem is that debt is typically denominated in nominal money and changes in the real value of nominal money do result in wealth transfer. That’s why governments burdened by debt typically attempt to inflate their way out of the problem.

What I don’t understand is Schlichter’s Nov. 8, 2012, argument that deflation will stimulate the economy. The mechanism would have to work something along the lines of a massive wealth transfer from the government to debt holders causing debt holders to increase their spending and stimulate the economy. Schlichter argues that:

To assume that nobody will spend money in a deflationary environment is nonsense. It ignores ‘time preference’, which is essential to human action and which also explains why interest is a universal concept. To want something means, all else being equal, wanting it sooner rather than later. Current example: Prices of computers and smartphones are falling constantly yet people spend heavily on these items.

It’s an interesting argument, but Schlichter offers no historical examples supporting it on a macro scale and experience tends to point in the opposite direction — that deflation discourages overall economic activity.

What I don’t see is how deflation, which increases the burden of the government’s debt, is supposed to ease the burden.

Bruce, I haven’t noticed anyone claiming that deflation is supposed to ease the burden of debt, but if anyone did, he or she is wrong. When an entity (a person or a government or a company) incurs debt, the nominal value of that debt is denominated in the currency of choice/compulsion by the debtor and the creditor. But the real value of that debt has nothing to do with currency, and has everything to do with the value of the underlying goods/services at the time of transaction (i.e. incurment of debt).

If I, instead of buying myself a new pair of shoes, I lend you my $100, the value of your debt to me is a pair of new shoes. If you in turn use the $100 to buy a new pair of jeans (I’ll let you be the fancy one here), that pair of jeans is the value of your debt to me (value being subjective). If meanwhile the government inflates the $, the price of shoes and clothing doubles, and if you repay me the $100, I can now only buy one shoe with it, so in effect you repaid only half of your original debt to me. If the government deflated the $, the price of everything is halved you pay me back $100, and I now can buy two pairs of shoes – while you may have forgone the purchase of two pairs of new jeans to repay the debt. All of this does put both of us in a situation different from the one we would have been had the value of $ been left constant, but that in no way changes the real value of the original debt.

Just thinking aloud here, as you may be saying the same thing I am.

the liberty dollar guy was trying to pass off his coins as the legal tender of the US (or at least was sailing as close to the wind as to make no difference). He was a buffoon.

Evidence?